Fiserv Inc (FISV) 2004 Q1 法說會逐字稿

Good morning, and welcome to the Fiserv earnings conference call for the first quarter of 2004. 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. (Operator Instructions). At the request of Fiserv, today's call is being recorded and also is being broadcast live over the Internet. The call is expected to last 30 to 45 minutes and you may disconnect from the call at any time.

Now, I 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 conference call over to Les Muma. Sir?

Thank you. Good morning and welcome to Fiserv's first-quarter earnings conference call. We appreciate your participation and look forward to presenting our first 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 acquisitions 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 our first quarter earnings press release for discussion of these factors and non-GAAP financial measures discussed in this call conference call. The press release and our Form 10-Q filed with the Securities and Exchange Commission are accessible on our website, Fiserv.com.

Fiserv started 2004 with record diluted earnings per share for the first quarter of 47 cents -- exceeding our expectations. Our free cash flow of 126 million for the first quarter was exceptional, increasing 57 percent compared to the prior year.

Fiserv continues to benefit from our business model built on significant recurring transaction base revenues, combined with our passion for service excellence that drives our industry-leading client retention rates.

We will now turn to Ken Jensen who will present our financial performance. I will follow with a brief business overview, and we will then open the lines for questions. Ken?

Thanks, Les. As already stated, Fiserv started 2004 with record earnings for the first quarter. Diluted earnings per share in the first quarter were 47 cents compared to 38 cents in 2003. The 47 cents in diluted earnings per share for the first quarter of 2004 exceeded the consensus analyst estimates, and our estimate made in the last conference call.

We were higher by approximately 1 penny due to the net impact of certain onetime items to be discussed on this conference call.

Our slightly revised estimate of full-year diluted earnings per share for 2004 is $1.87 to $1.93, which represents an increase of 16 to 20 percent over 2003.

Our EPS estimate for the second quarter of 2004 is 46 to 48 cents per share.

Our first quarter processing and services revenues of 840 million increased 236 million or 39 percent over 2003. Revenue growth for 2004 was positively impacted by growth of 88 million, or 19 percent in our financial segment, and 137 million or 199 percent in our expanding health segment.

A major contributor to the continued growth in the health segment is the revenue increases in our pharmacies services businesses. Our pharmacies services businesses generate an average operating margin in the mid single digits.

We're currently estimating 2004 second-quarter processing and services revenue to be approximately 845 million to 865 million. Which is an increase of 31 percent to 34 percent over the prior year period.

2004 cash flow, provided by operating activities before the increase in securities processing receivables payables of 29 million, was 158 million -- increasing 42 million or 36 percent over the prior year.

Our first quarter cash flow in both years was negatively impacted by the Company's annual 401(k) contributions of 41 million in 2004 and 37 million in 2003. Fiserv's 2004 capital expenditures included capitalized software were 32 million, down 4 million versus 2003.

As Les highlighted earlier, our free cash flow for the first quarter of 2004 was exceptional. 126 million, an increase of 57 percent over prior year. Fiserv continues to benefit from both our business model and our incentive systems that motivate Fiserv business leaders to focus on growing their units, earning and free cash flow.

I will now summarize our performance by business segment.

The first quarter, our financials segment -- which comprises approximately 65 percent of our processing and services revenues -- did 85 percent of our operating income, continued its strong performance. This segment increased first quarter processing and services revenue 19 percent, and operating income 27 percent over the prior year. Fueling these increases in the first quarter were 2003 acquisitions and strong operating margins as we continued to drive cost synergies in our businesses.

The first quarter performance in this segment was also positively impacted by a onetime $8 million fee received from a customer, due to an early contract termination. The existing Fiserv customer had approximately 40 months remaining on its contract when it was acquired by a financial institution utilizing another data processing system.

Our fast growing health segment increased first quarter revenue 199 percent, and operating income 60 percent over the prior year. Our health segment's revenues were positively impacted, and operating margins were negatively impacted by our December 2003 acquisitions of MedPay and the growth of our Inovean (ph) business. These pharmacy services businesses have an average operating margin in the mid single digits due to an approximately $95 million of prescription product costs being reflected in both revenue and operating expenses in the first quarter of 2004.

