Fiserv Q3 2007 Earnings Call Transcript

Fiserv Inc. (FISV)

Q3 2007 Earnings Call

October 24, 2007 5:00 pm ET

Executives

Jeff Yabuki - President and CEO

Norm Balthasar - COO

Tom Hirsch - CFO

Analysts

Pat Burton - Citigroup

John Kraft - D. A. Davidson & Co.

Dave Koning – Robert W. Baird

Tien Tsin Huang - J.P. Morgan

Greg Smith - Merrill Lynch

Charlie Murphy - Morgan Stanley

Julio Quinteros - Goldman Sachs

Kartik Mehta - FTN Midwest

Tim Fox - Deutsche Bank

Presentation

Operator

Hello, and welcome to the Fiserv Third Quarter 2007 Earnings 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 recorded, and is also being broadcast live over the Internet at www.fiserv.com. The call is expected to last about one hour, and you may disconnect from the call at any time.

Now I would now like to turn the call over to Jeff Yabuki, President and CEO of Fiserv. Sir, you may begin.

Jeff Yabuki

Thanks, Sid. Good afternoon everyone, and thanks for joining us for our third quarter conference call. With me today are Norm Balthasar, our Chief Operating Officer, and Tom Hirsch, our Chief Financial Officer.

Our remarks today will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. There are a number of factors that could cause Fiserv's results to differ materially from 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, the disposition of the Fiserv ISS business, the acquisition CheckFree 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 third 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 measure.

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.

This was an exciting quarter for the company. First, our businesses continued to execute well, delivering a 20% increase in earnings per share from continuing operations in the quarter. We also announced the acquisition of CheckFree, a business combination that we believe will transform the financial services technology industry, and place Fiserv squarely in the primary leadership position.

As evidenced by our acquisitions in the quarter, we are keenly focused on enhancing our product and services offerings, with a goal of providing the greatest value to our clients. We will continue to align our business model around those areas of strength in our technology leadership position in serving the financial services industry, today and in the future.

At our October 2nd Investor Day, we updated you on our Fiserv 2.0 progress, and also the importance of both strategically and financially of the CheckFree acquisition. Given that recent update, we won’t spend much time on those topics today.

Our strong earnings results in the quarter were again led by our financial segment, which generated about 80% of our net revenue and adjusted operating income. Adjusted operating margins also continued to expand, showcasing the underlying strength of our business model.

Third quarter EPS from continuing operations, was up 20% to $0.72, from $0.60 in the prior year. Adjusted EPS from continuing operations through September 30 was $2.03. Company wide adjusted operating income for the quarter was $206 million, an increase of 14% over 2006.

Financial segment adjusted operating margin was 26.8%, up 300 basis points versus the third quarter of 2006. Once again, our continuing operations results exclude the announced sale of our Fiserv ISS business, which is reported in discontinued operations. We continue to expect the sale of these assets to close in two separate transactions, during the fourth quarter of 2007 and the first quarter of 2008.

Revenues in the quarter were up 5% to $1.2 billion. Adjusted internal revenue growth was 1% overall and 3% in the financial segment. We achieved this growth in spite of a $12 million decline in mortgage-related revenues versus the prior year. In percentage terms, the impact of this decline on the financial segment, adjusted internal revenue growth rate for the quarter was about 2 points.

Although we were pleased with our financial segment results, we are disappointed with our insurance segment performance. The group continues to perform below our expectations, particularly on the revenue line with adjusted internal revenue declining 5% in the quarter, although we are encouraged by the slight improvement in the adjusted operating margins of this segment, we recognized that we must improve performance as we head into 2008.

Our growth in free cash flow continues to be very strong, up 16% year-to-date. We continued our focus on capital allocation, repurchasing $2.5 million shares of stock in the quarter and completing two small acquisitions which will enhance market differentiation. Importantly, we made great progress against our Fiserv 2.0 initiatives in the quarter, positioning us well for a strong finish for the year.

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

Tom Hirsch

Thanks, Jeff, and good afternoon everyone. Our financial segment once again had another strong quarter. Segment revenues were $753 million with adjusted internal revenue growth of 3%. The sources of internal revenue growth in the quarter were once again primarily the higher margin payments and core processing areas, offset by an estimated 2% point decline in our mortgage processing businesses. The growth rate also continued to be negatively impacted by the final transition of our remaining J.P. Morgan Chase item processing business. Year-to-date adjusted internal revenue growth is 5%, which includes an estimated 1 percentage point negative impact from the decline in our mortgage processing businesses.

