Fiserv Inc (FISV) 2005 Q1 法說會逐字稿

Good morning, and welcome to the Fiserv earnings conference call for the first quarter of 2005. We currently have around 108 total participants on this call. All participants will be able to listen only, until the question and answer session begins following the presentation. At the request of Fiserv, today's call is being recorded, and also is being broadcast live over the internet,. The call is expected to last 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 over to Mr. Les Muma. Sir, you may begin.

Good morning. 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 2005 earnings and revenue targets, sales pipelines and acquisition prospects during the course of this conference call. Such statements are covered by the Safe Harbor, included in the Private Securities Litigation Reform Act of 1995. These statements may differ from actual results, and are subject to a number of factors. Please refer to your first-quarter earnings press release for discussion of these factors and non-GAAP financial measures discussed in this conference call. The press release is accessible on our web site, www.fiserv.com.

Fiserv started 2005 with record diluted earnings per share of $0.58 per share from continuing operations, excluding a realized gain from the sale of our remaining Visis (ph) shares of $0.14 per share. Our operating earnings and margins were strong across all of our businesses. We were also pleased to see that our financial segments internal revenue growth rate at 5% for the quarter, matching our fourth quarter of 2004. This first quarter's performance adds to our confidence that our financial institution -- financial segments full-year forecast, internal revenue growth rate of mid-single digits will be achieved.

As a result of our strong financial position, we repurchased $106.7 million of our common stock in the first quarter, acquiring 2.8 million shares. We have now repurchased 4.5 million shares of our common stock in the last two quarters. Although no reassurance can be given, based on our current cash flow strength and market conditions, we currently expect to repurchase the remaining 5.5 million shares under the current buyback authorization during 2005.

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

Thanks, Les. As Les indicated, during the first quarter, we sold our remaining 3.2 million shares of Visis (ph) common stock, as this was a noncore asset of the company. We recognized a one-time gain of $0.14 per share as a result of the sale.

On March 24th, we announced the completion of the sale of our securities clearing business to Fidelity Global Brokerage Group for $345 million in cash, subject to post-closing adjustments. This agreement also provides for a contingent payment of up to $15 million to be paid after the first anniversary of the closing date, based on achievement of certain revenue targets. All further comments in this conference call regarding actual and forecasted earnings per share exclude the one-time realized gain on the Visis (ph) stock sale, and exclude the discontinued securities clearing operations.

Diluted earnings per share of $0.58 exceeded our first quarter estimate of $0.51 to $0.54, primarily due to higher than budgeted contract termination fees, increased sales of core financial institution software, higher flood claims processing volumes, and continued focus on operating efficiencies. First quarters of 2005 and 2004 were positively impacted by early contract terminations fees of $14.9 million and $14.3 million respectably. These termination fees were primarily generated from six customers in 2005, and two customers in 2004. All of these customers were acquired by other financial institutions, and represented a small portion of our over 6,000 core financial institution customers. These fees are very unpredictable since they primarily arise from customer acquisitions in the banking sector.

Based on our first quarter results, we are projecting 2005 full-year diluted earnings of $2.19 to $2.23 per share, and for the second quarter, $0.53 to $0.55 per share. The second quarter earnings per share estimate range is -- estimated range is lower than the first quarter, due primarily to lower forecasted contract termination fees and lower flood claims processing revenues. Our first quarter processing and services revenues of $882 million, increased $71 million or 9% over 2004. Revenue growth was primarily impacted by growth of $34 million or 6% in our financial segment, and $34 million or 17% from our health segment. We currently estimate 2005 second-quarter processing and services revenue to be approximately $880 to $900 million.

2005 cash flow provided by operating activities from continuing operations was $134 million, decreasing $27 million over the prior year. The decrease in operating cash flow was primarily due to an increase in accounts receivable of $26 million in 2005, or 6%, which is primarily due to increased internal revenue growth and the timing of accounts receivable receipts from a number of our business units. The first quarter cash flow in both years was negatively impacted by the company's annual 401(k) contributions of approximately $40 million in each of 2005 and 2004. In addition, we used $106.7 million of our available cash flow to repurchase 2.8 million shares of our common stock.

We completed one acquisition in the quarter, Del Mar Database, which offers a variety of solutions to automate the back office of mortgage brokers and lenders. This acquisition recorded approximately $12 million in 2004 revenue, and will assist our lending group achieve its strategy of providing end-to-end solution to the mortgage industry. Our current acquisition pipeline remains active across all our lines of business.

