Fiserv Inc (FISV) 2005 Q2 法說會逐字稿

Good morning and welcome to the Fiserv earnings conference call for the second quarter of 2005. We currently have 105 participants on this call and all participants will be able to listen only until the question-and-answer session begins following the presentation. At the request of Fiserv, today's conference is being recorded and also is being broadcast live over the Internet. The call is expected to last 45 minutes and you may disconnect from the call at any time. Now, I'd like to introduce Fiserv management team attendance on this call. Mr. Les Muma, President and CEO; Mr. Norm Balthasar, Senior Executive Vice President and Chief Operating Officer; Mr. Ken Jensen, Senior Executive Vice President and Chief Financial Officer; and Mr. Tom Hirsch, Senior Vice President and Controller. At this time, I would like to turn the conference over to Mr. Les Muma. Sir, you may begin.

Thank you. Good morning and welcome to Fiserv's second quarter earnings conference call. We appreciate your participation and look forward to presenting our second quarter results and answering your questions. As of this call we're changing the format of our earnings conference call to allow more time for your questions. As you undoubtedly notice, our earnings press release provided more in-depth analysis of the quarter along with our 2005 outlook. As a result of this new format, I will only highlight a few significant items from the quarter and then we'll open the call for questions.

Before we start, Fiserv would like to state that the Company may make forward-looking statements regarding 2005 and 2006 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 our second quarter earnings release for a discussion of these factors and non-GAAP financial measures discussed in this conference call. Our earnings release is accessible on our website, Fiserv.com.

Fiserv continued its fiscal 2005 with strong diluted earnings of $0.59 per share for the second quarter. Based on our strong first half results, we are raising our estimated 2005 full-year diluted earnings to a range of $2.24 to $2.28 per share from $2.19 to $2.23. Excluding the realized gain in the first quarter from the sale of our Bysis stock. We are projecting third quarter earnings of $0.53 to $0.56 per share. We were also pleased to see our financial segments internal revenue growth rate at 6 percent for the first half of 2005 compared to 2 percent in the prior year. The Australian item processing business, which began in April, remains on plan.

We announced in June our plans to leverage our financial and health industry strengths to a leading soft -- to be a leading software and service provider to our clients in the administration of health savings accounts. While this is a strong -- a -- a long-term prospect, we are excited about the future market potential for health savings accounts. Due to our strong cash position, we repurchased 6.5 million shares of our stock in the first half of 2005 and announced an additional 10 million share authorization approved by our board of directors in July.

Before we open the lines for questions, I would reiterate that our first half performance was strong and that looking forward our management team continues to focus on both acquisition and organic growth. 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 to our customers. Our management team continues to work on generating profitable new customer relationships and expanding existing customer relationships so we can 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's returns. We will now open the line for questions.

Thank you. We will now begin the question-and-answer session. (OPERATOR INSTRUCTIONS)

We have no questions.

Just a moment. David Togut from Morgan Stanley, you may ask your question.

Thanks. Good morning, Les and Ken.

Morning, David.

Les, as you speak to customers, how would you characterize their spending intentions with Fiserv over the next 12 months or so, and if you could tie that into some broader thoughts on the new business pipeline?

Generally speaking, as we mention in -- in previous conference calls, we have seen a pickup in spending, particularly in the bank, in the community bank area as we exited last year and came into this year and we see that continuing. And that's, I think's, been demonstrated in the increase license software sales, pretty much across our businesses. We -- we also continue to have healthy activity in -- in our outsourcing business as well. So I think overall, spending is -- is on the positive side and continues that way. And I think that's one of the reasons we are where we are from an -- from an organic growth standpoint and -- and why we project going forward to continue strong organic growth.

And then with respect to some of the larger outsourcing transactions in your pipeline, what are the sales cycles like on those and -- and the perspective to close some of those over the next quarter or two?

We closed several -- one or two minor deals in this past quarter. One of them in the area of -- of IRD's, and the other in -- in the general check processing area. The pipeline -- we still have a lot of big ones in there. They are -- the -- the moving them to close is -- is long. I'm not sure it's any longer than it has been in the past, but these take six, eight, nine months, sometimes a year because of the size of them. We're not discouraged because they're all there and they haven't gone away, but -- but i'ts taking a while to close them, David. So that doesn't -- no -- no sign of disappointment, but we're just continuing to work hard on these big deals.

I see. And just a -- a quick final question for Ken. Operating cash flow down 24 percent in the quarter. Looks like it came mostly from the working capital usage. Can you provide a little color on -- on some of the key accounts and what you see going forward?

