Fiserv Inc (FI) 2004 Q2 法說會逐字稿

Good morning and welcome to the Fiserv earnings conference call for the second quarter of 2004. We currently have 9 participants on this call and all participants will be able to listen only until the question-and-answer session begins following the presentation. During the question-and-answer session, please limit yourself to one question to allow time for other callers to participate. At the request of Fiserv, today's call is being recorded and also is being broadcast live over the internet. The call is expected to last 30 to 45 minutes and you may disconnect from the call at any time.

Now I would like to introduce the Fiserv management team in attendance on this call. Les Muma, President and CEO; Norm Balthasar, Senior Executive Vice President and Chief Operating Officer; Ken Jensen, Senior Executive Vice President and Chief Financial Officer; and Tom Hirsch, Senior Vice President and Controller. At this time, I would like to turn the conference over to Les Muma. Sir.

Good morning and welcome to Fiserv's 2nd quarter earnings conference call. We appreciate your participation and look forward to presenting our second-quarter results and answering your questions.

Fiserv would like to state that the company may make forward-looking statements regarding 2004 earnings and revenue targets, sales, pipelines and acquisition prospects during the course of this conference call. Such statements are covered by the safe harbor, included in the Private Securities Litigation Reform Act of 1995. These statements may differ from actual results and are subject to a number of factors.

Please refer to our second-quarter earnings press release for a discussion of these factors and non-GAAP financial measures discussed in this conference call. The press release and our Form 10-Q filed with the Securities and Exchange Commission are accessible on our website, Fiserv.com.

Fiserv continued 2004 with record diluted earnings per share of 48 cents for the second quarter and 95 cents on a year-to-date basis. Our year-to-date free cash flow was $252 million, was exceptional, increasing 40% compared to the prior year. Our focus on operating fundamentals drove our strong earnings and cash flow during the quarter. We accomplished this by operating our businesses and our traditional discipline manner and integrating our 2003 acquisitions effectively.

Throughout 2004 we have expanded our focus on internal revenue growth. While this expanded focus has produced favorable internal revenue growth results in our fast-growing Health segment and other business units within Fiserv, results in our overall financial segment remain below our goal. We do, however, remain optimistic about improved internal revenue growth in the financial segment, in the latter part of 2004 and in 2005.

We will now turn to Ken Jensen, who will present our financial performance, I will follow with a brief business overview, and we will then open the lines for questions. Ken.

Thanks, Les. As already stated, Fiserv continued 2004 with record earnings for the second quarter. Diluted earnings per share for the second quarter was 48 cents compared to 40 cents in 2003. And on a year-to-date basis was 95 cents compared to 78 cents in the prior year. The 48 cents in diluted earnings per share for the second quarter of 2004 was within the range of consensus analyst estimates and our estimate made in the last conference call.

Our estimate of full-year diluted earnings per share for 2004 continues to be $1.87 to $1.93, which represents a increase of 16 to 20% over 2003. EPS estimate for the third quarter of 2004 is 46 to 49 cents per share.

Our second-quarter processing and services revenues of 856 million increased 212 million or 33% over 2003, and on a year-to-date basis increased 448 million or 36%.

Year-to-date revenue growth for 2004 was positively impacted by growth of 160 million or 18% in our financial segment, and 263 million or 162% from our segment.

The major contributor to the continued growth in the Health segment is the revenue increases in our pharmacy services businesses which generate an average operating margin of mid-single digits.

We are currently estimating 2004 third-quarter processing and services revenues to be approximately 850 million to 875 million, which is an increase of 21 to 25% over the prior-year period.

2004 year-to-date cash flow provided by operating activities before the increase in security, processing receivables, payables of $5 million, was $322 million, increasing $61 million or 24% over the prior year: Our working capital changes, excluding security processing receivables, payables, had a positive impact on overall cash flow of 2 million in 2004, compared to 4 million in 2003.

Fiserv's 2004 year-to-date capital expenditures, including capitalized software, were 70 million, down 11 million, compared to 2003. As Les highlighted earlier, our free cash flow for 2004 was $252 million, an increase of 40% over the prior year. Fiserv continues to benefit from our business model and incentive systems that motivate our business leaders to focus on growing their units earnings and free cash flow.