I will now summarize our performance by business segment. The first quarter, our financial segment continued its growth -- its strong operating performance. This segment increased first quarter processing and services revenue by 6%, and operating income by 16%, over the prior-year period. Operating margins in this segment were 26% in 2005 and 24% in 2004. Fueling this strong operating margin in the first quarter was continuing cost synergies in our existing operations from product consolidations; improved internal revenue growth across the segment, including higher flood claims processing and higher sales of core financial institution software from new customers; both of which generate higher incremental margins.

Our health segment increased first quarter revenues 17%, and operating income 19% over the prior year period. Our operating margins in this segment were 9% in 2005 and 2004. Health segment operating margins, excluding the impact of prescription costs, were 19% for 2005 and 17% in the comparable prior year period. The first quarter of 2005, our investment services segment improved its operating margin -- its operating performance. This segment increased first quarter processing and services revenues by 8% and operating income by 35% over the prior year period. New client growth and increased assets under administration have improved Trust administration fees, and a combination of increased investments and rising interest rates has improved investment income. Now I'd like to turn the call back over to Les, who will provide additional highlights from the first quarter.

Thanks, Ken. Our 2005 first quarter internal revenue growth rate for the company was 7%, and excluding the prescription cost and our health segment, this rate was 5%. As I mentioned earlier, our first quarter internal revenue growth rate for our financial segment was 5%, at the same rate as in the fourth quarter of 2004, and an increase for the full-year rate in 2004 of 2%. A 5% internal revenue growth rate in this segment was led by our core financial institution license and service bureau businesses; our mortgage processing and loan settlement businesses and our lending division; and our flood insurance processing business, due primarily to an increase in flood claim processing activity. Overall, we are confident that our mid-single digit internal revenue growth-rate expectations for 2005 in the financial segment will be met. This confidence is based on improving market conditions and the ramp up of two thousand -- in 2005, of new clients signed in 2004 in the lending area. Further implementation of our internal revenue growth strategies, and the signing of our large-item processing contract in Australia, which began operation at two of the three financial institutions on April 18.

Adding to our optimism in this segment's growth, organic growth rate, are several market trends. First, in our payment businesses, rapidly expanding debit card internet banking and ATM transactions continue to increase demand for our financial processing solutions. In addition, our current pipeline of mid to large financial -- mid- to large-sized financial institution check processing deals continues to be strong, driven by the passage of Check 21 and the forecasted continued decline in the number of paper checks written in the United States. Also, as image-based check settlement grows and full electronics settlement evolves, we expect operating margins to improve in this business, making this an attractive opportunity. As the leading independent full service Check 21 provider in the country, we are strongly positioned to grow in this area.

The second positive market trend includes the continued strength of several key Fiserv products and services, including the fact that our bank, thrift and credit union co-products had a very solid first quarter. Also, our mortgage servicing and loan settlements services business continued to improve. We are seeing an increase in home equity loan buy-ins, and we expect this trend to continue throughout 2005. As interest rates rise and refinancing declines, home equity loans offer financial institution customers a good tax advantage vehicle to obtain cash. Our lending group offered a number of solutions for home equity loans including credit inquiries, automated valuations, loan settlement services and loan servicing.

Our health segment's internal revenue growth rate for the first quarter was 14%, and excluding the prescription costs, this rate was 4%. Revenues in this segment were adversely impacted in the first quarter by lower than expected worker's compensation claims volumes from our pharmacy retailer clients. We expect this lower than expected volume will persist in 2005, and accordingly, are lowering our internal growth rate estimate for the health group overall, to a range of 5% to 10%, including prescription costs and the low mid-single digits excluding prescription costs. However, this will not significantly impact this segment's overall profits or cash flows as much as -- as much of this decrease relates to prescriptions costs. Plus, we are experiencing higher generic drug volumes, which have a positive impact on gross margins in our worker's compensation pharmacy processing business.

Our investment services segment experienced a first quarter internal revenue growth rate of 8%. As Ken mentioned, new client sales and increases in assets under administration, investments and interest rates led to this segment's strong results compared to the prior year comparable period. We expect internal revenue growth in this segment to be in the low- to mid-single digits for 2005.

Overall, if our business progresses within the range of our 2005 forecast, our company's internal revenue growth rate for the full year of 2005 should be in the mid-single digits. With more of that growth than in recent years being driven by our financial segments which comprises 85% of our total operating income.

