Fiserv Inc (FISV) 2003 Q3 法說會逐字稿

Good morning and welcome to the Fiserv Earnings Conference Call for the Third Quarter of 2003. We currently have 100 participants on this call. All participants will be able to listen only until the question and answer session beginning formal presentation.

During the question and answer session, please limit yourself to one question to allow time for other callers to participate. At the request of Fiserv, today's call is being recorded. Also it is being broadcast live over the internet. The call is expected to last 25 to 35 minutes, you may disconnect from the call at any time.

Now I would lake to introduce the Fiserv management team in attendance on this call. Mr. Leslie Muma, President and CEO. Mr. Norm Balthasar, Senior Executive Vice President and Chief Operating Officer. 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 over to Mr. Muma.

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 for answering your questions. Fiserv would like to state that the company may make forward-looking statements regarding earnings targets for those pipelines and acquisition prospects during the course of this conference call. Such statements are covered by the safe harbor included in the private securities litigation reform act of 1995. These statements may differ from actual results and are subject to a number of factors. Please refer to the last paragraph of our third quarter earnings press release for discussion of these factors.

Our quarterly report on form 10-Q has been filed with the SEC and can be accessed on our web site, Fiserv.com. Fiserv continued 2003 with record earnings for the third quarter. Our business model, which includes approximately 85% 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 through continued strength in both new clients sales and cross-sales along with our ongoing initiatives in the area of operating efficiencies. We have continued to robust acquisition year with nine acquisitions closed so far in 2003, totaling combined annualized processing and servicing revenues in excess of $400 million. Our overall acquisition pipeline continues to be strong. We will now continue our review of the quarter 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. As already stated, Fiserv continued 2003 with record earnings for the third quarter. Diluted earnings per share in the third quarter were 41 cents compared to 34 cents in 2002, and on a year-to-date basis were $1.19 compared to $1.01 for 2002. 41 cents in diluted earnings per share of the third quarter of 2003 was within the range of consensus analysts estimates and our estimate made in the last conference call.

Our estimate of full-year diluted earnings per share for 2003 is $1.60 to $1.61. Our third quarter processing and services revenues, $712 million, increased 1$48 million or 26% over the third quarter of last year. And on a year-to-date basis increased $307 million, or 18% over last year. Year-to-date revenue growth was positively impacted in 2003 by continued strong revenue growth at 224 million, 17% in our financial institution services segment, and $85 million, 54% growth in our expanding health plan management services segment. We are currently estimating 2003 fourth quarter processing and services revenue for Fiserv, to be approximately $740 to $755 million, which is still an increase of 25 to 28% over the prior year period.

Year-to-date cash flow provided by operating activities before the decrease in securities processing receivables and payables of $36 million, was $439 million, increasing $65 million or 17% over the prior year. Our working capital changes impacting our weir to date cash flow, positive $49 million through September, versus $4 million through June. Positive changes in the September quarter were primarily associated with accounts payable and accrued expense items, that can fluctuate on a quarterly basis due to a number of factors, including the timing of vendor payments, the payment of year end 401-K profit sharing and incentive that take place in the first half of the year.

Fiserv's year-to-date capital expenditures including capitalize software were $119 million, increase of 12% compared to the prior year. I will now summarize our performance by business segment. In the third quarter our financial institution segment, which comprises approximately 75% of our total revenues, and 90% of operating income, continued its strong performance. The segment increased third quarter revenue 26% and operating income 25% over the prior year period, and on a year-to-date basis increased revenue 17% in operating income 20% over the prior year.

Fueling this revenue and earnings growth was continued internal revenue growth, strong operating margins and acquisitions. Our fast-growing health plan management services segment increased third quarter revenues 70% and operating income 49% over the prior year period. And on a year the date basis, increased revenue 54% and operating income 41% Fueling this revenue in earnings growth was continued internal revenue growth and acquisitions. Continued to be optimistic about the strong growth potential of our Healthplan management services segment. And our securities and trust services segment, 2003 third quarter operating income was $6 million, on a year-to-date basis was $20 million. Representing a decrease in operating income compared to the prior year periods of $2 million for the quarter and $4 million on a year-to-date basis. Our securities and trust segment operating income continues to be adversely effected by the weak but improving U.S. retail financial market trading environment, which still negatively impacts our security division, and the lower interest rates which negatively impact both our securities and trust divisions.