Yes. Why don't I -- if I focus just on the second quarter for a minute, remember that we have two estimated tax payments that take place in the second quarter where there are no estimated tax payments that take place in the first quarter. If you focus on the year-to-date numbers, I can divide that into three major components, our deferred income taxes and accrued income taxes had a negative impact of 53 million. 15 million of that was because in 2005 for the previous year taxes, we paid $15 million more than we did in '04 for the '03 taxes. And the biggest impact on the taxes was actually something kind of strange in that the sale of our securities business effected the calculation that one goes through in terms of figuring out your estimated taxes. It's an annualization calculation. AR's were down -- or effectively up 25 million, which effected the free cash flow and that's an increase of 6 percent versus our internal growth rate of 8 percent. So the -- the bad news that our AR's are up. The good news is our internal revenue growth is up. In terms of accounts payable, those decreased by 15 million and that was mainly connected with some hardware pass-throughs to our clients.

Thank you.

You're welcome.

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

Hey, good morning, guys.

Morning, Greg.

Just with the -- the -- the software -- or the banking clients you mentioned that will be moving -- you'll have a change in their relationship, one was the software moving in-house. Wondering is that -- is that something sort of unusual? Is that an atypical situation or are there any trends we should read into that? And I guess just to be clear talking about the client that's moving to an in-house platform and the one that's moving from the outsource to a software platform? Any trends we should read into those?

No, I don't -- I don't think there are any trends there. We have customers frequently going from in-hose to service bureau and service bureau to in-house in our platforms. Because these were larger ones, we just decided to -- to separate them and point them out. And I -- I don't think you should read anything into it other than the fact there's a -- a $40 million number sitting there that is going to work against our organic growth in -- in the coming two, three, four quarters. So, that's the reason we pointed it out. No -- not for a trend reason.

Yes. Okay. And is there any way you can sort of size the volume of new business that's been signed this year that may -- next year to partially offset that?

Well, I -- if we -- if we look at signings this year, we are slightly behind quota as of right now. On the other hand, the pipelines are very strong. Our sales people feel very comfortable they'll be back on quota by the end of the year. But if you remember, our organic growth, top line organic growth, jumps around in that, especially in the financial segment 4 or 5, 6, 7 percent, in that range and this is an indication of one of the things that makes that -- that percentage growth move around a little bit. So I -- I -- again I don't think it's anything unusual. it's just that the size of them -- we've become a little bit more transparent over the past two, three, four quarters on these so that you guys better understand what's going on in -- in our top line growth and that's why we pointed that out.

Yes, I appreciate the transparency. Then on -- just on the health plan segment, you did also mention talking about increased competition a little bit. Wondering, is that something that's kind of come on suddenly or been more of a gradual process?

No, it's been a gradual process. There -- the big guys are really going after the large multinational and national firms and -- and our niche is underneath that where we're looking for a smaller customer, particular customers that -- that own or already tied to their own PPO network. So we -- we're in a niche that we think we can continue to grow without running into those big guys and this is something that was not there when we initially entered health, but it's been coming on over the past 12 months or so as these big guys have gotten aggressive. But we fill steel good about the health business. We -- we feel like we can continue to grow it in the niche that we're in and we'll continue to move forward in the -- in the health area, both organic growth and -- and looking for selected acquisitions when they fit this model that we've set up.

Right, and just one more quick one if I can. The -- the higher cash balances in the investment segment, is that just based on market conditions or was there something else unusual at play there?

Yes, there's -- there's two items going on there. First, we had more deposits, so that increases the investments. Secondly, in cash at 12-31, we had about 150,000 in our trust operation that generally would have been in investments, so you also have that shift that took place as of June 30th that was fully back in there. 150 about right, Tom?

Yes, 150. But the -- the issue was to, it was kind of a market-related issue where -- where some of the investment advisors that -- that we do business with moved some of the money from the market into cash and -- and back out, so it just was really a one-time type occurrence in April and May as we indicated in our press release.

Okay. Thanks a lot, guys. Good quarter.

Thank you.

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

Hi, good morning.

Morning, Carla.

I wondered if you could clarify one thing. When you talked about the customers that were going in-house, did both of those choose Fiserv licensed products or one chose a Fiserv and one's a customer that's going to exit?

One of them is a Fiserv product and the other one is just taking -- the other one is-- is another product is the best way to explain it.