Operating income in the financial segment was a $174 million in the quarter, an increase of 17% over the prior year. Through September 30, segments operating income is up 18% to $499 million, almost all of it organic. Termination fees in the quarter were $8 million, up about $900,000 over the prior year period and down from almost $13 million in the second quarter.

Year-to-date termination fees are about $30 million compared with $60 million in 2006. Adjusted operating margin in the financial segments was 26.8% in the quarter, up 300 basis points compared with same period last year. The year-to-date adjusted operating margin of 25.7% was up 260 basis points compared with 2006.

Margin improvement was driven by a combination of cost control, operational efficiency and improvement in our product mix. Specifically we’re replacing some lower margin revenues in areas such as our mortgage BPO offerings, with increases in highly valued payments in core processing revenues, which tend to have more attractive margin characteristics.

At the same time, segment margins are negatively impact by investments that we make across our businesses to deliver future growth such as our NetEconomy acquisition announced in the first quarter

We don't expect year-over-year margin improvement of this magnitude to continue beyond 2007. However, we do anticipate that full year margins will continue to improve at least 50 to 100 basis points, annually into the foreseeable future. Overall, we are very pleased with our financial segment margin performance for the year.

Our insurance segment had weak results in the quarter and continues to be challenged to deliver top line growth. Revenues in the quarter was $420 million, up 5% overall. Reported revenue growth rate flowed from what we have been generating in the last few quarters, because of two large pharmacy contracts, one in the third quarter of 2006 and which is now of anniversary. As you know this pharmacy contracts includes significant pass through prescription cost, which lift our revenue growth rate.

Adjusted internal revenues declined by 5% in the quarter. The drivers of the decrease, primarily customer attrition in the large account area of our health plan administration business. The continuing slowdown in flood claims processing, lower property and casualty life and sales and lastly the revenue impact of shutting down some core performing businesses.

Insurance segment operating income was $32 million. Adjusted operating margin was 17.2%, up 50 basis points from the second quarter and up 40 basis points year-over-year. The margin improvement reflect the operating efficiency we've been driving in the segment over the last year, off set by continued investments in healthcare banking and payments.

Overall, we are disappointed with our results in the insurance segments. We are focused on managing our discretionary spending and improving the execution of our business strategies to deliver shareholder value.

Cash flow from operations through September 30^th was $459 million, compared with $437 million in the prior year. Year-to-date free cash flow is up 16% to $340 million, compared with $292 million in 2006. This increase is driven primarily by solid working capital management and increased focus on capital spending throughout the company. Year-to-date capital expenditures were $119 million, down 18% compared with the first nine months of 2006. Our effective tax rate for the quarter was 38% versus 37.7% in the prior year’s quarter.

We completed two relatively small acquisitions in the last 60 days, WorkingRx and BancIntelligence. WorkingRx is a fill-in acquisition in the workers compensation area of the insurance segment. This business will create significant leverage for one of our existing businesses. WorkingRx generated about $15 million in net revenue for 2006, not including a significant amount pass through prescription product cost related to its workers compensation business.

BancIntelligence brings a unique consultative capability for bank clients, primarily in the $500 million to $5 billion size. The business utilizes client data, along with market information to produce customized web based solutions that can be used to enhance growth and better manage their business. This service is right in the sweet spot of our mission to help clients achieve best in class results.

Now I'll turn the call back to Jeff.

Jeff Yabuki

Thanks, Tom. Each quarter, we share several performance metrics to demonstrate progress against key Fiserv 2.0 objectives. The first metric is integrated sales. This measures our progress in delivering incremental value to clients to a targeted set of Fiserv I. products, with an ultimate goal of achieving $360 million of incremental revenues by 2012.

Our 2007 incremental sales goal was $26 million in recurring revenue. Through the first three quarters of the year, we have closed 81% of that 2007 sales goal, with 34% of those sales in the third quarter. This momentum is critical as we move into the 2008 sales year. We are confident that we will reach our full year objective. We are also on target to deliver the planned $15 million of operational efficiency benefit in 2007, and rose to achieving $125 million in operational efficiency savings by 2011.