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

Thanks, Ken. As Ken indicated, our third quarter earnings performance met the street's expectation and management's forecasts. Our third quarter processing and services revenues increased 26% over last year, and on a year-to-date basis increased 18%. Resulting from a combination of acquisition and organic revenue growth. Our acquisition revenue growth for 2003 was derived from 2002 acquisitions and nine acquisitions that closed in the first nine months of 2003. 2003. From the first six months, we closed four acquisitions, including AVIDYN Inc., perdition computer systems, ReliaQuote Inc. and Wausau benefits. In the third quarter, we closed five additional acquisitions, these include number one, the EDS credit union industry group based in Plano, Texas, which has been renamed recently Integrisis. Integrisis specializes in court processing to the credit union industry and provides other products and services including debit card and transaction processing, electronic banking and lending and online bill payment and presentment services.

Number two, chase credit research and Chase credit systems based in north Hollywood, California, they provide credit information from the three major repositories and consolidated reports to lenders. They also lease software that allows lenders and credit reporting companies to perform their own analysis. Number three, Unishort Inc. located in Cincinnati, Ohio, provider of reinsurance software and related services. Number four, insurance management solutions group, Inc., in St. Petersburg, Florida, services the flood insurance market with a complete range of policies and administration services. And five, general American corporation based in Pittsburgh, Pennsylvania, provider of technology solutions and settlement services to the real estate and mortgage banking industries. This last acquisition, general American corporation, operates two divisions. GAC direct and Gator systems. GAC direct which provides the majority of GAC's revenue is a real estate settlement services provider to financial institution and realty firms nationwide. It uses the Gator systems to deliver services over an internet gate way connected to its three national processing centers. The Gator systems division license it is Gator system software to real estate settlement service providers and enabling them to provide this service in-house. In total, GAC services more than 4,000 customers and manages a network in excess of 10,000 independent vendors.

The acquisition of GAC and the Chase credit companies continue to broaden expanding product line and lending solutions group, providing additional strategic components in completing our end to end mortgage processing solution. Our overall strategy in making both opportunistic and strategic acquisitions has continued through 2003, we have continued to execute on long-term strategy of acquiring strong companies with experienced management teams while at the same time broadening our products and services, offering our customers the most comprehensive solution set in the industry. There seems to be some confusion about our internal revenue growth rate.

We closed the quarter with year-to-date internal revenue growth rate of approximately 3%. The company has consistently reported only year-to-date growth rate, but as I said in our last conference call, rounding can make these percentages somewhat confusing. For clarification purposes, our third quarter internal revenue growth rate was approximately 5%, up nicely over Q2. In addition, our securities and trust segments continued to negatively impact our year-to-date internal revenue growth rate by approximately 1 1/2%. Significant new business was signed in the third quarter, including the following: Cardtronics, the nation's largest independent operator of ATM's, will use FISV EFTCNS to provide processing for more than a thousand automated teller machines.

The benefit planners unit of FISV health will handle health plan management for SAF institute, that major provider of business intelligence software and services. Arc Cole company incorporated, nation's second largest coal provider, selected the Harrington benefit services unit of FISV health to provide medical plan administration in a multiyear contract that becomes effective January 1, 2004. And HSBC mortgage corporation, U.S.A., a wholly owned subsidiary of HSBC bank USA, will use the FISV mortgage serve loan servicing system to consolidate the procession of mortgages and home equity lines. Finally, FISV's substantially increased relationship with London-based Abby national bank to include 1 1/2 year outsourcing agreement to support its business banking operation.

These selected major client wins continue to highlight the breadth of our product offering, our ability to successfully attract new clients away from our competitors, and our ability to cross-sell additional products and services to existing 14,000 clients. During the third quarter, we also announced addition of Tim Roeback to board of directors, currently vice president of internal, I'm sorry, external affairs and corporate secretary for the University of Nebraska. She joined the University of Nebraska in 1999 after serving as lieutenant governor of Nebraska from 1993 to 1999.

