Fiserv Inc (FI) 2004 Q3 法說會逐字稿

Good morning for the Fiserv earnings conference call for the third quarter of 2004. We currently have 100 parties on this call and all participants will be able to listen only until the question an answer session begins following the presentation. During the question and answer session please limit yourself to one question and one follow-up 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'd 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 call over to Les Muma. Sir?

Thank you. Good morning and welcome to Fiserv's third quarter earnings conference call. We appreciate your participation and look forward to presenting our third quarter results and answering your questions.

Fiserv would like to state that the company may make forward-looking statements regarding 2004 and 2005 earnings and revenue targets, sales pipelines, and acquisition prospects during the course of the 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 the third quarter earnings press release for a discussion of these factors and nonGAAP financial measures discussed in this conference call.

The press release and our form 10Q, filed with the Securities and Exchange Commission are accessible on our web site, Fiserv.com.

Before we discuss our third quarter result, let me say that Fiserv is proud to be celebrating our 20th year anniversary in 2004. Fiserv was formed in 1984 through the combination of two bank processing organizations. At that time we had 21 million in revenue, 160 clients, 350 employees and three locations.

Through the efforts of our dedicated employees, we have since grown to 3.5 billion in annual revenue, 15,000 clients, 22,000 employees and over 200 locations.

While it's nice to reflect on the results of the past, we are even more excited about the prospects for our next 20 years.

Fiserv continued 2004's strong performance with diluted earnings per share of 47 cents for the third quarter and $1.42 on a year to date basis. Our year to date free cash flow of $396 million was exceptional, increasing 24% compared to the prior year period.

Our business model that reflects high recurring revenue, effective acquisition integration and exceptional operating efficiencies continues to drive strong you earnings and cash flows.

We also closed two acquisitions in the third quarter and announced another acquisition subsequent to the end of the third quarter. Our overall acquisition pipeline remains active.

Throughout 2004 we have expanded our focus on internal revenue growth. While this expanded focus has produced favorable internal revenue growth results in some of our business units, the results in our overall financial segment remain below our goal.

We remain confident however about the improved internal revenue growth rate in the financial segment as we head into 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, diluted earnings per share for the third quarter were 47 cents compared to 41 cents in 2003 and on a year to date basis were $1:42 compared to $1.19 in the prior year.

The 47 cents in diluted earnings per share 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 is now $1.90 to $1.92.

Our third quarter earnings of 47 cents were, relative to last year's third quarter, positively impacted by 3 cents per share for an increase in customer contractual termination and assignment fees and negatively impacted by 5 cents per share for an expected SEC charge in our securities division.

During 2004, the company's brokered dealer subsidiary, Fiserv Securities, has been responding to inquiries from the Securities and Exchange Commission as part of its industry-wide mutual review of mutual fund trading practices.

Fiserv Securities has engaged in settlement discussions with the SEC as a result of the SEC investigation of Fiserv securities with respect to these matters. As a result of these discussions, Fiserv's securities recorded an additional 10 million charged in the third quarter of 2004, or 5 cents per share, to bring its total reserve reported with respect to these matters to 16 million.

A portion of any settlement amount with the SEC may be nondeductible for tax purposes. While no settlement with the SEC has been reached and no assurance can be given that these matters will be settled consistent with the amounts reserved, we do not anticipate any further material liability arising out of the SEC investigation.

Our third quarter processing and services revenues of $866 million increased $164 million or 23% over 2003.

Now, on a year to date basis, increased 612 million or 31%.

Year to date revenue growth for 2004 was primarily impacted by growth of 216 million or 15% in our financial segment and 375 million or 137% from our health segment.

Major contributor to the continued growth in the health segment is the revenue increases in our pharmacy services businesses that generate an operating margin in the mid-single digits.

We are currently estimating 2004 fourth quarter processing and services revenue to be approximately 870 to 890 million, which is an increase of 16 to 19% over the prior year period.

2004 year to date cash flow provided by operating activities before the increase in securities processing receivables payables of 75 million was 560 million, increasing $66 million or 15% over the prior year.

Our working capital changes, again excluding securities processing receivables payables, had a positive impact on overall cash flow of $40 million in 2004 compared to 49 million in 2003.

Fiserv's 2004 year to date capital expenditures, including capitalized software, were $110 million, down 9 million compared to 2003.

Our free cash flow for 2004 was $396 million, an increase of 24% over the prior year.

As Les mentioned, we also closed two acquisitions in the quart quarter. Results International Systems is a provider of outsourced solutions for the property and casualty insurance industry and will contribute approximately $7 million in annualized revenue next year.

Results International is a natural fit with Fiserv, since it offers its outsource services by using the Fiserv Specialty Insurance Administration System, which we acquired in 1998.