Okay. So, okay. Very good. And then I wondered if you could -- just as -- as you look out into '06, you've obviously had some -- some very strong growth here in '05. And I guess as you look out to '06, are there any emerging drivers to growth, as you look out that you think will change and I'm just really trying to get a better feel for what -- what '06 is likely to look like given this very strong kind of start to '05 that you've seen?

There -- there is some -- some things going on in -- in the business that are going to impact our growth, image, everything that's going on in Check 21 and image will, the HSA account which we touched on -- I touched on briefly in my comments is another good potential growth area as we look out into '06 and beyond. So, I mean those would be the major ones.

Thanks. I'll get back in line with more.

Thanks.

Pat Burton from Smith Barney, you may ask your question.

Hi. Congratulations on the quarter. Looks like you guys have continued to experience operating margin expansion, particularly in the financial institution segment with or without the termination fees included in that calculation. Can you just talk a little bit about what's driving that and how sustainable that margin expansion is in the back half of the year and going forward? Thanks.

As far as the -- the margins go, when -- when you're -- when you're having strong software sales, obviously that can have a -- a minor uptick on your margin improvement, but on an ongoing basis at Fiserv, we continue to consolidate operations, to drive efficiencies into all of our operations. So we would expect our margins to -- to uptick slightly each year just from the -- the operational efficiencies and the consolidation that's going on within the Company. What's going make it move more and -- and we try to talk about those particularly is when we have a heavy software quarter, you may see a little higher margins than in normal quarters.

And that -- that's why I would say in the first half our margins were quite good in the large part because we had more software sales and in fact, our margin actually went down a little bit in the second quarter in the financial segment relative to the first quarter.

Does the flood insurance claims have a disproportionate impact on margin, or is it just the software?

Well, the -- the -- the flood claims can impact margin as well. That's a good point, Pat. When we're having high flood claims as -- as we did coming off of the hurricanes last year, it will drive margins up in -- in that segment of our business.

Okay, thanks. And thanks for changing the format to take more questions.

You're quite welcome.

Bryan Keane from Prudential, you may ask your question.

Hi, good morning.

Morning, Bryan.

Just trying to figure out the software license fees impact. It sounds like it's been material -- at least you guys have said it's been stronger in the -- in the first half of the year. Is there -- is there a dollar amount that we can get from that or maybe a -- a percentage so we can just feel the magnitude of -- of these license fees?

You know, we -- we don't disclo -- disclose details to that degree, Bryan. I -- I -- and I would say -- I wouldn't say that it's a major impact on the margins, but I said it did impact it because of -- of it and so you can't expect the -- the margins to continue at that level. If and when software starts to back down, and we're kind of projecting into the second half it -- it -- it'll probably go back to more of a normalized level.

What -- what -- Les explain the -- the pickup in software, was it just -- it just kind of a little bit random? I mean should we expect next year at the same first half of the year in '06 that software's going to be strong again?

No, I don't think it's -- I don't think it's as seasonal at all. I just think it -- it happens from time to time. We happen to have good license -- only about 5 percent of our revenue comes from license software to new clients in any case. But we had strong licenses, not only in the banking area, but in the credit union area and the insurance area and they were just significant enough that they were worth -- worthy of breaking out and at least talking about a little bit.

Okay, and then the -- the Australian check processing business you guys brought on, is there -- was there extra costs associated with that? Have you already ramped it up? I'm just curious because the margins didn't get hit too much so it looks like it -- it wasn't a damp other margins.

Not a significant damper. You will see some increase in -- in capital expenditures in the second half of the year as -- as we add some hardware to expand to the other banks that are coming on that operation. But what we essentially did is picked up an operation that was in place and we'll -- we'll be improving it and over time margins should improve in that business segment itself. It'll start off, I think as we indicated, actually are hurting our earnings by penny or two in this calendar year and then as we go into next year, improve.

Okay, and then you noted, I think, just switching gears around, you noted that the lending division was strong in the particular quarter. Can you help us understand or give us some color on that?

The -- the lending area was strong not only in -- in the -- the -- the servicing part of the business, but in the preclosing services, and in that area we con -- generally concentrate on equity loans and we just had a very strong quarter. We're coming off of a pretty slow year last year, especially the -- the second half of the year and we had anticipated that improving and talked about that in the first quarter call and the second quarter was strong in that area and we would expect that to continue. Everything that -- that we see going through the second half of the year, that lending area is going to contri -- continue to contribute to our organic growth.

How -- how rate sensitive is that? Because I know rates dropped in the second quarter, so did that help, I guess, that business?