In closing, we are pleased with our first quarter performance. Our sales pipelines are reflective of our increased focus on organic revenue growth. At the same time, our acquisition pipeline remains healthy, and we will continue to seek opportunities for acquisitions that add to our growth and enhance the breadth of our products and service offerings for our clients. Our management team is focused on generating profitable new client relationships and expanding existing client relationships that help us maintain our consistent increases in earnings and cash flow in every line of our business. We are also focused on deploying our free cash flow effectively to improve long-term shareholder returns. Looking forward, we are confident that we will be able to attain our revised 2005 earnings per share target of $2.19 to $2.23 per share. We will now open the lines for questions.

Thank you. [OPERATOR INSTRUCTIONS] Pat Burton with Smith Barney. You may ask your question.

Hi. Congratulations on the quarter to everyone. Question, Les, is the sustainability of the increased software sales and increased claims in the flood area, going forward, would you look for those numbers to bounce around or should that trend continue to be up as we move forward? Thanks.

The software numbers as they have in the past will bounce around. We'll have higher quarters and lower quarters. In the flood business, we're still seeing the tail end of flood claims due to the hurricanes last year. That is going to tail off as we get into the second quarter.

You mentioned the Australian Banks, two of the three have started up. That will pick up then, as we move through the year to offset that?

That's correct. That will pick up as we go into the second quarter. Two banks cranked up in April, the third one will come on in the send half of the year.

Thank you.

Carla Cooper with Robert W. Baird, you may ask your question.

Good morning.

Good morning, Carla.

I wonder if you could talk about check competition for item deals. You talked a lot about that pipeline and I wonder if your competitive position has changed at all in that business?

I don't think it's changed materially. One -- we have one competitor there, as you know, Fidelity strengthened themselves in the check processing business with some acquisitions. There are also other players in that, but I don't think that the competition in the marketplace has changed significantly. We still are, by far, the largest processor of checks in the country, and have the most experience, especially in these large deals. So we feel comfortable that we still have a very competitive edge on our competition.

Okay. Thank you. Then I need a little more help on the health side. If you're the -- your worker's comp claims that would have had a major -- that would have had a major component of prescription costs in it, is that right?

That's correct.

Then when you're talking about -- then I'm a little confused on why you would look for internal growth in ex-PBMs (ph) -- ex to (ph) prescription costs that's in the low-single digits whereas overall you look for five to ten.

It's actually low- to mid-single digits what we would expect to have happen in the remainder of the year.

Okay. And is there a reason for those climbs to have been off, kind-of a macro reason that could help us better understand that?

There have just been changes that have happened in the marketplace where the amount of the claims have gone down in the gross sense. When you look at the gross revenues, it's because there's been a shift from brand prescriptions to generic prescriptions.

Okay.

But we should be still very well-off in terms of our cash flow and our profits in that area.

You're going to see the revenue slow down because of that. Also, I would point out, in 2004 in that area was a very strong year as we added some very large clients during 2004. And we're seeing that slow down because those large clients are now completely on and are starting to anniversary. Also, there are some lower volumes than anticipated, not only from our standpoint, but from our customer's standpoint in some of their locations as far as workman comp claims go. So, all of that is contributing, but understand, as Ken said, that that's a top line impact and we don't expect material impact to earnings or cash flows as a result of that.

Thank you.

David Tolgut with Morgan Stanley, you may ask your question.

Good morning, Les.

Good morning, David.

Can you update us on where the FIO sales force stands year-to-date, relative to quota?

Right now, as far as quota goes, they are running slightly behind in the first quarter. But that's not particularly disturbing to us. Particularly, based on the fact that we have seen in the past 30 days a real strong increase in new deal flow into the pipeline. It just depends -- some years we'll start off a little slower than others. So, on an annualized basis for the full year we're not concerned about quotas, but as of the first quarter we're slightly behind.

And is there any specific area that's accounting for that or is it more the timing of deal closing?

I think it's more of just the timing. As I say, the pipelines are very nice. The pipelines that we're most concerned about, which are core business, are filling up very nicely as we came through March and into April.

Okay. Can you give us the sense of where the quotas are set this year, relative to last year in terms of growth?

Well, as far as total quota dollars, they're up from last year, obviously, because of our size and because we increase quotas each year. I don't know what that percentage rate increase is. Do you know --?

It varies by product, but it's probably in the high, single digits.