During her tenure in state government, she was chair of the government's information resources cabinet and led the information resources commission of Nebraska. The FISV board of directors now comprised of eight external directors and two internal directors. In closing, about your businesses, our businesses continue to grow with management expectations, our sales and acquisition pipelines remain strong and we anticipate continued growth organically and through acquisitions. Looking forward, we are confident we will be able to attain our 2003 earnings per share target, which is a $1.60 to a $1.61 per share. We will now open the lines for questions

Thank you. At this time we are ready to begin the formal question and answer session. If you would like to ask a question. [operator instructions]

Our first question comes from David Togut of Morgan Stanley.

Thank you, good morning, Les and Ken.

Good morning.

Could you give us your thoughts on fourth quarter and 2004 internal growth, just what some of the puts and takes are in your thought process?

You know, it's a little early to nail it down exactly. I think everybody knows that sovereign bank's processing will be going away in the latter part of the fourth quarter, at least it's planned to go away in the latter part of the fourth quarter. With that in mind, I would say it's little early to nail it down, although we anticipate continued improvement over time of our organic growth rate, including the fourth quarter, David.

OK. And what would drive the fourth quarter improvement specifically? Securities processing less of a drag and some of the new business signings kick in? .

Well, certainly if anything would happen in either one of those, it would make a major difference. We have our pipeline of large deals and if we were to sign one of those and would kick off in the fourth quarter, that would make a big difference. And then obviously the drag of interest rates and retail volumes on our securities and trust business is also negatively impacting and any turn in that would help us a lot. I would also point out that in the fourth quarter GMAC mortgage is due to convert in November and that looks like it's on schedule for November conversion and should that happen, which we believe it will, it should approximately offset the intercept situation.

OK. And could you update us on the three largest acquisitions you made in the third quarter? CNS credit union acquisition and GAC, just any thoughts in terms of recent operate and financial, operating and overall integration?

On GAC, we just acquired those. We obviously met with the people, they have been in to several meetings here at FISV, we're very excited about what they add to that end to end lending product we have been building, but to say anything from them from a financial performance standpoint it's way too early, though we have a lot of confidence in the team that's joining us from GAC. In the EDS credit union area, we're making good progress there, bringing the organizations together.

Obviously you heard the new name of that organization. We haven't seen anything that we didn't anticipate. We expect that business to be pretty flat for awhile as we work to add product, put dollars in to their R&D budget so they can bring their product up. We have had a client meeting, very well-attended client meeting of that group of credit unions, which went very positively. So we feel comfortable that we will continue to stabilize that customer base, which had some erosion problems at the time of our acquisitions and we continue to stabilize that, we can build on it in the future. So it is going as planned, David. Nothing extremely positive and certainly nothing negative of what we see so far. What it was third acquisition you wanted me to discuss? Just two?

CNS

CNS, a year and a half sowing's also very large, that was tail end of last year, I believe. Almost a year ago. It is doing extremely well. The process of putting that together with FISV EFT, now call FISV EFT CNS, well underway, technology decision of how to bring it together have been made and we're starting to progress on that that. From a financial performance, it is performing better than the pro forma that we put together at the time of acquisition. So we're very pleased with it.

OK. OK. Thank you.

Our next question comes from Carla Cooper of Robert Baird.

Hello. Good morning. I wonder if you could give us color, commentary on what you're seeing demand for core data processing? I know it had gone through a slower period. I'm wondering anecdotally if you're seeing clients with new appetite for those types of services.

Carla, I would say that we have seen some positive improvement in software licensing, small part of our business, but it's kind of a bellwether to help banks are thinking and how positive their attitudes are. And ITI had a strong year, year over year, with new signings. I would say that's positive. On the service bureau front, the outsourcing front, that's also moving along. We haven't seen any material change in that in the past couple years. What we see during economic periods is the tightening of software licensing and we have seen that firm up and in ITI's case have a very good year.

Great, thank you.

Good luck.

Our next question comes from Jennifer Dugan of Merrill Lynch.

Yes, hello. In the brokerage services area, industry volumes are starting to look significantly better, so why is there still a downward pressure year over year? Are we (inaudible) client de conversions?

