Fiserv Inc (FISV) 2002 Q3 法說會逐字稿

Good morning, and welcome to the Fiserv earnings conference call for the third quarter of 2002. We 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 being broadcast live over the Internet. This 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. , Senior Vice President and Controller.

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

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 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 third-quarter earnings press release for a discussion of these factors.

Fiserv continued 2002 with strong earnings for the third quarter. Our business model, which includes approximately 85 percent recurring revenue and associated cash flows, continues to fuel Fiserv's growth. Most of our business units performed at or above our expectations in terms of revenue and profit growth. This was through a combination of continued strength in both new clients and cross sales along with our ongoing initiatives in the area of operational efficiency.

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 third quarter.

All revenues and operating margins discussed today exclude reclassification of year to date customer reimbursements of $214 million in 2002 and $191 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 being - are before the recognition of realized gains on the sale of Trading Group stock. We do not believe it is appropriate to include the customer reimbursements or realized gains on stock in analyzing the current performance of Fiserv.

Effective January 1, 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 three cents in the third quarter and seven cents on a year to date basis due to the elimination of goodwill amortization.

Earnings per share for the third quarter of 2002 were 34 cents compared to 27 cents in 2001. Year to date earnings per share were $1.01 cents compared to 80 cents in 2001. The 34 cents in earnings per share for the third quarter was within the range of consensus analyst estimates and our estimate made in the last conference call.

Our estimate of earnings per share for the fourth quarter of 2002 is 34 to 36 cents, and full year EPS of $1.35 to $1.37. A third quarter revenues of 564 million increased 88 million or 18 percent over last year. Year to date revenues increased 267 million or 19 percent over 2001.

Year to date revenue growth was positively impacted in 2002 by our financial institutions services segment, which increased revenue $296 million or 26 percent over 2001. This segment's overall revenue growth was negatively impacted by a decrease in European revenue of $27 million, for our international banking system primarily related to reduced customer spending on profession services.

In addition, total year to date Fiserv revenue growth was negatively impacted by a decrease in revenue in our securities and trust segment, of $24 million excluding a $12 million termination fee in 2001. We are currently estimating 2002 fourth quarter total revenue for Fiserv to be approximately 570 to $580 million. Year to date cash flow after working capital changes and before securities processing receivables payables was $373 million.

Increasing 88 million or 31 percent over 2001. Our year to date operating cash flow per share was $1.91 in 2002 versus $1.49 in 2001, a 28 percent increase. Our year to date capital expenditures increased by 29 million compared to 2001, with the majority of the increase in capital expenditures occurring in the first half of 2002. Our capital expenditures of 18 million in the third quarter of 2002 were in line with management's expectations. We anticipate total capital expenditures of approximately 90 to 100 million for the full year.

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

Our third quarter operating income for this segment increased 24 percent over last year, and on a year-to-date basis, increased 29 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 the majority of our business liens, operational efficiencies, acquisitions, and the elimination of goodwill amortization of approximately 15 million.

In our securities and trust services segment, 2002 third quarter operating income was eight million, which is a slight increase over the third quarter of 2001. Our securities and trust segment operating income continued to be negatively impacted by the very weak retail trading environment, and expenses associated with our conversion to a new securities processing system, developed by CSS, Comprehension Software Systems Limited, a joint venture with several firms including Fiserv.

Our securities division has implemented several front-end modules of the CSS software system for our clients in 2002 and plans to be fully converted to the entire CSS system by the middle of 2003.

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

Thanks Ken. As Ken indicated, our third quarter earnings performance met or exceeded Street expectations and management's forecast. Our third quarter revenue was in line with management's forecast. Our increase in revenue for the third quarter was 88 million or 18 percent over last year on a year-to-date basis, increased 267 million or 19 percent.

Our revenue growth resulted from a combination of organic and acquisition growth. Our acquisition growth was derived from our 2001 acquisition and two acquisitions closed in 2002. In May of 2002 we acquired , nationally recognized provider of automated loan valuation services and collateral risk management products, adding an important piece to our end-to-end mortgage servicing operation.

