Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  
TRANSCRIPT SPONSOR
Wall Street Breakfast

Fiserv, Inc. (NASDAQ:FISV)

Q2 2007 Earnings Call

July 25, 2007 5:00 pm ET

Executives

Jeff Yabuki - CEO & President

Tom Hirsch - CFO

Analysts

Kartik Mehta - FTN Midwest Research

Greg Smith - Merrill Lynch

Paul Bartolai - Credit Suisse

Pat Burton - Citigroup

Dave Koning - Robert W. Baird & Co.

Charlie Murphy - Morgan Stanley

Glenn Greene - CIBC

John Kraft - D.A. Davidson & Co.

Tien-tsin Huang - J.P. Morgan

Presentation

Operator

Hello, and welcome to the Fiserv Second Quarter 2007 Earnings Conference Call. All participants will be in a listen-only mode until the question-and-answer session begins. Today's call is being recorded. It 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.

I would now like to turn the call over to today's host, Mr. Jeff Yabuki, President and CEO of Fiserv. Sir, you may begin.

Jeff Yabuki

Thank you. Good afternoon everyone, thanks for joining us for our second quarter conference call. With me today are Norm Balthasar, our Chief Operating Officer, and Tom Hirsch, our Chief Financial Officer. In addition to our remarks, we have provided supplemental materials as part of our earnings presentation, as we review some of the results. You can access that presentation at our website by clicking on the link for upcoming events, and then accessing the event.

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 our current expectations. We will make forward-looking statements about, among other matters, revenue growth, earnings per share, operating margins, cash flow targets, sales pipelines, acquisition prospects, the disposition of Fiserv Investment Support Services, or Fiserv ISS, and our strategic initiative, Fiserv 2.0.

Forward-looking statements may differ materially from actual results, and are subject to a number of risks and uncertainties. Please refer to our second quarter Earnings Release which can be found on our website at www.Fiserv.com for a discussion of these risk factors. You should also refer to our earnings release 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 formality handled, let's get to the results.

We delivered solid results in the quarter. Again, led by our financial segment which generated approximately 80% of our net revenue and adjusted operating income. Performance highlights include another solid quarter of financial segment internal revenue growth, continued operating margin expansion, and strong growth in free cash flow. Strategically, we increased traction across our Fiserv 2.0 platform, which is an important catalyst to accelerate growth and profitability in 2008 and beyond.

Second quarter adjusted earnings per share from continuing operations was $0.68, up 15% over the $0.59 adjusted EPS from continuing operations generated in 2006. Our adjusted EPS from continuing operations through June 30 is $1.31, in-line with our projections for the first half of the year. Our 2007 results comparison to 2006 continues to be negatively impacted by the more than $30 million decline in higher margin flood claim processing revenues in our insurance segment.

Our continuing operations results exclude the announced sale of our Fiserv ISS business, which is now reported in Discontinued Operations. Adjusted EPS in the quarter also excludes $0.06 of unusual charges in our insurance segment. More on how all that adds up in a moment.

Revenues in the quarter were up 12% to $1.2 billion. Adjusted internal revenue growth was 4% overall, and 5% in the financial segment. This was the 11th quarter in a row of 4% or greater internal revenue growth in the financial segment. Company-wide adjusted operating income for the quarter, which excludes the $17 million charge, was $198 million, an increase of 12% over 2006. Adjusted operating margin was up 110 basis points to 23.4%, versus a comparable quarter of 2006, and up 100 basis points sequentially over the first quarter. We also continued our capital allocation discipline, repurchasing 3.4 million shares in the quarter, for a total of 6 million shares in the year.

During the quarter, we announced the sale of Fiserv ISS, and came to closure on the pending investment evaluation we discussed for several quarters. We continuously review the mix of businesses that make up Fiserv. Occasionally, we may determine that a business no longer meets our performance or our strategic screens. In that event, we will take the actions appropriate to ensure we optimize shareholder value. We will also take proactive steps to add businesses that meet client needs, and add to our level of market differentiation.

Lastly, we will support investments in existing businesses to further drive long-term sustainable growth. We believe each of these actions taken together best serve our clients and our shareholders. On March 24th, we announced the sale of ISS.

We signed two separate agreements, one with TD AMERITRADE, to sell our institutional retirement plan and advisor services, and a second agreement to sell the remaining accounts and administrative services of ISS, to a private company which will be headed by Bob Barrio, the current Group President for ISS. As a part of this transaction, we will also maintain a small interest in the Barrio business. We expect the two transactions to yield gross proceeds of about $350 million, which includes the return of excess capital. After taxes and transaction related expenses, the net proceeds should be about $250 million, the majority of which we should receive upon closing.

In 2008, we have the opportunity to earn up to $100 million in contingent consideration, depending on the achievement of certain revenue targets in the 12 months following the close of the TD AMERITRADE transaction. We expect the TD AMERITRADE sale to close in the fourth quarter of 2007. The second transaction, which is much smaller in size, may slip into the first quarter of 2008, depending on the timing of regulatory approval. As I mentioned earlier, our adjusted earnings per share from continuing operations in the second quarter was $0.68.