I would say the largest thing in the securities and trust area right now is interest rates impact on our trust business, more so than retail trade activity. We have seen some uptick in that. When we deal specifically in retail trades, it's not as dramatic as the overall increase in transaction volume in the industry. But I go back and say the main impact, negative impact here, is interest rates.

In answering the first question, you mentioned a large pipeline that you were hoping to convert some new deals from. That was the securities processing pipeline, the bank or both?

No, I was talking more specifically about bank outsourcing contracts, more specifically in the area of item processing, back-office work for some large banks, that pipeline looks very good. You know, I don't want to jump to any conclusions here and we're going to say we're going to sign anything tomorrow. But the pipeline is fertile enough we would expect to sign some deals out that over time. That is one of the big drivers of our internal revenue growth, is those big deals.

Are those big deals, what you mentioned last quarter, where some of the larger banks, consortium of large banks are starting to talk to you about doing check processing outsourcing?

That is true, and it's driven by really two things. One is check 21, which is now I think completed and waiting signature of the president, as well as for the first time in the history, reduction of check volume in the United States, on a quarter over quarter basis. Both of these are driving large banks to look for alternative ways to do back-office check processing. And we certainly are well positioned for that.

Is that a significant part of the larger pipe? Or is that just a component?

I would say it's the major component.

Great. Great. Thank you.

Our next question comes from Tony Monacchio of Midwest Research.

Good morning, Les, how are you?

Im good, Tony.

Good morning. Couple of questions for you. You talked about check-21. Can you talk about maybe the revenue margins and potentially CapEx needed to upgrade processing centers, implications of Fiserv overall?

Our CapEx for preparing for check-21 are essentially in place. All of our check centers are image enabled, we have an image archive operation, that's been in operation now for several years, very successfully out of Atlanta. So the CapEx situation is not something that is of concern. I would say it's a little early yet, although the company anticipates that the movement to image could potentially reduce revenue, but increase profits because the margins on the electronic or image handling are higher than they are on paper handing. But exact impact of that hopefully will be masked by addition of new clients driven by Check-21 and check volumes. So I think that it is obvious that we're headed in that direction, that image exchange and image storage and image presentment are here to stay and it's exact impact on both new clients and margins we'll see in the next couple years.

Well then we have talked a lot about internal growth and some times confusion about what the real internal growth is for the company. But if we step back and you look at a big picture, take out some anomalies that have happened. Do you still believe that 8%, 10% internal growth is possible for the company? And you do see getting back to that level?

Our goal for internal growth rate is still 8% to 10%. As we look out in the next year and we certainly think that's attainable or we wouldn't have it as the goal. I will certainly know more as we get through the fourth quarter and first quarter of next year and be able to comment on it more. Knowing this business and being in it as long as we have, our goal still is 8% to 10% range.

(2) The only thing I might add, if it becomes very dependent upon whether we sign large contracts or not.

and a last question, you know, in terms of cross-sales, I know for awhile you were working on a middle ware software program to potentially help in the cross-sales. Is that still ongoing? And how do you look at your cross sales? I'm assuming they're improving because your third quarter internal growth have improved. As you look at inside the company, maybe if you could give us some color as to how they're improving and maybe some update on that middle ware you talked about in the past.

(2) Sure. Middle ware is called Fiserv integration framework and it is now been released, we just had a meeting of our technology people, some 100 of them from around the country, all units came to Chicago for a 2 1/2 day session on how to implement that software in to their system so we could begin that process. And I would say I'm very pleased with the progress there. As far as overall cross-sells, we continue to see improvement in that area and we continue to embark on initiatives to enhance that further. I still think and I think management certainly agrees with me, that that is an untapped area and area that we can continue to improve on. We just came out of a business leaders meeting also in Chicago where we spent a lot of time talking about internal growth and how to drive internal growth through cross sales. You will hear more and more on that from Fiserv as quarters unfold, have certainly a focus. But it's one I think we're continuing to make improvements on at the same time.

Thank you very much.

You bet.

Our next question comes from Bryan Keane of Prudential Securities.

Good morning. Les, just trying to clarify, and that's helpful with the 5% disclosure, nice to see an uptick there, internal revenue growth in 3Q. What it was the number, I don't know if you have it there, Ken, for organic growth in 2Q, just so we can reconcile numbers all together?