The high single digits increase in quota size. It will vary by product to product, but overall, I think that's a good number to use.

Can you update us, Les, on succession strategy and timing?

We're still moving along with the succession process. The succession committee has now ended the engagement with the outside consultant who came in and worked. The succession committee met earlier this week and has additional meetings next week. We're still hoping that we'll have a decision out here by mid- year, and we'll keep you abreast of that, David.

Okay. Thank you.

I'm still working awful hard so don't worry about it.

That's encouraging.

Greg Smith, Merrill Lynch, you may ask your question.

Hi, good morning.

Good morning, Greg.

On the Australian check processing deal - just wondering if that has generated significant interests in other areas abroad? How does the pipeline look outside the U.S for check processing?

Norm?

I think we still have some deals on the outside, but I don't think we've seen a material change there. I think the pipeline, both internationally and domestically is as strong as it was last time we talked. We continue to have confidence, we'll see other closes. I think I'd also add, though, that the size of this Australian deal and the fact that Australia is one of the few other places in the world that is heavy check volumes, this is probably an unusual contract by size.

Okay. And then, just the overall acquisition pipeline, how's it looking? How are valuations looking?

We continue to have a very good pipeline. We've got deals across all of our groups, pricing is up, relative to what it was a couple years ago. But we continue to believe that we will close a number of deals this year.

Okay. Thanks, guys.

Kartik Mehta, FTN Midwest Research, your line is open.

Thank you. Good morning.

Good morning.

I was wondering if you could talk about, maybe, the outlook for margins and financial outsourcing? I know software obviously helped this quarter, but looking out for 2005, what would you anticipate?

You know, margins for the fist quarter were 26%. Obviously, adding to that was the termination fees as well as the high flood volumes added to that margin. I think 26% is unusually high. I think a more realistic number for that area is 22%, 24%, that range. You guys agree with that, Tom?

I would say that, we're at 26% currently, as Les indicated, and probably, sequentially, we're going to be down a little bit because of the mix of business a percent or two. I don't think down at the low end of that range, Les. We are bringing on the Australian contract in the second quarter, and we generally have a mix of business-type issue. As you know, our operating margin and our financial outsourcing segment was about 24% last year, as a guide as far as operating margins go. And so, that would be my answer to that.

And just one last question. Internal growth, obviously, a fairly good start in the first quarter. Would you expect it to be around 5%, 4% the remainder of the year to end up in the high, single digits or would you expect we might have a quarter where it dips and then a quarter where it might just jump up again?

It always jumps around a little bit. That is one of the new things we've had to explain as we've started breaking it down by group and by quarter. So, you'll see it jump around, but I think that financial institution quarter for the year is going to end up in the mid-single digits. We're real comfortable with that. Even more comfortable, obviously, coming out at such a strong first quarter. Fundamentals were really, very consistent in the first quarter, across all of those business lines in the financial segment, so we feel very comfortable.

Thank you very much.

You're welcome.

Paul Bartolai, CSFB, please ask your question.

Thanks. Good morning.

Good morning.

Sounds like you guys saw a pretty nice pick-up in core sales of the bank and credit union market. You think that's something fundamental going on and sustainable, or is that more of a one-quarter thing?

I think we're seeing a pickup. I think banks are more confident right now. I think -- we see some positive things going on. I'd like to believe it's sustainable. Maybe not quite as strong as it was in the first quarter, but I think it's sustainable. We're seeing positive things across that -- We also have very strong products that are competing very well on the marketplace, and I think that the number of deals that we're getting, I'm confident we can continue to gain marketshare by adding deals. So we feel good about that.

Okay. Then just a follow-up on the big check-processing contract. The $460 million revenue target you guys put out there, is that a full-year run rate number or is that what you expect in '05?

That's a full-year run rate.

Currently, our forecast for 2005, approximately, is about $30 million in revenue, and maybe about $8 to $10 of that could potentially be in the second quarter.

And when do we get to the $460?

That's a total contract --

A total contract?

That's right.

So, we'll get in the high 30s as we go into 2006 after everything's completely off.

Okay, great, thanks.

David Trossman with Wachovia Securities, you may ask your question.

Thanks. I wanted to get a quick question in on the health plan business. I think at Analyst Day back in November, Jim told us there were about 4 million plan members. I was wondering if you could give us an update there as we've come out of what has been enrollment season?

