Fiserv Inc (FISV) 2002 Q2 法說會逐字稿

Good morning, and welcome to the Fiserv earnings conference call for the second quarter of 2002.

We currently have 110 participants on this call, and all participants will be able to listen only until the question-and-answer session begins following the presentation.

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 25 to 35 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: Mr. Les Muma, President and CEO; Mr. Don Dillon, Chairman of the Board and Chairman of the Fiserv Product and Technology Committee; Mr. Ken Jensen, Senior Executive Vice President and Chief Financial Officer; and Mr. Tom Hirsch, Senior Vice President and Controller.

At this time, I would like to turn the conference call over to Mr. Muma. Sir, you may begin.

Thank you. Good morning, and welcome to Fiserv's second quarter earnings conference call.

We appreciate your participation and look forward to presenting our second quarter and year-to-date results, and answering your questions.

Fiserv's management would like to state that the company may make forward-looking statements during the course of this conference call. Such statements are covered by the Safe Harbor included in the Securities Litigation Act of 1995.

These statements may differ from actual results and are subject to a number of factors. Please refer to the last paragraph of our second quarter earnings press release for a discussion of these factors.

Fiserv continued 2002 with record earnings for the second quarter. Our business model, which includes approximately 85 percent revenue - recurring revenue - and associated strong cash flows, continues to fuel Fiserv's growth.

Most of our business units performed at or above our expectation in terms of revenue and profit growth. This was through a combination of continued strength in both new client sales and cross-sales, along with our ongoing initiatives in the area of operational efficiencies.

We will start our review with 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.

I am pleased to report that Fiserv continued 2002 with a strong second quarter. All revenues and operating margins discussed today exclude reclassification of year-to-date customer reimbursements of $141 million in 2002, and $128 million in 2001.

This reclassification resulted from our adoption of the Emerging Issues Task Force Number 01-14. The adoption of this accounting standard had no impact on the company's financial position, operating income or net income.

All earnings per share numbers discussed today are before the recognition of realized gains on the sale of night trading group stock. We do not believe it is appropriate to include the customer reimbursements or realized gains on night stock in analyzing the current performance of Fiserv.

Effective January 1st, 2002, the company also adopted Financial Accounting Standard Number 142, which requires that intangible assets with definite lives be amortized over their useful lives, and that goodwill and other intangibles with indefinite lives not be amortized, but evaluated for impairment.

The effect of adopting this statement in 2001 would have increased 2001 diluted net income per share by approximately two cents in the second quarter and four cents on a year-to-date basis due to the elimination of the goodwill amortization.

Earnings per share for the second quarter of 2002 were 34 cents compared to 27 cents in 2001. Year-to-date earnings per share were 67 cents compared to 53 cents earned in 2001.

The 34 cents in earnings per share for the second quarter was within the range of our estimates made in the last conference call, and consensus analysts' estimates.

Our estimate for full-year earnings per share for 2002 continues to be $1.35 to $1.37 per share. We estimate that our earnings per share for the third quarter of 2002 will be approximately 34 cents.

Our second quarter revenues of $563 million increased $82 million, or 17 percent over last year. Year-to-date revenues increased $179 million, or 19 percent over 2001.

Revenue growth was positively impacted in 2002 by strong growth in our financial institution services segment. On a year-to-date basis, revenue increased by $217 million, or 29 percent over 2001.

Total year-to-date Fiserv revenue growth was negatively impacted by a decrease in revenue in our securities and trust segment of $29 million, excluding a $12 million termination fee in 2001.

However, our revenue in securities and trust segment have remained consistent over the last four quarters, with revenues between $53 and $56 million for the quarter.

We are currently estimating 2002 third quarter total revenue for Fiserv to be approximately $560 to $570 million, which is an increase of approximately 19 percent over the prior year.

Year-to-date cash flow after working capital changes, and before security processing receivables/payables, was $244 million, increasing $55 million, or 29 percent over 2001. Our year-to-date operating cash flow per share was $1.25 in 2002 versus 99 cents in 2001.