It is not as rate sensitive as you would think because we're in the equity loans which don't get tangled up too much in -- in refis. People that in -- in the prime loans, especially prime loan closing, will find impacts when -- when the rates change and refis either go up or down. But, in -- in the niche that we're in, we don't anticipate and haven't had real significant -- don't anticipate any going forward in this year.

Okay, and -- and just finally, just one house cleaning item. The -- the 40 million of runoff business in '06 that you guys expect, are you offsetting that with the termination fee -- the large termination fee you expect?

Well, we -- we will have some termination fees that we'll talk about. We don't -- we can't talk about those right now because we don't know exactly what they are. But the nature of the beast is the termination fees you guys will discount against our earnings and these -- the loss of the revenue will impact us going forward. So, yes, there will be some termination fees. We can't talk about specifics right now because we really don't know un -- until we have further conversations, but we'll talk about them when -- when we can.

But the 40 million excludes the impact of termination fees?

That's correct.

Okay. All right, thank you very much.

Chris Penny from FBR, you may ask your question.

Thank you. One kind of follow-up question to the free cash flow. I was hoping you'd give us kind of a sense of what you would expect for the pickup in your free cash flow in the second half of this year.

Yes, I would expect our free cash flow would be considerably better in the second half than the first half, probably close to being equal to our after-tax income, perhaps a little bit better. But also bear in mind that we will, as Les mentioned earlier, have more capital expenditures for the Australia operation.

Okay, but no -- you don't see any other material change in terms -- any other items like a tax item or anything like that where that's going to kind of -- would change or -- or impact your cash flow?

No.

No, again. Just to clarify that, Chris, the -- the estimated tax payments, basically what's happened here is we -- we just made more tax payments in the first half of '05 than we did in the first half of the '04. So, for the year you're going to see some of that swing. It's just really a timing item.

Okay. Great. And -- and Les, just a kind of question on your budgeting. If I look back and your historic growth rate -- revenues have been about 20 percent, earnings about 20 percent and I think clearly looking forward it's certainly not expected to do that. I just want to understand from -- from your perspective looking kind of long-range budgeting, with the rate -- internal growth rate you're seeing, do you kind of budget to that same level of growth, or what is it from an acquisition standpoint, what is it that you're kind of looking for in terms of that budgeting process, I guess?

Well, as -- as -- as we put the budget together, we -- we don't budget acquisitions. We -- we take acquisitions as -- as we find them that fit our model and -- and that we -- we think will perform for us going forward. So when we put the budget together we'll budget how we can grow the company organically. And the 20 percent top line growth, we'll -- we'll be in the mid teens to 20 depending on the acquisitions that we do. Our organic growth is, as we've talked about, talking the mid to -- to 5, 6, 7 percent. Right now we're running around 8, I think. That's what you can expect out of -- out of us organically. So -- but the earnings, obviously, we'll -- we'll budget again without acquisitions as well. And -- and our earnings per share have been running in the neighborhood of -- of 18 to 20 percent over the years. We've tried to, as we've gotten larger, to talk that down because of the law of large numbers and -- and we're -- we're expecting more in the mid teens this year and then we come out and have a great quarter like we just had, which will happen from time to time. But the -- the law of large numbers on -- on the earnings growth rate obviously is going to be impacted the larger we get.

And from an acquisition standpoint, I don't know if you can talk to any specific area, whether it be in the financial areas, as to kind of holes that you would look to fill over the next year or so.?

Well, in the -- I would tell you in the lending area in particular, we're -- we're continue to by products and service into lend area which flush out this end to end offering that we're building and we've been at this now for a couple of years. In the -- in the banking area, you'll see us continue to -- to buy market share where we can buy market share at the rates -- at the prices that we want to buy it and -- and continue to look to -- to expand product. So -- and then in the health area as we talked earlier, continue to -- we'll continue to look at other third party administrators when they fit the niche that we're talking about and look for other products that we can buy to cross-sell into our healthcare customers. So, I don't think from an acquisition standpoint we're focused order any particular area and I don't think it's changed materially.

You mentioned at the price you'd want to pay in the -- in the banking area. Is there any -- would you -- would you like to kind of give us an idea of what you'd be willing to pay?

Ken?

I -- I think it really depends on each individual circumstance. Our traditional pricing has been five to six times EBITDA. Right now with interest rates being so low, prices sometimes are higher, but it depends on how long we think this -- the client base will stay around.

And the only other thing that would impact it materially is the rate of growth that we see in it and that we can anticipate going forward. Obviously we'll pay out a little bit more for rapidly growing business.

Okay. And then one last question. Just give an update on the ETF business, how that's -- how that's working right now.

