Fiserv Inc (FISV) 2003 Q4 法說會逐字稿

Good morning, and welcome to the Fiserv earnings conference call for the fourth quarter of 2003. We currently have 95 participants on this call, and all participants will be able to listen only until the question-and-answer session begins, following the presentation. During the question-and-answer session, please limit yourself to one question to allow time for other callers to participate.

At the request of Fiserv, today's call is being recorded and also is being broadcast live over the Internet. The call is expected to last 25 to 35 minutes. You may disconnect from the call at any time. Now I would like to introduce the Fiserv management team in attendance on this call. Les Muma, President and CEO; Norm Balthasar, Senior Executive Vice President and Chief Operating Officer; Ken Jensen, Senior Executive Vice President and Chief Financial Officer; and Tom Hirsch, Senior Vice President and Controller. At this time I would like to turn the call over to Les Muma. Sir, you may begin.

Welcome to Fiserv's fourth-quarter earnings conference call. We appreciate your participation and look forward to presenting our fourth-quarter results and answering your questions. Fiserv would like to state that the company may make forward-looking statements regarding 2004 earnings and revenue targets, sales pipelines, and acquisition prospects during the course of the conference call. Such statements are covered by the Safe Harbor included in the Private Securities Litigation Reform Act of 1995.

These statements may differ from actual results and are subject to a number of factors. Please refer to our fourth-quarter earnings press release for a discussion of these factors and non-GAAP financial measures discussed in this conference call. The press release is accessible on our website, Fiserv.com.

Fiserv finished 2003 with record earnings for the fourth quarter. Our business model, which includes approximately 85 percent recurring revenue and associated cash flows, continues to fuel Fiserv's growth. Fiserv recorded our 19th straight year of record earnings, excluding a onetime charge in 1995 which was related to an acquisition. Our free cash flow for the year was exceptional, at 455 million, increasing 22 percent over the prior year.

We also concluded a robust acquisition year by closing 12 acquisitions in 2003 totaling a combined annualized processing and services revenue in excess of $610 million. Our overall acquisition pipeline continues to be solid. We will now continue our review of the quarter and the year 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.

Thanks, Les. As already stated, Fiserv finished 2003 with record earnings for the fourth quarter. Diluted earnings per share in the fourth quarter were 42 cents, compared to 35 cents in 2002; and for the full year were $1.61, compared to $1.37 in 2002. The $1.61 in diluted earnings per share for 2003 was within the range of consensus analyst estimates and our estimate made in the last conference call.

Our estimate of the full year diluted earnings per share for 2004 is $1.86 to $1.93, which represents an increase of 16 to 20 percent over 2003. Our EPS estimate for the first quarter of 2004 is 43 to 45 cents per share.

Our fourth-quarter processing and servicings revenue of $750 million increased 174 million or 30 percent over the prior-year period, and for the full year increased 494 million or 22 percent. As indicated in our press release, revenues and operating expenses have been reclassified for all prior periods to reflect the preferred industry methods for reporting flood insurance processing and prescription benefit management revenues. These reclassifications had no impact on the company's financial position, operating income, or net income.

Revenue growth for the year ended 2003 was positively impacted by continued growth of 308 million or 19 percent in our financial institutions segment, and 183 million or 85 percent growth from our expanding health plan management services segment. We are currently estimating 2004 first-quarter processing and services revenue for Fiserv to be approximately 800 to 830 million, which is an increase of 32 percent to 37 percent over the prior year period.

This large revenue increase over the first quarter of 2003 is due primarily to acquisitions and exceptional growth in the health plan management services segment. The major contributors to the expected growth in the health plan management services segment are the acquisition of MedPay and the expected growth in our existing prescription benefit management business. The operating margin of our prescription benefit management business is in the low single digits, similar to other competitors in the industry.

2003 cash flow provided by operating activities, before the decrease in security processing receivables payable of $80 million, was $598 million, increasing 83 million or 16 percent over the prior year. Fiserv's 2003 capital expenditures, including capitalized software, were 143 million, an increase of only 1 percent compared to the prior year.

As Les highlighted earlier, our free cash flow for 2003 was 455 million, an increase of 22 percent over the prior year. Fiserv continues to benefit from our business model and incentive systems that drive our business units to grow both their earnings and free cash flow.

I will now summarize our performance by business segment. In the fourth quarter our financial institutions segment, which comprises approximately 75 percent of our total revenues and 85 percent of our operating income, continued its strong performance. This segment increased fourth-quarter revenues 24 percent and operating income 18 percent over the prior year, and for the full year increased revenue 19 percent and operating income 19 percent.

Fueling these increases for the year were acquisitions and strong operating margins as we continue to drive cost synergies in both our existing operations and through certain of our complementary acquisitions.

Our fast-growing health plan management services segment increased fourth-quarter revenue 112 percent and operating income 61 percent over the prior year period, and for the year increased revenue 85 percent and operating income 46 percent. Our revenues in this segment were significantly impacted by our acquisitions and the growth of our prescription benefit management business. We continue to be very optimistic about the long-term growth potential of our health plan management services segment.