The first quarter of 2003, Fiserv had not yet entered the pharmacies services business. We continue to be very optimistic about the long-term growth potential of our health segment, and believe our pharmacies services businesses will be an important part of our overall growth for this segment.

In our investment services segment, operating income decreased 7 million in the first quarter of 2004 compared to 2003 -- primarily due to a onetime charge of 6 million for additional costs and reserves associated with the Company's broker-dealer subsidiary, Fiserv Securities Inc.

As part of the Securities and Exchange Commission's ongoing industrywide review of mutual fund trading practices, including market timing and late trading, Fiserv securities has been responding to inquiries from the SEC. The Company currently estimates cumulative revenues associated with such practices at approximately 4 to $5 million. The Company is cooperating with the SEC and is conducting its own internal investigation of these matters.

Although the Company is unable to predict the ultimate outcome of this these matters, if the SEC were to assert a violation of securities laws, with respect these matters, then Fiserv securities may be subject to fines and penalties and other administrative remedies.

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

Thanks, Ken. As Ken indicated, our first quarter processing and services revenues increased 39 percent over 2003, resulting from a combination of acquisition and organic revenue growth. Our 2004 revenue growth from acquisitions was derived from our 12 acquisitions closed in 2003. And one acquisition that closed in 2004.

In January of 2004, we closed the acquisition of RegEd, Inc., headquartered in Mooresville, North Carolina -- with annualized revenues of approximately $9 million. RegEd is a provider of Internet-based compliance management systems and distance learning programs for the insurance and securities industry.

As we go forward, we will continue to execute on our long-term strategy of acquiring strong Companies with experienced management teams, with the consistent goal of broadening our products and services, creating for our clients the most comprehensive solution set in the industry.

Our acquisition pipeline remains strong.

Our first quarter internal growth rate was 10 percent, increasing from a 5 percent rate in the fourth quarter of 2003. The increase in the Company's overall internal revenue growth rate from the previous quarter was driven largely by our health segment.

The first quarter internal revenue growth rate for our financial segment was 1 percent, and consistent with management's expectations from our last conference call.

The internal revenue growth rate of this segment was positively impacted by the contract termination fee Ken mentioned earlier. And negatively impacted by a similar amount due to continued weakness in our international business, and the full impact of the loss of Sovereigns Item Processing contract that we announced in 2003. We believe this segment's organic growth will improve in the second half of the year due to a number of factors.

First, we anticipate an improvement in our lending group over the next few quarters. This group has had a negative impact on our internal growth rate in the last two quarters. Our home equity processing business in the lending group has seen an increase in revenue in February and March, and we expect this trend to continue.

Also, GMAC, the nation's seventh-largest mortgage servicer, converted the major portion of its mortgage servicing business to our mortgage serve loans servicing system at the end of January. This was a very successful conversion and one of the largest conversions of mortgage loans ever in our industry.

The remaining GMAC business -- primary home equity loans -- is scheduled for conversion in the second quarter.

Our sales pipelines for our lending products and services remain very active. Additionally, our lending group is well positioned to capitalize on its expanding product line through cross sales to existing clients -- not only within the lending group but across Fiserv.

Second, we expect improvement in our corporatewide cross selling activities, as we continue to take advantage of our unique opportunity to market our array of lending products and services to our more than -- to our leading products and services to more than 15,000 existing clients.

Recently, we have seen the benefit of our cross selling activities with our plastic card business, Personic (ph), which is included in the others segment of our financial reporting. This segment's internal revenue growth was 6.4 million in 2004 compared to 2003, an increase of 28 percent, driven by both new sales and cross selling of products and services through other Fiserv business units, throughout all of our operating segments.

Third, 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 continued decline in the number of paper checks written in the United States.

Checks 21 and the anticipated cost of preparing for check imaging are causing financial institutions to re-examine their existing and future costs of processing checks.

The declining check volumes are increasing the per unit cost of check processing across the industry.

Together, these two phenomena are encouraging many large institutions that currently process their checks in-house to evaluate the future of their internal operations. This continues to provide a fertile environment for Fiserv's check outsourcing sales forces, as we are the nation's largest check processing Company.