Our capital expenditures increased by $23 million, and our depreciation expense increased by $7 million, compared to 2001. The increase in capital expenditures was primarily due to three factors: capital spending of $5 million by new acquisition closed in the second half of 2001; additional equipment purchases and upgrades of $8 million due to increases in new business; and new purchases of $10 million resulting from the timing of replacement hardware and software.

We anticipate total capital expenditures of $90 to $100 million for the full year, and our capital expenditures should approximate our depreciation expense in the second half of 2002.

I will now summarize our performance by business segment, starting with the financial institutions services segment.

Our second quarter operating income for this segment increased 37 percent over last year, and on a year-to-date basis increased 32 percent. The increase in year-to-date operating income over the prior year for this segment was due to a number of factors, including revenue growth across all business lines, acquisitions, and the elimination of goodwill amortization of approximately $10 million.

In our securities and trust services segment, 2002 second quarter operating income was $6 million, which included a $3 million net charge related to the write-down of WorldCom, Inc. bonds to market value. These WorldCom bonds were acquired by Fiserv through its acquisition of Resources Trust Company in May of 2000.

Excluding this investment charge, our securities and trust segment improved operating income over the first quarter of 2002, despite the very weak retail trading environment, impacting our securities division.

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 earnings performance met or exceeded the Street's expectations and management's forecasts. Our second quarter revenue was in line with management's forecasts.

Our increase in revenue for the second quarter was $82 million, or 17 percent, over last year, and on a year-to-date basis increased $179 million, or 19 percent. Our revenue growth was exceptionally strong due to a combination of organic and acquisition growth.

Approximately 75 percent of the year-to-date revenue growth was attributed to 2001 acquisitions, and one acquisition that closed in 2002.

In 2002 we acquired Case Shiller Weiss, Inc., the nationally-recognized provider of automated home valuation services and collateral risk management products. CSW's service adds an important component to our end-to-end loan processing capability. CSW provides services to mortgage banks, consumer home loan companies, mortgage insurers, mortgage servicers, investment banks and bond rating agencies.

Approximately 25 percent of the year-to-date revenue growth was organic, and represents a five percent year-to-date internal revenue growth rate. Our internal revenue growth rate includes the impact of a business disposition and a $12 million termination fee in 2001.

Our internal revenue growth rate was again negatively impacted by the revenue decrease in our securities processing and trust services segment, primarily due to continued sluggish conditions in the U.S. retail financial markets.

The year-to-date internal growth rate for the financial institution services segment, however, continues to be strong and within our target of eight to 10 percent. This segment of our business generates approximately 85 to 90 percent of our revenue, is largely recurring, and continues to be virtually immune to broad economic swings.

Our financial institutions services segment continued its exceptionally strong operating performance, increasing year-to-date revenue 29 percent and operating income 32 percent over 2001. Fueling the revenue and earnings growth were strong sales in all of the segment - all of this segment's business lines, coupled with acquisitions.

As Ken mentioned earlier, the operating performance of our securities division within our securities and trust segment, which today represents only approximately five percent of the overall company revenue, was impacted by continued lower transaction volume and margin balances, versus the first half of 2001.

Our trust division, which makes up the remainder of the securities and trust segment, also generates approximately five percent of total company's revenue. This division continues to meet our expectations, excluding the $3 million net charge related to the WorldCom bonds, which Ken mentioned earlier.

In the first half of 2002, our sales efforts generated more new banking, lending, securities and insurance relationships than the record numbers reported in the first half of 2001. Our ability to deliver a full suite of automated services and products continues to provide a fertile sales environment. Major account closes during the quarter include the following.

GMAC Mortgage, one of the top residential mortgage lenders and servicers in the country, selected Fiserv mortgage loan servicing solution to be its single platform for the servicing of both residential and commercial - and consumer loan products.

We also will provide a comprehensive range of technology services, including account and check processing for Community Bank, a $1.3 billion banking company in Pasadena, California.

We were successful in expanding our relationship with Isuzu Motors Acceptance Corporation to include proactively managing all sport utility vehicle marketing in the vehicle manufacturer's portfolio.