In our securities and trust segment, operating income was 8 million for the fourth quarter and 28 million for the year, representing a slight increase compared to the prior quarter and a decrease of 3 million compared to the prior year. Now I would like to turn the call over to Les, who will provide additional details and highlights for the fourth quarter and the full year.

Thanks, Ken. As Ken indicated, our fourth-quarter earnings performance met the street's expectations and management's forecast. Our fourth-quarter processing and services revenue increased 30 percent over the fourth quarter of last year, and for the full year increased 22 percent, resulting from a combination of acquisitions and organic growth.

Our acquisition revenue for 2003 was derived from our 2002 acquisitions and 12 acquisitions that closed in 2003. In the first nine months of 2003 we closed nine acquisitions, including AVIDYN Inc., Precision Computer Systems, ReliaQuote, Wausau Benefits, the EDS Corporation's Credit Union Industry Group, Chase Credit Research and Chase Credit Systems, UniSURe, Insurance Management Solutions Group, and General American Corporation.

In the fourth quarter we closed three additional acquisitions. First, the item processing business of the Federal Home Loan Bank of Indianapolis. Fiserv already is the nation's largest third-party processor of checks, annually touching more than 4.7 billion checks or more than 10 percent of the country's total volume. With this acquisition, Fiserv now operates 49 image-enabled check processing facilities across the country, all linked to Fiserv's image archive.

Our second acquisition of the quarter was MI-Assistant software located in Eleva, Wisconsin. This company provides rating and automation solutions to the insurance agents and companies in the Midwest. Our third acquisition, MedPay Corporation, based in Memphis, Tennessee, is the parent of Third Party Solutions Inc. and Direct Comp RX Inc. Third Party Solutions is among the nation's largest providers of workers compensation prescription processing services for pharmacy. Direct Comp provides workers compensation prescription drug services to employers and insurance companies.

Our overall strategy of making both opportunistic and strategic acquisitions has continued throughout 2003. We continue to execute on our long-term strategy of acquiring strong companies with experienced management teams, while at the same time broadening our products and services, creating for our clients the most comprehensive solutions set in the industry.

Our fourth-quarter internal revenue growth percentage was 5 percent, and for the full year was 5 percent. The full-year internal revenue growth rate was driven largely by our health plan management services segment and by solid growth in our lending and insurance services groups and our EFT and ITI product offerings.

The full-year internal revenue growth rate in our financial institutions segment was 2 percent, which along with a flat fourth-quarter rate in this segment was below our expectations for the year and for the fourth-quarter. The fourth-quarter internal revenue growth rate in this segment decreased 4 percent compared to the third quarter, due primarily to the following three factors. One, the loss of Sovereign's item-processing business; two, a slower fourth-quarter in our lending group, primarily due to lower volumes in home equity loans being processed, created by a reduction in customer promotion activity by our bank clients due to the holiday season; and three, the timing of customer software installations, which were slower in the fourth quarter than previous quarters.

However, our in-house software backlog has improved going into 2004. We believe that 2004 will see improved organic growth over 2003 in our financial institutions segment due to a number of factors. First, we anticipate strong growth in our lending group. GMAC, the nation's seventh-largest mortgage servicer, will be converting to our MortgageServ loan servicing system in late January; and our pipeline for this product is very active, including several other very large prospects. Additionally, our lending group is well positioned to capitalize on an expanding productline through cross sales to existing clients, not only within the lending group but across Fiserv.

Second, we anticipate continued growth in our insurance solutions group, driven by our business process outsourcing businesses, primarily in our flood processing operation. Third, our resigning of Sovereign bank to a five-year $125 million contract for core account processing eliminates a large anticipated negative impact on our 2004 organic growth rate. Additionally, this significant win underscores the strength of our products and services against the competition, and highlights the fact that Fiserv's products meet the needs of large institutions interested in outsourcing. The new Sovereign agreement continues a nearly 18-year relationship that has seen Sovereign grow from less than 500 million in assets to more than 40 billion in assets. We are obviously pleased to have this fast-growing progressive bank remain a core processing client of Fiserv.

Fourth, our current pipeline for large financial institution check processing deals is very strong, driven we believe by the passage of Check 21 and the forecasted decline in the number of paper checks written in the United States. Check 21 and the resulting move towards check imaging is causing financial institutions to re-examine their existing and future costs of processing checks. The declining check volumes is increasing the per-unit cost of check processing across the industry. Together these phenomena are encouraging many large institutions who currently process their checks in-house to evaluate the future of their internal operations. This is providing a fertile environment for Fiserv's check outsourcing sales force, as we are the nation's largest check processing company.

And finally, we expect improvement in our cross sell activities in the entire segment, as we take advantage of our unique opportunity to market our array of leading products and services to our more than 15,000 existing clients.

Our health plan management system segment internal revenue growth rate for 2003 was 31 percent; 18 percent related to the prescription benefit management business that generates operating margins in the low single digits, and 13 percent related to the remaining businesses in this segment.

Our securities and trust segment generated a decline in internal revenue of 8 percent for the year.

As we look into 2004 we continue to challenge our management team to aim at our target organic revenue growth rate of 8 to 10 percent. Over the past 10 years our average organic growth rate has been 7 percent. We have had four years at 8 percent or higher, and six years at 7 percent or less.