Our health segment's internal revenue growth rate for the first quarter was 41 percent, increasing significantly over the prior year -- due primarily to the strength of our pharmacies services businesses. We continue to actively cross sell these services to our existing clients in our health segment.

Our investment services segment generated a 7 percent internal revenue growth rate due to the improving U.S. retail securities financial market trading environment, that resulted in increasing trade volumes in our securities division.

As we indicated in our last conference call, we expect organic growth rate for the financial segment to start slow in the first half of 2004, and to end in the mid single digits for the second half of the year. Based on our first quarter results, nothing has changed our expectations in this segment.

We anticipate that our health segment for the rest of 2004 will grow revenues organically in the 35 to 45 percent range, due primarily to the continued exceptional growth of our pharmacies services businesses.

As we look into 2005 for this segment, internal revenue growth is expected to slow as a significant positive impact of our pharmacies services businesses is expected to be lower in 2005 than in 2004.

Although our investment services segment experienced a 7 percent internal revenue growth rate in the first quarter, we anticipate more moderate growth for the remainder of the year.

All four of our reporting segments have historically experienced quarterly fluctuations in organic growth rates -- both positively and negatively. Overall, and consistent with our comments on our previous conference call, if our business progresses within the range of our 2004 forecasts, our Company's organic growth rate for the full year of 2004 should approach 10 percent. This exceeds our historic average of 7 percent organic growth, due primarily to the strength in 2004 of our pharmacies services businesses.

Significant client renewals and new relationships signed in the first quarter include the following.

Underscoring the technology implications of the federal Check 21 legislation, three clients broadened their relationship with Fiserv to include image based check processing services. Fiserv significantly expanded its relationship with Hanmi Bank, a $1.7 billion bank in Los Angeles, with an agreement to deliver image based check processing that will support the bank's acquisition of Pacific Union Bank.

Community Credit Union a $1.6 billion (ph) credit union headquartered in Plano (ph), Texas also added image based check processing to its services.

And Fiserv will provide image check based check processing services to First Federal Bank of California a $4.8 billion bank based in Santa Monica, California, that already relies on Fiserv for many of its technology needs. In addition, Fiserv RemitStream solution will supply lockbox services to First federal.

Navy Federal Credit Union, the nation's largest credit union, and Amsouth Bank, a $47 billion bank holding Company based in Birmingham, Alabama, both significantly increased their relationship with Fiserv's integrated loan servicing unit for loan settlement services.

Also, National Bank of Canada signed a $368 million -- Canadian dollar -- agreement with Fiserv INTRIA Items joint venture to outsource check, lockbox and currency processing. Fiserv's partner INTRIA Items is the Canadian Imperial Bank of Commerce.

And lastly, Banco Ejercito (ph), a Mexican bank that provides banking services to the country's military services, selected Fiserv IICBS Core banking system to process its 48 branches throughout the country.

In closing, both our sales and acquisition pipelines are strong and we anticipate solid growth in 2004 -- both organically and through acquisitions.

Our management team is focused on generating profitable new customer relationships and expanding existing customer relationships, while driving increasing cash flow in every line of our business.

Looking forward, we're confident that will be able to attain our 2004 earnings per share target -- which is $1.87 to $1.93 per share.

We will now open the lines for questions.

(Operator Instructions). Carla Cooper, Robert W. Baird.

Nice quarter. I had one question about the Pharmacy Benefits Management. If you exclude that from the results of the segment, what did the so-called processing businesses in that segment do on an organic basis?

I believe it was something in the mid single digits.

And on target with your expectation or would you generally expect it to be higher?

That was on target for that quarter. I would expect that it will be higher in the later quarters.

Great. Thank you.

David target David Togut, Morgan Stanley.

Les, could you give us some sense of the level of new business signings in the first quarter? I know historically have not released the quantitative figure, but maybe you could give us some indication of bookings? Were they up versus the fourth quarter? And perhaps give us a sense of overall trend in backlog of business signed but not yet booked?