I will now summarize our performance by business segment. The second quarter our financial segment, which comprises approximately 65% of our processing and services revenues, and 85% of our operating income, continued its strong performance. This segment increased both second-quarter processing and services revenue and operating income 17% over the prior-year period and on a year-to-date basis increased revenue 18% and operating income 22%.

During these increases were 2003 acquisitions and strong operating margins as we continued to drive cost synergies in both our existing operations and through certain of our complementary acquisitions.

Our fast-growing Health segment increased second-quarter revenue 134%, and operating income 71% over the prior-year period. And on a year-to-date basis increased revenue 162% and operating income 65%. Our Health segment's revenues increased and operating margins decreased compared to the prior year primarily due to our December 2003 acquisition of Medbay and the growth of our existing pharmacy services business.

As a reminder, our pharmacy services businesses have an average operating margin in the mid-single digits. The overall lower operating margin of this segment is primarily due to a year-to-date increase in 2004, compared to 2003, of approximately $192 million of prescription and ingredient costs being reflected in both revenue and operating expenses.

We continue to be very optimistic about the long-term growth potential of our Health segment, and believe our pharmacy services businesses will be an important part of our overall growth for this segment.

In our investment services segment, operating income decreased 3 million in the second quarter of 2004, compared to 2003, and on a year-to-date basis decreased 10 million.

2004 year-to-date decrease in operating income, compared to the prior year, was primarily due to a 6 million charge in the first quarter of 2004 and additional expenses in the second quarter, primarily outside legal fees, associated with the company's broker dealer subsidiary, Fiserv Securities Inc.. Fiserv securities has been responding to inquiries from the Securities and Exchange Commission as part of its industry-wide review of mutual fund trading practices, including market timing and late trading.

Fiserv securities estimated cumulative revenues associated with such practices at approximately $4.6 million. Although the company is unable to predict the ultimate outcome of these matters, if the SEC were to assert a violation of security laws with respect to these matters, then Fiserv securities may be subject to fines and penalties and other administrative remedies that could have a material adverse impact on the company's quarterly operating results.

Now I'd like to turn the call over to Les, who will provide additional details and highlights from the second quarter.

Thanks, Ken. As Ken indicated, our second-quarter processing and services revenue increased 33% over 2003, and on a year-to-date basis increased 36%, resulting from a combination of acquisitions and organic revenue growth. Our 2004 revenue growth from acquisitions were derived from our 12 acquisitions closed in 2003 and one acquisition that closed in the first quarter of 2004.

In January of 2004, we closed the acquisition of [RegEd] Inc., headquarted in Morrisville, North Carolina with annualized revenues of approximately $9 million.

While we have only closed one acquisition to date in 2004, our current acquisition pipeline continues to remain robust. Fiserv continues to follow our long-term disciplined acquisition strategy that has served our shareholders well since our company's acquisition. Since our company's inception, excuse me.

Our 2004 second-quarter internal revenue growth rate was 11% on a year-to-date basis was 10%. The company's overall internal revenue growth rate in 2004 continues to be driven largely by our Health segments, prescription services businesses. Our second-quarter internal revenue growth for our financial segment was flat compared to the prior-year period and in line with management's expectations.

The second quarter internal revenue growth rate in this segment was negatively impacted by approximately 2%, due to the combination of the loss of Sovereign -- Sovereign's item processing contract that we mentioned in 2003, and the decline in the current-year mortgage origination volumes negatively impacting our lending group. Notwithstanding these negative forces, we are not satisfied with the current internal revenue growth rate of our financial segment businesses.

While we stay committed to our historical focus on core operating fundamentals of earnings and cash flow, we are also very focused on improving our internal revenue growth rate at all levels within our organization. We understand that improving our internal revenue growth is a long-term necessity.

We do believe this segment's organic growth will improve in the latter part of 2004 and in 2005 due to management's overall efforts in this area, along with a number of more specific factors. First, we anticipate an improvement in our lending group overall in the next few quarters. GMAC, the nation's 7th largest mortgage servicer, converted their remaining primary home equity business to our mortgage serve platform at the end of June. This will have a positive impact on revenues in future quarters. Our sales pipelines in the lending products and services remain very active.

Additionally, our lending group is well-positioned to capitalize on its expanding product line through cross-sales to existing clients not only in the lending group, but across Fiserv.