Our second acquisition in the quarter was Pharmacy Fulfillment Inc., which is a provider of mail order prescription services and will contribute approximately $10 million in annualized revenues.

Acquisition of pharmacy fulfillment will become part of our pharmacy management business and allow us the opportunity to integrate mail order services that are currently outsourced to a vendor. Our acquisition of Pharmacy Fulfillment will become part of our Innoviant Pharmacy Benefit Management business and will allow us the opportunity to vertically integrate mail order services that are currently outsourced to a vendor.

Subsequent to the third quarter, we purchased CheckAGAIN, a company that converts paper and image checks that have been returned for insufficient funds into electronic ACH transactions for representment to the check writer's account. This acquisition will join our item processing group and will contribute approximately $15 million in annualized revenue.

Our current acquisition pipeline remains active and continue to follow our long-term disciplined acquisition strategy that has served our shareholders very well since our company's inception.

I will now summarize our performance by business segment.

In the third quarter our financial segment continued its strong operating performance. This increased third quarter processing and services revenues by 10% and operating income by 25% over the prior year period and on a year to date basis increased revenue 15% and operating income 23%.

Fueling these increases were 2003 acquisitions, strong operating margins as we continue to drive cost synergies into our existing operations, and the customer contractual termination and consignment fees.

Our fast growing health segment increased third quarter revenue 100% and operating income 55% over the prior year period, and on a year to date basis increased revenue 137% and operating income 62%.

Our health segments revenues increased and operating margins decreased compared to the prior year, primarily due to our December 2003 acquisition of MedPay and the growth of our existing pharmacy services business.

As a reminder, our pharmacy services businesses have an operating average margin in the mid-single digits. The overall lower operating margin in the health segment is primarily due to a year to date increase in 2004 compared to 2003 of $287 million in prescription costs which are effectively reflected in both revenue and operating expenses.

Continue to be very optimistic about the long-term growth potential of our health segment and believe our pharmacy services business will be an important part of our overall growth.

In our investment services segment, operating income decreased $13 million in the third quarter of 2004 compared to 2003, and on a year to date basis decreased 24 million.

2004 year to date decrease in operating income compared to the prior year period was primarily due to a $16 million reserve in the securities division, as I previously mentioned.

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

Thanks, Ken. Our 2004 third quarter internal revenue growth rate for the company was 7% and on a year to date basis was 9%. The company 's overall internal growth rate for 2004 continues to be driven largely by our health segment's pharmacy services businesses.

The third quarter internal revenue growth rate and our financial segment was 1%. This rate was negatively impacted by 3%, due to the combination of the loss of a large item processing contract that we first mentioned in 2003, and a decline in current year mortgage origination volume and overall weakness in the automobile leasing market, which reduced processing volumes in our lending division.

These factors were partially offset by revenue associated with the customer contract termination and assignment fees mentioned earlier by Ken, which increased $11 million over the prior year period, impacting our organic growth rate in this segment positively by 2%.

The negative factors currently impacting this segment should have less impact in 2005, due to the one-year anniversary of the loss of the large item processing contract and the improving market conditions in the lending area.

As I have discussed in previous conference calls, our management team is not satisfied with the current internal revenue growth rate in our financial segment businesses. While we stay committed to our historical focus on the core operating fundamentals of earnings and cash flow, we are also very focused on improving our internal revenue growth at all levels within our business.

We fully understand that improving the internal revenue growth is a long-term necessity and have confidence that real progress is being made. We expect our internal revenue growth rate in the financial segment to be in the mid-single digits in 2005 and to be in the low-to mid-single digits for the fourth quarter of this year.

We believe this segment's organic growth rate will continue to improve as management continues to focus on a series of organic growth initiatives and the year over year comparisons improve.

Adding to our optimism for this segment's organic growth rate are several market trends. First, our current pipeline for large financial institution check processing deals continues to be very strong, driven, as I have mentioned in the past, by the passage of Check 21 and the forecasted continued decline in the number of paper checks written in the United States.

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.

While we did not sign any large check processing contracts last quarter, our sales pipelines continue to be strong. The sales cycle for these large check processing transactions is generally longer than our normal core business transactions and can extend from 12 to 24 months.

Our confidence remains high that our sales force will provide positive results leading to strong revenue streams in future quarters.

The second positive trend includes continued strength of several key Fiserv products and services. Our core credit union, ITI banking products, and certain of our mortgage servicing businesses continue to have very strong growth in 2004 and we anticipate this will continue in 2005.

Our health segment's internal revenue growth rate for the third quarter was 28% and on a year to date basis was 39%. This rate increased significantly over the prior year due primarily to the strength of our pharmacy services businesses, as we continue to actively sell these services to both existing and new clients in our health segment.