EFT, the transaction process?

EFT business.

It's going well. Debit cards continue to go well. The ATM processing. We're also continuing to see growth in our Internet bank area as we continue to add Internet banks and today are the -- the largest provider of that service in the country from the Internet banking standpoint. And continue to see volumes increase for customers that use it. So, EFT is a very healthy area in this company.

Okay, great. Thank you very much, and very good quarter.

Thanks a lot.

Kartik Mehta from Midwest Research, you may ask your question.

Good morning, Les.

Hey, Kartik.

Question on the 60 million -- $40 million on the financial institution segment side. Is -- is -- is that -- did I understand right, it -- that's all for 2006? It will not impact any quarters in 2005, will it?

We're -- we're going to have some impact of that in -- in 2005, but from one customer in particular. The others will be either very late in the year and into '06, so the full impact will be '06.

So, taking in account that loss that you'll have in 2006, is it still fair to assume that internal growth in the financial segment still can be in the 4 to 6 percent as you look out the next year or two?

Yes. Mid single digit organic growth in that financial inst -- segment is -- is very doable, even with this type of activity

Which makes it harder.

Just have to work a little harder. And just to clarify that, Kartik, as you know the -- our year-to-date internal growth in the financial segmented add about 6 percent and this -- the 40 million is about a percent and a half roughly from that standpoint, so that just kind of puts it into perspective.

Right. Have you seen more movement now by community banks for Check 21? Are b-- are you starting to finally see community banks wanting to adopt the technology and possibly either outsource or by products that'll help them get there since we're starting to see large banks kind of converged more and more to this technology?

We're -- we're continuing to see a rapid move of community banks to image technology on checks. In other words, becoming image enable and storing images. But the true utilization of -- of Check 21 where you're moving transactions electronically, has got a long way to go. And I -- I just come back and say that -- that we've always said that's going to be more of a -- a marathon than a sprint and it's just going to take acceptance by the consumer and business before you really get to that point. But all of the community banks are clearly aware of it. They all are now prepared to -- to handle the IRD's, the conversion of electronic back into paper through Fiserv and -- and they are -- are geared and poised to take advantage of Check 21 when -- when it's -- when it starts to gain momentum. It is going to be something that'll drive efficiencies into the -- the banks and they're all aware of that and want to be prepared for it.

So if you look kind of a rough estimate, is -- is there a rough estimate as to a percentage of your customers that are check processing customers that are not using image, or is almost everybody using image technology?

The -- the vast majority of them are today using image technology which means we convert the checks to image, store them in image. They can get back to them online as opposed to going to paper files like they used to. Many of them now do not return the checks, but -- but put images on the statements, so all of that is pretty well penetrated in the market today, especially in your customer base.

Thank you very much, gentlemen.

Okay, Kartik, have a good day.

Paul Bartolai from CS First Boston, you may ask your question.

Thank you, good morning.

Hi, Paul.

On the core systems sales, you mentioned that you're seeing some strength in the spending from banks and community banks. Can you give us any update on what you're seeing in the credit union market?

We've had strong credit union software sales as well and -- and -- and that -- that's been going on, I'd -- I'd say for the past 12 months or so. They -- they --

No, it's two years.

Yes, they -- they were a lot -- lot stronger earlier than banks. It's banks that we've seen start to be more positive as we exited last year and came into '05.

Okay, and on the software sales, are the most -- are those mostly core systems or are you also seeing strength in the sales of complimentary products as well?

We are seeing both. The big dollars are actually -- obviously in the core systems. But we're having good software sales in the peripheral products as well.

Okay, great. Then one last question. Any chance we can put some numbers around the benefit you're seeing in the flood claims processing?

No.

Big -- bigger than a bread box.

All right. Thought I'd try. All right. Thank you.

You bet.

Julio Quinteros from Goldman Sachs, you may ask your question.

Sure thing. Good morning.

Morning, Julio.

Based on the -- the comments that are in the -- in the press as -- like the new format, it just feels like this quarter, and I just want to make sure from modeling perspective, that this quarter is -- represents basically the peak in terms of organic growth and as we look at the second half here, we're probably looking at a couple of tail winds as some of these sort of one-time type growth events decelerate. Can -- is there something that I'm missing there, or if you can kind of walk through more of the -- the organic growth assumptions in the second half of the year?

I -- I -- I think you can expect our organic growth in the financial segment to come in right now in the mid single digits.

Okay.