Second, our current pipeline of large financial institution check processing deals continues to be very strong, driven, we believe, by the passage of check 21 and the forecasted continued decline in the number of paper checks written in the United States. Check 21, and the anticipated cost of preparing for check imaging, are causing financial institutions to re-examine their existing and future costs of processing checks. The declining check volumes are increasing the per-unit cost of check processing across the industry.

Together, these two phenomena are encouraging many large institutions that currently process their checks in-house to evaluate the future of their internal operations. This continues to provide a fertile environment for Fiserv's check outsourcing sales force as we are the nation's largest check processing company.

While we did not sign any large check processing contracts last quarter, our sales pipeline continued to be strong. The sales cycle on these large check processing transactions is generally longer than our normal core business transaction, and can extend to anywhere between 6 to 18 months. Our confidant remains high that our sales efforts will provide positive results leading to strong revenue streams, thereafter.

Third, our core credit union businesses continue to have a very strong growth year and we anticipate that this will continue for the remainder of the year.

As mentioned earlier, our Health segment's internal revenue growth rate for the second quarter was 50% and on a year-to-date basis was 46%. This rate increased significantly over the prior year, due primarily to the strength of our pharmacy services businesses, as we continued to activity sell these services to both existing and new clients in our Health segment.

Excluding the prescription ingredient costs, included in the revenues in our pharmacy services businesses, the Health segment year-to-date 2004 internal revenue growth rate would have been in the low teens.

The fourth segment of our financial reporting titled, 'other', includes our printing and plastic card businesses -- business per sonics. This segment is generated stellar performance this year to date, 2004, with 2004 internal growth of $12 million or 26%, attained through a combination of new sales and cross-sales.

We expect our internal revenue growth rate and our financial segment to be in the mid-single digits as we complete 2004. In addition, any significant check processing transactions that we sign between now and the end of the year could have a positive impact on our future internal revenue growth rate in this segment.

We anticipate that our segment for the rest of 2004 will grow revenues organically in the 30 to 40% range, due primarily to continued growth of our pharmacy services businesses.

As we look into 2005 for this segment, internal revenue growth is expected to slow as the significant positive impact of our pharmacy services businesses is expected to be lower in 2005 than in 2004. Although our investment services segment experienced 6% internal revenue growth rate in the first half of the year, we anticipate moderate growth for the remainder of the year.

All four of our reporting segments have historically experienced quarterly fluctuations in organic growth rates, both positively and negatively.

Overall, and consistent with our comments on our previous conference call, if our business progresses within the range of our 2004 forecast, our company's organic growth rate for the full year 2004 should remain at approximately 10%. This exceeds our historical average of 7% organic growth rate due primarily to the strength in 2004 of our Health segment.

Significant and new relationships in client renewals signed in the second quarter include the following: Caja Popular Mexicana, Mexico's largest credit union, selected the Fiserv core banking system to process its operations throughout the 327 branches it maintains across the country.

Sovereign Bank, a $47 billion financial institution based in [Wyomising], Pennsylvania added to its already significant Fiserv relationship by agreeing to use Fiserv unified pro-mortgage EX system as its new loan origination solution.

Liberty Bank for Saving, a $764 million asset financial institution in Chicago, significantly expanded its relationship with Fiserv by adding the Fiserv VISION core processing system, as well as, Fiserv's data warehouse, image-based check processing, and image solutions from Fiserv of Image Soft.

And finally, National Securities Corporation, Seattle, Washington, a wholly owned subsidiary of Olympic Cascade Financial Corporation, significantly expanded its relationship with Fiserv Securities for securities-clearing services.

In closing, both our sales and acquisition pipelines are strong, and we anticipate solid growth for the remainder in 2004, both organically and through acquisitions.

Our management team is focused on generating profitable new customer relationships, expanding existing customer relationships, and increasing the internal revenue growth rate across all our companies, while maintaining consistent increases in earnings and cash flow in every line of our business.

Looking forward, we are confident that we will be able to attain our 2004 earnings per share target, which is $1.87 to $1.93 per share.

We will now open the lines for questions.

Thank you. If you would like to ask a question, please press star, then 1. You will be asked to record your first and last name. To withdraw your request, please press star then 2. Once again, to ask a question, please press star 1. Our first question will come from David Togut of Morgan Stanley.

Thanks, good morning, Les.

Good morning, David.

Could you rank the relative importance of the drivers of improved internal growth in the FIO business in the second half of the year, and perhaps discuss some of the risks to that outlook.