Slide three of the supplemental materials provides a reconciliation of our EPS results. We incurred a $17 million charge in our insurance segment, or about $0.06 per share. About $13 million of this charge relates to shutting down an investment in a new health technology business platform in our insurance segment. We finally determined that this initiative did not produce risk adjusted returns above our investment hurdle. This action closes out the pending investment evaluation we have discussed in our three previous earnings calls, and was within the range provided of $10 million to $15 million.

The balance of the charge in the quarter relates to facilities shutdown and severance expenses in other areas of the insurance segment, which will begin to improve results immediately. We expect the annualized savings from these actions to be in excess of $10 million, with saves beginning the third quarter of this year.

Also, Fiserv ISS generated $0.03 of EPS in the quarter, before transaction related expenses of about $0.01 per share. Adding those $0.03 of ISS earnings to the $0.68 per share, brings us to a total of $0.71 per share of total adjusted earnings per share for the quarter. Overall, we are pleased with our results in the quarter, and remain on-track to achieve our 2007 objectives.

With that, I will turn it over to Tom for some further detail on our results.

Tom Hirsch

Thanks, Jeff. And good afternoon everyone. Our financial segment once again had another quarter of strong results. Total revenues were 754 million, with internal adjusted revenue growth of 5%. Our year-to-date adjusted internal revenue growth of 6% is within our 2007 expectations in this segment.

The sources of internal revenue growth in the quarter were primarily the higher margin payments and banking areas, partially offset by expected declines in our lending business, and the final transition of our remaining J.P. Morgan Chase item processing business, which together negatively impacted our adjusted internal revenue growth rate by approximately 130 basis points in the quarter.

Operating income in the financial segment was $166 million, an increase of 14% over the prior year, with almost all of the growth generated internally. Termination fees in the quarter were up 7 million over the prior year period to $13 million, and up sequentially about 4 million. While we strongly prefer annuity revenues to one-time termination fees, we recognize that that in our base of 6,000 core processing clients, acquisitions and the related termination fees are a normal part of the business mix, with variations in the amount each year.

Adjusted operating margin was 25.4% in the quarter, up 180 basis points compared with the same period last year. The year-to-date adjusted operating margin of 25.1% is up 240 basis points over 2006. Margin improvement was driven by a combination of ongoing gains in efficiency, strong growth in the payments and bank core processing space, and termination fees, slightly offset by the negative impact of the NetEconomy acquisition announced last quarter.

Overall, we are very pleased with our segment margin performance. Our deposits are a core processing division continues to deliver solid revenue and operating earnings growth. On the sales side, we are winning more than our fair share of the competitive core accounts processing deals, and improving our win rate from last year.

For example, we have already signed more de novo banks through the first half of 2007 than all of last year combined. The trend toward outsourced services in core account processing versus in-house license sales is continuing. The outsourcing trend seems to be driven in part by our clients' needs to stay current with the evolving complexity of regulatory compliance.

Meeting that need is an important reason we are integrating risk and fraud management solutions into our core processing platforms. Our payment businesses continue to generate strong revenue and profit growth in our EFT and debit card processing offerings, as we continue to drive more integrated sales through our core processing relationships. We are also experiencing strong growth in our expedited payment business, BillMatrix. Our Output Solutions Division, driven by our Personic Business Unit had a softer quarter due to seasonality trends.

However, we have signed a number of larger clients in this business line and anticipate strong second half results, due to a combination of new sales wins and normal seasonality. Our lending business declined for both the quarter and the year, although those results are in-line with our expectations. This is due primarily to continuing weakness in the home mortgage markets. Somewhat offsetting the decline is good growth in our home equity products, which has expanded among a number of our larger financial institution clients.

In addition, we have seen great growth in our lending Automotive solutions unit. A good part of this growth in this area is coming from leasing platforms, which tend to be counter-cyclical to interest rates, and therefore the overall mortgage market. This growth should have a positive impact on our segment internal revenue growth rate in the second half of 2007. Our insurance segment had mixed results in the quarter, with some improvement on an adjusted basis over the first quarter.

Revenues in the quarter were 426 million, up 22% overall, driven primarily by our pharmacy services businesses. Adjusted internal revenues declined by 2% in the quarter, while most of the customer attrition in the large account area of our health plan administration business has stabilized, the lost revenue will continue to negatively impact our growth rates for the balance of the year. Excluded the $17 million charge we took in the segment during the quarter, we generated 32 million in adjusted operating income, and adjusted operating margin of 16.7%.

Although margins are still down versus the prior year, the 230 basis point improvement from the first quarter adjusted operating margins is a good sign. We also had a sequential increase of 16% in adjusted operating income from the first quarter. These improvements were due primarily to operating efficiencies that we have been working on over the last year. While we are making progress in managing expenses, we remain fully focused on enhancing overall results.