We're talking in the 5 percent range, 5, 6 range and we're above that right now. So what we're trying to do when we talked about $40 million is caution you a little bit that there is a little downdraft in that and it depends what we saw -- sign from this point forward. We still have a strong pipeline of these large check deals. It depends how many of them come through on -- on where our organic growth really ends up. Obviously coming off of the first half of the year we're -- we're more optimistic than we were coming into the year because we had a very strong first half but we expect a little softness in the second half in that area.

And that you might have a different conclusion, too, when you talk about profitability. We tried to emphasize it on a profit side we had a mix of business, floods and software that increased our profits significantly. So we could end up with having, quote, the same internal revenue growth as in the previous quarters and still have not as good profitability.

That's good point too. We're right now in the -- at 7 -- at 6 percent in the financial segment.

Got it, understood. And one housekeeping question on the model. The sequential drop in the -- the interest income, can you guys walk through that? I'm looking at the balance sheet, looked like there was major changes on the -- on the debt -- on the debt balance, but the -- the net interest expense did decline pretty materially.

Yes, I think it's just the -- the proceeds from the securities transaction at the end of the first quarter.

That's where it's reflected. Okay, got it. Great, thank you.

Thank you.

Roger Freeman from Lehman Brothers, you may ask your question.

Hi, good morning.

Morning, Roger.

Actually wanted to follow up on Kartik's question on Check 21. It seems to me there's a -- there's a big opportunity for you to connect big banks to your thousands of community banks and credit unions. Is there an opportunity for you to go to them and -- and -- and make a proposition where they can route images to you, which you can then convert to IRD's and -- and distri -- and deliver through your di -- your data center network to your bank customers? Is that something that you're pursuing?

I'm going to ask Norm to comment on that.

Roger this, is Norm. We have those alliances and partnerships in place, so as -- as the actual exchange starts to ramp up, we'll be -- we have with [INAUDIBLE - sound faded] and Viewpoint, and actually End Points, so all -- all the major players out there will have a -- will have a gateway to our client base which is very valuable to them.

And are -- are you -- are you starting to -- are you starting to see some volumes flow through there?

We're -- very -- very little, I guess it's -- it's starting to ramp up slightly. IRD's are probably catching up, which is the substitute checks that we print.

Right.

Probably -- are sum -- showing more increase. They have gone up significantly month over month, but they're -- they're still in the tens of thousands on a monthly basis.

But we -- we had anticipated that, that the IRD's would pick up and then as the -- the acceptance of the electronic image transaction becomes more prevalent, then you'll see IRD's go down and you'll see more exchange. Also with the -- the ability to -- to have these images stored, we're in a very strong position to -- to clear between our banks within our system, and we have some pilots running in that area, so there's a lot of opportunity here. Check 21 and what Check 21 is going to do for banking is positive and what it's going to do for Fiserv is positive. It's just going take time to be -- to be fully impacted.

Right, right. That's encouraging. And I guess -- I guess the second question is to see about your other growth opportunity in the HSA segment. Is -- is -- what -- what percentage of your bank customers would you say today offer health savings accounts and -- and -- and -- I mean is this -- is this something that could be a significant opportunity for that segment and push that growth rate up again?

Yes, it is a -- it's a significant opportunity. Very small number of our banks use -- or have offered HSA's today. About 25,000 accounts in total in our core processing area. But -- but I would say that also add that our health plan administration business is already enabled and administering high deductible health plans, HSA accounts as well. All of our core systems now have the capabilities to handle HSA accounts. I think the -- the future is bright just from a volume standpoint, but -- but would also add that in the long-term our debit, our ATM, our prepaid card, our electronic funds transfer network all will play in -- in the HSA area as HSA eligibility and plan design verification and payment, the whole healthcare system will change. So there's a big opportunity. How big, how fast, who knows? But we're -- we're working very diligently to get ahead of that curve.

Great, thanks. Appreciate the comments.

Thank you.

Robert Tung, Citigroup Smith Barney, you may ask your question.

Great, thanks. I was wondering whether you guys have any plans to acquire -- would you -- would you acquire your way into more merchant acquiring revenues, or do you think you'd continue to just leverage your -- your relationship with Primax.

That's something we look at all the time, that's something we would evaluate going forward. It's -- it's -- it's not something that we've turned our back to. Nothing eminent, however.

Okay. And just a question on kind of philosophy. Would you guys do defensive acquisitions to protect share?

On occasion we would and we have. What -- what we will perhaps pay a little bit more for an acquisition than as opposed to let it fall into enemy hands. On the other hand, we're not going to be foolish about it either. We're pretty disciplined in that area, as you know, and we're very careful about how much we s -- how much we pay so it does contribute to -- to our earnings in a reasonable period of time.