The drivers are obviously continued strong sales, which -- which are continuing, not only in the software business but the service bureau business, certainly maintaining and increasing across sales, are going to help. Certainly, another driver is the whole area in lending, where we have had a slow first and second quarter driven by the increase in interest rates.

That is going to -- to be -- it's going to be important on how lending behaves in the second half of the year and we look at that to start improving on a relative basis. I would also tell you that Check 21, the impact Check 21, and the reduction in volume of checks has on general outsourcing as well as these large deals that I've talked about. All of those factors weigh in on what we'll do in the second half of the year.

Just to -- perhaps just to clarify my question a bit. As you look at those different factors, um, you know, what -- what sort of quantitative contribution do you expect from each, for example, if you look at, you know, new sales versus cross-sales, you know, what percentage of the impact, uh -- of the -- the improvement internal growth should come from each.

David, I don't believe it differs an awful lot from what we've talked about over the years. The main driver of organic growth is net new customers added. New customers signed and converted, less any we lose, to acquisition or for other reasons.

Second thing in there is cross-sales. And obviously cross-sales, this whole organic growth thing is a focus right now and we're pushing very hard on that so if anything would uptick slightly but will still be secondary compared to net new sales.

And then obviously the lending area. And what happens to -- to lending and -- and especially originations and how that moves forward.

And then of course, on top of that, if one, two, or three of these large deals pop, it will make a material difference to what that organic growth rate looks like. And we still expect fourth quarter to be the -- really the bellwether quarter as we start to see this thing turn around as we go into 2005.

And what do you see as the major risks to your expectations for improving internal growth? Do you have a lot of visibility on the sales cycles of what's in the pipeline, for example, on one or two of these big deals, or is it more of a -- you know, just hitting a few singles and doubles?

I don't think there's anything, uh, other than just continuing to hit singles and doubles. Certainly, the lending area is something that is dependent on interest rates and how the economy behaves, so we watch that a little closer. And then I would tell you that if any of these large deals come through, uh, and they very well could, they could also just as easily slide to the first quarter of next year. But if they come through in the third or fourth quarter, that will make a big difference there.

Fundamentally, you know, there's really nothing wrong with that business and it's just going to take time to see it move back. Lending has hurt us this year pretty significantly, as that has fallen off. As most of our lending areas, we've talked before, is with sub-prime loans and equity loans, but we had some spillover when the re-fi market was going on and what we're seeing is that spillover, that very small bit of primary loans due to the re-fis slowing down and that is really hurting us in that area.

Okay. Thank you.

David. Excuse me, go ahead.

Greg Smith from Merrill Lynch, you may ask your question.

Yeah, hi, good morning. Just wanted to get the timing. When did the GMAC deal fully convert and when can we expect the Sovereign mortgage processing deal to actually convert?

The GMAC [he-laq] loans, home equity loans, converted June 30th, so no impact at all on the second quarter, the full impact will be on the third quarter.

The deal with Sovereign is certainly not as impactful. They are scheduled to convert over the next several months to our product, but it is not going to be near the significance. That's more like a single, as opposed to a double or a triple.

Uh-huh. And then on the Check 21 side, are you seeing any -- any changes from financial institutions, anybody just deciding they're going to wait longer to see how this all plays out, or is it just -- just merely a function of these long sales cycles.

It's a function of the long sales cycles. There's nothing -- there's no real material change there. We've had some things that some banks where they had this front burner and pulled it back to the backburner for a while. But they're still in the pipeline. We still think we've got a very good chance for quite a few of these big deals.

Uh-huh. And no change in sort of a competitive landscape, who you're going against in some of these maybe larger RFPs.

No. I would make one other comment. In this area of -- of preparing for Check 21 and converting to Image, on -- on the in-house side of our house where we license this type of product, we continue to see that do very, very well.

In the service bureau side, banks continue to convert at a very rapid rate to Image. So the movement towards the preparation for Check 21, both on our software side and on the service side continue, and we have just got to rock some of these big deals loose and then there -- you know, I say some big deals, there's some 6, 7, 8 and $9 million deals in there as well, as well as some larger than that.

And just lastly in the financial outsourcing segment, you know, obviously you've been impacted on the lending side, but is there anything else that hasn't quite materialized in the past two quarters the way you would have expected or any other kind of areas where there may be some weakness that was unexpected.