In August of 2002, we acquired the corresponding clearing business of , a division of the international banking group . The acquisition enhanced the servicing capabilities and securities processing volumes of Fiserv Securities and expanded our client base of retail and institutional broker dealers.

Based in New York, has more than 80 corresponding clearing relationships.

Our year-to-date internal revenue growth rate was approximately five percent and excludes the impact of a business disposition and a $12 million termination fee in 2001.

Our year-to-date internal growth rate of five percent was negatively impacted by a decrease of our European revenue of 27 million for our international banking system, due primarily to, due primarily to a reduced spending by customers on professional services. In addition, our securities processing and trust services segment continue to experience sluggish conditions in the U.S. retail financial markets.

The year-to-date internal revenue growth rate of our financial institution services segment including, excluding the weakness in our international professional services business, was between eight and 10 percent. Our financial institution services segment continues exceptionally strong operating performance, increasing year-to-date revenue 26 percent and operating income 29 percent over 2001.

Fueling this revenue and earnings growth were strong sales, continued cost efficiencies and acquisitions. 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. As Ken mentioned earlier, the year-to-date operating performance of our securities division within our securities and trust segment, which today represents only five percent of the company revenue, we impacted by continued lower transaction volume and margin balances versus the first nine months of 2001.

However, in the third quarter, our revenues and operating income for this segment increased over the prior year, despite a very weak retail trading environment and continued expenses associated with our conversion to the software system described by Ken earlier.

In the first nine months of 2002, our sales efforts generated more new contracted revenue than the record numbers reported for the first nine months of 2001. Our ability to deliver a full sweep of automation services and products continues to provide a fertile sales environment.

Major account closes during the quarter included the following. Fifth Third Bank, a $75 million diversified financial services company headquartered in Cincinnati, Ohio selected the Fiserv UniFi PRO Mortgage loan origination and processing solution to automate its mortgage unit. In addition, EMC Mortgage, a subsidiary of Bear Stearns Companies, Inc. will use the Fiserv UniFi PRO system to expand into a new line of business.

New Century Mortgage Corporation, one of the nation's fastest growing mortgage loan originators and a subsidiary of New Century Financial Corporation, has just reentered the loan servicing market with the Fiserv MortgageServ loan servicing system. Liberty Savings Bank added MortgageServ, item processing, EasyLender and image solutions to its current suite of Fiserv products, which include core processing and ATM services. Fiserv will provide and integrated suite of account processing services from its Information Technology, Inc. unit - ITI - to the North Valley Bancorp, a $600 million multi-bank holding company based in Redding, California.

And last, Amica Life Insurance Company, a subsidiary of Amica Mutual Insurance Company, expanded its relationship with Fiserv by licensing the Fiserv Life Portraits life insurance marketing solution to support Amica's telemarketing efforts. These selected major client wins highlight the breadth of our product offering and our abilities to successfully attract new clients away from competitors and to cross-sell additional products and services to our existing 13,000 clients.

In September, we announced the promotion of Norm Balthasar to the newly created position of Senior Executive Vice President and Chief Operating Officer. At the same time, we created four new operating groups from this - from our former Financial Institution Group and promoted division presidents to lead these operations. These moves help set the stage for the future. Norm has demonstrated outstanding skills in leading our largest group through some significant growth and is uniquely qualified to be our Chief Operating Officer.

In closing, I would stress that our business continues to grow within management's expectations. Our sales and acquisition pipelines remain very robust across all of our business, and we anticipate continued growth, both organically and through acquisitions. We are confident that we will be able to obtain our 2002 earnings per share estimate, which continues to be $1.35 to $1.37 per share. In addition, we are looking forward to seeing many of you at our upcoming analyst day on October 30th, 2002, a little over a week away.

We will be introducing you to our expanded management team, presenting a more detailed picture of our operations, and demonstrating a few of our many outstanding products. We will now open the line for questions.

Thank you. At this time, we are ready to begin the question and answer session. If you would like to ask a question, please press star, one. You will be announced prior to asking your question, and to withdraw your question, you may press star, two. Once again, to ask a question, please press star, one.

Our first question today is from of Merrill Lynch. You may ask your question.

Thanks. I want to drill down a little bit more on the professional services weakness in Europe. What percentage of overall European revenue is professional services in a normal environment.