As Jeff mentioned earlier, our second quarter actions should generate additional annualized expense savings of over $10 million, and we should see this benefit begin in the third quarter of 2007. As we have shared with you, we expect to see material improvement in second half 2007 results in our insurance segment, compared with the first half of the year.

The primary drivers of the improvement are first, the benefit of expense savings in our TPA consolidation plan, and an increased focus on expense reductions throughout the segment. Second, the seasonal nature of our insurance software businesses, which are generally stronger in the second half of the year. Third, the continuing strong results in our pharmacy services businesses. And finally, a continuation of our strong management focus on near term results, which contributed to the improved adjusted operating results in the second quarter.

Cash flow from operations through June 30th was 291 million, compared with 276 million through the first half of 2006. Year-to-date free cash flow was up 14%, to 209 million, compared with 183 million in 2006. This was driven primarily by strong working capital management, and better discipline on capital spending throughout the company. Year-to-date capital expenditures were $82 million, down about 12% compared with the first six months of 2006.

Lastly, our effective tax rate for the quarter was 38.3%, this rate is up about 120 basis points over the prior year quarter, due to one-time positive benefits recorded in the prior year. As expected, the rate increase resulted in a negative impact of approximately $0.01 per share in the current quarter, and a $0.02 negative impact year-to-date. We expect a 38.7% effective tax rate on continuing operations for the remainder of the year.

Now I would like to turn the call back to Jeff.

Jeff Yabuki

Thanks, Tom. Last quarter we shared performance metrics to measure our progress against key Fiserv 2.0 objectives. Those results are shown on slide 4 of the supplement. As we mentioned last quarter, we are tracking the sales of 18 add-on products and services, to enhance our existing core account processing client relationships.

Some of those products include Paytraxx, our electronic bill pay solution, EFT, which has shown tremendous success in the first half of the year, and should positively impact our second half results, the Fiserv Clearing Network, and other new solutions such as our wire exchange product, which enables financial institution clients to streamline wire transfers and provide flexible archiving capabilities.

The sales of the 2007 target set of products is our first step in achieving our goal of $360 million in incremental revenues by 2012. To date, we have closed 47% of our $26 million incremental recurring revenue sales goal. This objective is in addition to our normal sales quota for the year. You will recall that we were at 14% attainment through the first quarter.

We have seen great acceleration in the second quarter, attaining about a third of our full year quota in the quarter. That improving run rate gives us confidence that we will reach our objective, which will positively impact 2008, and importantly, sets the foundation for higher levels of growth in the future. We are also on-target to deliver the planned $15 million of operational efficiency benefit in 2007, en-route to achieving our $125 million goal in operational efficiency savings by 2011. Our year-to-date attainment is on-track against this objective. At 7.4 million, or almost 50%, compared with 2.5 million, about 17%, through the end of the first quarter.

Our overall sales quota performance also gained traction in the quarter. Through June 30, we were about 97% attainment for the year, versus about 90% at the end of the first quarter. The majority of our groups had very solid results, offset by weakness in lending and insurance. In particular, the depository institution and payments in industry products groups performed well in the quarter.

Our financial segment sales pipeline remains strong, and our HPA sales are running slightly ahead of 2006 levels. Accordingly, we continue to believe we are on-track to achieve our overall 2007 sales objectives. We have adjusted our previous EPS guidance of $2.86 to $2.94 per share, by $0.12 to reflect continuing operations, and no longer includes the expected EPS impact of ISS in 2007. We will also record a one-time gain on the sale of ISS upon closing.

This gain has not been reflected in our earnings guidance. The announced sale of Fiserv ISS should be slightly accretive to our 2007 continuing operations adjusted EPS growth rate, which is now in a range of 14 to 17% for the year. We expect continuing operations adjusted earnings per share in the range of $2.74 to $2.82, which excludes the insurance segment write-off this quarter.

We continue to expect our full year 2007 adjusted internal revenue growth rate to be in the mid-single digit range, for both the company and in the financial segment. For the insurance segment, we expect the adjusted internal revenue growth rate to be in the lower single digits for the remainder of the year. We expect free cash flow from continuing Operations in 2007 to be in a range of $470 million to $500 million, which now reflects the ISS divestiture.

In summary, we feel good about our second quarter results, and our outlook for the year. We are delivering results while making real progress against the Fiserv 2.0 objectives we laid out for you nearly a year ago. We are actively managing our business and product portfolios, and providing a more Fiserv-centric value proposition to our clients. The financial segment once again performed well in the quarter. We remain focused on optimizing performance in all of our businesses, and in particular, the insurance segment.

Credit as always goes out to our employees and associates around the world for their relentless commitment to clients and shareholders. Thanks for everything you do in pursuit of Fiserv 2.0.

Lastly, we will once again host an Investor Day at the Hudson Theater in New York City on October 2nd. We hope you will be able to join us as we update you on our plans for the future. More details will be available soon.

With that, operator, let's open up the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Kartik Mehta, FTN Midwest.