For 2004 we anticipate our health plan management services segment to grow organically similar to 2003, or in the 25 percent to 35 percent range, due primarily to the expected growth in our prescription services business from our new acquisition, MedPay, and our existing prescription benefit management business.

We expect our securities processing and trust services segment to experience little if any organic growth for the year, although a material retail securities business pickup or a significant move in interest rates could alter this outlook.

Our financial institutions segment is expected to start slow in the first half of 2004, and end up in the mid single digits for the second half of the year.

All four segments have historically experienced quarterly fluctuations in organic growth rate, both positively and negatively. Overall, if our business progresses within the range of our 2004 forecast, our historic average of 7 percent organic growth is very visible, and our 8 to 10 percent management target could be achieved.

Significant client renewals and new relationships gained in the fourth quarter include the following. As I mentioned earlier, Sovereign Bank, a $40 billion bank headquartered in Philadelphia, signed a multiyear renewal agreement for account processing services. Chicago-based Northern Trust Company expanded its longtime relationship with Fiserv to include cash bulk processing services. Associated Mortgage Company, based in Green Bay, Wisconsin, will use mortgage servicing software and systems from Fiserv MortgageServ. Community First Bancshares of Fargo, North Dakota, extended its comprehensive relationship with Fiserv to include outsourced check processing for the bank's operations in 12 states.

And Citizens Financial Services, a $1.6 billion banking company in Muncie, Indiana, will process its accounts through Fiserv ITI service bureau network, an agreement that also includes Internet banking and cash management services. In addition, South Africa's Standard Bank will use software from Fiserv's IPS-Sendero unit to implement the first group-wide asset liability management system in Africa. And Bank of Ceylon, the largest bank in Sri Lanka, will implement Fiserv's International Comprehensive Banking System, ICBS, and other Fiserv products at its 300 branches to manage approximately 3 million accounts. Also, Washington State Health Care Authority expanded its relationship with the Harrington Benefit Services unit of Fiserv Health through a multiyear contract to administer a preferred provider program for state employees and certain retirees.

In closing, our sales and acquisition pipelines remain strong, and we anticipate solid growth in 2004 both organically and through acquisitions. Our management team is focused on generating profitable new customer relationships in every line of our business. Looking forward we are confident that we will be able to attain our 2004 earnings per share target, which is $1.86 to $1.93 per share. We will now open the lines for questions.

(OPERATOR INSTRUCTIONS) David Togut.

Les, could you talk about the opportunity for further margin expansion potential in the large financial outsourcing business?

As we continue to work on that business, and you are aware that we've done acquisitions in that segment of companies like the NCR operation and the ATM operation from EDS, both of which we brought in and are going through a consolidation phase. Obviously that consolidation takes time. And as it takes place, however, margins will improve.

I would also say that there is still margin improvement within some of the base businesses as we continue a very slow migration of banks off of some of our older products onto our lead products going forward. One of the things that I think we are promised of is how our units, as a whole, continue to concentrate on margin improvement and profitability improvement out of their existing customer base.

Do you have specific market targets for that business in '04?

Not specifically; other than we challenge the people that run those groups to continue to improve them. But we don't have a specific target; unless you do, Norm.

I might also add, David, as to the extent that we acquire a big check processing contract, that would have a tendency to actually lower the margins. Because those are usually high single digits, low double digits. On the other hand, if it was high image content, that we have a tendency to raise the margins.

That is a good point, Ken. We do have a nice pipeline for that type of contract as we look into 2004. So it is kind of a balancing act with the operating people working to improve margins and sometimes we bring business on that lowers them a little bit.

Just finally, could you address the pipeline for large traditional bank outsourcing contracts? It seems like a few have been percolating over the last year. Should we expect some signings in Q1 or Q2?

I don't expect anything unusual, just in our core. Adding new service bureau customers and software customers. We have seen a little bit of a pickup in our software licensing business in both ITI and CBS, which are our lead products. But I don't think there's going to be any material change 2004 over 2003. That business has been good all along.

Thank you.

Carla Cooper.

Congratulations on the Sovereign business. I was wondering if you could talk about the dynamics of retaining that business; and then the impact on the economics of Fiserv vis-a-vis the old contract. Thanks.

I would just say that we are very pleased to have Sovereign renew and extend with us. And at this stage we would like to refer any questions on the dynamics of the whys and the wheres and the hows back to Sovereign Bank, which is our agreement with Sovereign Bank. We are very pleased to keep it going forward.

As you know they just acquired or announced the acquisition of a bank holding company, which is a positive. And that is why it is good to process large progressive banks like Sovereign. But detailed questions have to be referred back to them, Carla. I'm sorry.

Then my other burning question is on the health group. The contribution from the pharmacy benefits, how recurring has that business been? And how comfortable do you feel with that 25 to 30 percent forecast? Is that an 85 percent recurring business like your others and very high visibility? Or could it bounce around a bit more?

It is largely recurring, and we are very comfortable with the ranges of growth between 25 and 35 percent. But I would say that that business typically, the whole health area, experiences a little more of what we call customer churn on an annual basis.