No, I don't believe so. The international, which we've talked about before, I don't think has hurt us as bad this year as in previous years, but it's still not good, we still haven't seen a pickup there. The IP Sovereign situation, you know, we did expect that. That was expected, and the compare on that won't go away until we get to the latter part of this year, which is when they initially, went away -- started going away.

What is -- is that 4Q -- will it take all -- will it annualize in 3Qor 4Q.

It will annualize in 4Q, and then some in the quarter of next year.

Great. Thanks. I appreciate it, Les.

You bet.

Carla Cooper from Robert W. Baird. You may ask your question.

Good morning.

Hi, Carla.

You talked in the last -- I believe in January and in April about strong software sales in the bank area, I think last quarter you noted you had record sales of CBS and ITI. However, it doesn't look like we saw that translate into revenue. Could you talk a little bit about that bookings to revenue conversion or -- or did I miss something there?

Well, bear in mind that on the ITI side, we don't book that revenue until the conversion takes place.

Okay. So is that yet -- would you characterize then the record sales that you noted last quarter as still sort of yet to be converted into revenue?

Right. And that will be converted over -- you know, the next 6 months or so.

And is that part of your thinking for the -- for the -- for the idea that FIS can still accelerate.

Well, that'll help some, but those aren't material numbers, Carla. If you go back and remember that -- that on a percentage basis, our software sales are still a very small part of our top line.

Our software sales, Carla, are only about 4% of our total revenues.

Right. Right. But -- yeah. That's right. Um, and then I guess just to get a summary on the sales type of line, would you characterize it as overall stronger, you know, as you sit here today versus what it was say 3 and 6 months ago?

If you go back to the middle of last year, it's stronger. But I don't think it's any stronger than it was coming out of last year and into the early part of this year but it remains strong, we're doing very well. We're signing a lot of new customers across our products.

So, you know, it's a matter of conversion times. When you -- when you sign service bureau customers, they don't go on generally for 60, 90, 120 days. So it's just a matter of moving along, blocking and tackling and continuing to sign. I don't think there's anything unusual there, Carla.

Okay. All right. Thank you.

You bet.

Bryan Keane from Prudential Equity, you may ask your question.

Yeah, good morning. Just a question of clarification. Uh, Les, I think you mentioned the lending group will be an area that probably picks up some, just with -- with rates looking like they're going to go up, can you just clarify how -- how the lending group will -- will outperform or will start to pick up?

Actually, I can answer that a little bit. It's a lot of new sales to -- to new customers and then some existing customers are also expanding their programs, which will likely have a good impact, even though you'll have some negative impact from the interest-rate situation.

It'll be new sales driven.

New sales driven and growth within existing customers, especially in the -- the second-mortgage home equity area, as well as some prime loans. And we do a lot of work there, not only in the origination but in the preclosing services.

And as those continue to grow and they are growing by them pushing more business down this -- this pipeline, uh, existing customers, plus we've got a nice pipeline of new customers in that area.

Okay. And then on the acquisitions, you mentioned you haven't been very active so far, but the pipeline is robust. Where -- where do we think the acquisitions, or what areas look more robust?

I'll pass that to Ken after saying that it's not that we haven't been active, we've been active as heck, we just only closed one deal. Where do we see --

I'd say that we're probably still more likely to do deals in the health and the insurance area just because, uh, you know, we have less of a presence in those areas than we do in the financial institutions area. But we have opportunities in the pipeline that are in virtually all of the areas that, uh, we're in.

And, uh, to fund those acquisitions you use cash and -- and I don't think you guys do much stock deals.

Predominantly we will use cash.

Okay. Great. Thanks.

Thank you.

Pat Burton from Smith Barney, you may ask your question.

Hi. Two-part question. Number one, could you quantify the amount of the legal fees in the securities unit, because it sounds like that was a nonrecurring expense? And then I have a follow-up, please.

We don't have that number. Do we, Ken?

Yeah, we haven't quantified it other than it was a significant part of the contribution -- the negative contribution in that quarter.

But you're right, it is one-time, we just haven't quantified it, Pat.

Okay. But presumably it will go away when that gets settled. The second question is 10-year bond yields ran up early in the year hurt mortgage originations and then obviously the 10-year came back in yield here in the last couple months. Has the -- did the mortgage business do better as the quarter went along?

You know, I can't answer that off the top of my head. Norm, can you give me any insight there?