The strength in the quarter I would say would be in our bank software business -- primarily ITI and ICBS -- who both recorded the best quarters they have had in history, as far as new signings.

The Credit Union business also experienced a very strong quarter -- both software and services. I would say in the general financial services area, service field part of the business, it continued as it has in the past -- nothing unusual, but strong.

In the health business, we also had a strong quarter and in insurance business we had strong quarter. But, I would back up and say that the real strength came out of bank software and our Credit Union business.

And I know you had a very good bookings in Q4 in bank software, but you didn't specifically recognize the revenue. Have you recognized any of that revenue yet?

And also, the business you booked in the business in Q1, has that actually been recognized from a revenue standpoint?

The fourth quarter bookings obviously are being part if not most have been recognized in the first quarter and second quarter. The bookings we had in the first quarter -- very little would have been booked in the first quarter, and that will go into the second and third.

I see. And just a quick final question for Ken. Your CapEx came down about 11 percent year-over-year. Can you talk about some of the underlying drivers for that? And what should we expect for CapEx for the balance of the year?

I would say that that's just really totally a random situation. In general, I would expect our CapEx to be equal to approximately our depreciation. So there is no single driver of that at all.

Okay. Thank you very much.

Greg Smith, Merrill Lynch.

Hi, good morning. Les, on the acquisition pipeline, you mentioned it is quite full. Is that across all the segments or is it concentrated in any one area of the business?

I would say it's pretty much across all the segments. We are seeing activity in all four of the segments.

Okay. And then, in the kind of core bank processing market we have seen a fair amount of consolidation with Kirchman and Oram (ph) getting acquired. How do you see that impacting Fiserv from a competitive standpoint?

We will have to wait and see how it shakes out. Right now, we don't really anticipate any material change from what we have seen in the past. Those software products have been in the market, and that services product (indiscernible) have been in the market for years. And they are just under different ownership now. We will have to see how the new owners treat those businesses.

And then two, just kind of a broader macro questions. What do you kind of consider the rate of decline in the number of checks written at point-of-sale? And also, what are you seeing as far as online banking trends?

I still think the rate of decrease is in the low single digits -- low to mid single digits. So -- but I think, from a retail standpoint, they are probably lower than that. To get that high, you really need to include the commercial side. What was the second part of your question?

Online banking -- what are you seeing as far as consumer adoption trends? Any acceleration?

We continue to see new customers sign up for Internet banking and volumes of Internet banking increase on the ones that we have signed in the past. So, Internet banking, Internet bill payment -- that whole area continues to grow within the Fiserv organization.

Okay, great, thank you.

Franco Turrinelli, William Blair & Co.

On the securities processing side, one would assume that the revenue related -- the cumulative revenue that you disclosed is likely nonrecurring. That seems to be just related to the current inquiries.

That is correct.

Okay. Can you explain to me, maybe, a little bit why you would be liable or responsible -- presumably this market timing and late trading would be what your customers did, not what you did? So why would you end up being responsible for that?

You know, it's a little bit of both. When we bought Investec, they had a group of traders in their (indiscernible) were trading on behalf of (indiscernible) Company. So it is our responsibility in that part particular case.

And, some little bit of that across our Houston operation and Denver operation -- minimally. Most of that is coming out of that New York Investec acquisition. So we do have some vulnerability there and we -- Ken mentioned in his comments, the revenue -- cumulative revenue -- is between 4 and $5 million in that particular practice.

You have expressed some frustration before with your exposure to these unusual situations in that business. I'm sure your patience is wearing somewhat thin. Any thoughts about long-term strategy for that unit?

You know what, none that I really want to talk about in a lot of detail. I would say that right now our strategy is to continue to clean that business up and to grow it. Until we see what happens in the future.

But that is what we're doing right now (multiple speakers) I've got a lot of resolve and patience I guess.

(laughter). Are you currently still in the process of trying to shed, let's say, the nonbanking customers and try to really focus that business on banking related -- on bank owned broker-dealers? Is that kind of underway?