Our third quarter progress was significant. In fact, we have now achieved $13.7 million or 91% of our full year objective of $15 million in annualized cost savings. Importantly, we have moved ahead of a ratable attainment phase on both of these important metrics.

Overall sales quota attained was 100% for the quarter, and is now 99% through September 30. The majority of our groups had solid results, offset by continued weakness in mortgage-related sales and to a lesser extent, insurance.

In particular, the depository institution and payments in industry products groups again had strong sales performance in the quarter. Overall, our financial segment sales pipeline remains strong, and we believe we are on track to achieve our overall 2007 sales quota objectives.

As we shared with you at our Investor Day, we expect to be at the low end of our $2.74 to $2.82 adjusted EPS from continuing operations guidance for the year. The movement in the range is due primarily to the sharp downturn in the U.S. mortgage markets, which we anticipate will continue in the weaker than expected performance in the insurance segment.

Even with the difficulties in the mortgage lending environment, we expect our full year 2007 adjusted internal revenue growth rate to be in the mid single-digit range for the financial segment and the low single-digits for the company. We now expect our free cash flow from continuing operations to be between $470 million and $490 million for the full year.

Our guidance for the remainder of 2007 does not incorporate any potential impact from the CheckFree acquisition. We have received early termination on our HSR filing, as well as CheckFree shareholder approval. Our financing is on track, and we are working to secure the necessary state money transmitter license approvals.

Given the anticipated closing of CheckFree later in the fourth quarter, we plan to release our 2007 year-end earnings on or about February 6, 2008.

On balance, we had a good quarter, and are on pace for the full year. In a somewhat challenging environment, we achieved 20% earnings per share growth from continuing operations, and delivered across the board margin expansion.

Our financial segment has a strong foundation and is performing very well. At the same time, we are focused on improving execution in our insurance segment and are committed to improving shareholder returns in that business group.

We are delivering results while making progress against the Fiserv 2.0 objectives, described for you nearly a year ago. We are actively managing our business and products, providing a more Fiserv-centric value proposition to our clients.

We believe there is tremendous value to be unlocked in the combination of Fiserv and CheckFree. We will be even stronger financially, have more robust products and networks, universal client access and bring together some of the most talented people in the industry to serve clients. This combination is truly transformational.

Lastly, we thank our employees and associates around the world for their relentless commitment to clients and shareholders. There is energy and excitement across the board as we enter the next stage of the company's future. With that, let's open the call for questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) First question today comes from Pat Burton from Citi. Your line is open.

Pat Burton - Citigroup

Hi, good afternoon and congratulations on the results. I'll ask about the insurance segment first of. Was the organic growth a negative, if I had anticipated when you lowered the range at the Analyst Day, Jeff?

Jeff Yabuki

Hi Pat, how are you?

Pat Burton - Citigroup

Good, thank you.

Jeff Yabuki

We clearly had a view into the results at that time, I would say that the insurance performance ended up being a little bit, even a little bit worse than we anticipated it would be at the time, and so, while we had the view, we didn't have it all the way in. And at the time, we believed that we would have issues and we talked about them, but again, the revenues were a little bit lower than we anticipated.

Pat Burton - Citigroup

Okay. And moving forward whether it’s the fourth quarter or beyond, what steps can you take to get that business back to at least some sort lets say, low single-digit positive growth given the improvement you’re making in the rest of the company? Thanks.

Jeff Yabuki

Yeah. From our perspective we believe that the performance in the third quarter is a bottoming out of performance. We expect to see performance continue to move up in the fourth quarter and beyond. We are managing the business more tightly. We are taking a good look at where we see opportunities to sell in a more dedicated or precise fashion and we’re just much more focused as we move past some of the acquisitions that we been involved in this year to ensuring that we are going deliver those results.

In addition, we've looked at some of our management, and we're looking at what are the right ways for us to organize to ensure that we can capitalize on the market opportunities that exist for us, Tom do you have anything to add?

Tom Hirsch

Yeah. Just to add to that Pat, I think as we go back to our investor day a couple of weeks ago, I think what I indicated at that was that our full year for the financial segment would be in the mid single-digits, which we’re very comfortable with. And also, that our insurance segment was a challenge for us in the second half of the year.