Tom or Ken, can you give that number?

Give me a moment, you want to start with your second question?

While he's digging on that, let me comment on that $27 million number. That's an annual number, and that does -- mainly out of Europe, and it is professional services, which, on the positive side, is a low margin business, so it impacts our revenue much, much more than it does our earnings, .

And what's the source of the weakness over there? And does this weakness indicate that there might be a delay in the startup of some recurring revenue business there?

No, I think what it's -- represents is just they're pulling in their horns a little bit on what they're doing technically. Generally, professional services will follow the signing of a license agreement to license our software. So if anything, it means they're just slowing down the process of installation.

So it's more of a delay of up front software licenses than the start of recurring revenues?

Yes, that's correct.

So do you see this at all as impairing the long-term outlook in Europe, or is this just really temporary, very related to the market?

We're pretty convinced at this stage, that it's temporary, that the pipeline in the European market still looks good and we don't anticipate any long-term impact of that.

Do you have any visibility as to when that might start coming back on stream. You know, a quarter or two, or does it really going to depend on the economic environment over there.

It's going to depend on the economic environment. I mean, we're looking out into 2003.

OK, great.

, the percentage is about 40 percent.

Professional services about 40 percent. And the balance is mainly license revenue?

License revenue and maintenance.

OK, great. Thank you.

Our next question is from of Morgan Stanley. You may ask your question.

OK, thanks. Just two questions. First, Ken, could you update us on the three acquisitions you made in December of last year? Just where they are relative to your financial and operating plans.

They seem to be right on target. The biggest one, of course, was . It's done very well for us. Trying to remember the other ones, frankly. ILS is another one that's done very well for us, ahead of projections, and we also did a flood business, and that one's just about right on projections.

OK, and just as a quick second question. Could you just walk us through the cash flow statement? There's just a couple of items I have a question on, in particular the negative impact on cash of securities processing receivables and payables. What are the -- you know, what are the key drivers behind that in the quarter? Or I should say for the nine months, some 80.6 million?

Yes, what you really want to do, frankly, is ignore that number because that number can vary by a couple hundred million, even within a month and it gets offset by the short-term buyer .

That is a, you know, really a daily type number and actually just to forecast a little bit in our analyst day, that should actually go through the cash flow in a little more detail to try and make these issues a little clearer for everyone.

Well, what might be the drivers behind that number? You know, why would it be a negative drain on cash?

Basically, , that's the activity in our securities operations whereby the receivable is increasing and therefore we have to fund that through short-term borrowings to basically earn a spread in that particular business.

So we have an increasing receivable, which is a use, which is funded by the 74 million down in short-term borrowings. If you go back historically, as Ken has indicated, those typically offset time over time. So, again, it's just one offsetting the other. It has no impact on operating cash flow.

It's just a requirement by the accounting standards to put the security process in receivables and payables and operating cash flow versus netting them down in financing activity. And it's because of the regulated industry and at the presentation as required for that particular item.

OK. Thank you.

Thank you .

Our next question is from Carla Cooper of Robert W. Baird. You may ask your question.

Good morning.

Good morning Carla.

I wondered if you could talk a little bit specifically, you kind of -- started to separate out impacted international on the financial institution segment. I wondered if you could talk specifically about the domestic business and within the domestic business and that segment, you know, the bank piece and the insurance piece.

The domestic business of the bank piece had a strong year. There was a little bit of sluggishness in the third quarter, nothing significant, and the pipelines look good as we go into the fourth quarter for bank software.

In the insurance business, in a year over year basis I think the insurance businesses have been about the same year over year. So I would say we've had a relatively good business, you know, in the insurance software business also. Relatively good year.

You know, I think the important thing is that the international - what's going on international seems to be completely separate from what we're seeing on the domestic front.

Got it. And then, just back on the bank piece, the sluggishness that you saw in the quarter was that more on the software side or more on the outsourcing side?

It's more on the software side, because domestic outsourcing has continued strong every quarter this year.

Got it.

I'd also point out to you in the software side, you expect a down turn on the third quarter because you've got the summer months.

Right.