We don't have that much detail, Pat. One thing I would caution you, though, is our impact there is primarily in the run-off or slowdown in the prime-loan, uh, refis, which was the hot button back when rates were very, very low and continued to stay low and we don't do an awful lot of that but we did enough that as that slowed down, it did impact that area.

So there's -- there's some degree of argument that the impact of the higher rates will hurt us less and less going forward because we have less of rate-sensitive business and because most of our business is subprime and equity, which are not interest-rate -- as interest-rate sensitive.

Thank you.

Sure.

Julio Quinteros from Goldman Sachs, you may ask your question.

Good morning, guys, in the year ago health plan services number. Can you tell us what the gross pass-throughs were in the 2003 Q2 equivalent?

I think the number was disclosed in the 10Q. I think it was roughly around 10 to $12 million, I think $12 million was in there.

Okay. Great. Thank you.

You're welcome.

Andrew Jeffrey from Needham, you may ask your question.

Hi, good morning.

Good morning, Andrew.

Les, could you discuss a little bit what you think the long-term operating margin is gonna be in the health plan business. I understand the -- sort of the lever, the dynamic that's pulled it down over the last few quarters, uh, in terms of PBM, uh, do you see that dissipating and where do you think, uh, you know, if you look out a year or so, the sustainable profitability in that segment shakes out?

You know, right now we're -- the margins in that area are around 9%. And, you know, I don't expect any material move in that interest rate in the foreseeable future, you know, --

Margin.

I mean the margin is 9%. I don't see any particular move in that. Obviously, as -- as the prescription business grows, it can have some downward tugging on that. At the same, time, we're putting efficiencies into the other part of the business, which will be able to bring the -- the rate back up, the margins back up. So expect it in that 9% range.

Okay.

I might add to that is in some ways I would hope that it would go down because I would say that our prescription business did even better than we expected.

Uh-huh.

And then I'd say that if you look at the margins without the ingredient costs, and I would expect it to go up.

Okay. And -- and what's the competitive environment like? I know you're sort of -- although you're growing very quickly, still relatively small in that market. Uh, has pricing remained pretty constant, uh, what are you seeing on that front.

Well, competition's pretty aggressive in that area, there's no question about it. There's -- and we're like the 5th or 6th largest, and we're certainly not a major player by comparison. On the other hand, we've got a market niche that we are doing very well in.

We're continuing to add new business, bear in mind that piece of our business has more churn than our bank business have done, we talked about that before, generally it's in the 8% to 10% churn rate, generally early in the year when most of that comes. Uh, but it's competitive but I don't think we see any more of a material competitiveness now as we did 6 months ago or 9 months ago.

Thank you.

Thank you.

[inaudible] [Chapitis] from First Boston, you may ask your question.

Hi, thanks. Just a question on the acquisition side. You mentioned that you've been active there but haven't closed deals. Can you elaborate a little bit on what happened there, if that was an issue of price or other matters that kept you from closing them.

It's a combination. A lot of the deals that we didn't close were based upon price, some of them were just as we investigated farther we discovered that it was not something that we would want to at any price.

Okay. Have you seen some -- any upward pressure in multiples there, in the acquisition front?

Uh, well, there's -- you know, obviously been some upward pressure in terms of prices that some people have paid for certain of the acquisitions that they've made.

There were a couple that -- that were priced aggressively, that we obviously walked away from, but there are a lot of other reasons, too.

Okay.

The deal flow is still strong, we're still looking at a lot of -- a lot of opportunities, and I think, you know, we're disciplined in how we do acquisition, which has served our shareholders very well over the years. We don't anticipate changing that. And we'll continue to block -- we'll get our deals over time.

I might add that, you know, if we look at our past history, there are probably 7 or 8 of our acquisitions that we've made that, uh, we didn't win the first time that they were acquired. And we then acquired them thereafter at a more reasonable price.

Okay. Thanks.

Scott Kessler from Standard & Poors, your line is open.

Thanks very much. A couple of my questions have been asked and answered but one question that I did have is, you know, there's been some discussion as to the relevance of interest rates and not only their movement but the magnitude of that movement, um, on your company's businesses. Um, in the past, I've heard discussion about how actually interest rates would aid some of your securities businesses, and now it seems like you're indicating that contrarily higher interest rates actually hurt, um, some of your FIO businesses.

So if you could kind of maybe take a step back and tell us how we should think about interest rates from the perspective of your entire company's businesses, that would be very helpful. Thank you.