Regions Bank of Birmingham, Alabama chose us for a full suite of automated lease services, including complete account management and collections.

United Trust Group of Springfield, Illinois signed a license agreement for the Fiserv life, annuity and health insurance administration systems to provide business process outsourcing services.

And the State of Nevada selected us as third-party administrator for the 31,000 employees covered by its Public Employees' Benefit Program.

Also during the quarter we significantly expanded our relationship with WR Hambrecht & Company LLC of San Francisco - a San Francisco investment firm - to include execution and clearing services for Hambrecht's large-volume institutional account business.

All of these recent client wins highlight the breadth of our product offering and our ability to successfully attract new clients away from our competitors, and to cross-sell our products and services to our existing 13,000 clients.

In closing, I would stress that our business continues to grow within management's expectations. Our sales and acquisition pipelines remain very strong across all of our businesses, and we anticipate continued strong growth both organically and through acquisitions.

Looking forward, we are confident that we will be able to attain our 2002 earnings per share estimate, which continues to be $1.35 to $1.37.

We will now open the lines for questions - .

Thank you, Mr. Muma.

At this time, we'd like to begin the question-and-answer session of the conference. If you would like to ask a question, you may press star one on your touch-tone phone. You will be announced prior to asking your question.

To withdraw your question you may press star two. Once again, if you would like to ask a question, you may press star one at this time.

One moment, please.

The first question comes from Mr. David Togut of Morgan Stanley. Sir, you may ask your question.

Thank you. Just a couple of questions.

First, could you update us on the major acquisitions you made last December, how they're performing both operationally and financially?

The main acquisitions near the end of the year was the acquisition of NCR, their bank processing and check processing. And that's going extremely well. That particular acquisition was acquired, as you remember, to consolidate into our other operations, and the consolidation process moving along very nicely.

We also acquired at the end of the year Trewit, which is a back-office processor of employee benefits. That company is also performing on plan.

Other large ones, Ken, near the end of the year?

Oh, ILS, which is a company that provides origination services, primarily for home improvement loans, consumer loans. That business is actually performing nicely ahead of its projections that we put together.

And then the last major one was NCSI, which added to our flood business. And that unit has been combined with our existing flood business, but the entire flood operation is doing extremely well for the year.

So, we're quite pleased with the acquisitions we did at the end of last year.

And what impact do you expect these acquisitions to have on earnings this year? I think you initially said they would be neutral. Any thought that they might be accretive?

I would say they'd be probably slightly accretive in the aggregate, when you put all of those together.

Yes, NCR is the one that is, you know, really neutral to negative. But that was the one that we planned to have that way for about a year to two years.

OK. And just a couple of very quick balance sheet questions. First, it looks like the deferred revenue declined about $4 million sequentially. What were the drivers behind that?

There are a number of factors. One thing that you might be interested in, too, is that there was effectively a $9 million negative swing in the first quarter. And year-to-date, there's actually only an $8 million swing. So it actually changed around a little bit in the second quarter.

But we do have swings in terms of all sorts of things, you know. Sometimes it's licenses that are, you know, fully installed so that we'll recognize them. And in the past we've had a number of issues like revenue that comes in early, and then we reverse it in the next month. So it's a number of swings.

I think the important thing is that it's a relatively small number relative to our total revenue.

OK. Just finally, the capitalized software increased about 30 percent year-over-year. Was that - was that just a one-time event? Or is that what we should expect for the back half of the year?

I would expect that the capitalized software, which I think net was about $2 million year-to-date net of amortization. And I think it was about $1 million in the first quarter, so it's about the same.

Generally, we would expect the capitalization and amortization to be about the same, so that, you know, I think in the remaining the year, it probably wouldn't be much more, you know, if it's, would be more than $1 million, I'd be surprised - net for the quarter.

OK. Thanks a lot.

Thank you, David.

The next question comes from Miss Carla Cooper of Robert W. Baird. Ma'am, you may ask your question.

Good morning. I have two questions.