We don't want to get down to that much granular granularity. Suffice to it say, less than the third quarter.

OK So, it definitely ticked up this quarter?

Absolutely.

Les, where shall we model out margins in the divisions between FISV health plan and securities going forward? Should we look for quarter over quarter margin expansion, year over year or how should we think about those areas?

I would say that's going to be very dependent upon what acquisitions we make in any particular time period. period. So to get more detail that way, it's probably just to call Tom Hirsch.

OK. The margins will depend on the amount of acquisitions, I guess.

Yes, bear in mind as we work in these individual operating groups, they work in improved margins as part of their business plan. But then as we add acquisitions to it, it can impact it positively or negatively depending upon the margin of the company we bring in and almost always when we bring in a company, the margins come in lower and improve over time. So it really has largely to do with the acquisitions.

OK. And then finally, I was interested in your comments, Les, on the FISV EFT network that teams like it's integrated kind of ahead of schedule, and positive growth for you guys. Do you have an appetite to continue to maybe look in to acquire and add to the FISV EFT network?

We would certainly look at any acquisition potential out there that we can continue to expand on that business. We do like that business. It fits what we do and we would look favorably on acquisition prospects in that area.

I was going to add, in terms of the growth rate, the EDS acquisition, CNS business is actually negatively impacted our growth rate.

OK. Great. Thanks. .

Our next question comes from Andrew Jeffrey of Needham & Company.

Hello, good morning.

Good morning, Andrew.

Seems like there's a little more activity in addition to GMAC in lending automation. Can you just talk about sort of overall demand and whether this is an area of emphasis for more and or larger financial institutions?

We do have strategically the end to end lending engine that we're building, we believe is the direction that lending automation is going. Lenders are looking for a place that they can go to one place and handle loans all the way from origination through the servicing and even in to the foreclosure should they go there. That's what we're building. Large lenders obviously GMAC liked what we were building there. There are, we believe, potential to attract other large lenders, medium in size and large lenders, because of what we built there. We're not finished in that area yet. We will still look at other acquisitions to plug holes as we build that end to end, but we have come a long way in the past, I would say 12 to 24 months through acquisitions as well as organic growth in that area. The products that we have all the way from the beginnings to end in that process are very competitive, compete well on their own and we believe as we bring those closer and closer into this single delivery mechanism, we will have even a bigger edge on competition.

Are you competing primarily with in-house solutions? Are you or can you talk about the competitive environment?

would say the major competitors are probably are like fidelity, first American, those offering, they offer quite a bit of the technology that we do, some of those also offer title insurance, which we don't, obviously and appraisals, which we don't. We will do appraisals but we don't actually have appraisal people, appraisals are part of our service but we don't own the appraisers.

Terrific, thanks.

Our next question comes from Tim Willie of A.G. Edwards & Sons.

Good morning, thank you for taking my question. Les, could you talk to the degree you're comfortable, as you look at, again, several large transactions here in the last year and a half, and as you look at internal growth rates, is it possible to sort of delineate between expected ramp up in internal growth at some of the larger transactions versus maybe the more mature businesses that you have? I would assume you have plans for all of them to grow, but is there definitely a discernible pattern over the years that after an integration period recently acquired properties, tend to enjoy higher internal growth rates than the more mature products at Fiserv?

Tim, it varies so widely acquisition to acquisition, that it's hard to put your finger on it. We tried to when we do an acquisition like the CNS or the Credit Union business to articulate we don't expect to it grow for awhile until we do some, in one says case, some integration, in the other case some software improvements. To take each acquisition and talk about it, they vary so widely it's hard to talk about it. It suffice that to say that we buy these companies in most cases because they're growing, or we expecting them to continue to grow and if it's an exception like CNS or Credit Union, we will talk about it specifically.

OK, thank you.

Our next question comes from Julio Quinteros of Goldman Sachs.

Good morning, guys. Two quick questions on the other operating expenses line, that line jumped up by about $22 million quarter over quarter. Can you just give us a sense of what is in that number and how we should expect to see that line trend along for the next couple quarters?

That's going to vary, you know, dramatically, again depending upon our acquisitions. In the third quarter we had an impact of --Tom, which business unit was it?