Kartik Mehta - FTN Midwest

Good afternoon, Jeff.

Jeff Yabuki

Hi, Kartik.

Operator

Your line is open, sir.

Kartik Mehta - FTN Midwest

Thank you. A big picture question for you, Jeff. The termination fees obviously were a little higher this quarter than they were a year ago. Is this a result of maybe some aggressive pricing, where banks are moving away from Fiserv, and moving to another competitor, or is this just a result of mergers and acquisitions?

Jeff Yabuki

Yes, Kartik, as you know, in the business that we're in, it is difficult for clients to pack up their technology and decide they are going to switch and these termination fees, the increase in termination fees in the year-to-date 2007 is much more akin to the termination fees that we saw in 2004 and 2005 as you may recall, we said 2006 was lower than normal.

And frankly, we are seeing a bit more acquisition activity in our client base than we did last year, and we are also seeing more clients being acquired earlier in their term, and therefore, when that happens, we end up with higher termination fees. You know again, it's a little bit of the good news/bad news, but in a base of our size, I think we are always going to see that kind of activity, Tom, do you have anything to add to that?

Tom Hirsch

Just to clarify that. Again, this is not clients leaving us to go to the competition, this is primarily through our clients being acquired by other institutions, and the termination fees year-to-date are pretty close, when you go back to '05, roughly about the same amount for the six-month period.

We had about 30 million for the year in '05, excluding one large fee, and about 35 in '04 and the year-to-date, we are at about 20, so we are pretty well aligned with those years, a little bit higher though than the prior year. As Jeff indicated, when those clients are acquired early in their contract term over a five-year period, that results and can result in a little bit larger one-time fee.

Kartik Mehta - FTN Midwest

Jeff, as you look at the marketplace, obviously you talked about acquiring companies that fit into Fiserv. But as you look at the marketplace, where do you think pricing stands, and how are you balancing that right now with share repurchase?

Jeff Yabuki

When you say where does pricing stand, what pricing are you talking about?

Kartik Mehta - FTN Midwest

Pricing for companies. Are acquisition prices high, and as a result are you leaning more towards buying back shares, or are there opportunities out there, where there are companies you would rather acquire to increase the number of products that you have?

Jeff Yabuki

Yes, you know, obviously it is not new news that prices are high, where we are seeing so much activity, kind of non-strategic activity. So that has been the trend for a while, which makes us frankly, be even more disciplined in how we think about expending capital relative to acquisitions.

You know, at the same time, we continue to maintain real discipline in how we look at our own valuation, and how we look at our intrinsic value, and we have been pretty disciplined in buying back shares. I think we are about 6 million shares so far for the first half of the year, and we will continue to do that.

However, we do think it is important within our long-term strategy to pull products into our family, that we believe will provide differentiated value to our business proposition, as an example, we bought NetEconomy last quarter, which is a smallish acquisition, but because of the size of our distribution system, we are able to take products that are of high quality, integrate them into our core systems, and we believe ultimately be able to deliver a lot of value to clients, which will translate to nice cash flows for our shareholders.

Kartik Mehta - FTN Midwest

Thanks. Thank you, Jeff.

Jeff Yabuki

Thank you, Kartik.

Operator

Our next question comes from Greg Smith from Merrill Lynch.

Greg Smith - Merrill Lynch

Hi, guys. Can you talk about anything that may impact the organic growth rate in the financial services segment in 3Q or 4Q, anything specifically coming on or moving off that you know about, and also just the comps in the year ago period?

Tom Hirsch

No, I don't think there's anything that should hit us in the third and fourth quarter. I would say that the historically, Greg, in the financial segment, the seasonality of the first quarter has historically been a little stronger than the second quarter.

As I did mention in my comments, we do have some stronger sales activity in our Output Solutions division, and also in our payments businesses, so we look forward to the second half. Our quota results have been good year-to-date, along with our integrated sales, so we don't have anything major that we are aware of going one way or the other as we go into the second half, and we are very comfortable with our mid-single digit organic revenue growth rate in that financial segment. Jeff, I don't know if you have anything to add to that.

Jeff Yabuki

No.

Greg Smith - Merrill Lynch

Okay. And then it sounds like in the health plan segment, you are doing some great things on the expense side but just, the general competitive pressures you have been feeling against some of the larger providers, is there any progress you are making, or some near term light at the end of that tunnel that you could talk about?

Tom Hirsch

Yes, and the, as we have been talking about, taking our focus, our sales focus and making it a lot more precise in targeting clients, that we think are appropriate for our value proposition, which is more customization versus specific focus on network discounts. We are seeing good, on a relative basis, we are seeing good success this year.

The real problem, Greg, in the HPA business, which is the largest part of that segment is because most changes happen at the beginning of the year, once you fall back, if you have a bad swap at the end of the year as you go into the new year, you are basically behind the eight ball all year. You don't find people switching their healthcare providers, or their, I'm sorry, their health plan administrators and their providers during the year. You usually only see it on July 1 on a very limited basis, but the big shift is on January 1.