First, perhaps for Don, could you talk specifically about software sales within the FIOSS division? Maybe any color as to whether those are stronger or weaker, given the economic outlook?

Actually, software sales are significantly up this year. The trend has been that way through the whole year. And it's a positive impact in that regard.

I mean, simply, that's it. They're just been up.

So your customers aren't nervous about spending, even given the economy.

Well, again, as we've often said, we're kind of insulated from the economy in the sense that when it's, the economy's down, the banks have a tendency to purchase to save money, and reverse - when they're doing well they have a tendency to spend. So we've been somewhat insulated.

But this year, software sales are actually up.

Great. And then, on the securities and trust division, obviously the market environment is negatively impacting whatever additions you - whatever progress you're making in terms of new sales there.

You mentioned WR Hambrecht. Are there any other - could you maybe compare the pace of wins in the securities and trust area to the pace of wins last year? And is the weak economy accelerating or causing a slowdown in new sales discussions?

You know, I would say the new sales this year are about the same as they were last year in number.

What we've noticed, though, is as we sign these new sales, they give us an estimate of transaction volume. And by the time they come aboard, the transaction volume is down pretty significantly from their estimates.

So, you're right. We're running awful hard, signing new clients, converting them, and the transaction volume continues to be sluggish.

And then, I guess, one last. And then, in terms of the cost savings that you've realized in that unit from the restructuring charge, is there more to come there? Or are you about at the cost levels where you think you'll be going forward?

There's some fine-tuning that's still being done, but the major numbers have been taken out, such things as management taking salary decreases and things like that. But they're minor compared to the big numbers we've taken out.

Thank you.

Thank you, Carla.

The next question comes from Mr. Franco Turrinelli of William Blair and Company. Sir, you may ask your question.

Good morning, everyone.

, Franco.

The operating margin in financial institution outsourcing, as well as being very strong, I think is actually about the highest, about - certainly I - since I've tracked it.

I think Don may have hinted a little bit as to why that is with software sales being strong. But could you try to give us a little bit more color, and indeed whether that's sustainable going forward? Thanks.

Yes. Let me just leap in with one point. Bear in mind that goodwill amortization occurred last year, and this year it's not occurring. So that accounts for like one percentage point by itself.

Yes, the only thing I would add to that is, certainly, when we have strong software sales relative to last year, you are going to see a little uptick in margin, because more of that goes to the bottom line, obviously, than it does in the service environment.

So I would say those are the two contributing factors.

Yes, and you know, and another factor too is that, internationally we've had less sales in professional services, which have a low margin. So to the extent that we've replaced that lost revenue with other revenue that has higher margin, you get an impact there, too.

Ken, what about in terms of, you know, the mix of different products?

You know, without trying to corner you into saying, you know, what's doing better or worse, it would seem that some of the newer areas like mortgage, you know, TPA, loan origination, might have some more attractive margins than, you know, the item processing or some of the more commoditized traditional businesses.

Is this about fair? Or is that reading too much into it?

Well, I mean, there's no question that item processing in, you know, the professional services that I just alluded to are more like single-digit margins, whereas the rest of the businesses are more like, you know, double-digit margins.

So, yes, that is an impact.

Yes, and some of the - some of the new acquisitions like business process outsourcing in the insurance area, and ILS and RSA are all nice margin businesses, especially relative to the item processing in professional services.

Thank you.

Thank you, Franco.

The next question comes from Miss Jennifer Dugan of Merrill Lynch. Ma'am, you may ask your question.

Thanks.

Good morning, Jennifer.

Hi, how are you?

Good.

Can you give us an update on your insurance BPO push? I'm wondering what the annual run rate is up to now and what you think that's growing at, sort of on an internal basis.

Oh, I think the BPOs are approximately $200 million in revenue.

Thereabouts.

Thereabouts, and, you know, it's growing pretty much in line of our, you know, long-term growth expectations of eight to 10 percent.

So it's with a - because I had gotten the impression that it might be above that eight to 10 percent range. Do you think it's within the eight to 10 percent range?