Yes, generally in that category, Julio, we have outside contractor expenses, professional fees, all other types of expenses and it really depends upon the mix of business that we have. In our lending solutions group and our insurance group, it has a higher proportion of other operating expenses compared to salaries. So depending on the mix of business there, you might get an uptick in other expenses associated with that that. So it's basically just a mix of business issue.

Should we expect to see that line trend down? Or I guess just depend on acquisitions for you guys?

Yeah, it would depend on acquisitions and growth rates of that particular business that's have a higher component of the other expense.

OK, and finally, can you give us the explicit components that drove the difference between comprehensive income and reported income? Comprehensive income was like $73 million and your reported income was in $280 million dollar range.

There if you could just give Tom a call, to go through it in detail with you.

OK, thank you.

Our next question comes from Chris Penny of Friedman Billings Ramsey, Inc.

Hello, thank you for taking my call. Les, quick question on some of the deals that you talked about maybe in the check processing businesses, you looked in to larger banks. One, can you talk about potential size of those banks in relationships you might create and then two, the structure. I think even in he past you've talked about potentially joint ventures or buying assets. Could you talk about that, please?

I feel uncomfortable talking about exact size. Suffice to it say they're big deals, $50 million and above. If I'm too specific, people will start putting names on them. And in most cases, those would be structured as partnerships or alliances that we would run and operate similar to the CIBC relationship that we have, the northern trust the lock box operation that we run, where we pick up the people, the assets, and then continue to build the business going forward with that seller as a partner of ours going forward.

OK, and I'm also going to ask a question on internal growth rates, your comments about goals getting back to 8% to 10%. What in your opinion from an outside perspective or macro perspective, if anything, needs to change in order for it to be a little easier for you guys to get back to the 8% to 10% range?

We have those historically signed a major deal, major out sourcing deal every 12 months, every 18 months. We probably haven't signed one in two years. To start closing some of these big deals in the pipeline would assure that we get back in the 8% to 10% range. Obvious this year was also impacted by Europe and our bank business in Europe as well as securities and trust, both drug that organic growth rate down. So any improvement in either one of those two soft places this year and/or signing of one or two major deals would assure that 8% to 10%.

And looking at your acquisition strategy, how do you feel about, you know, your returns on capital there in terms of pricing and as you look to bigger deals, your ability to, you know, continue to show positive ROIs on those acquisitions?

Well, typically our deals are priced five to six times EBIT, as a result you're making 16% pre-tax. So that if you make 16% pre-tax you can end up making a great contributor.

You feel pretty comfortable with acquisitions in the pipeline going forward?

Yes.

Thank you very much.

Our next question comes from Pat Burton of Smith Barney CitiGroup.

Good morning, congratulations on the quarter. My question also has to do with acquisitions but from a philosophical standpoint given the level that you've done, how is it shaping up from both a management time perspective overseeing the new additions as well as your philosophy to say let's do a larger deal around a billion and a half or $2 billion, would you consider that given the level that you've done and would you use your stock to finance such a transaction? Thanks.

Al right Ken in a will Ping-Pong on this. Let me start by saying that the ability to do the acquisition that's we have done this year certainly are enhanced by the fact that we operate with eight operating groups so. When we do acquisitions, we can essentially do eight, one in each group, all at the same time and the capacity to absorb, manage and move forward would be very easy It's when we get two, three, four in one area that we have to watch out for, in general that doesn't happen So our capacity is there I would also say that we don't ratchet up and ratchet down acquisitions based on anything other than they're, there they fit the model, we're opportunistic, we buy them Some years we will do nine of them in nine months, other years we'll do two or three in nine months, but doesn't have anything to do with the throttle in the hand, it's more of what's in the pipeline, what comes out way and what fits our financial. I'll let Ken talk about it financially.

Yes, if we have were to crowned as it an acquisition at a billion and a half that made sense for Fiserv, we certainly would do it, we would be very cautious about doing such a thing. And if there was an acquisition of that size, that would keep revenues it's just a comfortable stuff

Thank you.

Certainly.

Our next question comes from Jim Kissane of Bear Stearns.

No question, thanks.

Thanks That was an easy one, Jim.