So there is a percent, low percent, generally in the single digits, mid single digits, that churns each year, which can cause some fluctuations. Because you obviously have to sign new business to offset that before you can grow. But overall it has the same recurring component that we like, and we are very comfortable with that growth percentage that we're talking about.

The other thing I might add is that because it is new business, it doesn't become recurring until after we've gotten it.

Thank you.

Franco Turrinelli of William Blair & Company.

You didn't talk much about, or at all actually, about the Northern Trust cash management. I wonder if you could comment on that a little bit more. And to what extent is that part of your plan for 2004 to build that business? Thanks.

We have always pointed at this currency business as something we could get into, because we do that in Canada and have for years. We have been pursuing a number of opportunities in the United States, Northern Trust being the first one of any size that has signed with us.

I think it is encouraging, number one because it shows the strength of the relationship we have with Northern Trust, that they continue to outsource different parts of their technology to us. Second, it gives us a base in the United States now to go after that business with other financial institutions. Plus we now have a demonstratable client that has outsourced this part of their operation, which is currency, which is a little bit different in the United States.

So from a contract size standpoint it is not huge; a couple million dollars a year. But it is a significant statement that a large bank is willing to do that. I think it'll pay dividends for us over time.

Is this a big area of opportunity Les, or relatively small?

Absolutely, it is a very very big opportunity. You look out there at some of these larger banks, and their currency operations are much bigger than what we have at Northern Trust. And there is good opportunity. It's not an awful lot different than what we do in the area of check, lockbox, ATM processing. Very similar type operation and one that we think we can capitalize over time. And we are very pleased to get the first large bank signed in that area.

Thanks.

Bryan Keane of Prudential.

I appreciate the extra disclosures. Just a couple questions on clarification. Ken, it looks like you restated some gains on sale on the operating results, if you go back into 2002. Is that correct? And is that an accounting change?

The restatements that were done are just on the revenue with respect to the flood business. Is that correct, Tom?

Yes, and we did reclassify those realized gains previously in our previous filing. That should be out there; that was not a change in the current quarter.

Okay, because I have 4Q '02 operating income from the old release at 113.8; and now it's restated to 114.3.

I think the difference is that small realized gain.

Okay. Was there any gains in this particular quarter?

No.

And just the second question of clarification, on the organic revenue growth or the internal revenue growth discussion, you say that there was 374 million of acquired revenue, and that represents preacquisition normalized revenue. Is that the trailing 12-month revenue contribution of the acquisition? Or is that normalized means something else there?

It is the trailing 12 months, plus any adjustments that we know of for business that we are sure is going to go away.

The other item to add to that is we also have different companies report their revenues gross versus net. And we have different adjustments along that line, to make sure they are comparable to how we report our revenues here at Fiserv.

Okay, and lastly that growth in health plan services, is it typical to be that strong? Or is that just something that is happening in industry? I'm not familiar with that industry.

I think just really it's a new business for us and it's been expanding very well, and it just allows us to offer a fully integrated solution.

Will it continue to grow over the years at the pact that it is growing right now? Absolutely not. As it gets larger, obviously, it will slow down from a percentage standpoint. But it is a very good growth business. And it's in an area that we think has a lot of potential for Fiserv in the coming years. So we look forward, going forward.

Bryan, I might also just thank you for making the comment about our increased granularity that we're showing on the financials. We labored over that for a while on far to break it down and how to break down, and I think it'll go a long ways to clarify some misunderstandings we had in the organic growth area.

It is great. It is really helpful for us, so thanks.

Julio Quinteros.

Real quickly on the fourth quarter, just the expense structure. Just trying to understand how much of the changes in gross margin on a sort of quarter-over-quarter basis had to do with some of the reclassifications that you reported this quarter? That's the first part of my question.

Secondly, as we look at 04, what I am trying to get a sense of is the last sets of acquisitions, in particular the MedPay acquisition, I was trying to get a better sense on how you guys paid for those acquisitions; and how that will impact at the interest expense line and operating margin line. So any further detail you provide there would be helpful.

Let me answer the second question first, and then let Tom answer the first question second. We paid cash for MedPay. So that will cause interest expense to go up. I also might point out to you in terms of our free cash flow that we generated 500 million free cash flow paid by the 700 million in acquisitions. So that went up about 200 million.

What is the rate on your interest rate expense, then, going forward?

It varies; but currently interest rates are very low, so they probably average around 2 percent, 3 percent.

That's on an incremental basis. But our all-in rate on average is around 5 percent, in that general area. Because we fix some of our debt, obviously, to have a mix between fixed and variable.

What about the expense? Some of the moving parts in the expense line part of it?

We reclassified some revenues, as he indicated. I think overall, if you look on a company basis, the overall margins are about the same. We did have a little bit of an increase in the financial institutions segment by about a percent; and a little decrease in the health plan management services by a couple percent. So overall it is not significant to the company. But you did have by segment it changed a little bit, based upon those reclassifications that we note in our press release on page 7 at the bottom.

Will we get the full income statement on a reclassified basis at least for the last quarter, eight quarters, maybe?

You have the detail. We have the three years by segment in the press release on page 7.

I'm talking about the income statement.

The reclassification there, I can get you those quarters. Basically it comes out of revenues and operating expense, so you have the information there to be able to do that.