Yes, I think it's pretty much within the eight to 10.

OK. And do you have any more - the Nevada contract looked interesting. Are there some more big contracts like that in the pipeline?

Oh, they're working on them right now. Sure. The Nevada one was one of the large ones that came through, but there's other out there that are being worked.

Great. Thanks.

Thank you.

The next question comes from Mr. Julio of Goldman Sachs. Sir, you may ask your question.

Good morning, guys.

Good morning, Julio.

A quick question on the - I guess the securities revenues this quarter, I was a little bit surprised. I had it down sequentially much more than it was.

I mean, is that a function - I mean, obviously, it's a function of you guys ramping up some of the new clients that you won last year.

So I'm - just to go back to the question somebody asked earlier, you know, can you give us a sense on how many you've added, maybe? And why that - and how that's helping support the revenue run rate this quarter?

And then kind of going forward, you know, what your expectations are as far as relative ramp-up of new clients is concerned.

Julio, I don't have the exact number of new clients signed this year. I can get that for you and get back to you.

I would just reiterate what I said earlier. The sales continue to look strong in that area. And the disappointing thing is that transaction volume continues to come down on these new customers.

So, these guys are working extremely hard to add new clients. We're not losing clients at this stage, other than, you know, in the past year or year-and-a-half since we lost a couple of big ones due to acquisition.

But it's just frustrating in that the volumes seem to slide as rapidly as the additions take place.

Right. And the profitability of that business also, obviously, with the charge included there, looks like it's a little bit better than expected, as well.

It's turning around. The impact of the cost cuts that these guys have done have taken effect, and it is, you know, returning to nice profitability.

OK. And then on the outsourcing side real quickly, the business appears to be holding up fairly well here, growing in the sort of eight to 10 percent range that you guys have been targeting. But the outlook on the revenue for the third quarter and the EPS seems to be a little bit lighter than what I was expecting.

Is that, you know, you guys trying to be conservative there? Or can you just give us a sense on what the revenue expectations are like for the outsourcing business?

Well, you know, part of it is being conservative. But I would also say that if you look at the core part of our business, the banking part of our business continues to sell very strong, and we continue to see that grow in that eight to 10 percent range.

And that's pretty evident from the major accounts that I just listed off, and those pipeline for those, as well as our traditional accounts, is very strong.

The soft areas are the securities. And, you know, if securities were to pick up in any way in the latter part of the year, that would make a material difference to that revenue growth, obviously.

The only other thing that I would say is, on the international market, the international software sales are down year-over-year, and professional services are down primarily in that area. And the professional services obviously hurts our revenue, but because it's a lower margin business, our earnings are really not impacted, if anything, impacted in a positive way.

So we're being a little cautious on the revenue side. But there's some things out there like this continuing slump in the securities business, and the international software that's - have our concern a little bit. But we're watching them, and hope to see them turn.

- finally, for Ken, the operating cash flow expectations for the full year excluding the securities payables and receivables, are we still on track?

I think I've got a figure of about I think a little over $450 million, with free cash flow above $300 million.

Yes, Julio, that would be best to pursue with Tom Hirsch offline just to make sure. I don't have those numbers available.

OK. Thank you.

But I will say that our operating cash flow and free cash flow will continue to be very strong. And in particular as we, I mentioned earlier, we expect to have the appreciation equal the capital expenditures for the last half of the year.

And the only thing I would jump back in and add on the revenue growth numbers that we talked about, I think we need to continue to concentrate on the core part of our business, which is still very strong in that eight to 10 percent range in the financial institutions segment.

Thank you.

The next question comes from Mr. Art Bender of Credit Suisse First Boston. Sir, you may ask your question.

Good morning.

Morning.

Can you tell us what your total internal growth was for the quarter? And then also, in the companies that you're acquiring, do they generally have faster or slower internal growth than your existing business, if you can generalize? Thanks.

On the internal growth, we continue to talk about annual internal growth. And on a year-to-date basis, we're at right around five percent on internal growth.

As far as acquisitions, you know, it's a mix. You take an acquisition like NCR, it's growth rate's slower, because it's a consolidation acquisition.