If I had to get it Thanks.

Our next question comes from Peter Heckmann of Stifel Nicolaus and Company

Good morning, gentlemen. As regards, I missed a piece of the call, so forgive me if this has already been asked, but you commented on the software and item processing business, converting off late in the fourth quarter. I seem to remember there was also the core piece was involved. Has that core already moved off? Or is that a 2004 conversion?

That right now is still slated for conversion in the first or second quarter of 2004 and time will tell whether that make it in the second quarter of 2004 or it slides. But that's how it's scheduled today.

Okay. Al right Thank you. And then as regards the mortgage and lending businesses, certainly the volumes have been very significant over the last couple years, in an environment of drastically lower originations, would you believe that would you see increased spending by firms looking to automate and become more efficient or would you anticipate a decrease in spending?

Let me talk about two points there. Our business as a business is not dramatically impacted by the refi market. We are heavily in to home equities and heavily in to sub prime loans and those two type loans, which we concentrate on, are not impacted near as much by the refi market, which is really what drives that business up and down. But I would also say that there are some things we do, like origination systems, that have a more of an opportunity for these services to look at them when things slow down. It could have an impact on it, but very minor, because of the way we structured that business around the non-volatile type loans.

OK, that's helpful. Thank you

Our next question comes from Glen Greene of Thinkequity Partners

Thank you. Just sort of looking at your cash flow numbers and Ken, you gave year-to-date numbers for operating cash flow. Looked like the quarterly numbers, at least my calculation, close to 180 million. And I think you were referenced in this your comments, I wanted to get clarity. But was there anything unusual that sort of drove those strong numbers? And then the followup to is that, your free cash flow expectations for the year.

Yes, and what was unusual was the accounts payable increased so dramatically in the third quarter relative to the year-to-date through June, so we picked up something like I think it was $45 million and bear in mind that is that going to jump around quarter to quarter, so I wouldn't say that we're going to by any means do that each quarter. And free cash flow, you know, I haven't really calculated what it is. I mean we expect to continue to have very strong cash.

OK, thank you.

Our next question comes from Craig Peckham of Jefferies & Company.

Good morning. A question about the mortgage piece again as it continues to grow by acquisition and new clients. Can you give us a rough sense for assuming of course that all the revenue is in the Fi-segment, roughly how much of that segment is derived from what I call the mortgage end market?

We don't generally break it down that finely.

It's around 10% or so, lending group.

10% of the total is the lending group, right.

10% of that reported segment?

No, total revenue in the lending group is 10% of our total revenue.

And that does fall in the financial institution segment, which is about 75% of our revenue. So it's 10/75ths, it's that percent of 75, 10 over 75.

I follow you.

OK, not sure I did.

Not sure I did either.

You can call me off-line if you have any questions

Thanks, Craig.

Separately on the European software front, we haven't, you didn't refers that specifically as a business that's strengthening per say. Are you getting to the point in the second half of '04 or '03, rather, where the comparisons start to get easier?

I would say they're easier, it still hurts us.

Still hurts us a little bit, not like it did when it was ramping down as rapidly as it was. -- We also don't see any real sign right now that there's any dramatic improvement over there, by the way. So the best we can hope for is better compares, which I think is where you were going.

OK, thanks.

Our next question comes from Nik Fisken of Stephens Incorporated.

Hello, good morning. In that meeting you referenced in Chicago, can you talk about what products you're focusing on from the cross selling and where you see the most opportunity? And then secondly, how are you making sure that the units are effectively addressing the initiative? Thanks.

Well, I would say that there was a meeting of unit presidents, primarily, so I would say we concentrated on the cross-selling process, how to initiate it, how to track it, how to measure it, how to incense for it and putting in place initiatives to do all of those. So no specific products. Obviously these guys will go home and pick the products that have kind of the sweet spot, the ones easiest to cross-sell and move on those. I think important thing here is we worked on the process, how to initiate it and how to measure it. But also add that we have a boot camp coming up in the early part of '04 where we actually bring in the sales and support folks to look at the products, in particular the new product, to improve cross-sales at the street level, if you will. So there are a lot of things going on in that area, suffice to it say that it is a focus of the company and I think it's one that we will continue to see improvements on.