You know, I'd say the TPA business or that core business in the health is growing flat to a slight growth in that business, which is not different from the entire market area. That's about what the market is growing, so we feel very good about our competitive position in that business. But it is a flat to just a very slightly growing business in the TPA area.

Is there any cost cutting across your platforms that you're doing now, that's helping that profit grow 20%?

Oh, sure.

With smaller revenue growth?

Yes. There are some synergies being taken advantage of. We're consolidating some platforms, eliminating some operation centers, some data centers and bring them on to common platforms. That plan is to continue to take advantage of those synergy capabilities as the year unfolds.

And also bringing other products to those customers' base.

As we add other products and step up our cross sales, we can add revenue and earnings growth from the existing customers. That's really how to grow that business right now with the fact that the TPA business, the whole market area, is just a very slow growth business right now.

Very good, thanks.

Welcome.

Our next question is from Tim Willi with A.G. Edwards.

Thank you. Good morning.

Good morning, Tim.

Could you talk a bit in the FIO business in terms of the appetite between banks and credit unions? I know credit union has been quite strong. I was curious as the momentum there has remained in tact,,t or if there's been any kind of change in the growth. And then, any kind of relative comments on the bank side as well in terms of trajectory?

The credit union growth continues strong. We had a strong year last year, and the first quarter this year was strong and we look for that to continue. I think that's based on the fact that we just have some very competitive credit union products, and all of those products are doing quite well right now. On the bank side, we've also seemed to pick-up, not only in service growth, but in the area of software licensing. Not only in what we've closed, but in the pipelines that are there. So, we feel comfortable that the community banking and banking area, are picking up as compared to prior years, and -- but at the same time, we expect the credit union to stay strong.

Just a follow-up on the bank side. I know you probably don't want to comment on competition specifically, but if you look at what you're seeing there in terms of picking up new customers, for those that are competitive wins, would you characterize that as coming from what are popularly referred to as the "major vendors." Or are you seeing a migration from the second and third tier vendors. where those customers are unhappy with what they've currently got, and are electing to move up to that group of four or five large vendors of which you are one.

I think that is probably more true than not, the fact that we are gaining from the weaker vendors. On the other hand, we will get wins from the top major competitors as well. And as acquisitions are made, and customers are moved around, that sometimes causes unrest in customer base and gives us more of a fertile market. So, we'll take advantage of all of those. I don't think that's changing materially over the years. The top guys will pick at each other, but the main customers come from those middle tier processes.

And if I could just sneak a quick one in on health. Does the slowdown here in the growth rate at all change your appetite for additional acquisitions in that space?

No, not at this stage it does not. We're still looking to gain market share in that space. We're also looking to add products that we can cross-sell into that customer base. So, at this stage, nothing has changed. Obviously, we evaluate all of our businesses all the time, and where it pays to make changes over the long haul we will. But right now, we consider that still, a very strong business.

Thank you very much.

Phil Mickelson, J.P. Morgan, you may ask your question.

Yes. I was wondering if you could quantify -- ? With the termination fees of $15 million, it's a small number of customers, but can you kind of quantify the annual revenue that's lost with those terminations?

Yes. In terms of the first quarter, the annualized revenue that would be lost, is like, four-tenths of a percent of our financial segment. Just to give you a perspective, last year we lost something like $37 million, though I think that included an assignment fee, too, of about $5 million, so, we'll call it $32 million. That was about - total, on annualized basis - of about 1% of our financial segment revenue. Put that in perspective as you are placing that, in part, with our customers acquiring other customers of other competitors and also it's all of our new sales. So, it's a relatively low runoff.

And just one more question regarding the health area. As you look at that business, obviously, the growth rate projections changed dramatically as we went through the year and now into the first quarter. Do you attribute this to just kind of a -- this is such a new business --? The dynamics changed that dramatically that the growth profile -- is that reduced or can you give a little more color of what you're learning within that business segment?

Just to comment on that, dramatically -- last year we announced at the end of the year, that the growth rate was slowing in that business, to 10% to 20% on a gross basis. We announced in our year-end call, primarily due to the fact that the pharmacy services businesses had a very strong year. They signed a lot of the large clients. And in regards to the core TPA business and what we're seeing for the outlook, we'll reduce our growth outlook to 5% to 10%. But that's been impacted by the growth of prescription costs, primarily. Regarding the other markets, the core TPA market, we continue to be successful in the small to middle tier commercial markets. We are seeing in the large commercial market, more competition in that particular area, but that's really industry wide. And so, we don't view it as dramatic slowdown in growth. Our projection net of prescription costs for the year is low- to mid-single digits and it is down for the prior year of around 10%. But that growth was primarily driven by several large client lists. So, that would just put it into perspective, I believe.