Excluding the prescription cost included in the revenues in our pharmacy services businesses, the health segment's year to date 2004 internal revenue growth rate would have been approximately 10%.

We anticipate that our health segment for the rest of 2004 will grow revenues organically in the 25 to 35% range, due primarily to the continued growth of our pharmacy services businesses.

As we look into 2005 for this segment, internal revenue growth is expected to slow to somewhere between 10 and 20%.

Our investment services segment experienced year to date 3% internal revenue growth rate. We do not anticipate any significant changes for the full year .

The fourth segment of our financial reporting, titled "other", includes printing and plastic card business personics. This segment has generated stellar performance in 2004, with year to date internal revenue growth of $16 million or 23%, attained through a combination of new sales and cross sales.

As we have discussed in the past, all four of our operating segments have historically experienced quarterly fluctuations in organic revenue growth rates, both positively and negatively. Overall and consistent with our comments on our previous conference call, if our businesses -- if our business progresses within the range of 2004 forecasts, our company's organic growth rate for the full year of 2004 should be around 9 to 10%.

Significant new relationships signed in the third quarter include the following: America's Community Bankers, a trade association for community banks endorsed Fiserv as the preferred provider of comprehensive range of check processing products and services to help ACB member banks prepare for the implementation later this month of Check 21.

Fiserv will supply credit processing services to the North American division of CIT Group, a commercial and consumer finance company with nearly $50 billion in assets under a six-year multimillion dollar agreement.

Fiserv will install its ICBS core banking system at UK Consumer Finance Company Cattles, PLC, one of the largest providers of financial services products to the nonstandard consumer credit market in the UK.

Innovative Systems Inc., a provider of transaction processing and terminal driving services for credit union and community banks, will resell Fiserv's EFT services to its community bank and credit union clients.

And Mercantile National Bank America of Indiana, an $800 million asset bank, headquartered in Hammond, Indiana, will outsource its core processing to Fiserv in a multiyear contract.

Before my closing comments, I would like you to join us Fiserv's Analyst Day, November 4th, at the Weston Essex House in New York City. The theme of this meeting is driving growth.

At the meeting we will share insights into our strategy for organic growth, outlining our process and direction, as well as our supporting value proposition. We will be previewing our strategy and development in the area of system integration, which is having a profound effect on the markets we serve.

Specifically, you will learn about Fiserv integration initiative and the results it has delivered for our clients as well as the future impact this initiative will have on our organic growth and in the solution sets we deliver to the market.

Additionally, as the market represents -- or presents great opportunities for payment solutions, you will learn about Fiserv's payment strategy and solution sets.

You will also hear more about the growing opportunity we have to partner with our clients to deliver greater ROI on their IT investment, illustrated by an in-depth look at our end to end lending solutions. We view both the payments and the lending areas as key contributors to our future growth.

We will also be devoting significant time to acquaint you in more detail with the Fiserv -- with Fiserv Health,our newest and fastest growing business segment and will outline the opportunity that Health presents to our organic growth equation.

And of course, we will provide updates on our traditional lines of business and will have our entire management committee on hand to answer your questions.

In closing, both our sales and acquisition pipelines are strong and we anticipate solid growth for the remainder of 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 our company 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 has been narrowed to $1.90 to $1.92 per share.

We will now open the lines for questions.

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press Star one. You will be prompted to record your first and last name. To withdraw your request, press Star #. Once again, to ask a question, press Star 1. One moment for the first question. Our first question will come from Greg Smith of Merrill Lynch. Sir, your line is open.

Hi, good morning.

Good morning, Greg.

Can you talk a little bit more about the margin improvement we saw in the financial outsourcing? What were sort of the key things driving that? Obviously there were the extra contract termination fees, but above and beyond that, what was drive the strength there?

Well, obviously the fees that Ken and I both both mentioned contributed to it, but it was primarily the areas that I mentioned that are growing very nicely.

Our credit union business is growing very nicely and several others in that banking area. Certain parts of our lending operation, though some have been impacted negatively by the interest rate change, there are other parts, the preclosing parts, which are growing very nicely and contributing positively to margins.

Okay. And then, just on some of the big check processing deals, I know we keep talking about this every quarter, is anything slipping further? Are banks taking more of a wait-and-see approach or is it just the long sale cycle that you've kind of expected all along playing out

Greg, I think it's just a long sales cycle. I don't think there's any real slippage. You're always disappointed because you think it's going to close sooner than it will, but it just takes a lot of meetings with these banks to -- to bring these things to closure.

Okay. Thank you.

Franco Turrinelli from William Blair and Company. You may ask your question.