From their feedback, do they give you any idea what the initial lapse would be?

Well, there's some obvious ones that have always been here, like ATM processing and check processing and right now certainly check image is a hot button, debit cards is a hot button, lending is an area that we feel like the especially with this end to end engine that we built, that it's one we should continue to concentrate on cross-selling in to our existing customer base. So there's a lot of area that's are hotter than others, but I don't want to put the emphasis on any because I think we can and should improve cross-sales across the board.

Right, Right. Thank you.

You bet, Nic.

Our next question comes from Scott Kessler of Standard & Poor's Equity Research.

Thanks very much. I guess what I'm wondering about is we have all seen volumes pick up with respect to the retail trading environment, I'm kind of wondering when that pickup, if of course it continues, will be reflected in your securities processing business results.

If and when retail trades and margin balances both, which is how we make money in that business, start to uptick the earnings impact of that will be immediate. So it's a matter of when is it going to happen in any kind of material form.

I would just add as long as the interest rates increase too, that's what allows us on the margin balances to make the spread.

So I guess that's the question that I have, I don't think there's any question that the market environment has obviously improved over the past, say, 6 to 12 months and obviously has accelerated, say more recently over the past say three months or so in terms of everything from asset values to margin balances to interest rates actually increasing, to volumes in creasing. So I'm kind of wondering what exactly we should be looking to because it doesn't seem necessarily that these improvements have been fully reflected in your results as you would characterize them. So that's kind of the problem that I'm trying to figure out.

Year over year your interest rates are still down, so that still has a negative impact. And it has a negative impact in our trust business too, which is what you're seeing in the combined segment so. The trust business has been actually hurt more than the securities business this year in terms of the interest rate spread. The other thing I would just remind everybody that the securities, not less than 5% of our business. So yes, it does have a negative impact, but it's not overwhelming.

Conversely as that turns and starts to go north, it's going to have a positive impact, but it's also not going to be overwhelming because of the size it is of our business.

OK. So I guess you're indicating that interest rates are more of a sign post that we should be looking to as opposed to, say, volumes and the overall health of the market? Is that inaccurate?

That is accurate.

Accurate relatively speaking. I mean volumes tripled, then that would be more important.

All right. Thank you.

You bet.

Our final question comes from Charlie Ackerman (ph) of Sagamore (ph) Health.

I Appreciate you taking my question. I just had two questions. One was on sort of your implied operating margin for next quarter, just looking at it briefly, looks like it might fall out somewhere near 18%, using 748 revenue and 41 cents in earnings. I'm curious, like, you know, you guys have been kind of running in the 20, 22% back from 1999 to, you know, 2000, 2001, I'm curious like going forward, you know, look out a year or two, where you think that number is going to be. Then I had a quick question on acquisitions after that.

Well, I would comment on the fourth quarter as often in the fourth quarter our operating income margin goes down, look at it historically.

So then would you expect for '04 it would be higher than your Q4 implied?

Correct.

Then secondly if I would just look at when you look at acquisitions, I mean you guys talk about buying as a multiple of EBIT, but do you look at it as a cash on cash return? If you go back and look at the amount of money spent over the last six or seven quarters it's considerable and has the cash on cash return, you know, been what you thought?

Yes. When I talk about EBIT too, I mean cash EBIT. So if you have a case where you're having to finance a lot with working capital changes, you know, then you take a discount to your standard price. So yes, our return on a cash over cash basis has been quite good from the acquisitions? .

I go back and look over the last seven quarters, it's unfair, because this quarter had you a big chunk but done roughly almost a billion dollars in cash for acquisitions. If I assume maybe you get a 10% cash on cash return, that would imply sort of 100 million dollars of free cash flow should be coming from, you know, maybe next year from the amount of money you spent on acquisitions over the last seven quarters. Is that sort of a fair way to look at it?

Yes. I think that would be. But you can just give me a follow-up call on that if you want more detail.

OK, thanks a lot, appreciate it.

Yes.

That concludes the Q&A session. I would like to turn the call back over to Mr. Muma for closing statements.

I would just like to say we thank you for your participation, we appreciate your questions and look forward to talking to you again next quarter. Thank you very much.