Let me just add, and then Ken you can jump on this, but overall, our company, if you look at the 3 billion plus run rate, we're not materially sensitive to interest-rate moves. However, where we are sensitive on the -- if rates go up, it does have a negative impact -- small negative impact on our lending area. And the -- the impact has been probably larger in the past couple of quarters because we came off a very high refi boom back down to something more normal. On a go-forward basis, there will be some sensitivity there, it will not be material.

On the other side of our business, the securities and trust side, rising interest rates helps that business because of the -- the margin account, interest rate, and because of the interest rate that we receive on our investments on the trust side of the business. So there's a positive impact on that side. But overall, if you look at the large part of our business, it -- it's relatively rate sensitive. Ken, do you want to --

Yeah, I would say it would probably net out positive right now and I'll add one exception, is that if we were to do large acquisition -- or acquisitions that utilized a lot of cash, uh, and we had to do a lot of borrowing and the interest rates had gone up that would obviously hurt the performance of the business. Or being able to borrow very cheaply, which is of course what we can do right now.

Okay. Thank you very much.

Sure.

John Kraft from DA Davidson, you may ask your question.

Good morning. I just wanted to follow up, ask a couple clarifications on the check processing business. Les, I think you mentioned that Fiserv was number one in that business market share, and I think in the past you guys have said you're number three. Are you picking up market share there? And then secondly, are all of your processing centers able to print substitute checks ready for Check 21.

The answer to the first question is we've been number one in the check processing business for years. So any -- it was a misunderstanding if -- if you had the impression we were number three.

On the other hand, we are gaining market share. We do continue to gain market share. And all of our check processing centers across the country are image enabled, all of them are ready and prepared to do replacement checks, and move into Check 21.

So we are -- I would say as good or better prepared than anybody in the country for Check 21.

Okay. Thanks.

Sure, you're welcome.

Chris Penny from FBR, you may ask your question.

Thank you very much. Les, we're getting up to the two-year anniversary of your acquisition of the ATM business you acquired. Can you talk a little bit about how that is -- is coming along and what you'd expect to see in terms of back end of the year for that business? Thank you.

I -- right off the bat, I'd just say that's been an excellent acquisition. It's performed extremely well compared to its pro forma from a -- a revenue and profit standpoint. The retention rate was as good or better than we expected, uh, the only disappointment, and it's a minor disappointment, and that is our consolidation of the two businesses on to a common platform has gone slower than expected. That has not impacted the performance because the performance went beyond our expectations, notwithstanding the fact that this consolidation of platforms hasn't taken place. And that is moving forward.

On a go-forward basis, I would expect it to continue to perform at or -- at or above its current levels, and will continue to gain as we -- as we consolidate that platform, which right now, Norm, is scheduled --

[inaudible] the next two years.

Okay. A gradual consolidation of platforms over the next two years. So we will continue to be able to leverage the -- the expense base there over the next two years.

Have you picked up any new customers based on that -- on that platform?

We continue to add customers. Uh, on -- quite honestly right now on both platforms. On the CNS or the EDS platform, as well as ours, and then on a go-forward basis as we consolidate onto one, I would continue to -- I would expect to continue to add clients. That's a very competitive product.

Again, it's a pretty competitive area with some large competitors but we do extremely well. And our real strength in that ATM and debit-card area, although we sell to non-Fiserv service bureau customers, or software services customers, our real strength is when we license or sell a bank service bureau or license our software to a bank, they almost always by our ATM services.

And one follow-up question on the -- on the core side. Um, any change in compensation or, uh, change in structure that might stimulate some sales in the back end of this year? Or just a -- just -- are you just focusing, is it just a sharper focus on the sales and the FIO business?

I think it's more the -- the latter than the former.

Okay.

You know, we constantly look at ways that we can move prices around or move the -- the way we price around, but we're pretty consistent. And it's more just a blocking and tackling and doing better at what we do.

Okay. Thank you very much.

Certainly.

Tim Willie from AG Edwards, you may ask your question.

Thank you. Uh, one follow-up question to the one that was just asked and then I do have one other brief question.

But in regards to core system sales, um, I apologize if I missed it. If you said it earlier, but I mean is there -- I guess I would ask what is the sort of interest levels at the -- in the banking side of the franchise for, you know, moving or upgrading core systems. I know you said the credit union's strong and other areas of FIO business should perk up, but when you look at core are there high levels of activity, it's just pulling things through the pipeline and getting it signed, or is the activity more moderate in nature.