We are seeing very good performance in our pharmacy businesses. Those are continuing to do well. And we have a bit of seasonality in our insurance business, in kind of our P&C and life businesses, and we believe those will have a bit of acceleration in the third and fourth quarter.

You know, last, overall, as we have said for a while is one of the big benefits that we see in this space, is the ability to take that health-oriented expertise that we have, pair it up with our banking and financial services and payments expertise, and turn that into growth. And we are continuing to have success in that area. However at this stage, the businesses are so small, that they don't move the needle on the growth rates, vis-à-vis the rest of the segment, but we are seeing success in that area.

Greg Smith - Merrill Lynch

And then with regards to Oracle acquiring i-flex, and i-flex maybe moving into the U.S., what do you make of just the overall landscape? Are you seeing interest in this space, kind of what you do, recurring revenue by other big software vendors, whether it is an IBM or an SAP, or do you think what Oracle is doing is kind of a one-off. What I am getting at, are we going to see acquisitions of maybe some of your close competitors by some of these bigger companies?

Jeff Yabuki

Yes, and I mean obviously, Oracle, a couple of years ago when they made their initial investment into I-flex, it must have been a year or a year and a half ago, when they took that investment up to 80%, they made it clear that they saw an opportunity to try to get a little bit deeper in the back office of the financial institutions.

And we certainly, there is a lot of noise in the landscape as it relates to not just i-flex, but you have got other competitors, like a TEMENOS, who are trying to get into the space. For right now, you know, as we look at the competitive landscape certainly on the core processing side, you know, we aren't seeing the landscape shifting, in terms of who is winning, who is winning deals. Today I think Tom mentioned that we continue to do well in that space, and in fact, this year we are actually winning more than our fair share, and we think that is good news.

But we are always aware of what is going on there, and believe that when you are in the lead position, you have people paying a lot of attention to you, and clearly the recurring revenue space is an attractive space to everyone. IBM, Oracle, us, and anyone else who is in this space. I think you continue to see people taking a look at this.

The real problem, Greg, is breaking into this space, it is a very difficult move, specifically on the bank side and the credit union side, where shifting your core provider is just a major, major event, and just people are typically unwilling to do it. And I won't say almost at any price, but almost at any price.

Greg Smith - Merrill Lynch

Thank you very much.

Jeff Yabuki

Thank you.

Operator

Our next question comes from Paul Bartolai from Credit Suisse.

Paul Bartolai - Credit Suisse

Thanks, good afternoon.

Jeff Yabuki

Hi, Paul.

Paul Bartolai - Credit Suisse

First question, just on the organic growth and FIO, you guys mentioned some of the things that impacted the year-over-year comparison. If you look at it sequentially, it did tick down a little bit. Just wondering if there is any more impact from that, or if you could provide any more insight there?

Jeff Yabuki

No, I think we mentioned a couple of the things that impacted a little bit. Quarter-over-quarter, we do have a little seasonality. This happened last year too, if you kind of look at the first quarter to the second quarter, typically a little stronger in the first quarter as far as software goes, and that's just really timing. We also did have and I briefly mentioned in my remarks, some item processing contract with JPM, that the final phase of that went away in the second quarter, which negatively impacted the second quarter a little bit.

But outside of that and besides the lending piece, which continues to be a drag on our growth rate, there was really nothing substantial there. But there is some seasonality. For instance, also in our output solutions division that I mentioned, Paul, regarding our Personic business unit, first quarter is generally stronger than second quarter, and then it ticks back up in the third and fourth quarter. So there is some underlying seasonality trends there, but nothing large or unusual.

Tom Hirsch

Paul, the other, I think the other thing to keep in mind is because of the sales cycles, and because of how buying decisions get made, even though we have a fair amount, the lion's share of our revenue is recurring based revenue, you are going to have some variability between quarters all the time, and I know there is rightfully a lot of attention on our growth rates.

But it doesn't take a tremendous amount to move one point up or down, and that is why we have really said all along, you know, it is most important for us to focus on where are we in 12 month increments, and making sure that our sales trends are looking right, and that the underlying fundamentals of what we are doing are getting executed correctly.

Things like the integrated sales progress that we are making, you know, the 26 million of annual recurring revenue that we are focused on within our target, you know, that excludes one-time fees, and it is not total contract value. We fully expect that that recurring revenue will be additive to next year, and then when we have the, when we have next year's target that will be additive in to 2009, and we are really looking to build those new layers of recurring revenue growth, and we think we are making some really good progress.

Paul Bartolai - Credit Suisse

And then switching to margins, you guys have certainly had some nice improvement in FIO margins. You know, is that something we should expect to see to continue to increase sequentially, or you know, have we already seen a lot of the benefits run through it? Just curious on what we should be looking for going forward in the back half?

Tom Hirsch

Clearly, margins are a big focus for us. We believe that by, you know, over the next few years, by reducing our expense base by over $100 million, that that will be additive to margins, I suspect for this year that the performance that we have seen in the first two quarters, is fairly indicative of what we would expect to see at the end of the year.