Got it. Okay, thank you.

Pat Burton of Smith Barney.

Two-part question, and thanks on the additional disclosures as well. Les, could you give us an update on the pipeline in the Check 21 area? The second question relates to, as these acquisitions in aggregate move into the internal growth number, are they additive? Or are they a drag? Or are they about the same as the 7 percent number that you are shooting for here in '04? Thanks.

To answer the first question on the large Check 21 deal, that pipeline is I would say stronger than it has been in the past couple of years. We can never guarantee anything is going to come out of there, but I would be very surprised if it doesn't. These deals vary in size. Some of them quite large, as these financial institutions are taking a serious look at their in-house operations and the cost of getting them image enabled.

They also couple that with the fact that the volumes are slowing down; and making major investments in technology in an area where volumes are decreasing generally are against banks' nature. So they are looking at that very strongly, and that pipeline is very, very good.

Your second part of your question had to do with are these acquisitions as they roll forward, are their growth rates faster or slower than Fiserv’s? I would have to say they vary. In some of them they are faster; in others we will buy companies that are slower. You look at last year's, I would say there is a mixture of both, although in the health area obviously the growth rates are very nice in some of those health acquisitions.

As we pointed out earlier, the acquisition of MedPay we expect to contribute significantly to our internal growth in health plan management segment. And also our existing acquisition of Wausau, which is in the prescription benefit management business, is also a significant contributor to the internal growth there.

One follow-up. When the EDS CNS business became internal growth in the second half of this fourth quarter, was that a drag? Or has the business pretty much stabilized from the runoff rate that it was experiencing before you acquired it? Thanks, and I'll hang up. Thanks again.

Overall for the year it was a slight drag.

And has it stabilized since you acquired it?

It has stabilized, but I would expect it would be a slight drag in the first quarter also.

Thank you, Ken.

Shane Diament of Stephens Inc.

Quick question on your comment on improving cross sells; specifically I guess to your smaller bank tech market. Are there any particular products there that you are seeing strength in? Or any particular competitors that you're making more wins from?

I would say the things that are cross selling better into the core bank business of ours are image technology in the area of check image. What else would you add to that, Norm?

I think the origination, the lending area. We've got several products now with our lending systems and software suite that we are looking to move across our community banks.

And then one that we cross sell consistently is, almost every time we sign a bank customer, he now buys our ATM processing, ATM/EFT processing. And that along with the debit card portion of that offering also cross sells very nicely into existing customers. So those would be the major areas.

Okay, thank you.

Glenn Greene of ThinkEquity Partners.

Just trying to drill down on the FI organic growth in the quarter. Wanted to know what the impact was from the item processing piece of Sovereign, which it was my understanding came off this quarter? And also it was my understanding that GMAC was going to be converted by the end of this quarter. I was wondering if that had been delayed at all.

The GMAC conversion was originally scheduled to convert Thanksgiving weekend, and in agreement with GMAC we delayed that to the end of January because of the pending year end being so close. So that slipped essentially a little over two months. The first part of your question had to do --.

With the item processing from Sovereign.

That was probably about half a percent to 1 percent.

Okay, but that did come off this quarter?

Yes it did. It was off fully in the quarter.

Then competitively, anything changed? I am talking about the pricing environment, specifically any new competitors, particularly Open Solutions or Fidelity, that you are seeing more frequently?

Let me go back to your previous question first. Sovereign was off probably about halfway during the quarter; so that it will have more of an impact actually in the first quarter (inaudible) second quarter.

Okay.

To answer your question on anything in the marketplace as far as pricing goes, we are not noticing anything particular on the specific competitor you mentioned, Fidelity. But I would say overall in the bank business, if anything there is a slight, a little bit more aggressiveness in pricing by competitors that we are seeing, especially in renewals. And especially in renewals of recent acquisitions, as we move to move the NCR banks, for example, over into our products. People come in and are being aggressive.

Is it particularly worrisome? No. Is it something we're watching very closely? Yes. But there's a little bit more competition there pricewise.

Okay, thank you.

Roger Freeman of Lehman Brothers.

In terms of the new business awards you have enumerated, can you put any kind of a revenue number around how big those contracts are maybe in total, on an annualized basis?

We just hesitate to do that, because of the confidentiality of those that are in the pipeline. I will tell you, you are talking about the large accounts in the Check 21 area?

All the business awards, like Sovereign, and Chicago Trust, and so forth. If you just kind of lump those together, how big are we talking?

Sovereign is a $125 million five-year contract. The Northern Trust deal I said a little earlier was a little over $2 million a year. And from there, I don't think we have any more detail or have not disclosed any more detail. But those are the two major ones that we talked about.

Some of the other ones there, a $2 billion bank is a nice size contract; but certainly is not in the Sovereign size, because they are a $40 billion bank.

But when you talk about your organic growth forecast for this year, that includes all business that you have booked, right? That doesn't anticipate additional bookings?

It does not anticipate additional bookings other than normally what we anticipate selling every year. And also baking into that any normal attrition that we anticipate during the year. So as we look forward at our forecast internally there is obviously a little bit more detail; and they would include both of those.