Would you characterize that business getting tougher since you first entered that business, like a year ago?

It may be getting a little tough are at the upper end, the large clients with national spread. The big four competitors, because of the fact that they own their PPO, are stronger in those. But the competitive landscape in our sweet spot, which is the middle-tier has not changed materially and we continue to do very well there.

And we continue on top of that to cross-sell a lot of other services, such as our PBM disease management care management services into that customer base and will continue to do so.

I don't think there have been any surprises there. I think we knew the majority of this coming in. It's still a good business. It's still a business we believe we can continue to grow, not only by acquisition, but grow by cross sales and, to some degree, by growing organically by gaining market share in that mid-tier market. That's still our strategy and we're comfortable with that going forward.

Thank you very much.

Chris Penny, FBR, you may ask your question.

Yes, thank you. Good morning.

Good morning, Chris.

Quick question. You mentioned in your stated comments about product consolidation. I was wondering if you could add a little bit more to that? What kind of products did you -- could you consolidate this quarter?

Right at the tail-end of last year, we eliminated our Cleveland data center. That was a process that took about a year and a half, two years to do. We had acquired that business back in 1987, I believe. They did extremely well for us. It got to the point where their customers were starting to move across to our large -- our lead products, so we moved the rest of them across. Also, in the area of in the NCR acquisition, we continue to consolidate that very aggressively off of the NCR products onto our products. So those are the two main areas.

Looking forward, do you have more opportunities for more consolidation?

We have some additional. We certainly have a lot more to do in the area of NCR, because there are a lot more customers there that we'll be bringing across. There are other areas that we will also consolidate over time, and then, of course, we look for M&A team to buy us other acquisitions that we can do the same thing with.

Just one question on the guidance - given the upside in the quarter from obvious termination fees -- you didn't raise the high end of the range. Is that just because, from an organic perspective, things are getting better and would we expect to see less acquisitions this year? If you can talk about the high end of the range and why that didn't go up.

We expect to have more acquisitions this year, not less. I would also say that in terms of the range, that we didn't feel at this point in time, that we wanted to raise the upper range, obviously, because we raised the lower range, it increases the probability of achieving in the higher part of the original range.

That's the type thing we'll watch on a quarterly basis. We certainly had a very strong first quarter. Based on what we do in the second quarter and third quarter, we may or may not move that annual -- or year-to-date range around. Right now, we feel comfortable just bringing up the bottom.

One last question on the cash flow for the year, based on your balance sheet and the free cash flow you can generate, you are going to have probably over a billion dollars of cash, or close to that, by the end of the year based on my calculations. Just kind of wondering what the outlook is, or what the goal is for that? Any types of dividend --? Or, obviously, you talked about acquisitions, maybe after the 5.5 million, you'll do more buyback -- If you could just talk a little about the use of cash?

Our priorities in terms of using cash, of course, is first reinvest in the business to provide new products for our customer base. Second, is acquisitions. Third, is stock buyback and then, fourth is to consider other things such as dividends.

Okay. Thank you.

Dan Perlin, Legg Mason, you may ask your question.

I just had a quick question on the investment services basis. Now that you are getting rid of the securities processing component, I think the interest rate environment is going to play a bigger role in that division. Can you just talk about what's more important to you guys right now? Is it the steepness of the O-curve or the direction of rates for that division? Thanks.

It would be the direction in terms of rates. As long as rates move around, then generally, we have good returns on our investments.

Okay. And I just wanted to come back to Chris' question on guidance real quick. The acquisition, you do assume a certain level of acquisition into that guidance number. Is that right or --

Not explicitly. Any kinds of estimates that we're doing, we're assuming that certain things will happen. Some of which we don't identify.

Lastly on that same issue, when you originally put out guidance, did you assume you were going to buy back the remaining 5.5 million shares you had out there?

Not explicitly.

Thank you very much.

Roger Freeman, Lehman Brothers. You may ask your question.

Hey, good morning. I was wondering if you would quantify what the impact of the flood processing was on the organic growth rate in the financial institution segment as well as margins perhaps?

I'm sorry, do that question again? I apologize.

Sure. The flood processing, upside, how much did that contract to organic growth in the financial institution segment?