Actually I wanted to follow up on that check processing question, Les. I mean, is there -- what's, in a sense, enabling these banks not to make a decision? Is it that the uptake of the implications of Check 21 has been relatively slow? I mean, what are they doing right now, I guess is really the question.

The Check 21 that kicks off here at the end of October is not a -- a critical date in -- in these big banks making their decisions. Check 21 is expected to ramp up gradually over time and I think the big push is not going to happen until you get into 2005 and really probably the mid to the latter part of 2005, so the decision process has no real impetus because of Check 21 passage at the end of this month. And these contracts -- these deals are generally partnerships as opposed to straight outsourcing contracts and they just take time, Franco

Les, could you give us an update on a couple of significant acquisitions that you've done, not recently -- the credit union business and the EDS electronic funds ATM business? Thanks.

Both of those acquisitions -- the credit union and the ATM business -- are performing at or above their pro formas from a financial standpoint. In particular we're very pleased with the retention rate that we've had in the credit union area of that acquisition.

We anticipated losing some customers, and we did, but we retained a higher percentage than we thought we would and we also are selling into those products now that they are under our ownership and we've put some R&D dollars in to improve the products. So we're very pleased with that.

The CNS acquisition, ATM acquisition, was back about two years ago now, a year and a half, two years ago, and it's doing extremely well as well. I think the strength there and probably the surprising strength is in the network and our ability beyond what we thought we'd have to encourage our existing customer to utilize that network or to put that network bug on their card, which has increased the volume there. So we're very pleased with both of those large acquisitions.

Les, you'd commented about the credit union acquisition was likely to be negative for internal growth for a while. Is that still the case, or is it now positively contributing?

I think it's still mildly negative.

Relative to the rest of the credit union growth rate, it's negative.

The rest of the credit union growth is in the other products that have been family -- Fiserv products for a period of time, but we would expect over time to see the EDS credit union products continue to gain momentum. But they're right now a little bit of a drag, relatively speaking.

Thank you.

Sure.

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

Hi, Good morning.

Good morning, Carla

I wonder if you could talk a little bit more about the positives and negatives within the bank division. You outlined the EDS being a little bit of a drag right now, the loss of Sovereign, and the lending. Is there anything else that -- that -- that's causing a bit of a drag there? You know, Europe was something you'd talked about in the past. Anything else?

I think those are the main things. Europe's probably starting to flatten out some, so we're not feeling the negative impact from there. We're still -- and there was some speculation by some of the analysts that the Sovereign thing, we anniversary in the fourth quarter and we really don't. We don't anniversary that until the fourth quarter of last year. A little piece of it was in the fourth quarter but the majority of it will be anniversaried in the first quarter.

Okay

So that's the big drag, Carla.

One of our acquisitions in the lending area just by itself had a negative impact of 1.5% on the growth rate for the whole segment.

Got it. Okay. That's helpful, Ken. Thank you.

And then, I guess my second question would just be -- let's see. What would be my second question? In the terms of the SEC settlement discussions that you're involved in, in an earlier quarter you had outlined that the revenue you thought was sort of at risk in that scenario was a little under 5 million. Can you help us kind of put in relation the revenue that you earned from those strategies in relation to the size of the -- of the settlement that you think you'll have to make?

The revenue is still a little under 5 million.

And to compare that and talk to that in relationship to the penalty which we're anticipating of that 16 million or $15 million number that Ken mentioned earlier, I'm not sure I can talk about the relationship between the two. I'd probably rather not.

At this stage, Carla, we do not have a -- a signed and sealed agreement with the FCC, so the comments that we can make in regard to that whole situation is limited to pretty much what we've said in the release. We are confident, however, that we are not going to have any more material dollars other than what we've already reserved.

Okay. Thank you.

David Togut from Morgan Stanley. You may ask your question.

Thanks. Good morning, Les

Good morning, David

Can you talk a little bit about the performance of the sales force in the quarter, how they did relative to quota in Q3 and where they stand year to date relative to plan?

Right now, if we look at the quota attainment through Q3, it's very positive. We've had a very strong sales year. The bright spots, you know, relative to last year are -- we mentioned -- I mentioned earlier the ITI products. Both in the in-house and in the service side are doing extremely well this year, so you know, overall we feel good about the sales side of the business.

Now, you still have churned on that side of the business because of acquisitions, and we go through that as all of our competitors do when a bank is acquired that you service, you obviously battle to keep that, but quite often you lose it, especially if you are the acquired and not the acquirer. But from a sales standpoint, we continue to feel very strong.

Well, I'm a little puzzled, because you know, we know the internal growth and financial institution outsourcing has continued to deteriorate, you know, negative 1% in Q3 if we strip out the contract termination fees, but was there some specific factors that led to the continued slowdown in Q3 relative to what we saw in Q2?