What it would not include is any growth on top of a new acquisition, because we don't roll new acquisitions into our forecast at all. So if we buy a company that is growing rapidly year-over-year, that would be obviously a plus to our growth. Conversely if we buy something that is not growing quite as fast, it could drag us down a little bit.

Our internal forecast would not include any mega new contracts.

That's correct. We take the megacontracts as they come. And by a megacontract we are talking about something in the 10 to $15 million a year or up range, which are pretty much what those contracts look like in the large bank item-processing area

Could you talk a little more about Check 21 in terms of what you think your biggest opportunities around that are? Is it more an aggregation of small banks deciding to outsource? Or do you think there is potential for some large bank deals here? Is it more image storage versus image processing? How do you look at this opportunity, and how significant is it?

First let me comment just for a minute back on the large accounts you were talking about a minute ago. If we were to sign one or two or three large check outsourcing customers, it obviously would make a material impact on our organic growth rate. And you would see that. Because that is not backed into it.

Your question on Check 21, that is impacting us positively both in the small bank and the large bank opportunity. We continue to sign a bank a day, a community bank a day, onto our image and image archive operation. Our strength here is that we have more image-enabled locations across the country than anybody else.

We have one of the very early and largest check archive operations, where all of our checks are archived in an image base. And we are then very appealing to these large financial institutions who have multistate operations, as a company who can come in and handle that form.

I would caution you that Check 21 is causing some excitement in banks to look at new ways to handle checks. Its impact on Fiserv is going to be over the next year or two or three, because Check 21 in itself is being implemented in phases, not all at one time, with the first phase coming in October of this year, I believe.

So if you look at --.

We have to let other people ask questions here.

Okay. All right. Thank you.

Scott Kessler of Standard & Poor's.

Two quick questions. The first is an obvious one, but I will ask it. That is can you comment on the impact that the obvious M&A activity in the bank industry is going to have on you, either beneficial or detrimental? According to my calculations we have actually already had more in terms of value of banking M&A this year than we had all of last year.

The second question I have is can you speak to what exactly is being done regarding what I perceive as modest internal growth projections for your historic core businesses? What exactly are you guys doing to increase that rate of growth? Thanks a lot.

The first question, which I forgot what it was now.

It was the bank consolidation question.

The bank M&A is -- your guess is as good as ours. Every time a big acquisition takes place, we obviously sit down and find out where we are servicing both sides and touch base to make sure that our business is in place. We will have some acquisitions that will hurt us over time. We will have others, Sovereign Bank is a good example, as they buy banks, which is a very positive thing for Fiserv.

I think the important thing here is, if you look at what it has done to Fiserv over the years, it has been a push. Some quarters are up, some quarters are down, but over the long haul it is a push. I think that is largely because our size and geographic coverage and size of our client base have certainly helped us there.

It is really not a new f phenomenon for us. We've been going through it since we formed the company in 1984. Les being a predecessor to that was probably going through it in the '70s.

Absolutely. It is certainly not a new phenomenon. It is one we track and watch very closely.

Okay; I just wanted to hear if you had any additional thoughts relative to the new activity. But that's fine. On to the second question?

Which was?

The second question was about internal growth. What are you guys doing to address--.

In the core bank business? There are a lot of initiatives going on right now. But suffice it to say that the main components of organic growth are new sales, so you concentrate on going out and aggressively going after new sales. Retention, which I think is one of Fiserv's strengths, although it is something we cannot take our eye off, as we continue to work on maintaining that very very high retention rate.

And then the key ingredient that we think we can have the most leverage over time is cross sell. And there are many initiatives going on inside of the company, both software wise, building middleware products In implementing middleware products that enhance our ability to cross sell our products; plus policy, procedure, meetings, training, a lot of other things to enhance our ability to cross sell.

We have a big advantage over any of our competitors with this huge base of products or suite of products that we have. We just have to continue to work internally to improve our cross sale of those products. And there are many, many initiatives that are going on all the time in that area.

And we are gaining ground. We are doing better quarter-over-quarter, year-over-year. There is just a lot of room left. I think the number that we use is we sell about on average about 2.5 products per client, where we have 30-plus products to sell. That is, obviously, from this chair, very disappointing, and we are working on it.

One last follow-up if I may. Your last comment suggested the answer to this question. But at this point are you satisfied with the progress made with respect to cross sells? And have you done anything specific with respect to new training programs and hiring of new reps? Thanks a lot.

The answer to that is absolutely not satisfied. You can ask anyone of 21,000 Fiserv employees and they will let you know that management is not satisfied with our cross selling. And there are a lot of initiatives to improve that, and we are comfortable that we will improve it over time.

We have got a great team, great set of products. We just have to be better. These businesses as we bought them were busy selling their product. Now we have got to get them busy selling all of our products. And that's what we are working on.

Fair enough. Thank you.

Matt McCormick (ph) of Friedman Billings.

You did 12 acquisitions in '03 for approximately phase 600 million in revenue. With your strong free cash flow performance, what should we expect for '04? About an equal amount across all business lines?

I'll let Ken answer that.