I think our official guidance earlier in the year was we expected to do better, and we will, than our performance in 2006. But again, I would say in any quarter, you can have slight fluctuations. We are really looking at moving that margin performance up as you are seeing, but I wouldn't expect to see these 100 basis point sequential ticks each and every quarter.

Paul Bartolai - Credit Suisse

Fair enough. And then kind of same line on the health side, it sounds like you guys expect to start to see some nice improvements in the margins there. Is that something we think we can see the on an adjusted basis, the health margins back in that 20% range, X the pass-throughs?

Tom Hirsch

It won't happen in a quarter. But we are pretty focused on making sure we get our expense structure in-line, and we do expect to see continuing increases in margin performance in the insurance segment. I can't sit here right now and tell you if it will be done in two quarters or four quarters, but I do expect to continuing ticks up in operating margins in the segment.

Paul Bartolai - Credit Suisse

Great. Last question, you know, I have been hearing some varying opinions in the marketplace. Just curious your thoughts. Do you expect to be sunsetting any of your core systems? I know in the past you said you didn't expect to do that, but just curious, an update on the strategy, as far as some of the core platforms go?

Tom Hirsch

Our take is that going to clients and telling them that you are going to sunset their platform, is basically an invitation to go bid that contract out. What we are doing is we are paying a lot of attention to what products we are developing, and where we are making our longest term investments. And we think that is a better course of action than shuttering any of our core platforms. So for right now we continue to manage all of our core platforms. We continue to make sure that clients who choose those platforms are served in the way that is best for the marketplace. And I suspect we will continue that going forward.

Paul Bartolai - Credit Suisse

Great. Thank you very much.

Operator

Our next question comes from Pat Burton from Citi.

Pat Burton - Citigroup

Hi, congratulations on the quarter. My question relates to the timing of the ISS sale, the accounting treatment now with Discontinued Operations, and when you will actually receive the cash, and be able to buy back stock. Could you take us through kind of the economics of all that, versus the accounting? Thanks.

Tom Hirsch

Sure, Pat. This is Tom. With this, business is highly regulated. There are a lot of regulatory approvals that we need to do. The first part of this transaction, which is the largest piece of this, which is the sale to TD AMERITRADE, should close by the end of the year, the fourth quarter. And that, the total transaction value of both transactions is net proceeds of about $250 million, $350 million gross.

So we envision that we will get a majority of that by the end of the year, and then the other part follows that, so that may lead out to early in the first quarter of 2008, as far as those proceeds go. But that should be the timing. And then the contingent payment that we talked about will be later in '08, but we will again, we are going to reinvest that capital wisely, as we normally would, either into value enhancing acquisitions or share repurchase.

Pat Burton - Citigroup

Okay, but from an accounting perspective, Tom, you are losing the income now, hence the lower guidance, and getting the cash later, is that correct?

Tom Hirsch

We will still have the income. What we did, Pat, is we have broken our guidance out into Continuing Operations and Discontinued Operations. So the guidance that we had out there now is just for continuing. We will continue to have those earnings until we close the transaction. In addition, we will continue to have the gain on sale once that transaction is closed. We will in the Discontinued Operations line, however, have certain transition related expenses that will be going through there, but our total earnings including Discontinued Operations will continue to be there. It is just that we may have some transition expenses through the quarters, and then when we close the transaction we will have a gain at that point in time.

Pat Burton - Citigroup

Okay. And without it your returns in the base business are higher, you have a faster growth rate and all of those things?

Tom Hirsch

Exactly.

Pat Burton - Citigroup

Okay. Thank you.

Operator

Our next question comes from Dave Koning from Robert W. Baird.

Dave Koning - Robert W. Baird & Co.

Hi, guys.

Tom Hirsch

Hi, Dave.

Dave Koning - Robert W. Baird & Co.

One follow-up on the ISS question. When we look at the $0.12 dilution, that is basically it looks like just the profits and any income from ISS that you are just stripping out this year. But next year, because you will actually have the cash, you will still have that lost profit of ISS next year, but you will have the actual cash in hand, and will be able to invest it, et cetera. So we can expect the dilution next year to be, I would imagine much less than that $0.12, given that you have the cash to offset?

Tom Hirsch

Yes. That is exactly right. We certainly will not, we will not sit on that cash. We will get it invested as quickly as we can.

Dave Koning - Robert W. Baird & Co.

Secondly, when we think about your focus on acquisitions, is it still kind of the standard bill pay, other payments type businesses and other ancillaries, that you would like to add into the core FI platforms?

Tom Hirsch

Yes, I mean, our strategy in thinking about acquisitions is really continues to be those acquisitions that we believe can expand our platform position, so to the extent that there are opportunities for us to acquire additional cores, we think that would be a good use of our capital.

And then again, those products that we believe we can distribute to clients because of the privileged relationship that we have through the core position. So in the FI space, clearly if you think about the payments assets and the risk management assets, those kinds of areas where our clients are spending a lot of time thinking about how they can be better, that is a big focus for us.