I mean, that's historically been true.

And then on the insurance side, Les, just to make sure I understand what you're saying. You said it was flat year over year?

No. No. We've had growth year over year out of that business.

But the same as the growth in the second quarter, perhaps?

Correct.

And then, any - would Tom, perhaps care to take a stab at separating out domestic growth on an internal basis in the quarter versus the international piece so we can understand sort of how the domestic strength is coming through?

Well, I think what Les indicated on the conference call is that our growth excluding the European weakness was approximately eight to 10 percent on a year to date basis. That's basically our comment.

Right. I think another way to say that, is that international piece probably impacts our internal growth overall by, say, one and a half, one and three quarters percent.

That's very helpful. Thank you.

You bet.

Our next question is from Julio Quinteros of Goldman Sachs. You may ask your question.

Good morning guys. Quick question. As a point of clarification, the $27 million that you guys disclosed as far as the impact from Europe, I think you said Les that that was an annual number or was that just the year-over-year decline?

Year-to-date decline.

Year-to-date decline.

Relative to last year.

So that would be for nine months not, that's not the decline I guess for three months, this September versus last September.

No, no, no, year-over-year.

So the decline was more severe in the third quarter, third quarter.

OK. And then I guess, can you just walk us through then, to get a better sense on the variable components of your business? You've got software, which you've told us is about, I think it's five to six percent of revenue, and now we've got European revenues, about six to seven percent of total of which 40 percent is variable. What other pieces of your business is also variable and subject to possible weakness here going forward?

The only other thing that you'd point to would be the securities industry and you guys are well aware of that. That's much smaller part of us, now, you know, that's five percent or less of our revenue. But that also varies with transaction volume and margin balances. The remaining part of the business is essentially the recurring component that we talk about, and it's under long-term contracts; it has rate increases and does not experience the same fluctuations that those small pieces that we spent a lot of time talking about.

So you've got software at about five to six percent of revenue, Europe at about six to seven percent and then the securities business, as the variable components?

Right, except the international overlaps the software.

Right, no, I understand that.

Yes, that's ...

So there's some double counting there, potentially?

Correct.

And 40 percent of the six to seven percent was the variable component?

Yes, except you've got to be careful, because that Europe is not six to seven percent, all of our international business is six to seven percent.

Oh, OK. What is the, just the European?

I was afraid you were going to ask that question. I guess Europe might be the majority 60 percent and you know, that's just a very rough guess.

Sixty percent of the six to seven?

Right.

OK, and then just really quickly then, on margins, I know there's been some debate here in terms of margin contribution from software, and looking at companies like Microsoft and then looking at like , margins seem to be for software business somewhere in the 30 to 45 percent range. Would you guys just care to comment on what kind of margins you guys generate on your software business?

I would say it varies all over the place. In some of our units, it's much higher than the 30 to 40 percent and the others it's down around probably 20, 25 percent.

OK, so anywhere from 20 to 40 then. And then for your European business, where do you have lower margins, lower than the corporate average. What should we be thinking about there, as far as an operating margin is concerned?

Tom or Ken, can you?

As we've indicated, the professional services business is a much lower operating margin than, you know, lower operating margin than our standard business, but that's as much detail as we'll go into there.

OK, well professional services tend to be somewhere in like the 10 to 15 percent range, would that be?

I would take it down lower.

Lower than 10 to 15 percent. OK. all right. Great. Thank you very much.

Thank you.

Our next question is from of Jeffries and Company. You may ask your question.

Good morning. Can you tell us how much revenue came from in the securities processing segment this quarter?

What we announced on the press release was that business had about a $20 million annualized revenue, so we had a little bit over a month of that particular business.

Couple million.

Yes.

And can we comment on where we are in terms of integrating , and I guess, specifically what I'm focused on is where we can and when, expect some margin expansion from that integration?

We're still scheduled to consolidate Investec into our other operations in mid to latter part of November this year.

Thank you.

You bet.

Our next question is from of Salomon Smith Barney. You may ask your question.

Hi. Two-part question. Thanks. Just so I have the math right here. If the U.S. grew eight to 10, excluding Europe and Europe shrunk one-and-a-half to one-and-three-quarters, the total internal growth in financial institution was like between six and eight. Is that correct?