Well, what we are doing is we are continuing to evaluate the customers in our securities business. And any customers that we feel are weak or suspect or could potentially have problems -- we're asking them to leave. So, we're concentrating on the financial institution owned broker-dealers and/or the ones that are strong and well capitalized on the other side -- the independent side.

Thanks.

Andrew Jeffrey, Needham & Co.

Could you address the trends you're seeing in the FI business in terms of volume? If you set aside the item business and you look at data processing and ATM processing data and so forth -- can you talk about sort of what the volume trends are like beyond item, which we know is down modestly?

The item is down very modestly -- on the other side, the ATM side -- debit card point-of-sale -- that business is growing very nicely. We don't release the exact percentages for competitive reasons.

In the bank software and bank servicing areas, we continue to have a very high customer retention rate. We continue to add new customers in that area.

So, overall, we see that banking business being a growth business over time. And quite honestly, we see item processing being a growth business because we think the volumes down and Check 21 are going to lead to more outsourcing, which will give us more growth in the check business as well.

Okay. And one follow-up -- could you talk about the trends you're seeing in the debit processing pricing arena?

We're seeing the same thing that everybody else is. And that is -- there is continuing to be price compression there on the (indiscernible) of debit card processing.

What you have to do there is continue to put efficiencies in the business -- which we are fortunate to be able to do by combining the operations that we acquired with ones that we owned. And continue to drive efficiencies into that business so that you can continue to compete.

Still remains a very strong business, good growth business as we add a lot of new customers each month, each quarter. And the volumes there continue to go up in the debit activity.

Debit activity is actually growing faster than credit activity. And I saw some figures recently from one processor who says debit transactions are now exceeding credit transactions -- so, good business.

Bryan Keane, Prudential Equity Group.

The first question I had was on the lending group. Is that sensitive to any interest rate rising environment? And how would that effect that business?

Some, I would say, in the refi area and interest rate -- when interest rates move around. But the majority of our business there, in the origination side, is with home equity loans and some prime loans -- which are not as interest rate sensitive. On the mortgage side, most what we do in the mortgage area is processing of mortgage loans -- which is a pretty stable business.

Okay. And then I just wanted to go back to two other questions. One was on the acquisition front with Fidelity National and Metavanta (ph) -- seemed to be a little more aggressive. Does that change the price in the industry of what Fiserv is willing to pay for acquisitions? And then maybe you can remind us on what you usually typically will pay for an acquisition?

It will not change our price. I will turn it over Ken, who runs that -- (indiscernible) area -- and let him comment on it. Ken?

Yeah, our typical price has been five to six times EBIT. And if it's an exceptional grower, we will go over that price. And otherwise, we will stick to our valuation model.

We're pretty disciplined in our valuation model. And if other folks are willing to pay more than that, there is not a lot we can do about that. There are still a lot of businesses out there -- a lot of properties out there -- worthy of looking at. And to be acquired by Fiserv has got some other distinct advantages, we believe, over and above price.

Are some of these acquisitions being bought at irrational prices, do you think, Les?

I would rather you say that instead of me. But it sure smells that way.

(laughter). And then finally on the investment services side, I think that was about 7 percent organic in the quarter -- and you said you expected that to be modest growth going forward. I guess, with the brokerage environment improving, I just wonder why that necessarily wouldn't tick up instead of maybe ticking down?

It may tick up, I just don't have a lot of confidence right now. We have been burned by saying that is going to grow for about 10 quarters now, I think. So we're now saying that we think it's going to be modest growth -- and we will see what happens.

Certainly, interest rates move in that area -- if interest rates move up, it will help both our trust and our securities business both in that segment, which could help that grow -- but, time will tell.

Okay great. Thanks a lot.

Julio Quinteros, Goldman Sachs.

One quick question on the software contribution within outsourcing. It's typically right around 5 percent or so of revenue. Did it tick up in the current quarter? I guess what I'm really trying to get at is -- the improvement in margins within the outsourcing business. How much of that was related to the better sales in ITI and ICBS? And what can we expect from a margin profile for the outsourcing business on a go forward basis?

Let me try and answer in terms of the software. The first quarter is usually a little bit higher in terms of software. So, it was probably higher a little bit higher than the 5 percent. But I think, in general, if you think of 5 percent, that is probably a good parameter.