The revenue growth was lower than anticipated in the third quarter. We had lower flood claims, processing to implant our P&C license sales were lower. One of the things that I want everyone to remember is that in this business the net revenue is here about $190 million, so you are talking $7 to $8 million, as far as the decline in revenue, that has been impacted all year by the HTA business, but it can't be impacted by timing as far as license sales in our P&C business and some of our flood claims. So it is a much smaller part of our business as you know and, but we anticipate in the fourth quarter that we will be up from where we are from a growth standpoint. Our margins were up in this business quarter-over-quarter and has been up sequentially for the each quarter this year.

Pat Burton - Citigroup

Okay. Thanks and congratulations on the main part of the business and the performance there in this rocky mortgage days. Thanks.

Jeff Yabuki

Thanks Pat.

Operator

Next question come from John Kraft, D. A. Davidson & Co. Your line is open sir.

John Kraft - D. A. Davidson & Co.

Hi Jeff, hi Tom.

Jeff Yabuki

Hey John, how are you?

John Kraft - D. A. Davidson & Co.

Doing well. Let me just start with guidance. You just said Jeff that you will provide the official guidance in the February, on the February call. But, just big picture wise, I mean excluding what you can – you don't want to talk about it as far as CheckFree, you think there is enough of an exposure in the mortgage business, which kind of caused you to fall below your longer term target rates for both growth and earnings growth, revenue growth, earnings growth?

Jeff Yabuki

Yeah, I mean, that, John, just to clarify the outlook that we have provided in few weeks ago at our investor day, which was the same, not including CheckFree that we had put out in prior year. We remain very comfortable with that. But what we have also said is that that long-term performance outlook and that, it's really a three year average and in that some years will be up and some years will be down. But in any three year period, we will be within that range.

Now that said, we don't see anything today including what is going on in the mortgage market, that would give us any level of discomfort that we would be outside of our range in the financial segment, so talking about the financial segment.

So we’re comfortable with that, but again, we will give that actual guidance in 2008. And for just one more piece of clarity, we were talking about the Fiserv only numbers, not including CheckFree?

Tom Hirsch

Yeah. I think to just add to that the, our annual long-term performance outlook is to grow organic earnings 9% to 13%, that’s from internal measurement and again as Jeff indicated we don’t see anything today from the one example that’s really baked into our numbers, now and end of the fourth quarter. That would see us outside of that particular range. And the other thing I would just comment on is that our financial segment year-to-date is generated about 18% organic earnings growth on year-over-year basis. That’s been off-set somewhat by our insurance segment, but nonetheless a very strong performance.

John Kraft - D. A. Davidson & Co.

Okay, thanks, that’s helpful. And then speaking of the insurance segment, do you anticipated, what sort of impact or exposure, you have relating to the claims processing essentially from the fires in Southern California?

Jeff Yabuki

Yeah. We aren’t in that business, so we don’t have any – we wouldn’t have any impact there.

John Kraft - D. A. Davidson & Co.

Okay. And then, lastly here, on your legacy, the paper item processing, what’s the latest percent of your overall revenue did that represent?

Tom Hirsch

You know what John, I think it’s been around that, I think we've put that in that our investor day updates. So I think it was in the range of 10% somewhere in there, as far as percent of our financial segment revenue. And I think you can see that kind of on the pie in the analyst day presentation.

John Kraft - D. A. Davidson & Co.

Okay, thanks guys.

Tom Hirsch

Thank you.

Operator

Our next question comes from Dave Koning from Robert W.Baird. Your line is open Sir.

Dave Koning – Robert W. Baird

Hi, guys

Jeff Yabuki

Hi Dave

Dave Koning - Robert W. Baird

First of all, we had FI growth this quarter around 3%, and that was obviously impacted by mortgage and on the Chase business. If the mortgage business continues kind of at the current level, and it takes a lot of the anniversary that the Chase item loss. What gives confidence that then the next couple quarters we get better than 3% internal growth, and maybe you could give us a few items that kind of gets us back on track?

Tom Hirsch

Yeah, I would say, Dave, when you look back historically and if you even look at in the second quarter, we reported adjusted revenue growth of 5% which was a positive impact by a percent from termination fees, and a negative percent from lending. So that was at about 5% which was our core mid single-digit growth rate.

In the third quarter, we did report adjusted internal revenue growth of 3%, but that really hit us kind of hard with the lending piece, which is 2% points. So, when I look at our core payments, core processing business, that's been at 5% to 6% over the last six to seven to eight quarters, and we continue to see that going forward.