I think it had a roughly positive impact of about 1%, but as Les indicated earlier, as we go into the second quarter, we'll see some of that drop down a little bit, but we'll have a positive impact with the Australia contract.

In terms of the margin impact, any significant impact from that there?

Yeah. It had a positive impact from the first quarter, and will have a reduced impact in the second quarter that would reduce the margin.

Which is why we're a little hesitant on saying 26 will stay in place.

I was wondering if you could talk about the M&A environment among your customer base, and there's really two questions in there - one is, with increased M&A activities of banks, should we be accustomed to maybe a higher level over time? Then, your other point about how you win some, you lose some, what would you say the balance has been over the last few quarters? Have you gotten more business than you have lost?

As far as the rate of consolidation, I don't think it's materially different now than it was last year and the year before. What really causes those termination fees to jump around is, how early in the contract the bank is when it gets acquired. And if it's real early, they have to pay off a longer number of years. And that's what makes that jump around. And it will continue to jump around. So -- but I don't think we're going to see it increase any, from where it is today. I think our average term fees are in the neighborhood of $4, $5 million in the quarter. This was very high this quarter. As it was the same quarter last year, I might point out.

Right, right. Okay. Thanks.

Julio Quinteros, you may ask your question.

Good morning, guys.

Good morning, Julio.

My question relates to specifically, if you net out the comments about the one percentage point contribution in the flood business, and then the positive contribution from the Australia contract, what is the explicit assumption on the organic growth of the second quarter in the financial outsourcing business? Or the range that you guys are thinking about?

We're thinking mid- single digits.

Okay. And then, as it relates specifically to one component of the statement of cash flows, it looks like there was about $96 million in payments for acquisitions. I don't think Del Mar was big enough for that payment, or was there some earn out that flowed through that number this quarter?

Del Mar probably would have been very happy if that was the case. There were earn outs through the quarter.

Earn outs?

Yes.

Okay, great. And just on client attrition. Can you just give us a sense on what client attrition looked like for the quarter in the financial outsourcing business?

It was in the range it had been previous quarters - in the neighborhood of 1%, 1.5%.

Okay. Great. Thank you.

Nik Fisken, Stephens, Inc, you may ask your question.

Hi, good morning. It's actually Shane, sitting in for Nik.

Hi, Shane.

Just a follow-up question on a couple of things we talked about earlier. On the M&A pipeline, it seems like it's been strong for quite sometime. But the level of deal activity is slow. Can you give us any thoughts there? Are the sellers, I guess, more hesitant with an improving environment? Is the pricing slowing it down? Is there really much to that or anything you can point to specifically?

I would say that the pricing may be slowing it down somewhat. We do have tons of activity - act files (ph) and abilities to do deals.

I believe we will close more this year than last year. We follow a pretty disciplined pattern of looking at acquisitions. It's disciplined not only at price and how it fits and how the culture is. A lot of times a deal flow will get in, and we'll work a deal for 30 days, and find out for some reason we don't think it fits. We think our discipline has paid dividends for us over the years. We don't intend to change that materially, going forward. So I just echo what Ken says. The pipeline is strong. Every time I walk in his office, the stack of folders on the front right corner tells me what he's working. We'll see more deals closed.

Okay. Then just a follow-up on the competitive environment for core processing deals in the FI segment. We've heard some rumors or noise in the marketplace about intensifying competition, specifically price discounting. Just wanted to get your thoughts on that and whether or not you guys had experienced or seen any of that.

There's always some price competition in certain geoographies and in certain products. It moves around, depending on what's going on in consolidation of our industry and consolidation of the banking industry. So, it's still there in pockets but it's not alarming. It's nothing unusual. And we generally will not play in that deep discount game unless we just have to cloud up on somebody and rain on them a little bit in the geographic area to tell them that we're big and we can do it, too. We generally stick to our guns of our pricing, as you know, because that's a slippery slope if you get caught up in that. I don't think it's anything unusual compared to prior years.

Okay, thanks.

Brian Keane with Prudential, you may ask your question.

Hi, good morning.

Hi, Brian.

I want to drill down on the 26.2% operating margin in the financial segment. That was, obviously, the highest I've seen, at least, in some time. The -- how much software or when's the dollar amount of software or licensees that drove that up?

We're not actually disclosing that, Brian.

I guess, was it abnormally high this quarter compared to other quarters?