Other acquisitions like ILS and some of the business process outsourcing will grow at or a little bit faster. So it's a mix. But I think if you look at it in total, we look at it in the eight to 10 percent range.

Thanks.

The next question comes from Mr. Stephen McClellan of Merrill Lynch. Sir, you may ask your question.

Les, can I have permission to ask a puffball question?

Sure, go ahead.

We'd be surprised if you didn't.

By the way, now that automatic's growth record is - looks like it's busted, you're assuming the mantle of the longest consistent growth record in the industry.

You're taking over that role, so ...

We're proud of that, Steve.

Two questions. Organic growth in the second half compared to this first half, five percent pace - that's the first question.

Well, again, I would only say that we watch the securities area with caution, and the international software group with caution.

We're hopeful that it will exceed the five and start moving back towards our eight to 10 percent range, but we're cautious.

And if you look at our revenue projections for the third quarter that were mentioned in the release, you can see that we're cautious.

So, better than five percent, but maybe not all the way into the eight to 10.

I think that's a safe way to look at it right now. Now, you know, Steve, that's barring, again - what happens in the securities area.

Right.

That's the big wildcard here.

And the second question is, total new contract booking growth rate in the second quarter. It was pretty robust back in the first quarter.

What were the new contract, the booking growth ...

The numbers I don't have right on the top of my head. But I can tell you, Steve, that the second quarter's bookings exceeded the first, and then the net the first half of this year exceeded the first half of last year.

So bookings continue to be very strong, continue - especially in the financial institutions segment.

Yes, well, they're up like something like 25 percent in the first quarter, so I presume they're - when you say robust, they're, you know, well above the 10 percent range.

Let me go back and check those two percentages and get back with you.

OK.

I'm not sure of the percentages, Steve.

OK, great. Thank you.

You bet.

And I might also point out that some of that revenue growth you won't see until next year, and some of the nice contracts that we've signed here in the second quarter don't even really kick in until like the second quarter of next year.

Yes, that's true. Generally, your community bank or smaller sale will convert within 90 to 120 days, but some of these big guys are six months and beyond to get them converted.

OK. Thank you.

You bet.

The next question comes from Mr. of Prudential Securities. Sir, you may ask your question.

Good morning. Just a little confused on that, the new clients - I - earlier in the call I thought you said it was kind of equal to the first half of last year. Now I understand it's upwards of 20 percent over last year?

No, Steve mentioned that the first quarter was 25 percent over the first quarter of the year before. And I'd have to go back and double-check that percentage. I can just tell you that the first half of this year is up over the first half of last - or the first half of last year.

How about - how about average size of those contracts? I know we used to get that.

Average size is also up over last year, so that there are larger contracts and more of them.

And one of the things we've started doing, too, if you remember, , is we're combining new sales and cross-sales, because I think giving them separately has been misleading. So we're combining them. And cross-sales also continue very strong.

OK. And retention rates?

Retention rates are still in the 99 percent - 99-plus percent range - which they have been ever since we passed Y2K.

So, retention's strong. Recurring revenue, you know, our recurring revenue model with retention is really the heart of the business, and they are still very strong.

OK. I guess my last question, then, is on the financial institution outsourcing area.

I know you don't break out individually how fast the internal growth rate is of that business, but should we understand that that internal growth rate ticked up from first quarter year-over-year levels? Is it flat or is it down?

It was - it was flat to down slightly, but still in the eight to 10 percent range.

OK. Great. Thank you very much.

You bet.

The next question comes from Mr. Matthew Fassnacht of JP Morgan. Sir, you may ask your question.

Good morning.

Good morning.

Last quarter you seemed to indicate that the core bank business and the insurance business were trending above the eight to 10 percent range and this quarter may be in that range.

What would you attribute that to? Is that right interpretation?

I think that's the wrong interpretation. I think last quarter we said it was in the eight to 10 percent, and this quarter it's in the eight to 10 percent, maybe slightly down from last quarter, but still in the eight to 10 percent range.