We do believe, as a baseline going into next year. We obviously have our integrated sales initiatives which are going extremely well, and we don't believe that the J.P. Morgan thing, that will anniversary by the end of the year. We don't anticipate having as we look into 2008, that large of an impact in our lending business.

And again, we have those other growth vehicles that we're driving through those integrated sales initiatives that will lift that core rate. But we've been very consistent at the 5% or 6% quarter-over-quarter, as you look over the last six or seven quarters, and we anticipate that going forward, not withstanding the lending impact that we had, which is fairly unusual in this quarter.

Jeff Yabuki

Yeah, and Dave, I would just add that we also continue to have a very strong pipeline where we are continuing to engage in lots and lots of great conversations of prospects, and so we feel good about that. We feel good about the underlying transaction growth that we’re seeing in our payments assets, and when you combine that with the fact that we’ve been seeing a lot of lending decline over the last four quarters. We believe that by the time we turn into 2008, the grow-over on what we had really seen in 2005 will be far simpler than we've had to deal with this year.

Tom Hirsch

And just to add one thing to it. Jeff indicated, the margin characteristics of, we drop off on the lending business, that’s a much lower margin business than our core depository institution payments business, and you can see in the current quarter, what we've basically done, is replace some of that revenue with much higher margin revenue from payments and other core processing assets which we continue to push in our integrated sales initiatives, both EFT, wire exchange bill payment, those products and services.

Dave Koning - Robert W. Baird

Okay. That’s great. And I guess a follow-up, Jeff, in Q4 we maybe shouldn’t be surprised to see another quarter, a little bit impacted by the mortgage-related business, but then a pick up really in '08?

Jeff Yabuki

Yes. We are planning at least for forecast purposes that the mortgage business will get no better for the remainder of the year than it's been for the last month or two, yeah.

Tom Hirsch

We've indicated at the Analyst Day, it was mid single-digit for the full year, is the rate and that’s what we reaffirm today.

Dave Koning - Robert W. Baird

Great. Thanks.

Tom Hirsch

Thank you.

Operator

Next question will come from Tien Tsin Huang from J.P. Morgan. Your line is open, sir.

Tien Tsin Huang - J.P. Morgan

Hi. Thanks for the mortgage detail, a couple of questions there. The $12 million decline in the mortgage revenues, how much of that should we consider to be as loss due to decline in bankruptcy?

Jeff Yabuki

Yeah. The majority of that, Tien, is coming from declines in volume as opposed to lost clients. I mean, clearly, everyone who is serving the mortgage industry to some extent has had some falloff from that perspective. But these clients are largely the BPO-oriented closing services, where we are seeing volume declines, really driving our drop off as opposed to lost clients. In fact interestingly, we've had actually a pretty good year in signing up new clients and bringing them in. Unfortunately, that's getting subsumed by the drop off in overall volume.

Tien Tsin Huang - J.P. Morgan

Got it. How was the lending business performing quarter-to-date? And also, can you give us some sense on how you are adjusting your cost structure to offset from this weakness?

Jeff Yabuki

Yeah, again, as we said a couple of times, for what we can see right now, we expect volumes to be certainly no better than they were in third quarter, and recognizing that the third quarter started out better than it ended. So, we really believe that the quarter is going to look really like it has for the last month or two. So, basically flattish to even a little bit down to where it's been in the last month and there is no signs in the economy that that is getting any better.

About the same token, we are very aggressively looking at on our business, looking at our process fees, and looking at ways to realign our cost structure as we shared with everyone. Previously, this business is a lower margin business and we have been caught in a little bit of a timing issue, and as the volume has fallen so rapidly, kind of catching up, realigning our cost structure to match the new level of volume that we are assuming for the remainder of this year, and frankly for most of 2008.

Tien Tsin Huang - J.P. Morgan

Okay. Thanks a lot. Jeff, maybe if you can just comment on the overall demand environment for bank spending, any change there? Looks like your sales increased?

Jeff Yabuki

No, not, really not at all. And we have been actually very pleased at our sales pipeline. Most of our business unit leaders and our sales leaders are saying that this is a pipeline is as strong as its ever been, in terms of the businesses that really contributes the most margins for us. And we’re optimistic that we are going have some attractive clients wins between now and the end of the year. And we are pushing hard on that in that way.