I would contribute part of it to the churn that I mentioned, where clients will be acquired we'll lose them. Another thing I would say is that new sales generally -- even though we talk about sales successes, they don't kick in for 90 to 120 days when they're converted. Ken, I don't know if you --

I'll just add again to emphasize the lending area and the automobile leasing areas. They have big negative impacts on it.

Yeah, Ken mentioned that one acquisition in the lending area, that the drug is down a percent and a half --

By itself.

So as we look to '04, as we look to Q4 of this year, then 2005 -- I mean, aside from the fact that you'll have easier comparisons around Sovereign, what do you expect to change to drive internal growth higher at FIO?

We certainly believe the lending area will continue to improve. Everything we see, and you know, it's a little early to talk about it now, we'd probably be able to talk more intelligently about it in the first quarter, but we're in the middle of the budget process now and all indications of that lending area will continue to improve.

I -- I also think that -- that there is a high likelihood over the next 90 days we'll be able to talk about some contracts that we're working on -- some new contracts that we're working on and -- Ken, Tom, can you add to that?

Those are the main things. Obviously, getting the Sovereign thing behind us and a strengthening of the lending area or the two largest factors in -- in that turnaround in organic growth and then any large contract we get in the item processing area would just be on top top of that.

Can you give us any sense of how much growth you would expect in the sales quotas in 05? I mean, to the extent churn is becoming a bigger issue, do sales quotas need to be a little bit more aggressive to get you to your internal growth targets?

Obviously, as we put our strategies together for next year and look at our sales team and what the quotas represent is when we start making decisions on that, David, and do we need to add salesmen? Do we need to expand quotas? Do we need to move salesmen to different markets? And all those type of things, is what we're in the process of doing now.

Okay. Thank you.

Kartik Mehta from Midwest Research. You may ask your question.

Good morning. Les, you said that you would anticipate in 2005 for the financial services business, to have internal growth of mid -single digits. You know, if you look at this business long-term, would mid-single digits be a long-term internal growth or would you expect that to improve as we move into 2006 and beyond?

For the core banking area right now, in our line of sight, it's probably mid-single digits. We may be able to, based on other factors as the -- as next year unfolds, to be able to build on that, but right now I'd like you to think mid-single digits.

And then if you look at the Sovereign Bank contract, how much do you think that held back internal growth in 2004?

It was about a $20 million loss, year over year.

That's about a percentage point by itself.

And then lastly, you know, we've talked a lot about Check 21 and new check processing contracts. Do you believe -- is there any new competition in terms of correspondent banks getting into this business a lot because they see the same trends, you know, check volumes coming down and they need to increase their check volumes because they'd like to stay in-house. Would you consider that new competition, and would that make any difference to the contracts that are out there?

No, I don't think there's any new competition. The competition has moved around a little bit, Fidelity acquiring both Aurum and Intercept, who had check processing operations, gives them a better footprint than they had before but they're the same competitors, just in a little bit different wrapper, and we'll have to see what that means. But we still think that we have a very strong foothold in that market and we'll have to see how that plays out.

And one last question on acquisitions, you know, is -- was 2000 more of not enough opportunities or pricing being too high, in terms of getting acquisitions done, in your opinion

I believe that it just changes over time, in terms of just what opportunities exist that you consider to be good. So at any point in time you may do a lot or you may not.

Pricing was a factor in some acquisitions as I mentioned in the last conference call, where people are pricing the properties much higher than I think the rest of us believe are -- they're worth. On the other hand, there were a lot of acquisitions that we looked at very carefully that, frankly, if the price was considerably less, we wouldn't have acquired it. So it was just -- when we got into them deeper they weren't worthwhile.

And if you look backwards over time with Fiserv's acquisition stream, we did 12 last year, but the year prior to that we did five and I think the year prior to that we did 12 again. So it moves around and we're opportunistic.

One of the things that we are is we're very disciplined and it's our discipline, I think, which has led to the successes in the acquisitions and maybe to some extent the volatility of in year over year because of our discipline.

Thank you very much, gentlemen.

You're quite welcome.

Bryan Keane from Prudential, you may ask your question.

Good morning. Les, I was at an industry conference this quarter and there was some noise about maybe Fiserv doing a sales force reorder, some shuffling around. Can you help me with that?

Number one, I'm amused when a competitor of ours gives questions to you guys to ask us. But that's neither here nor there. What we did is, we didn't reorganize our sales force. We reorganized our banking area and what we did is we took two areas where we had bank software and service for the same product, ITI and our other product, CBS, and we put them together organizationally. So the sales teams also came together.