Dave Koning - Robert W. Baird & Co.

Great. Thank you.

Tom Hirsch

Thank you.

Operator

Our next question comes from Charlie Murphy from Morgan Stanley.

Charlie Murphy - Morgan Stanley

Thanks very much. I had a question on the acquired revenue from acquisitions lines within financial and insurance. I guess Tom, assuming you don't make any acquisitions for the rest of this year, would you assume both of those lines tail-off fairly sharply for the rest of this year?

Tom Hirsch

Yes. Was that in both segments, Charlie?

Charlie Murphy - Morgan Stanley

Yes.

Tom Hirsch

Yes, I think the only one that many we will have out there is the NetEconomy acquisition which we kind of acquired in the first -- really in the second quarter here. So that will continue to be there for a year.

But I think the other acquisition that we have out there is Jerome, which should annualize here at the end of the second quarter. Regarding the insurance segment, we have a couple that will go into the third quarter and then tail-off in the fourth quarter right now. But that is just where we are at today.

Charlie Murphy - Morgan Stanley

Great. Thanks very much.

Operator

Our next question comes from Glenn Greene from CIBC.

Glenn Greene - CIBC

Thank you. Good afternoon, guys.

Jeff Yabuki

Hi, Glenn.

Tom Hirsch

Hi, Glenn.

Glenn Greene - CIBC

The first question, just could you give us the revenue loss attributable to the early terminations, just some way of quantifying that?

Tom Hirsch

You know, we have that that goes out over a period of time, you know, we don't disclose that information. It is not material to where we are going. And some of these transactions as I indicated, if you get a large fee of $4 million to $5 million from a particular client that was acquired, that could be $700,000 or $800,000 a year, over the next four to five years. So as that revenue comes out. So that is kind of a way to look at that, it really depends on the contractual terms.

Jeff Yabuki

Or it could be much shorter.

Tom Hirsch

The real problem that we have in identifying that is we know internally, but if we put that information out, we think it would be very difficult to understand, and I think the other important element is, we have termination fees every quarter, and I bet we have had termination fees every quarter since well before the time that I was here, because it's just normal when you have a core base of our size.

Glenn Greene - CIBC

That is fair. I'm sorry, another question, sort of related to the termination fees. If you adjust the FI operating margin for the termination fees, it actually looks like it declined somewhat sequentially. Is there anything that sort of happened in there? Is it sort of a revenue mix, you had less software this quarter as opposed to the first quarter?

Tom Hirsch

I think we had, are you saying first quarter to second quarter, Glenn?

Glenn Greene - CIBC

Yes, sequentially.

Tom Hirsch

Well, I think the termination fees, I have that in front of me, I think they were up 3 million or so from the first quarter to the second quarter, so I believe our adjusted operating margins were up, despite that, because I am showing them up about 60 basis points or so, and I think our termination fees are only up $3 million to $4 million. But we haven't had any, we do have a little higher software generally as I indicated previously in my comments in the first quarter. We did have some additional expenses in the second quarter, a little bit associated with NetEconomy, but overall adjusted margins in that segment are up, notwithstanding that term fee increase.

Glenn Greene - CIBC

Finally, Jeff, sort of looking at the sale of the investment business, which I applaud you for, is it sort of indicative that you are sort of doing an ongoing strategic review of your overall business? I know you went through a pretty significant review when you joined the firm, and all during last year, but is there sort of like quietly behind the scenes, you are still evaluating the portfolio of businesses that Fiserv has?

Jeff Yabuki

Yes. When we did our analysis last year, we did really deep reviews. I mean, we clearly based on all of the businesses that we had, you know, it would not be surprising if some of those businesses ended up in the category of someone else may operate them in a way that is better than we would be able to operate them, better for their shareholders versus ours. And so we are paying attention to those businesses on a regular basis, and we will continue to do that.

That review happens on a continuous basis, and to the extent that we determine that a business or a group of businesses no longer meets our screens, whether that be profitability or strategic, and someone else can run that better than we can, we would say that is a business that we may not want to be in any longer.

Glenn Greene - CIBC

Okay. Thanks a lot.

Jeff Yabuki

Thank you.

Operator

Our next question comes from John Kraft from D.A. Davidson.

John Kraft - D.A. Davidson & Co.

Hi, Jeff, hi, Tom.

Tom Hirsch

Hi, John, how are you?

John Kraft - D.A. Davidson & Co.

Tom, you just reiterated your organic growth targets for the year for the FI segment of mid-single digits. Can you remind us again what the overall goals are, specifically I guess in the insurance segment?

Tom Hirsch

I think we said for the remainder of the year, we have had some, as you know we had that decline in the flood claims that kind of hit us hard in the first quarter, so we said low-single digit for the remainder of this year in the insurance segment.

John Kraft - D.A. Davidson & Co.