Is that the right way to do the math, Tom? Ken? I mean, ...

I guess, in total, you're going to be within - you know, what we've said is, excluding the international, it's eight to 10. So, I mean, you're in the range. We don't disclose that by segment, but, you know, you're in the range from what you stated there.

That - and the point we're trying to make here with the eight to 10 percent range for Financial Institution Group is that the core part of our business, which is the majority of our business, continues to grow at expectation. And then where we're being on a year-to-year basis is the securities piece and that international professional services piece.

All right. OK. Good. That's helpful. The second question is could you just give us an update on the acquisition pipeline, at least qualitatively, where you stand there. Thanks.

We have - continue to have a very good pipeline. We expect that, you know, some will come to fruition in the near future. And, you know, it's - you always have to wait until they happen.

And pricing has improved with the stock market decline up until the last couple weeks?

Oh, I don't really see too much difference in pricing in terms of the way we price things.

OK. Thank you.

Thank you, .

Our next question is from Bryan Keane of Prudential Securities. You may ask your question.

Yes. Hi. Good morning. Just wanted to get a better idea. The brokerage revenues were better than I expected and there seemed to be a nice pop of growth there, despite market conditions. Can you just comment on maybe what was driving that?

I'm sorry. I was talking. Growth in what?

Do that question again. I'm sorry, Bryan.

The brokerage revenues were better than I expected. There was a nice pop in the quarter for growth there. Just wanted to know what the drivers were.

Yes. That was Investec.

Investec was about two million in the quarter?

Right.

Well, if you still - I mean, there wasn't a decline, obviously. There's still growth year over year in the brokerage business. I'm just curious to know what particularly was driving that. Was that an increase in volumes, new sales?

Remember - you've got to remember there's two components of that, Bryan - both the trust services business and also the securities business. Our trust services business had a very strong quarter - up over the prior quarter. And our securities business did not - you know, it stayed relatively stable and increased a little bit. We've been signing a lot of clients there, as we've indicated before. And so, really, you had some incremental growth in securities, the acquisition and also the trust services business was up.

Yes. During this whole fall off of the securities volumes, due to the market, we've continued to add new broker dealers - in the neighborhood of 40 over the past 24 months. So, some of that is offset by the growth - by new sales.

Were there - were there more sales in the trust business this particular quarter for the strength there? Is there anything to read into it?

No. And I don't think there was anything special you can read into it. The trust business was up, year over year, and the securities was about flat. But, you know, securities being flat - Investec - is a tribute to the strength of what's going on there from a sales standpoint. Because those volumes continue to fall.

OK. Great. Thanks.

Our next question is from David Togut of Morgan Stanley. You may ask your question.

Thanks. Just a quick follow up, if I might, on the pricing of customer renewals and also new contracts and if you could just give us some insight into the contract.

Sure. In the situation, remind everybody that that business is not -- going away is not going to impact us until 2004. It'll be with us through the rest of this year and all of next year. And that was a situation where we had competitors come in and under price us to the point where we would have lost money if we would have renewed the contracts. So we did not. Now, we're keeping a lot of business and losing two major pieces, account processing and check processing. It's our philosophy and policy to not deep discount to either get or keep business, because it is not healthy for Fiserv over the long haul. We feel like our products are competitive in the marketplace, and our pricing is fair. And I think for the most part, you'll see that works, because we sign a lot of customers each year without discounting.

Now, in certain cases, we'll discount to break into a market, but we certainly don't make a habit of it, because it's not the right way to run this business long-run.

Could you comment, Les, on the general pricing on a per unit basis. What the pricing trends are like on your existing book of business as you renew, and then broad trends as you compete for new contracts.

I don't think there's anything really different than it's been in the past two or three years. We're not getting any significant price pressures on renewals, overall. And on new business, our prices continue to be what they have been, and if anything, go up a little bit as we had functionality. I think the situation you had with was a one-off.

OK, thank you.

You bet.

Our next question is from of Goldman Sachs. You may ask your question.