And the reason we did that is you have clients move between service and software and software and service and the trend we're going through right now is a -- is a heavier trend towards people that are in-house looking for service. And by putting those organizations together it facilitates and really is better for the client as well as Fiserv to put those organizations together.

Now, we've had other organizations within Fiserv sales and service together for years in our credit union area it's been consistently that way. But that was a change in the banking area. We think that will help our clients. It will also, we believe, facilitate organic growth.

And are you still growing the sales force there?

I don't know whether we're growing it or whether it's -- we're just combining what we had on both sides. We had separate sales force, one for software and one for service. We brought them together so they can -- a salesman can sell either delivery method now.

Okay. And then the -- the loss of the item processing contract which I think you said was 3%, was that -- that was an existing client that decided to do something else? What was the decision there?

That was a 1%, not a 3%, Bryan, and it was a client, a large client, who decided to go to a competitor. Now -- and the name of that client is Sovereign. I think everybody knows that.

That was sovereign. Okay. Was sovereign also the -- is the contract -- or the customer contract terminations in the quarter of 10.7 million, was that partly Sovereign as well?

No, it was not.

What was that, Les?

Are we at liberty to say that? I don't know. I don't think we're at liberty to say that because the contractual arrangement that we have on those particular deals

Was that just one deal in particular?

It was a number of contracts.

It was a number of contracts, and ---

Probably 15, 20.

You know, Brian, we always have termination fees every quarter and what we just reported this time is a group of them that we thought were unusual because of their size and because we don't think they're the repetitive type, and that's why we separated them out so that $11 million is different than our normal vanilla termination fees.

We actually had one or two that were acquired earlier in their contract and therefore the fees were a little bit larger than what we normally see in our business, so that was a driving factor in the amount.

The termination fee in this industry on all of us has to do with the length of time remaining on the contract and how much they pay you per month and you annualize that and they pay a penalty against that amount due.

Was that in the bank area or the credit union area or -- where was that, Les?

It was in the financial institution group primarily --

Banking and item processing.

Banking, item processing and ATM.

Okay. That's helpful. Thanks, guys.

Andrew Jeffrey from Needham, you may ask your question.

Good morning, gentlemen. I don't mean to beat a dead horse here on organic revenue growth, but I guess I will anyway.

You just can't resist.

If it makes you feel any better we beat that dead horse pretty frequently in here too.

Les, you'd mentioned the fourth quarter in particular as being a low- to mid-single digit organic revenue growth number for FI. Does that contemplate any additional contract -- I guess material, in light of your last comment.

No

Material additional termination fees?

No.

No? Okay. So in other words, you're looking for -- just to clarify -- an uptick from negative one to something in the low- to mid-single digits?

That's correct.

And then, Ken, what do you think the normalized operating margins are, long-term ,for both FI and -- and the health care businesses? You've sort of been around that 25% level in FI. Should we see that scale up? Are you looking for license deals in check imaging, and then the similar question for health.

I would say that 25 is probably a good number. You know, it kicked up in the third quarter, mainly because of those termination and assignment fees.

For health, I think we averaged, what was it? 9% for the quarter. And I think that's a good number, but let me just add my general qualifications that I usually do. We get a lot of item processing -- big item processing contracts, you'll see a decrease in that margin in the financial institutions group. By the same token, if -- which we would hope happens -- if we grow our pharmacy services business more than we would expect, that will have a depressing effect on the 9% but make us more money and make us, you know, help our cash flow.

Okay. Thank you.

Thank you Andrew. Dracie Petas from CSFB, you may ask your question

Hi. Thanks. You mentioned the potential for improving market conditions in lending, but even with some of the tough comps year over year in mortgage, I think there's some expectation that mortgage may come under further pressure. Can you talk about your expectations, both in mortgage and auto leasing, going forward, since auto leasing is -- kind of the first time we're heard about that being a headwind?

Right. In the mortgage area, the -- what caused the downward pressure was when interest rates started to move up and the refis slowed down. A very small part of our business, 10, 12, 15%, is refis, and that pretty well has run off so we're now down to not prime loans, but servicing subprime loans in the origination and service area, which is really our primary business and especially the origination side.

And predominantly home equity loans.

Home equity and subprimes. And as long as -- and we don't anticipate any change in that particular part of our business and if there is continued elimination of refinances, which is what's out there, refis have picked up a little bit and they may go away again, that should not impact our lending area. So that's why we look out in our lending area which tied to the two types of loans I mentioned as being more positive.

And what is the total -- can you give a sense for the exposure of mortgage and auto leasing, both within FIO?