It would just really depend upon what acquisitions make sense out there at the time. So 12 is an exceptional number, and the dollar amount was exceptional, so generally I would not expect as much this year as last year. On the other hand if we find ones that are very contributory to Fiserv, we will make them.

Okay, and then with respect to Nice (ph) which is obviously on the block, does that fit into your acquisition strategy?

Anything that would be in the EFT area like a Nice would be something of interest. But we don't comment on any particular potential acquisition.

But as long as it is strategic, does it matter if it is a much higher price then you normally pay for a company?

It would just depend upon whether any particular situation made sense or not.

We look at each one individually. But I can tell you that overall our discipline in acquisitions do not materially change acquisition to acquisition. It is our discipline that has gotten us to where we are, and we are not going to go way beyond our normal discipline just to bring something on, if it doesn't work. If it doesn't work within our formula.

Lastly a housekeeping item. Your other and corporate line item, you reported 23 percent organic growth for the fourth quarter. Could you tell us what that was?

It is a fairly small piece of business for us, but it is in our Personics operation, our card operation. That has strong fourth-quarter and typically some first-quarter cyclicality. So if you look back historically, that is just how it has been. They just had a good fourth quarter, and they just have more cyclicality in their business on a quarter-over-quarter basis than our other businesses.

Personics embosses and encodes plastic cards for the financial and other industries. If you open your wallet and look at all those cards, that is what Personics does.

As well as print services.

As well as. They have a print service, as well.

Great. Thank you.

Craig Peckham of Jefferies & Co.

I have question, more of a strategic question for you, Les. As we look at the mix of revenue today, obviously, the health side of the business has been growing pretty dramatically. Looking out three to five years, taking into consideration the acquisition pipeline, and the cross selling potential across the businesses, what do you envision the rough revenue mix for Fiserv down the road?

To give you a rough revenue mix, I would be going way out on a limb. I'll save this, in general, is that the health area is going to continue to grow very nicely. It's an opportunity. I think obviously the way it is performing and relative to the rest of Fiserv, I would say at least so far management made a good decision to move into that area. It has got a lot of the characteristics we like.

However, we still have a lot of room to grow our core business. Remember, in that core business there is our insurance operation as well as everything we do in banking. And even in the banking area, which has been our traditional business because it's where we started, we still have less than a 30 percent market share of financial institutions using our prime product.

So we have not turned our back on that industry. That will continue to grow both organically and by acquisitions as we see opportunities. But overall I would say the mix, the health is going to grow faster than the others, at least in the foreseeable future.

And turning back to 2003, obviously retention is a key determinant of future cross sales, et cetera. Can you comment on how you are doing on retention in 2003? And maybe some more current thoughts on what the quarter to date is looking like on that front?

Our retention is in the range that it has always been; that is in the 99, 98.5 to 99.5 range. It is actually right now I think running around 99. But I would say that we had some disappointments in 2003. We don't like losing business, and losing Sovereign's check business certainly was not a high point of our year. And there were some other losses that I hate to point at. But everybody from Fiserv listening to this call knows which ones I'm talking about.

We hate to lose business, and we just have to continue to concentrate on quality service. And if we lose business, the only time we lose business that I'm not as bothered by it is if we are undercut on price. And we are not going to process companies at a loss. So if we lose business like that, it's very understandable. But if we lose business for service quality reasons, it really bothers me. And you can bet that the company continues to concentrate on that, because I think that's always been one of our strengths.

Thanks, Les.

Peter Heckmann of Stifel Nicolaus.

Could you comment on the EDS Credit Union business? That business has been suffering some customer defections prior to your acquisition. Can you comment on if you have stemmed some of those losses; and how you're doing on retention to that business?

And also as regards cross selling, could you comment on the Internet banking side? It still seems to me that there is some low hanging fruit there in terms of your existing core processing customers using another Internet banking vendor. If you could comment on the opportunities there in 2004, I would appreciate it.

Let me talk about the Internet banking, and then I would ask you to clarify your first question. On the Internet banking side we continue to sign Internet banking customers. That is a growth area. That is probably one of the areas, when I was asked the previous question on where we expect to cross sell in our core banking business, Internet is certainly an area.

We do have some of our banks using other products, non Fiserv products. Obviously it would be ideal for Fiserv to bring all of those back to Fiserv, and we continue to work on those over time. But that continues to be a good area for us. Not only are we seeing new customers signed, but we are seeing gradually increased volumes in Internet banking, including bill payment and so forth.

And if you can clarify; your first question had to do with --

On the Credit Union processing business that you bought from EDS. It was my understanding that they had lost some customers prior to your acquisition. I was wondering how retention is doing there; and what the prospects on your multiple (technical difficulty) platforms look like.

There were some customers when we bought that operation that were already signed to go out the door, and we have lost some of those. We've also lost some others, and we had anticipated when we bought that, we pro forma'd in a loss over the first year or two, where we thought we would not retain all clients.

But I would say overall that team is doing a very good job, if they can't retain them within the platforms that they run, introducing the other Fiserv credit union platforms so that we can save them within the Fiserv family. And we have gotten quite a few, especially at the upper end, large credit unions, stay within the Fiserv family; moving over to another Fiserv product.