Tien Tsin Huang - J.P. Morgan

Very good thanks.

Jeff Yabuki

Thank you.

Operator

Next question comes from Greg Smith from Merrill Lynch. Your line is open Sir.

Greg Smith - Merrill Lynch

Yeah, hi. It seems to me that something been missed here, its just that mix shift in your revenues. Just looking at the, in the financial services segment, 3% organic growth, that you had 17% operating profit growth. So I guess my question is, if you can break this out of that 17% operating profit growth, how much is coming from the positive mix shift in revenue versus how much is coming from more expense initiative?

Jeff Yabuki

It would be difficult to do it any other than, kind of on an estimated basis, but we have identified for our purpose of allowing people to gauge our progress, our expense management initiatives, where we have got accomplished about 90% of our expense goal on the Fiserv 2.0 site for 2007, so about $13 million. And that’s for the entire company. So that’s the biggest expense initiative or expense management focused point that we have.

As Tom mentioned in his remarks, Greg, the real difference here is, we have taken revenues that are historically low margined whether it be in the lending BPO or some of the IT other areas that are much slower growth or declining in this case and replace those with much more attractive marketing characteristic as we showed, at our Investors Conference the revenues that are around the depository institution side and on the payments in industry's product side, carry margin characteristics that are in excess of the 23% margin that we had last year.

And so, you are exactly right, if you do the math and you are bringing in those higher margin products on the increment, or on the average, in both cases, those are going to add a lot to our operating earnings and that's why you are seeing the leverage that we've been seeing.

And as you know, we've been seeing that each quarter, we were 300 basis points up in the first quarter, almost 200 basis points up in the second quarter, 300 basis points up in the third quarter and that's really been happening as these lower margin revenues have been replaced by what we think are more attractive recurring streams of revenue.

Greg Smith - Merrill Lynch

Yeah okay. That's exactly what I was trying to hit at. Then, just is that possible to give us annualized runway revenues on the two recent acquisitions?

Tom Hirsch

I think we did have that Greg, for one on the Working comp RX, which was $50 million. And the other acquisition, I think, is under $10 million, as far as just an estimate for that on annual basis.

Greg Smith - Merrill Lynch

Okay, perfect. And then, you called out Tom, the $12 million of sort of negative impact on the mortgage side. Any ballpark what we can think about, incremental margin on that. Obviously they have to be relatively low, just given the high margins you are putting up here?

Tom Hirsch

Yeah that's correct

Tom Hirsch

No, I’m not going to do that on the increment basis, but that being said, if they are lower than our overall operating margin as a company and much lower than those other areas that Jeff highlighted in the payments and core depository institution area.

Greg Smith - Merrill Lynch

Okay, perfect. Thanks a lot guys, appreciate it.

Jeff Yabuki

Thanks Greg.

Operator

Next question will come from Charlie Murphy from Morgan Stanley. You’re line is open sir.

Charlie Murphy - Morgan Stanley

Thanks very much for the detail on sub-segment margins. I just wanted to check in on payments and see if you are in disclosing what approximately, how much more profitable that sub-segment is than the financial segment as a whole?

Jeff Yabuki

What we said Charlie is that; in our in Investor Day, we basically said that, that group payments and industry products, which are our payments assets and a variety of other products. The margin characteristics of those revenues tend to be higher than our 2006 average margin, which is 23%, so that’s really all the insights that will be providing at this time.

Charlie Murphy - Morgan Stanley

Okay.

Tom Hirsch

The only I thing, I clarify that, just to add Charlie is that the incremental components of when we add incremental transactions to our EFT data card platform, those are obviously much higher margins on the increments than what we would experience in lending or other ones, there is just a lot of higher direct cost associated with those businesses than lending IP’s. So, incrementally this is very positive when we get that incremental revenue on there.

Charlie Murphy - Morgan Stanley

Okay great. And I just wanted to ask the same question on lending, is this anyway excites how much below the 23 that is?

Jeff Yabuki

No, I think the way to think about it is that they tend to be BPO services, so they are little more expensive to deliver, given you have both technology and people in those businesses. And we have also talked about the fact that as those revenues have declined as rapidly as they have, that we have had a mismatch or a misalignment, and we have not been able to reduce cost in that sub segment, as quickly as the revenue has come off.