Right -- generally we don't --

Lending's probably about -- today, in our first segment, it's probably 10 to 15% of our total revenues there, but that includes our mortgage servicing operations and other types of businesses there. And I think as we indicated, the impact of those items impacted our organic growth rate in the third quarter negatively by about 2%, so that kind of gives you a feel for the size of the dollars we're talking about.

Okay. And then just to follow up on the termination fees, you mentioned 15 to 20 contracts. Can you give a sense for the -- if the termination fees were a little bit higher than you typically see, what the revenue impact might be going forward? Would there be bit a bit of a grow over hit there?

There would be a grow over hit in the third quarter of next year, yes.

Well, the grow over for the 11 million of fees but also if -- if termination fees were unusually high, does that mean that there would be the grow over of some contracts that aren't there next quarter or going out over the next year.

You want to answer that, Tom?

I'll take that question. There's two fees that we mention in there. Termination assignment fees. First of all, regarding the termination fees as I mentioned earlier, some of that occurred earlier in the contractual term, so we don't see a big impact from them.

There was one other assignment fee that we had from a -- that was fairly large and that fee is a -- not a detriment to ongoing revenues. It was not a contractual termination fee but rather a, just assignment of a contract that we received a one-time fee for, so there will be no negative impact on that. So overall, the impact on 2005 from these fees, as far as recurring revenue goes, should not be that significant because of those two factors.

Okay. Thanks.

Tim Willi from AG Edwards. You may ask your question.

Thank you. Good morning. Just a question on health plan margins. If I'm doing the math correctly, based upon the info you give about the prescription costs, it looks like the margins this quarter, if you back out that impact, were a little bit over 18%. That's about a 400 basis point lift from last year. Could -- A, could you confirm the math and then B, if you look at the pharmacy business versus that sort of original plan management business, could you just talk a bit about what's going on in the margins of those two and I guess maybe, you know, sort of the inherent net scaleability, if you exclude the prescription cost issue going forward?

Your math is correct in terms of the 18 percentage points and I think that if you looked at it going forward, that's a good number when you net out the prescription costs. In terms of the traditional TPA business versus the prescription business, TPA business hasn't grown as fast as the prescription business.

And so if we look at that 400 basis points of margin lift year over year, would we basically point to the PBM business as the driver there versus the TPA business?

That would be a major impact, yes.

Tim, just to add to that that those margins are up a little bit sequentially but the margins without those costs has been in the 17 to 18% range for the first couple of quarters.

While I have you, Tom, just real quick, do you happen to have four Q '04 prescription costs? I couldn't find that when I was going back through the year end K. I know you gave it out for two and three Q '03 from the Qs this year. Do you happen to have the four Q number

I think it's 23.5 million.

Great. Thanks a lot.

Thank you, Tim

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

Sure. Good morning.

Good morning.

Let's go back to the comments, Les, that you made about the pharmacy benefits business excluding the passthroughs. I think you had said that on a year to date basis the growth -- internal growth was 10% and I don't know if you actually commented specifically on the net revenue growth in the quarter for the pharma business.

No we did not. All I did was back out the prescription cost and gave you a growth rate without the prescription cross in there, which was the 10%.

Last quarter I think you guys said on the call that the internal growth would have been about in the low teens range. Are we still in that range, or did we see a slowdown in that business?

If it's down at all it's slightly, but it's in that range.

Okay. And the -- the target, just to be sure, in the second quarter you said that the target growth would have been 30 to 40%. I think now you're suggesting 25 to 35, but that's on a gross basis. Is that correct?

That's correct.

Okay. And could you just talk about the mechanics just in terms of what is causing the -- the slowdown in the health business?

I think it's more of a case that it ramped up so quickly in the first place. So that now you're starting to get some compares that just slow it down.

We did the acquisition of MedPay at the end of last year and MedPay was on a very rapid growth path that just picked up one very sizeable client, signed another one within the first 90 days that they were a part of us and that's what caused that ramp up and I think you're just seeing that slow down as we anniversary those big sales.

And if I remember correctly, Innoviant started it out in the third quarter of '03 so that now in the third quarter of '04, you're getting a compare that's obviously tougher

Innoviant was the piece that was acquired through Wausau, is that correct?

Yes, it was. It was a very small company, very small part of Wausau, and it's really almost an organic growth plate from the very beginning. They had just started Innoviant. It's done extremely well but it ramped up very quickly right at first.

Okay. And Les -- I'm sorry, Ken, the fourth quarter 870 to 890 revenue target, that is -- is that for the whole business or is that just processing? Or -- I'm sorry, or just your financial outsourcing business?

That would be the whole business.

Whole business. Okay. And within that 870 to 890, what's your assumption for prescription costs?