Okay, and just finally. On your -- on your cash flows in the quarter, they seem to -- to go down a little bit versus -- maybe about 13 percent versus the first quarter, both operating and the free cash flow. I was wondering whether that had anything to -- is there any seasonality involved or were there other items that kind of --

The -- the ma -- the major impact there is you have two estimated tax payments that take place in the second quarter and no estimated tax payments that take place in the first quarter.

Okay. Thanks, guys.

You bet.

Scott Kessler from Standard & Poor's, you may ask your question.

Hi, thanks very much. Two quick questions. My understanding is that Congress is considering allowing credit unions to offer a variety of other products and services. I'm wondering if you see that as a potential opportunity? And second, the M&A activity in the second quarter was clearly a little bit more significant than we've seen in recent previous quarters and I'm wondering if if that's indicative of a trend or if we should expect to see M&A activities staying comparable to last year? Thanks a lot.

I'll -- I'll answer the first question and let Ken an -- Ken answer the second. Credit unions -- as credit unions get more bank-like services and they're approved, obviously it's opportunity for us. We've already seen a -- a strong push of credit unions towards commercial lending and we're taking advantage of our expertise and products on the commercial banking and commercial lending side to strap those over into the credit union businesses. So, certainly at product flexibility, we have an -- an opportunity to -- to grow what we do in the credit union business and the credit union business is very important to us. We're the largest processor of -- of credit unions in the country, so it's great opportunity. Ken?

On the M&A front, I would expect more acquisitions this year than last year and I would expect some more still in the rest of the next half.

Pipelines are -- are very healthy.

Great, thank you.

Shane Diamant from Stephens, you may ask your question.

Hi, good morning.

Good morning.

Just a follow-up actually on the M&A pipeline. Can you give us some details as far as maybe what that pipeline looks like as far as size of deals? Are you seeing bigger deals maybe with purchase prices greater than, say, 200 million, or is it a pretty good mix kind of across the board?

It's -- it's really a good mix and that's generally true in that we will have stuff in the pipeline that can be down in the 2 million range and all the way up into the billion range.

So no ex -- expectations if you look out in the second half of the year, that the -- the deal size will change significantly from what we've seen seeing the first part of the year?

No, I think you'll have a -- a mix of deal sizes. It really depends on what comes to fruition.

Okay. And then looking at -- at your cash balances as they continue to build, has -- has there been any talk of maybe a -- a change in the use of cash beyond the buy back program and -- and maybe more of an emphasis on -- on dividends?

It's something that we always consider, but we have not reached any conclusions.

Okay, and then -- and finally, just one question on the Australia contract. Have you had any progress in that region? I know it's -- it's really early on in installing the pro -- the existing contract, but have you had any talks or any -- or made any headway with sales to the other large banks that aren't currently part of the deal?

At this stage it is pretty early. We're -- we're working on the -- the three banks that are in the deal, the - the exciting part of it is the opportunities that we see and are already putting in front of us for the existing three banks to expand what they do to Fiserv is -- is very strong, stronger than we expected it to be. So you'll have to give us some time to get this thing to mature, to get all three banks up and running before we'll really go out and look seriously about adding other banks.

Okay, thanks a lot.

Sure.

Glenn Greene from ThinkEquity Partners, you may ask your question.

Thank you. I also had a question on the Australian JV. But just wanted to get a sense for -- just little bit of color around the progre -- the progress with it and where we are in terms of volumes and how quickly you think that would ramp and if it would have any notable impact on your organic growth on the back half?

Well, it -- it is -- it is ramping up. There's no question. It's on track with our plan. We exc -- certainly expect to see more revenue in organic growth coming from that piece of business in the third and fourth quarters than we did in the first and second. So, it's ramping up as anticipated. By the end of the year, two banks should be up and running on it and the third bank will come on as we go into '06.

Okay. And then your international portion of your financial services outsourcing business, just an update on the tone of business there.

We're -- we're getting some good activity in -- in Canada on the credit union side. We also see more positive signs in Europe than we have previously, although we've -- we've not gotten any -- any significant deals from it to date. Tom?

It could impact in Mexico on the credit union side.

Ah, good point. Right. Yes, we've signed a -- the largest credit union in Mexico and have a good pipeline down there as credit union regulations have changed down there and the government's pushing them to automate better than they have in the past, so good opportunity down there as well.

Okay, and then just one final question on the software license. Were there any notable large deals in the quarter that kind of skewed the numbers or was it more broad based ?