Yeah, it was higher than usual.

Higher than the fourth quarter, higher than the same quarter last year, both in the software area.

I would also say that our margins in that segment fuel back to the third quarter last year. I think they were around 25%. We've had time where's software is a little bit bigger component, and it drives the margins up a little bit, but over time, if you look at our margins historically, as I indicated 24% last year and 22% the full year before, we continue to make positive progress. But you are going to have these quarters where you have higher incremental margin associated with certain types of activities.

Bear in mind, as we continue to eliminate operations and eliminate operations like we did Cleveland and limited process with pieces of NCR business, that has improvement, just takes time to do it.

The Australia transaction will reduce the margin, also.

Australia will pull the other direction, because big check deals and lower margin businesses especially initially until we get deeper into the deal.

Right. And the flood business, those margins are typically higher, too, because that drove some upside or that just drove upside in the organic growth?

Claims processing has very good margins in it. Part of that is, all the rest of the years that you're working on, processing the policies allows you to take the fruits of when you get the claims in. But it's a very random event, as you know, in terms of hurricanes occurring.

There were a lot of hurricanes, especially in Florida and the Southeast. And having a home down there, I hope you don't have quite as many this year but there are bound to be more storms. So, you'll see fluctuations in the flood claim business.

I only had one question on the footnotes. I think you said there is six banks that terminated in this quarter. I just wanted to just for comparative purposes, what were the total banks terminated last year in 2004?

To begin with, we said there were six banks that made up most of that termination fee in the quarter. As far as -- these banks were acquired. As far as banks that we lose, on an annual basis if we lose 1% or 1.5% in renewal, it's 100 banks or so that we'll lose. We gained a lot more than that on the sales side and when the termination fees are impacted are almost always when an acquisition takes place. If a bank's going to leave you just as a course of business, they'll run the contract out and move and you won't pick up the term fee. So, the churn in this business is very low if you have --deliver high-quality service with good products. That's exactly what Fiserv is known for. We have very low churn in the bank side of our business for that reason.

Just finally, I want to make sure I understood, Ken, I think you said that you guys plan on buying the rest of the 5.5 million shares in the authorization, but you didn't expect that when you gave guidance originally to buy back the whole authorization? Is that true?

You know, our current plans tore buy the rest of the shares, but you know, we don't give any assurances as to what we will actually end up doing because we have a disciplined program as to how we buy back stock.

That was always the plan?

Yeah. You know, and we in terms of how we're making our estimates in the future, we factor in some parts of the stock buyback but not necessarily all of it in terms of -- you are always expecting some things will have positive impacts and some will have negative impacts. You can't forecast everything.

Great. Nice quarter.

Let's take one more call and there's a few people waiting out there. We'll take you off line. Let's take one more call before we shut it down.

David Trossman with Wachovia Securities. Your line is open.

Thanks for taking the follow-up. Maybe Norm, could you give us a little bit more color on the item-processing business? I'm wondering if you could tell us whether paper volumes are declining in the system and how many IRD's roughly, you guys are printing on a daily basis? And I'm interested in knowing whether this business is contributing to the acceleration of the organic growth over the last couple quarters?

The paper volumes are continuing to decline in that low single digit range. And the IRD's are ramping up, but they're not ramping up to appreciably offset that. What we're really gaining is new business to offset that. We see IRD's continuing to grow, but they're still in the infancy.

And I'd say the check area was probably a drag in the first quarter, in terms of our internal growth, and will help in the second quarter because of the Australia deal.

Second and third quarter, you'll see a pickup.

If you look at our pipeline, the pipeline for standard service bureau, as well as large outsourcing deals is very large, very strong.

When you say the declines are low single digit, is that not including the new business that you add into this --

That's the --

Same store.

That's same store. So net/net --

Existing volumes, existing clients.

That's in the range of 2%- 3% in our world, and I think you may see higher numbers projected out there. Federal Reserve is saying it's more like 6%, 7%, 8%. Their numbers are a little misleading and part of their numbers is they are losing volume to the private sector. So, they may be down 5% or 6%, where the private sector is really seeing a realistic 2% or 3% dropoff right now.

The business that you're gaining is more than offsetting that?

That's correct.

Thanks.

Certainly will for the year.

Thank you.

You bet.

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

Thanks, Gerry. We appreciate your interest in the Company, your ongoing confidence in the Company. We had a great quarter and we look forward to continuing our progress as the year unfolds. Thank you.