We don't disclose that type of detail. You know, it --

But the ratio is -- I guess maybe a different way of looking at it, would the ratio that we saw this quarter be consistent for next quarter or would it be --

That would be as good as a guess as any.

That would be the ballpark.

Okay. Maybe -- can we talk a little bit about some of the -- the churn in the core outsourcing business. Is -- is the client churn -- I mean, historically I think you've talked about a 90%-plus kind of retention rate.

Are we seeing something different on the competitive landscape that's causing more churn in your client business or is this sort of an unusual quarterly event? Can you just kind of talk to it because I guess I'm looking at the industry with the -- with the F&F sort of growth through acquisition strategy and you also have the Metavante guys on the other side kind of moving into the space with the nice acquisition.

Has the competitive landscape changed meaningfully or incrementally such that it's something having to deal with now and churn rates are probably going to be a little bit higher?

No, the churn rates I'm talking about are churn rates due to banks being acquired, not churn rates due to loss to competition, where we still are very, very strong. That's a retention rate we talk about which is very strong. But in the acquisition in all of it, Fidelity and Metavante and ourselves, if you have a bank that's acquired, that's where the term fee comes up and that's where you'll lose a customer and eventually lose revenue after the term fee is booked.

So that's just more the nature of what's going on in the banking industry right now than anything to do competitive. From a competitive standpoint we really have not seen any significant change as these other companies have been acquired by Fidelity and -- and Metavante.

And as Tom pointed out earlier, the churn rate is a little bit exaggerated because some of these term fees came at the start of a contract. So it makes it look like there's more churn because term fees are up, but not relative to the number of revenues.

Not the number of acquisitions are changing material. And that's just going to happen in some quarters where you'll have an acquisition of an early contract and next quarter you won't.

We're going to have to just allow two more questions to a new caller.

Shane Diamant from Stephens, Inc., you may ask your question.

Hi, good morning. One quick question, or actually two, on the item processing business. Do you think that the bank M&A -- recent bank M&A trends are having any effect there?

No, I don't believe we've had any -- you're talking about the larger acquisition?

Right.

No that hasn't impacted us at all.

Or even for, I guess kind of stepping down to maybe a super-regional or regional level of bank.

Again, In the acquisition, if a bank is acquired and you're doing check processing for them, you're likely to lose that check processing over time and conversely if one of our banks buys a bank and we do the item processing, we may pick up the business. So you're going to get some of that.

So has it made, I guess, for your perspective clients the possibility that they could be acquired? Do you think that's maybe driving their sales cycle out a little bit?

Possibly, but we don't -- we don't know if there are any like that. When you're dealing with a new customer, you don't know what his acquisition or his plans are to be acquired or to acquire somebody else, so I can't speak to that specifically. Could be but none that we know of.

And then finally on the litigation accrual, what caption on the income statement was that recorded?

Other.

Okay. Thank you.

Thank you.

Chris Penny from FBR, you may ask your question.

Thank you. Les, kind of a broader question. Obviously your free cash flow has been very strong this year and as it relates to kind of the growth in the core business which has been obviously soft, everybody knows that. As you look out next year and if those growth rates do pick up, how do you that impacting any significant CapEx requirements to maybe sustain that, so where we may see a little bit on free cash flow. How should I look at that for next year?

I don't think -- based on what we see and the capacity that we have on the centers that are selling more aggressively that there will be any material CapEx. schedule. Now again, we're in the budget process. We'll probably be able to answer that more specifically in January. Tom, can you add any color to that?

No, I would agree with that. The only thing that might impact that somewhat is a larger check processing type contract would typically have a larger capital expenditures associated with that, so that may be and influence, but that would be the only significant change I would foresee.

So you guys don't anticipate any change to the cash flow that you're generating now in terms of that growth rate year over year?

No material change, no.

Okay. And another -- one quick question. Just, outside of some of the processing you're doing, what are any other opportunities, Les, that you see, maybe longer-term horizons, that Fiserv maybe is not in today that we might see in the next couple of years?

Beyond where you see the -- where we're growing in the check area and the image area and the debit card area to branch out and go elsewhere, we probably generally wouldn't talk about that for competitive reasons, but you can bet that it will have have to be in the close arena of financial data processing.

So what we'd look at is where are banks going. The two areas inside that you might see more growth by acquisition as organically are in the health area and also in this whole area of payments. But other than that, we're going to be opportunistic, depending on what our financial institutions are looking for.

Thank you very much.

Due to time constraints we've had to cut off a number of callers that are still in the queue, so please do call us and we'll follow up with you.

Be happy to handle them on an individual basis. We just are running pretty close to an hour which is well beyond where we normally are. We appreciate your questions and your attendance on the call and your following of our company. Have a good day gentlemen, ladies.