I think it was pretty broad based. I don't think we had any unusually large ones that -- that -- if we would we would have pointed those out. If you read the press release, it talks to some degree about the -- the banks and the credit unions that did sign in the quarter, but nothing unusual.

Okay, great. Thank you.

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

Given kind of the changing competitive environment in your health processing businesses, I mean what kind of competitive responses are you guys going to take? Does this change the strategy or change your pricing, kind of how you approach your market? Can you kind of give us a what the strategy is in that?

Yes, I think the -- the main change you're going to see and it's not really a change, it's - it's something we've been moving towards over the past 12 months and that is focusing more on a target market. The target market are really two things, companies that have or -- or -- or businesses that -- that have their own PPO, their own network, because that insulates us from the big guys that have a network, where we won't. So that's one focus. And then in the general outsourcing business where we go in and outsource the back office of an HMO is a good business opportunity for us and we've signed several of those already and we see great prospects going forward. So this niche that we're in is not new because it's a niche we've been in from the beginning. What we've just seen is -- is less likelihood that we'll get the big national ones because of the -- the aggressiveness of the -- of the big guys going after them, which we can live with because of the niche we're in is very strong.

Guess from a longer-term perspective, I mean this business is -- the growth rates have come down dramatically. Have we bottomed in this business, or do we kind of think this is kind a steady state of where we're at, no mar -- little potential for kind of margin expansion next year? Kind of give us some color on those kind of --

I would tell you that -- that the slowdown in growth has been driven really by two things. One is we had a very rapid growth in '04 in our -- our pharmacy business, which -- which bolstered that growth because we signed some very big customers early in -- in '04. But I would also point out that the whole industry itself has the growth rate has slowed down and we have slowed with that. We -- we don't -- I -- if anything, I would consider this a bottom. I think we can grow from here. I think the -- everything that we see in the market niche that we're playing in indicates to us that there's additional growth. We also continue to cross-sell very aggressively the products that we have in the managed care area and the pharmacy area into our TPA customers. So we see good opportunity in -- in internal growth just by cross-sale.

And I would just also add that the -- as far as the operating margin percentage in that particular segment, when you exclude the prescription claims, it's actually up on a year-over-year basis from 17 to 18 percent, so I think we look at that margin improvement on a year-over-year basis and so -- so there's -- there's still some strong, very strong things in that particular segment.

Switching gears real quick to the -- to the core processing business, just trying to understand, competitors have -- have fallen into the camps of other -- of other larger competitors changing kind of the -- the landscape. Have you seen any fall-out now from some of those acquisitions that other competitors have made in terms of your win percentage increasing against any of your comp -- of your large competitors, such as a Fidelity, Medivante, et cetera?

I would say that -- the in the acquisitions that have taken place that we didn't get, we are seeing some good sales opportunities and good sales closes. Without talking particularly about which competitors, some of them are a little bit more aggressive in consolidation than others and whenever there's aggris -- aggressive consolidation or indications that they are going to be consolidation, it breeds opportunity for us to go out and pick up new customers through the normal sales channel.

I mean do you realign the sales force to kind of address those opportunities? I mean do you focus on certain segments where these guys are strong? I mean does that change the game or it -- have you guys pretty much -- business as usual within that whole world?

No, no, it's not business as usual. If we see a weakness, if we see a -- a unit consolidating, any kind of an indication that there's going to be activity in a -- in a particular competitor, we will focus the sales force there and go after it very aggressively. So, but -- but that's just the way this business runs and we've always operated it that way. Just when you have more acquisitions and more consolidations in the competitors' camps, it's -- it's more opportunity to co -- to concentrate.

All right, thanks.

Thank you.

John Kraft from D.A. Davidson, you may ask your question.

Good morning, gentlemen.

Good morning.

Just wanted to quickly follow up on some previous questions regarding some of the business in '06, those three banks that are changing their relationship. One of them in particular is moving to your license product and presumably that would result in significant up front license fees coming to you. It would certainly should offset any year's worth of outsourcing fees. Is that going to happen in '05 and that's why you mentioned this in '06, or is that -- I guess could you kind of --

It -- if has already happened in terms of the license fee, so that the outsourcing fees are what we're now saying are going away.

Okay, thank you very much.

You bet.

That concludes the question and answer session. I would like to turn the call back over to Mr. Muma for closing statements.

We thank you very much for your interest in Fiserv and for your questions and for your participation on the call. We had a great quarter. We're looking forward to a great year. Thank you very much.