And then secondly with securities market, how would you characterize the environment for new wins in coming quarters?

And also, I think last quarter you mentioned two significant implementations slipped into the second quarter. Did you get those done?

Yes. The implementations were done, and I would tell you that the pipeline for new sales in the securities business still is very strong. And we would be very surprised if we didn't continue to add new customers and convert new customers as the year unfolds.

All we need now is for the business in general to firm up and transaction volumes to come back to somewhere close to normal.

And then finally, the transaction volumes through the quarter, did they deteriorate with the market? And is that continuing through July?

I would say they were down slightly with the market, and July doesn't look a whole lot more encouraging than June - May and June.

Thank you.

The next question comes from Mr. Charles Trafton of Adams, Harkness, Hill. Sir, you may ask your question.

Thanks. Good morning. Is the FI outsourcing business strongest in large, medium or small bank market? Or are you seeing similar trends across the three?

We're seeing similar trends across the three. I mean, it has been - you know, in the heart of our sweet spot is really kind of the medium-sized to large bank. And it's very, very strong. Community banks are strong, and the big deal pipeline is very strong.

Do you find that the larger banks are more financially secure right now because they can borrow at the lower end of they yield curve and are able to move quicker on contract proposals?

I don't think we're seeing anything that ...

No, in fact, larger banks always move slower.

Just because of the size and awkwardness of the organization.

So, I mean, we haven't seen any real change there. It's just that the pipelines continue strong and the sales are good.

Earlier in your prepared comments you said something about being virtually immune to the broader economic cycle, or swings. Does that include on an upturn? If the economy starts doing better, would you expect to accelerate growth?

You know, this business is pretty well smooth in upswings and downswings. In downswings, financial institutions want to outsource to cut headcount and save money. And in upswings they're more willing to spend money on bells and whistles. So it seems to flatten itself out over time.

Makes it pretty boring, but pretty comforting at the same time.

And do you have a back-of-the-envelope number on how much of your FI outsourcing business is volume related? Versus monthly fees?

Well, monthly - let me answer the question this way. The monthly fees that we charge a bank are volume related. They're based on number of accounts and number of transactions, number of happenings.

So, I would say - to put a percentage on it, I would just be taking a guess and I'd rather not do that. But it's largely driven by activity, either the number of accounts or number of transactions or related.

Yes.

Right.

And the one thing I might point out is that a lot of our contracts now are fixed fees based upon volume of accounts and transactions. So to the extent that the accounts and transactions exceed those volumes, then they will pay more.

But you have that fixed nature to it ...

Minimums.

Yes, .

... so that, you know, you don't have that much of an impact on a month-to-month basis, based upon volumes.

I would also say that as the economic swings take place, the number of transactions that a customer does at a bank, paying his mortgage payment or his consumer loan, or writing checks or making deposits, has not materially changed.

The size of the check may change, but the number of checks written just doesn't seem to fluctuate with economic swings. And we get charged, not by the dollar volume, but by the quantity of transactions.

And beyond Case Shiller & Weiss here in Boston, do you have any grander plans for the mortgage market that you want to comment on?

Yes, we're very interested in the mortgage market and continuing to expand on that end-to-end processing suite that we have, all the way from the appraisal through the processing at the other end.

So, yes. We have visions of continuing to grow that, and it's been very good to us lately as you can see with large signings like GMAC.

Right. Any internal new products or services you're developing? Or will that be acquired?

We've all - you know, we continually develop product internally, as well as look to the outside. If it's a complete business, we're more likely to buy it than build it.

Right.

But we're always adding feature functionality and new capabilities to what we offer.

Thank you very much.

You're welcome.

The next question comes from Mr. Brad Moore of Putnam Lovell. Sir, you may ask your question.

Hi. Thanks for taking my call.

Sure, Brad.

A couple of questions. Curious to know how significant is your lock box business in terms of revenue? And with the recent regulatory, or pending regulatory changes, are you anticipating any acceleration in that business? And what is the relative growth in that business right now?

The lock box business, Ken, if I'm not mistaken is ...