Hey Ken. One quick follow up, and I want to nail this question because there always seems to be a lot of confusion around organic growth when you guys reported. I know the format changed this quarter, coming out of, you know, the way that it's presented on the Q, you guys reported five percent on a year to date basis. Assuming that the European revenues stay weak going forward for you guys, is it -- is it -- I guess just sort of by implication right now, I mean, can we assume that the total business going forward is going to grow eight to 10 percent safely, or should we assume that this five to six percent rate is probably the more normal growth rate now going forward.

And I guess in addition to that, that means that -- based on the numbers that I have, you guys would have to do about 130 million or so in acquisitions for revenue contribution for the next year. Would you care to comment on that?

Let me comment, first of all, on the internal growth. You know, I think what's going on right now, holding us at five to seven percent is unusual situation in Europe, and securities. I think our goal remains in the eight to 10 percent range for internal growth going forward. And we continue to feel confident that that's very doable outside of these two peculiar situations that we have right now.

As far as the acquisitions go, I'm going to turn it over to Ken and let him comment on acquisitions.

Well, you know, as I mentioned earlier, you know, we expect to continue to have very good opportunities. We've had very good opportunities, and we'll expect to close some nice acquisitions.

Pipeline remains very fertile, and we're looking at some interesting things as we speak right now, and I've got a lot of confidence you'll see some closes there.

And then I'd like to add one other thing on internal growth is that that's going to bounce around, quarter to quarter. I mean, that's just the nature of our business. If I look back over the last nine years that we've kept track of internal growth, you know, we've had quarters as low as one percent.

Right. No, I understand it. I guess I'm just trying to make sure that in the short-term as we kind of go through this turbulent period that, you know, we understand the dynamics of the growth. The domestic outsourcing business obviously appears to be doing a lot better, but you have, you know, some pressure from software sales and some pressure from outsourcing.

So to assume in the next quarter or two that you guys would be growing at an eight to 10 percent rate immediately seems fairly aggressive.

I'd say in the near quarters it may be a little aggressive, but I think over the long haul if you look at us year over year, eight to 10 percent is very doable. I think one of the things you have to recognize with Fiserv compared to other companies in our market spaces, our strength is the fact that 85 percent of our revenue recurs under contracts.

So we're going to see these little blips, but in other areas - other companies that aren't as fortunate as we are to have the product mix and the revenue mix that we have, just don't have the staying power we do during these fluctuating periods.

Right. OK. Great. Thank you very much.

Our next question is from of D.A. Davidson. You may ask your question.

Good morning .

Morning. I guess I'd like to clarify a couple of things on your financial institution segment. You talked about the international revenues and you talked about the software sluggishness. Did you have any client losses over the quarter and how about transactions per client or institutions? Any trends that you're seeing there?

Are people making less transactions?

One of the things, you know, I'm sure we've had some client losses over the quarter but nothing material. We retained 99 percent of our clients when contracts renew and so we may have lost, you know, a handful of them but nothing that jumps out and you'd need to focus on.

As far as transaction volumes, I just don't have that information available to talk to you. But, again, there's no material changes. You know, the only thing well publicized material changes in the area of checks. And there probably is some evidence now that the number of checks written are beginning to reduce domestically in United States and that's kind of from some new accounting methods that the federal agencies that keep track of that have come out with.

But we look at that as more of an opportunity over the long run, than anything that's going to hurt us. Because I think that's going to make more financial institutions outsource check.

OK. That's fair. And I guess, housekeeping question here. Did - how many shares did you repurchase this quarter and at what was the average price?

Just a moment and I will find that for you.

Ken, I can help you with that one. It's about 750,000 shares. It's right on our balance sheet there and it's around $32.

OK. Good. Thanks.

You bet.

Our next question is from Charles Trafton, of Adams, Harkness and Hill. You may ask your question.

Hi. Thanks. Good morning.

Hi Charles.

Revenue in the last year is up about 100 million from the quarter versus a year ago, but the AR is down $2 million. So your collection cycles seem to be getting better.

What is the main driver behind that?

They are going down is your question?

Yes.

We continue to offer incentive programs effectively to reduce AR's. Everyone's charged at cost of capitals to the extent that they have accounts receivable outstanding. Their expenses go up.