Okay. And then also, just to go back to the improving, generally speaking, at least, improving margins in the FI segments. You cited the payment processing business. Is that bill payment, or remote deposit, or a bunch of other things? Can you talk a little bit more about specifically product-wise what was -- ?

Tom Hirsch

Yes, we focused a lot, one of the things that we have done as a company is spend a lot of time over the last year in our integrated sales is focusing on those products that produce incremental margins. In our payments businesses specifically, we continue to sell for instance our debit card processing platform into all of our core processing areas, and that product typically has a good incremental margin, as we continue to have good scale in that particular business. So we are very focused internally on those products that produce a good bottom line impact for us.

One of those is starting up is our Paytraxx bill payment product. We also have BillMatrix, which is an expedited bill payment solution, and we have seen good revenue growth in there, and we have good leverage in that particular business model, so it has been a good, sound business model for us. It is something that we run very well, and that has produced some incremental margin impacts over the last year or so.

John Kraft - D.A. Davidson & Co.

And then just kind of following on what you just said, have you guys been able to incorporate the expedited functionality of BillMatrix into the PayTraxx product?

Tom Hirsch

We have used not right into our PayTraxx product, but we have used that, integrated that into more of our mortgage processing type platforms, and so that is a strategy we are using with that. But we haven't had a lot of crossover in regards to our PayTraxx, or bill payment products.

John Kraft - D.A. Davidson & Co.

Okay. Thanks, guys.

Operator

Our next question comes from Tien-tsin Huang, J.P. Morgan.

Tien-tsin Huang - J.P. Morgan

Thank you. Question on Fiserv EFT, looks like you had some nice wins there again. Who are you taking share from, and what kind of revenue growth are you seeing from this unit?

Jeff Yabuki

Yes, you know, we wouldn't have kind of specifically who we are taking share from. What we are doing is we are really leveraging that core processing relationship we have with our clients. I mean, we have said for a while, that we think that privileged position really pays off for us, and EFT is just a great example. I think about 89% or so of our business was delivered into the core base. And so I suspect that there are a smattering of different providers out there, where our relationship depth is really the differentiator.

Tien-tsin Huang - J.P. Morgan

In terms of just revenue growth trajectory, how does that look today?

Tom Hirsch

Those businesses generally our payment businesses are a little bit higher than our overall average, because they experience better growth, especially now through some of the integration that we are doing into our cores, and our integrated sales initiatives. Our overall mid-single digit growth of those payment businesses are generally on the higher end of that particular framework.

Tien-tsin Huang - J.P. Morgan

Fair enough. The implications of E-funds, curious to hear your thoughts on that, them getting acquired by FIS, and was this an asset that Fiserv looked at?

Jeff Yabuki

Well, I don't think it would surprise anyone to know that given our legacy, we look at everything, and we clearly looked at that, and you know, we made our determinations, and it ended up being owned by someone else. It is, they have some interesting assets. There is no question about that. And I think we will have to see what happens in the future.

Tien-tsin Huang - J.P. Morgan

Okay. Okay, last one on insurance. Can you give us a sense of what the adjusted internal revenue growth rate would have looked like, if we could somehow back out or exclude the impact of that pressure in the large national accounts of the health plan management business?

Tom Hirsch

Well, that business has been running, we did disclose that, our old health segment in the low-single digits, so I think it would be a couple percent higher than that, given the fact that probably get into that mid-single digit type range, if we didn't have that attrition in that particular area.

Tien-tsin Huang - J.P. Morgan

That's helpful. Thanks a lot.

Tom Hirsch

Thank you.

Operator

Our next question comes from Greg Smith from Merrill Lynch.

Greg Smith - Merrill Lynch

Hi, guys. Just wondered if you can put any sizing around the Personic business? Tom, you mentioned about some wins, I think in the press release. If that takes up the second half, just trying to get an idea of the size, and also the margin profile?

Tom Hirsch

The margin profile is good on that particular business. There is a lot of leverage with that business. But I am not going to profile that, Greg. I wouldn't mention it if it wasn't a division of Fiserv, it is a piece of our particular puzzle. It is greater than $100 million, I am not going to go much more than that, as far as that standpoint goes. It is not less than that, but I am not going to go up on the upper end of that.

Greg Smith - Merrill Lynch

That is very helpful. But on the margins, is it sort of corporate average, or financed services segment?

Tom Hirsch

Yes. It is on a net revenue type basis. That business has a large amount of customer reimbursement, because of the nature of the business, but there is a lot of leverage, because there is a lot of more fixed expenses in that particular business line for us.

Greg Smith - Merrill Lynch

Okay. Sounds more profitable than I thought. Thank you very much.

Jeff Yabuki

Thanks, Greg.

Tom Hirsch

Thanks everyone for joining today. We appreciate the time. If you have any further questions, don't hesitate to call our Investor Relations team. And thanks for your support

Operator

This concludes today's teleconference. Thank you for attending. You may disconnect your line at this time, and have a good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Fiserv Q2 2007 Earnings Call Transcript
This Transcript
All Transcripts