Okay. And then, so as we go forward, will the contribution go down -- should we expect to also see the margins go down in the outsourcing business?

No. I would think in general the outsourcing margins will continue to be about what they are. We continue to drive efficiencies in that area. So, there might be some upside in there.

And I just -- real quickly -- still trying to get my arms around this health plan business. The two disclosures around the treatment of costs related to the pharmacy services business where you -- it looks like you're booking revenue and costs of about -- for the prescription side. Can you just walk us through the treatment of that? Is that just a gross to net situation in terms of how that impacts your other expenses line?

Yeah, it's pretty much a gross net situation. It's just the way that the industry treats those items. So that you got $95 million there in the first quarter, that if you really wanted to try and figure out what your net margin was, I would subtract 95 million from revenue and expense and then calculate the margin.

Got it. Okay, thank you.

Pat Burton, Smith Barney.

My question is a twofold question. I don't know if you can answer it, but I am going to ask it. As it relates to the option for nice (ph), I guess Total Systems on their call indicated that it has moved to the second round and that there were three Companies left in the bidding. I don't know if you would care to comment on that asset that First Data is divesting?

And then the second question, Les, would just be anything on the acquisition pipeline in general? Thanks and congratulations on a great quarter.

Obviously, we cannot comment on any acquisition activity going on, for obvious reasons. So we will not. As far as general in the acquisition pipeline, acquisition pipeline is strong, as I said earlier. We have prospects being worked by all four of the major segments that you're looking at across all 8 of operating groups.

So, we start the year a little slow with one acquisition. But that is because the businesses that are disciplined model (ph) have not come across our desk. But, we continue to work the ones in the pipeline.

Thank you.

Nikolai Fisken, Stephens Inc.

Congrats on the quarter. Let's just say that Internet banking was strong. Can you break this out and tell us -- were the wins mostly competitive takeaways? Or new to Internet banking?

I would say a little bit of both. We continue, obviously, to sell almost exclusively -- well, really exclusively -- to our customers. Now, some of our customers over the years -- our full processing customers -- have gone with other products. So we are winning some of those back every month as we pull them away from competitors.

At the same time, there are new banks that are entering the Internet banking arena on a monthly quarterly basis as well. I would say a little bit of both, and I really quite honestly cannot give you how it breaks down.

Okay. And then on the $8 million contract payment, what was the total expenses associated with that including tax?

Total expenses against that 8 million?

Yeah.

Well, you can figure a tax rate of roughly 39 percent on it. Other than that, what you have is you have the residual costs left to run the business, from the business, in which that termination took place. So those costs will -- some of those costs just continue. And that will mean tighter margins in that particular business until we replace that lost revenue.

Which is the reason that we write the contracts the way we do. As you sign these big banks into a service organization -- you necessarily by spend dollars on equipment to service them. And when they go away they leave a hole -- which is the reason for the fee.

All right, so no accrual. Okay. On the 6 million charge, what line item did that show up in? And is that inclusive of the 4 to$5 million of revenue?

That is in the other operating expense line.

Okay. And I take it that includes the 4 to 5 of revenue?

We have some reserves associated with that area, yes.

Okay. Thank you.

Craig Peckham, Jefferies & Co.

I wanted to ask you about the European software business. That is an area that has been a guess a drag on the internal growth rate for the financial segment for a few quarter's now. When did the comparisons there begin to ease?

Secondly, but related, I wondered if there were any structural changes you have been making to that business? Or are they just sort of waiting out till the cyclical elements start working in their (ph) favor?

I would say that the European market is still slow. The compares will get better on that as we go into next quarter. And we are certainly making structural changes in that business, and have been for a period of time. That business has been soft now for a couple of years. The staff size over there, obviously, has changed significantly. A lot of the operating costs have been cut out of that as we wait for that business to turn.

Is that something that we can look for as a booster for operating margins in that line of business -- that segment?

As the European market improves, and we start to sign new contracts and get Professional Services contracts, I would say that certainly will play to the benefit.