Let me answer that two different ways. One in our service bureau side of our business has really been strong all a along. On the software side of our business, there is a -- a -- probably an increased confidence we're seeing in bankers. And there are more likely today and are stepping forward more today to upgrade their systems. So we have seen an increase in interest, which has impacted both our CBS and ITI products with stronger sales this year than we had last year.

Uh, the service bureau business has continued to plod along, although I would say this year we're having a better sales year this year than last year but they were both very strong on the service bureau side.

Okay. And the follow-up question I had is just on the health business, I guess just trying to go back through some of the numbers you've shared with us on the -- the -- the impact of the pass-throughs in the PDM business. On a net revenue basis, if you look at it that way, is a margin somewhere in the 15% to 20% range, uh, in the ballpark for that business, if you back out the pass-throughs?

Yeah, that's in the ballpark.

Okay. Thank you.

David Sharf from JMP Securities, you may ask your question.

Good morning. Les, can you tell me what percentage of financial outsourcing is a lending area?

Uh.

Just ballpark.

It's around 12%, 15%, that -- that neighborhood.

12% to 15% of that segment.

All of that -- of that segment, which is about 65% of our revenue.

Okay. So it gives us a little sense for just how to perform sensitivity analysis.

On the Health side, another -- give you another angle on the margins. When we back out the direct pass-through costs, we get operating margins in both the first and second quarter, you know, in the low 17s, um, pretty stable. Ken, you made the comment that when you back those out, you would hope to see margins in that business actually increase.

What would be the factors contributing to that? And on the reverse, are you seeing any stepped up price competition from the carriers and their benefit processing offerings?

It would be predominantly -- well, it would be actually two factors. One would be getting increased efficiencies, which we always work on in terms of our operating side, or sales in -- that will help, too. We also have had one of our business units, uh, which I mentioned in the last conference call, at a -- compared to the previous year. And I think that that will turn around to help those margins a little bit, too.

Okay. And then, lastly, this may be splitting hairs, Ken. Looking at the low end of the Q3 guidance range, uh, 46 cents. I'm looking through my notes in the past, I'm not -- I'm not finding too many quarters where the low end of the range was as much as 2 cents below what you just reported. Um, is -- is there any potential swing factor, any business unit that, you know, might cause us to think about 2 cents sequential decline in earnings?

Uh, no. I -- I think that you have to recognize as we get larger, it's more likely that we're going to have wider ranges in terms of our earnings per share estimates.

Fair enough. Thank you.

There's no message being sent there at all.

Okay.

Operator, we don't have the ability to communicate with you computer-wise, why don't we take one more call and then close out.

Roger Freeman from Lehman Brothers, you may ask your question.

Hi, good morning. Um, I just had a question on the follow-up on Check 21.

Um, it seems like there's been some more activity in terms of, you know, providing replacement drafts to maybe some of the smaller banks that won't be ready for Check 21, given I guess your -- your deals with net deposit and air net, and then I think check clear did a deal with EDS, or they're trying to do the same things to the end-point exchange -- is this a -- is this one of the big areas of opportunity? Maybe not, in terms of the -- you know, the size of individual deals, but in the aggregate?

In the aggregate, there is some -- some near-term upside because of replacement checks for people who can't do replacement checks, and we are getting some business and people in the pipeline who are talking to us about doing replacement checks for them.

But bear in mind, that that is something that's going to be, um, an opportunity for us in the near term but it will degrade over time or slow down over time as people get more image oriented and don't need replacement checks anymore. So -- but, you know, it's something that -- that could provide some opportunity for us in -- say in the next 3 or 4 quarters.

Okay. And then lastly, quickly, uh, if -- were you not to do any more acquisitions this year, and obviously, you know, that depends on how they actually work out. Can you grow earnings 15% next year just based on your internal growth and costs -- you know, costs containment and so forth.

We've been able to do it in the past when we've done very few acquisitions. I mean, that would obviously be our goal to do it. I would be very surprised, however, if we didn't do any more acquisitions this year.

Okay. Great. Thank you.

Thank you.

Is that our final question, sir?

Yes. Operator, I think that will be plenty and let me just say that we appreciate the participation and the interest of the -- of the shareholders and the analysts on the call. Thank you very much.