As a result, we've had better collections and that's really been going on for about three or four years now.

Right. I was going to say, is that really new?

It's not new but the guides continue to focus on that part of their balance sheet because it effects their compensation program and where they can push receivables down, they do.

I mean, we did implement that, I think, about three years ago and it's made a material difference in the way our guys watch cash flow.

Right. barely changed in two years.

And we've gotten a lot bigger over that same period of time.

Right. The other side of the coin is deferred revenue has been down each of the last four quarters, sequentially and I'm sure that's a seasonal business and goes, is that mostly hand in hand with software license sales.

It's software license sales; it's hardware sales; it's postage, I mean it's a conglomeration of a number of items, you know.

At what point does that become a harbinger of slower future growth, if not already?

Only if it goes down significantly. I mean, it was down, last year it was down 17 million. This year it's down 21 million. I mean, you know, the difference is immaterial.

Right.

By the end of the year it starts to go the other way because the maintenance revenue comes back in.

And bare in mind in our business model there's a tremendous amount of deferred revenue that is contracted revenue that doesn't show up in deferred revenue in our service bureau business.

Where does that show up?

It doesn't show up anywhere, because it's just long-term contracts of recurring revenue.

Oh, right, right, I see what you're saying.

So we have a five-year contract in the service bureau business, it doesn't show up in ...

But it doesn't have prepaid?

Correct.

Can you break out the internally generated software development on the balance sheet from your intangibles?

Yes, it hasn't changed substantially. You can see we have on the cash flow statement ...

Yes, so it's still about 100 million?

Yes. It's up about two or three million if you take out the capitalization and the amortization and in the third quarter, we were right, approximately, I think we capitalized net about 500,000 and that's right about the same as the third quarter of last year.

So basically the addition is from the acquisitions?

And also our existing units where we capitalized, we've had more projects in the first half of the year as far as spending on software for our external customers. We had a number of projects out there, and in the third quarter it was right about on track.

Uh-huh, OK, thank you.

Our next question is from of AG Edwards. You may ask your question.

Good morning. I had a question about securities and trust units. Could you, in the securities unit, is there any kind of guidance you could give us, whether it be customer make up or volume make up that is retail versus institutional and how that is changed over the last year, especially since you've done the acquisition?

We're still heavily retail. You know, the acquisition did add some institutional customers to us, which will be converted over, as I said eelier, in November, but if I were to guess, I'd say probably about 90 percent retail still.

OK, and when you talk about the acquisition pipelines overall, would those comments hold true for the opportunities within that securities processing and clearing unit, or is it a different tone in the pipelines there for potential acquisitions?

We have some opportunities in the securities business. I've actually been surprised that we haven't had more, but then, you know, came along this summer, so that worked out well for us. So there are some, but not as many as I would have expected.

OK, thank you.

Thank you .

Our next question is from of . You may ask your question.

Hi, thanks very much. A number of my questions have already been answered, but I was wondering if you could just again indicated what your EPS guidance is for the fourth quarter and what cap ex was for the first nine months of this year. Thanks a lot.

EPS growth, EPS for the quarter ...

For the quarter is 34 to 36 and our cap ex year-to-date off our cash flow statement's about 75 million. So for the year we're forecasting between 90 and 100 million.

Great. Thank you.

You're welcome.

Our next question is from David Scharf of JMP Securities. You may ask your question.

Good morning. Les, I wanted to follow up on just a couple product demand issues. Number one, on the mortgage side - you seem to be announcing an awful lot of mortgage processing deals. Could you give a sense for, you know, A - what percentage of the business now is related to mortgage processing and whether or not you expect to see organic growth, perhaps, subside a little bit as the refinancing boom passes or whether or not that's immaterial at this point?

The refinancing boom doesn't, you know, impact us materially as far as signing new business there. I think the reason you see a lot of activity in our mortgage area right now is over the past two or three years, we've put a lot of emphasis on moving that to a truly, end-to-end processing operation and added a lot of pieces to it.