And then, I guess, secondly, more of a strategic question for you. One of the themes, I think, from the banks and vendors this quarter has been some nice increases in adoption on the bill payment side. Maybe you could just refresh us in terms of where Fiserv sits in that market's development? And any thoughts about getting deeper in that area?

We have our own bill payment software and services in our software products that we license -- ITI in particular has a product. So those banks would be using our software.

In the service bureau area, we do most of our bill payment processing through Check Free and the organization that is owned by Metavante (ph). We have relationships with both. And let our bank customers choose where they want to clear their bill payment processing.

Okay. So no plans then to develop your own payment infrastructure then at this point?

We have got to see a little bit more -- the quick answer is no. Near-term, no plans.

Okay. Thank you.

David Trossman, Wachovia Securities.

Les, I'm wondering if you have any opinions or thoughts on the speed of uptick of image exchange going into next year? I guess I'm always surprised that people in the industry are so conservative and hesitant to talk about it when you and others have worked so hard at it, and there are so many benefits.

There's no question that it is going to be a gradual increase in the image. The October date, when this goes into effect, primarily is for replacement. All banks have to be ready to do replacement checks. If an image comes through and the customer wants a paper check, you have to be able to produce it. Or, if the clearing bank wants the paper check. So, that's what starts in October.

But the volume to move to image is going to be a gradual thing. I would say probably over the next three to five years as the adoption rate increases.

How aggressively will you try to (indiscernible) images for your Community Bank customers?

We will do just as fast as they are willing to go. We certainly are well positioned for it -- all of our checks centers are image enabled. We have that large image archive, as you know. We have great relationships with a lot of the other image processors. So you will see Fiserv encourage banks to move in that direction.

Is there any reason why one of your Community Banks processing with you would not have you start clearing images for them as soon as possible?

There's no reason that they would not, if the originator -- if they are being converted to image at the origination side. There is no reason at all that would not have us process it.

Thanks.

David Scharf, JMP Securities.

A few more questions on health care, since that is the bulk of your internal growth still. Did I hear Ken say that TPA (ph) business, the actual processing, grew mid single digits? Was that correct for the quarter?

In the current quarter.

Yeah. And on a net revenue basis, ignoring pass-through costs, is the TPA business, relative to pharmacy benefits, still roughly 80 plus percent of that segment?

Were doing a quick calculation.

I would say that it's probably less than 80 percent right now, but I'm not sure.

Okay. And the growth in covered lives there -- the primary driver. Did that increase mid single digits as well?

It would have to, if our revenue growth did. Understand that that business has about an 8 to 10 percent churn in it. And most of that happening in the early part of the year, as Companies are lured away by other processors. And we gain -- obviously, we gain customers and we will lose customers during that time. Then, there is some runout runin in that business as you finish processing the business of somebody you have lost. All of that impacts, in particular, the first quarter.

But that would impact every first quarter seasonally. And I'm wondering -- my understanding was that -- core processing business has been growing double digits throughout the last couple of years. I'm wondering if there were any issues with some of the benefits consultants that you use to distribute? Or any switch in self-insured plans, converting over to indemnity plans? And ultimately why it should trend back to double-digit growth through the remainder of the year?

Well, there is nothing we can put our finger on as an exact reason why the first quarter misbehaved differently.

Well, there was actually one of our business units had a very strong first quarter last year and not this year. That hurts significantly.

So different comps.

And in terms of guidance, I don't know whether I would say that it would be into double digits or not in the double digits. But, certainly significantly higher than what we have experienced in the first quarter.

Okay. And the escalation of the internal growth guidance for that whole segment -- I would assume that is entirely on the PBM side. Is there much drug inflation year-over-year that is factoring into that? Is it all increase in pass-through costs? Or are you seeing a lot more cross selling in some of the pharmacy services to your installed TPA base?

It's predominantly cross sales and new clients.

Okay, great, thank you.

Roger Freeman, Lehman Brothers.

I just wanted to follow up on the Check 21 front as well. Are you seeing any delay or push out in decisions on the part of banks? With announcements like, I think, the Fed saying they're going to provide document replacement for banks that are not in a position to accept images by October? And do you think there has been an overall push out in decisions? Or is on track with what you saw a quarter ago?