And so, not only do we have the impact of that being a lower margin on average, but as Tom was talking about that the increment, it actually goes the other way. It is little bit worse.

Charlie Murphy - Morgan Stanley

Okay, thanks very much.

Jeff Yabuki

Thank you.

Operator

Next question will come from Julio Quinteros from Goldman Sachs. Your line is open, sir.

Julio Quinteros - Goldman Sachs

Great. Thanks guys. Real quickly, just on the environment, your client environment specifically, I'm just trying to get any sense from you guys as your sales people are out there on sort of the front lines. Have they noted any sort of change in tone or sort of environment or appetite for IT, especially the kind of work that you guys are selling to them? Is there any sense that there is an increased nervousness or anything along those lines? I am just trying to get, just kind of general color for what the demand sort of situation might be like, relative to all the terminal that we're seeing in the financial services vertical today?

Tom Hirsch

Yeah. It's good question, Julio. We again have a pretty broad spectrum of clients that we are serving. But for our core processing clients, we are seeing kind of a continued demand. People looking for ways to create advantages in the market by the same token, they recognize that it's becoming more competitive, that the big banks at time will move down into their space. But as we have talked about the last couple of quarters, we have actually seen movement from bank core processing that had typically been in-house, starting to move over to the outsourcing side. And we also showed a little bit of slide on that at the Investor Day.

But we believe in times like this, outsourcing is a pretty viable opportunity, and we are seeing it on the core processing, we are seeing it in some of our other businesses. And then lastly, our sales pipeline and our sales quota attainment, both are pretty strong.

So, on a metric basis, that’s all very positive. I would say that there is consternation in the markets in terms of lending-oriented, people are not making big mortgage processing platform decisions. They are not making big lending origination decisions. And so, in those areas we have seen a slowdown, and when you talk to clients, you do hear your consternation from them on, when are things going to change. Today we saw that existing home sales were down 8%.

So, I think we are going to continue to see issues in that area. Thankfully, that remains to be a very small piece of our business. And as consumers continue to use their debit cards or pay their bills online, or write cheques, again because of our recurring revenue transaction-based model, those who are pretty positive for us.

Julio Quinteros - Goldman Sachs

Okay, thanks. And then, on the termination fees, I think on a nine month basis, you are up somewhere in the neighborhood of about two times where you were last year. Is there anything different about the profile the clients are contributing to the increase in the termination fees this year versus last year?

Tom Hirsch

No, there really isn’t, Julio. We had a couple of ones that I noted that were bought a little bit earlier in the contract term. So, when they get bought out a little bit earlier, are acquired in the contract term, it’s a little higher fee, just because of that acquisition earlier in the term. The other thing I'd say is as you saw in third quarter there, really right about the same as where they were, the third quarter of 2006. And, we are right in line really where we were in '05 and '04 as far as the dollar value. So, that being said, that's kind of where we at on that.

Julio Quinteros - Goldman Sachs

Okay. And just finally, when do you guys expect CheckFree to report their results?

Jeff Yabuki

I believe it's this week. So, I'm not sure if it's tomorrow or on Friday.

Julio Quinteros - Goldman Sachs

Okay. Thanks guys.

Jeff Yabuki

Yes.

Operator

Next question will come from Kartik Mehta from FTN Midwest. Your line is opened.

Kartik Mehta - FTN Midwest

Thanks. Good afternoon, Jeff.

Jeff Yabuki

Hi.

Kartik Mehta - FTN Midwest

I wanted to ask you a question on the insurance segment, Jeff. If you look at that segment, do you think the reason maybe you haven't performed up to your expectation is a product issue or is it just an execution issue that's more easier to fix versus the product?

Jeff Yakubi

Yes. Kartik, one of the challenges in answering that question is, I would guess if there are probably well over 50 products in that segment, my take is, it is a combination of both, but the lion share where I think we have upside, is execution-based, not withstanding the challenges in HPA that we've talked about where we are, to some extent disadvantaged on the network discount side.

All of that said, I do think we can perform better, by better execution. We have had some management changes this year, and I believe that we will be in better shape and deliver better results in this segment. It's not going to happen magically overnight, and we are going far deeper into what's going on in there to make sure that we don't have any product issues or other issue lurking out there. So, I'm comfortable that we are going to improve performance. I’m disappointed that its taken as long as it has, but we will turn that corner.