So I consider that very favorable. That team is working very hard to retain those clients within the family, and I think doing an admirable job. We are still at or ahead of our pro forma as long far as losses go there. Nothing alarming.

New business outlook on the credit union side?

The credit union business continues to grow. We haven't gotten the EDS portion to where it is growing to where we want it to be now. They are very very busy on the retention side. But our other lead credit union products, especially a product called Users has had a very, very good year last year; and we anticipate another good year this year. And our other products which are very competitive in the market, Summit and XP and so forth, are also doing well.

Thanks.

David Trossman of Wachovia Securities.

I was hoping you can give us update on any integration that had gone on in the health plan management platforms? Or maybe where you think that's going over the next couple years.

As far as integrating the products together? Right now we are operating all of those products that we've acquired independently. They still also market under their existing names like Benefit Planners and Harrington and Benesight and Wausau Benefits and so forth. What we are doing is aggressively teeing ourselves up to cross sell things like our prescription management business across those products and other businesses that we have created or acquired.

So there is a strong cross sell component there that we are not actually integrating into the existing ones. We have good products in the area of utilization review and case management and chronic disease management that are all being cross sold as well as those prescription businesses.

When I see 30 percent plus kind of organic growth in that business, is there any way you can help me understand how much of that comes from new clients, and how much of it is just drug inflation on the grossed-up revenue?

I would say most of it is new clients; and some growth within existing clients. Very little of it I think is drug inflation.

Thanks, Ken.

David Scharf, JMP Securities.

Two quick things, one on the healthcare side. There is typically pretty large turnover in self-ensured enrollment every year. It is just part of the business. It is now the end of January. You are through the open enrollment season. How did the renewals look this year heading into '04?

I think we did pretty well. You're right, and I mentioned that earlier, that there is a little bit of what we call churn in that business. And in the business as a whole it is probably 8 to 10 percent. We think ours is probably more in the mid-range, like say 5 to 7 percent is what we shoot for. But it is there.

And we could go company by company, which I won't. Some retain better than others, but there is some natural churn in that business. But I think we came through that season of the year pretty well.

Is this usually a onetime event, open enrollment at the end of the year? Do you usually get a sense for visibility throughout the year? Or is it you have to wait till every January to get a sense how retention looked?

You know where retention is as you get near the end of the year, but it impacts you almost exclusively at the end of the year. Because people switch at the end of the year. There is some switching midyear, but it is mainly at the end/

On the financial institutions side, FIS processing, could you give a little more color on your comment regarding more aggressive pricing on contract renewals? I am wondering if internal growth has been getting clipped by a point or two lately based on your accepting a little more aggressive pricing, as you maintain your 98, 99 percent renewal rates.

No. I don't think that it has been measurable in the organic growth area. It is just something that is kind of a red flag that has gone up recently, when we had our folks do a poll of our senior salespeople. And I always listen to the senior salespeople with a very open mind, knowing that they never lose a customer for anything but price. So I have to take that with some measure of skepticism.

But I have hard enough of it to where I thought it was worthy at least mentioning that there does seem to be a little bit more than normal. But it certainly hasn't been to the degree that you would see it in our organic growth rates. And we certainly hope it never gets there.

And relating to your comment that an organic growth in that segment will, quote, start out slowly in the first half of this year, should we take that to mean flat like the fourth quarter?

In the first quarter it could be flat like the fourth quarter before it starts to grow. Remember we still have the pressure of -- even more pressure in the first quarter because of that loss of Sovereign's item processing. And there are some other things there. The software installations we are not sure are going to pick up right away in the first quarter. But we certainly have a nice backlog as we get into the second and third quarters. So slow could mean flat in the first quarter.

And we don't expect the lending to pick up until probably the second quarter and third quarter also.

Okay, thank you very much.

Roger Freeman of Lehman Brothers

Sorry for taking up too much time before. I just had two more follow-ups; one on Check 21. If there are going to be any large deals on that basis, given the October deadline, is it fair to assume that we would hear something in the first or second quarter this year?

No, the October deadline is not a drop dead date for these guys outsourcing their checks. A few things change there, but you could hear some in the first half; but I think you're going to hear these large check deals coming over the next couple years. October date is not a drop dead date for that particular activity.

Lastly, in the securities business, the organic growth, can you help me understand a little more why that segment hasn't benefited from the overall improvements in the market?

I think best explanation is to say our customers are largely retail. Mom-and-pop customers. And those have not seen the resurgence that we've seen, that you see in other parts of that business as of yet.

Our average daily trades in the fourth quarter were virtually identical to our average daily trades in the fourth quarter the year before. Margin debt was up, but we don't get the benefit as we usually would, because interest rates are down. So we don't have as much of a spread.

As we have moved into January, we've seen some encouraging signs there. But it is going to take some time before we say we've got any real growth. As I said earlier, we don't expect any growth in that particular segment this year unless things to turn around a little bit.

Thanks. That is very helpful.

This does conclude the question-and-answer session. I would like to turn the call back over to Les Muma for closing statements.

Let me thank all of the listeners and the questioners for their interest in the company and their ongoing support of the company. We appreciate it. I would make one comment. Not many of you asked one question, or if you do ask one question you cleverly break it into five parts. Have a good day. We enjoyed it.