Under five percent. Way under five percent.

Right. Did you hear that? It's well ...

Yes.

... under five percent of our revenue. And as far as the new regulation and the impact, if there is going to be any - I haven't heard of any major impact.

I mean, our major growth - and that's going to be coming from, like it has historically - is adding new customers.

OK. On a different tact, with regard to your securities business, curious to know, is it meeting your original expectations that you had set out from a strategic perspective?

And beyond just sort of the revenue diversification, what is your - what were your original expectations with regard to the strategic fit in that business?

Strategically I think it's performing like we wanted it to. Our banks are, that have broker-dealers are more and more using our operation.

So we are cross-selling it nicely within to our bank base, which is the - strategically why we went into it.

Obviously, the financial performance has been a little more volatile than we had initially anticipated or planned, but from a strategic standpoint, we still think it's an important part of what we do.

And would you anticipate growing the business at this point beyond just the organic volume growth?

If we could acquire other businesses with it, sure.

Great. Thank you.

You bet.

The next question comes from Mr. of Colonial Funds. Sir, you may ask your question.

Please check your mute button.

The next question comes from Mr. Scott Kessler of Standard & Poor's. Sir, you may ask your question.

Thanks very much. I have a question about - well, it's more a comment, I guess. I'm asking for a comment from you in return.

As you may know, "Forbes" last month, you know, did a big story about earnings quality. And they actually mentioned Fiserv by company name, indicating that it was their impression that the earnings quality of the company was poor. And I think the reason that they articulated it was because of capitalized expenses.

I guess I just wanted to give you an opportunity to kind of respond to that article in this public forum.

I'm going to ask our CFO to make a couple of comments, because I get irritated every time I think about that article - Ken.

I just found it interesting that they would talk about capitalized expenses, when we capitalized net - I think it was - what was it, two, $1 million, which represents less than five-tenths of a percent of our earnings.

I just found it somewhat ludicrous. And if that's how bad we are, then I'm satisfied.

OK. Thank you.

Thank you.

The last question comes from Mr. Tim Willi of A.G. Edwards. Sir, you may ask your question.

Good morning. I was wondering if you could comment at all, what you're seeing in terms of any kind of market share shift or customer preference within your core bank marketplace to maybe utilize yourself more often than pure-play vendors, whether that be for Internet banking or other sort of complementary products?

And I mean, by your own assessment, do you feel like you're gaining market share at the expense of maybe the lower end of the chain that's not as integrated and comprehensive?

You know, I think clearly, two things. I think we are gaining market share overall by adding customers and retaining the customers that we have.

So gaining market share in the space that we play as a processor is happening and continues to happen.

As far as a customer that we have, more likelihood for him to use all of our products as opposed to going out and using an Internet product from somebody else, and an ATM product from another entity? Yes.

We also are gaining market share because financial institutions seem to want to buy an integrated solution as opposed to a piecemeal solution and try to integrate it themselves. There's clearly a trend in that direction.

And when you look at the competitive landscape, I mean obviously, there are a couple of, you know, fairly well known people that have strong market presence, as well. But then that trails off pretty dramatically.

Do you feel like you're gaining the market share maybe at the expense of the smaller end of the competitive scale? Or even with some of the more prominent competitors?

I would say both.

Both.

Yes, yes. We - you won't name them and I won't name them either, but we're taking from them as well as we're taking from the smaller ones.

OK. And if I can just ask one quick question on mortgage.

Could you give us a feel for what sort of mortgage related revenues would be throughout your different product sets?

You know, I just don't have that number. I can tell you that all of the banks and savings and loans that we service, or the vast majority of them, use us to process their mortgages.

Our mortgage business, when we refer to mortgage is our mortgage banking business, which targets more specifically at mortgage banks. But to break that out as a dollar number, I just don't have that.

OK. Thank you.

You're quite welcome.

Mr. Muma, sir, you may resume.

Thank you very much. We're going to bring the call to a close. We certainly appreciate the interest in the company and the following and the questions that were asked today.

Thank you for your time.