Kartik Mehta - FTN Midwest

Great, and a last question Jeff. Have you noticed any change in behavior for your customers for the bill payment product? I noticed that in your press release, I think you said you had 82 new clients for your bill pay products, but this is what I was wondering is, as clients look for you to finalize the CheckFree acquisition and has that product on your umbrella, are you noticing any client saying we’ll wait till you acquire the company or any change in behavior for even the internet banking product, because its clearly a?

Jeff Yabuki

The short answer is no. We have developed the Paytraxx product is a good product, and we got a nice job of distributing it across our base as you will recall, there was a large segment of our population who had not yet signed up or, I think about 50% of our core clients had not signed up yet for bill pay solutions or making nice inroads there. What’s been most exciting is that in the last quarter we started to have some very nice competitive wins. And so we’re starting to take clients from our competitors, and I believe that upon the closing of CheckFree, that we will be able to put together a far more robust and richer offering, that will hopefully be an even stronger best in class offering that exits today.

But, no we have not seen slowdown on the bill pay side nor on the internet banking side. We continue to hear from our clients, they want to know what we’re going to do that is going to be innovative, and how are we going to deliver more products to them faster, which kind of continues to give us confidence about the success that we’re going to have in the future with that acquisition.

Kartik Mehta - FTN Midwest

Great, thank you very much.

Jeff Yabuki

Thanks Kartik.

Operator

Our last question will come from Tim Fox from Deutsche Bank. Your line is open sir.

Tim Fox - Deutsche Bank

Thank you, good afternoon.

Jeff Yabuki

Hi Tim.

Tim Fox - Deutsche Bank

Just one follow-on on the margin question, given the performance you had this year and then certainly in this quarter in improving margins and mix shift that we should see going forward. I am wondering why did that you anticipate only sort of 50 to 10 basis points over the longer term from margin improvement perspectives.

Jeff Yabuki

Good question Tim. Let me just give you my quick insights then I will have Tom give the more detailed answer. We have seen really, obviously healthy gains in margin this year and as we have talked about that those gains in margin is really coming from a combination of primarily product mix, as well as a bit on the cost efficiency side. What we have said is that we expect to see at least 50 to 100 basis points of grow annually so each year sequentially, and over the foreseeable future. So, we don't expect to see only 50 or only a 100, but we believe that its reasonable for people to build into their economic analysis, some level of continuing gains in market.

Now, we'd all like to see those gains be larger, but by the same token, we can't always estimate what is going to be happening in the market. We didn't anticipate, its the beginning of the year that we would see precipitator's follow-up that we have seen in the mortgage lending side. But we believe that 50 to 100 basis points is a very comfortable level that we will be able to achieve on a regular basis, Tom.

Tom Hirsch

Yeah. I think that covers that, I think the comments that I made was that will be at least in that 50 to 100 leap. The comment that we want to make is that our financial year-to-date, they are up about 260 basis points and that type of margin improvement on year-over-year basis. So it will be very difficult to us, obviously attain. So we just want to make the point that we continue to anticipate at least 50 to 100 basis points. Its something that we've demonstrated our ability to execute on it, its something we are very focused on, is getting those higher value products to our clients that result in higher margin status also.

Tim Fox - Deutsche Bank

Okay good that's helpful. And in one just other sort of high level question Jeff, about, you mentioned, budget was pretty good, pipeline remains fairly strong, I was just wondering, given some of the success you've had with de novo wins over the past year or so, what do you think on that front now, is there any effect on new de novo formations and possibly on win rate there, if we see some continued softening in this market?

Norm Balthasar

Yeah, hi, this is Norm. That it still continues to be a very vibrating area for us. We've got probably the same level of more activity, for de novo is not only opening, but the month we would be signing on it, mark share that we would gain. So we still feel very good about the de novo market. We don’t see any appreciable difference and what we do see is probably a little bit of traction as far as the de novo that are coming up.

Tim Fox - Deutsche Bank

Thank you all

Norm Balthasar

Thank Tim.

Jeff Yabuki

Thank you Tim

Operator

This time I show no further questions.

Jeff Yabuki

Great, well thanks everyone for joining us this afternoon. We as always appreciated your sport. If you have any further questions, please don't hesitate to call our Investors Relation group. Thanks, thanks again.

Operator

At this time now we conclude today's conference. You may disconnect and thank you for your attendance.

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