We've also, in the past several years, completely retooled our mortgage servicing operation, which is MortgageServ, to be browser based, to be state-of-the-art technology. And that's attracting a lot of attention. You can see that from our signing people like Fifth Third and GMAC. So I think we've just got some momentum in that area and we're real excited about how we've grown this year. And we don't see that stopping as we look forward.

Is the revenue tied to those products transaction based? Is it directly tied to the origination value?

It's transaction based and account based. So, number of mortgages and number of transactions against mortgages in many of the cases. But refi - still, the refi activity is not - we're more interested in payments coming in, escrow disbursements going on, that type of transactions. So, although you see the refi, probably - that may impact the installation of loan origination systems because they're used a lot heavier during that period of time. But it doesn't really impact our revenue overall.

Got you. And, lastly, on the check side, I know you and I have spoken about just some of the revised strange numbers coming out of the Federal Reserve on what appears to be lower check volumes - how big is item processing now as a percentage of revenue? I know, in the last - a couple years ago, I'm trying to recall, it was sort of that eight to 10 percent range. Is it still that large?

Yes. It's still in the eight to 10 percent range.

Any sense that some of the organic growth is being impacted by a larger-than-expected shift in the slowdown in check writing?

No. No. We haven't seen any material impact from that. Yet, it was more a change in the count than it was a change in actual volume. I mean, it may be going down, you know, a percent - a percent-and-a-half a year. And that's not enough for us to see.

Got you. Great. Thank you.

And what it did is it changed us from having a five percent market share to a 10 percent market share.

Right. Thank you.

Our next question comes from Brad Moore of Putnam Lovell. You may ask your question.

Hi. I wonder if you could tell me - how big is your credit union business in terms of revenue in accounts? And how quickly has that business been growing. And are you aggressively seeking opportunities in that vertical?

We have about 2,200 credit unions that we provide services for. And the revenue is roughly - I'm looking at ...

The revenue is about 10 percent of our total.

A little over 200 million revenue. And as far as the health of that business, we're seeing consolidation in the credit union business like we are at others, with credit unions buying credit unions. But we're having a very good year as far as new customers and cross sales in the credit union area. We have six very competitive products. We continually look for ways to grow the credit union business because we consider it a stable and growing business over time. So, we'd look for acquisitions in that area and we certainly are aggressively selling our services.

OK, and is it growing in that -- or is your expectation for growth in that business still in the eight to 10 percent range?

On an organic basis, yes.

OK, great, thank you.

You're welcome, .

We'll take one more question today, from of Think Equity Partners. You may ask your question.

Thank you. Just a couple quick questions. I was wondering if you could give some color on sort of your cross sales activities. I don't know if there's any specific metrics you could provide, but, you know, which specific products are doing relatively well or weak? And then the second question would be, just an update on your free-cash flow expectations for the year.

OK. I'll do the cross-sales, and then I'll turn it over to Ken to do the free cash flow. But as far as cross sales go, we're having an exceptionally strong year in cross sales, as we have 13,000 clients out there that we have multiple products that we can sell into it. We track that closely for internal purposes, but generally release just broad numbers. And last year, I think our cross sales were somewhere in the neighborhood of 1100, 1200 new contracts signed as we cross sell business. And I would expect that to be at least that much, or higher, this year.

How about specific products that are doing relatively well. Any color on that?

Image is probably one of the hottest, as our check customers convert almost one a day over to Image technology. Debit card continues to be a hot area, debit card processing. Other than that, you know, the -- a couple of the acquisitions we've done, ILS in particular stands out to me as we deliver loan-closing capabilities to customers, that one is cross selling very well. So those, I'd says, would be the hottest ones.

And then on the free cash flow number?

Free cash flow is generally about 20, 30 percent more than our earnings per share.

I thought you had given a goal of about 360 million for the year.

That's operating cash flow.

And , why don't you give me a call after the call and I can go into that a little bit more. Obviously, our free cash flow is going to be our operating cash flow less our cap ex, which we gave you on the call, which is about 100 million. So we don't see any significant changes in our operating cash flow trends. So you could annualize that and come up with a respectable number there.

That's great. Thank you.

Thank you.

What happened to ?

We have no further questions at this time, sir.

Thank you very much. I appreciate that and we appreciate the callers and the attention to our company. Have a good day.