It is on track with what we saw. We have seen no change really in decision cycle.

Okay. And just secondly, the operating margin in securities processing, if you adjust for the $6 million -- the cost for the SEC investigation, I guess implies about a 10 percent operating margin, would you say that -- are you getting the kind of contribution margin from the uptick in organic growth rate that you would expect? Relative to last year's 13 percent operating margin?

I'm looking at my financial people here.

Yeah, I think it's down a little bit. We did have, in the first quarter of last year, in our investment support services business, some -- a couple of million in onetime fees associated with some readoption fees. So, we expect to get that uptick going forward, although, we have put in some more costs into our securities operation, going forward, to leverage for some of that new business that's coming on.

Great, okay, thank you.

Glenn Greene, ThinkEquity Partners.

A couple of questions. The first one is, if you could just update us on the EDS Credit Union business that you bought? And also, Les, you had alluded to the credit union business overall was good. Where you also including the business acquired from EDS within those comments? Or just some color there. And then I have a follow-up.

The EDS Credit Union business is doing very well. It is on or slightly ahead of pro forma. We actually signed a new customer in the Credit Union business to the EDS Credit Union business, and we have not really anticipated doing that probably for another six to nine months. So that was very positive for us.

Overall, the Credit Union business, from software licensing, those that take a product in-house as well as service, are doing well right now, and have been for the past several quarters.

Okay. And then on the health-care side, I think in your comments, you had alluded to that the organic growth in fiscal '05 should slow down somewhat. What it a reasonable level to think about?

Yeah, that's pretty far out. Ask us that like in the third quarter, as we get a better feeling for what that is going to do.

All we know -- we're confident that the rapid growth rate that we're seeing in '04 will not repeat itself in '05. But, what that means right now -- it is a little too early for us enough.

Is it still a double-digit growth business? Or more mid single digits?

I would expect it to be a double digit growth rate business. We will know more at the end of the year.

Thank you.

Franco Turrinelli, William Blair & Co.

A couple of follow-ups, actually. The first, Les, is the contract in Canada is obviously one of the more significant contracts that you signed recently. But can you just remind us of the accounting for that? And specifically, is it going to be -- is a going to have any effect on the reported internal growth rate?

Ken, you want to answer that?

Sure. That is in our joint venture. So the only part that goes into our revenues is our share of the profitability that venture. That particular client is going to start out slow in terms of profitability, and build over its life. So I don't think you'll see any significant impact on our numbers for probably a year to 1.5 years.

The revenue comes on immediately, Franco, but you don't see the revenue in our books. That stays in the Canadian operation.

Right. And I want to make sure that I understood that correctly, because it is obviously a very significant contract. But, had it been signed through the U.S. operations, would in fact have contributed materially to the internal growth over the next several quarters?

That's correct.

And then, I'm sorry, just a point of clarification. Can you -- you said 95 million of prescription -- of pharmacy costs -- in the PBM business. I'm assuming that's just the cost, that's not the total revenue? I just wanted to clarify what exactly that 95 million number was.

That is absolutely correct -- that it is our cost. That's really for -- not only our Pharmacy Benefit Management business, but what we refer (ph) to as our pharmacy services business.

Okay. So, revenue from that segment is high up and that is essentially what you're saying.

Absolutely.

Right. And, Les, do you have any sense of what -- if I remember correctly, the pharmacy services is essentially only being sold to your existing customers in the health plan management business as part of the overall service offering. Do you have any sense of what the penetration of your existing customer base is? With these pharmacy services? Thanks.

First of all, we're selling that both to our existing customers and to customers that are not TPA customers of ours. So it goes both ways.

As far as the penetration into our existing business, it is very, very small. We have just begun. Anovian (ph) has only been around -- it's been around less than a year. So it's very, very small.

Most of the new business that we're getting in the workman's comp area in that prescription management business, has been new customers.

Thank you.

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

Thank you very much. And I would like to thank everybody on the call for their ongoing interest and support of our Company, as well as the questions that were asked today. We had a great quarter -- we appreciate your questions. Thank you very much.