Fiserv Inc (FISV) 2005 Q3 法說會逐字稿

Good morning and welcome to the Fiserv earnings conference call for the third quarter if 2005. We currently have 85 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 call is being recorded and also is being broadcast live over the Internet. The call is expected to last 45 minutes. You may disconnect from the call at any time. Now I would like to introduce the Fiserv management team on attendance in 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'd like to turn the conference over to Mr. Les Muma.

Good morning. Welcome to Fiserv's third quarter earnings conference call. We appreciate your participation and look forward to presenting our third quarter results and answering your 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 third 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 posted diluted earnings of $0.58 per share for continuing operations in the third quarter. That included an income tax benefit of $0.03 per share. We have raised our estimated 2005 full-year diluted earnings to $2.28 to $2.31 per share excluding a realized gain of $0.14 per share in the first quarter, from the sale of our Bisys stock.

Our financial segments internal revenue growth rate continues in the mid single digits at 6% for the first nine months of 2005 compared to 2% in the prior year. Our BillMatrix acquisition was completed on August 12th. This acquisition further solidifies our extensive payment capabilities and gives Fiserv a significant foothold in the fast growing area of expedited electronic bill payment. We are excited about the future potential of electronic bill payment and look forward to working with the innovative BillMatrix management team.

Fiserv is taking an important step toward further globalization of its operations through the formation of a new business, Fiserv Global Services. While Fiserv currently conducts business in 60 countries, this new initiative will further globalize our delivery capabilities in our business unit and client in the range of technology and processing disciplines and expand our market into other parts of the world not currently served by Fiserv.

In October we hired [Arun Maraswori] as President of Fiserv Global Services and as a member of our management committee. Arun was previously the President of CFC's India operation, which he grew to nearly 4,000 employees. We are pleased to have someone of Arun's extensive experience in growing this type of business on our management team.

Before we open the lines for questions I would reiterate that our performance through the third quarter of 2005 was strong and that looking forward our management team continues to focus on both acquisitions and organic growth and providing long-term shareholders returns. We will now open the line for questions.

[OPERATOR INSTRUCTIONS] Please stand by for our first question.

There being no questions, it's a short conference call.

Our first question comes from Greg Smith from Merrill Lynch. You may ask your question.

Hi, good morning.

Good morning, Greg.

Have you guys been able to better quantify the potential impact from the hurricanes on the flood processing business?

You know, at this stage, the answer is no. We do expect a pickup in flood processing claims in the fourth quarter, and if it follows the -- and I would caution you, too, that the fourth quarter of last year had a lot of flood processing claims in it, too, so it will not make a material difference in our organic growth, but we would expect if it follows the same pattern of the last wave of hurricanes to see our fourth quarter pickup stay strong in the first quarter of next year then start tapering off in the second and third quarters of next year but we do expect an up-lift there.

Okay. And what do margins look like in that business?

Margins are quite good in that business.

Okay. Great. And then switching gears to the healthcare business, you know, you talk in the press release about it getting a little more competitive. Are there any kind of longer term strategic initiatives you're looking at such as an acquisition to help kind of bolster your position there? How should we think about that?

Strategically we've talked about changing -- not changing but continuing to concentrate on the middle market and on specialized companies as opposed to going head to head with the big guys who own the PPOs. We also, if you remember in this last quarter, added a PPO, Aetna, to our capability. So we can now go into companies with a network selling Aetna's network, which is a little bit of a change in strategy.

You also see us concentrating on business process outsourcing in the health business and that lines up with what we did with EDS, signing the contract with EDS to use their software capability and our business processing outsourcing capability. So we've done a lot of things I think to rejigger our strategy in that area. At the same time, the pharmacy part of that business continues to grow very nicely. So overall, we still think that's a good business. We will continue to fine-tune our strategy, and we think there's good prospects.

I would also add that it also brings a tremendous capability when you start talking about health savings accounts and the whole redefinition of the health payment system in this country. We think that will not only help us on the health side but help us on the electronic payment side back in our bank area. Not only is at group overall, it's going to be complimentary to what we do on the bank side.

Okay. Great. And lastly on the new Fiserv global services initiative will that be based out of India? And then is this more focused on sort of internal initiatives or more on external as far as selling product rather than internal development?

Greg, when we bought a company last year it had an Indian operation in it, it had about 35 people. We're now up to about 80 or 90 people in India, primarily in the development area. We have taken that part of our Indian operation and added to what [Arum] is doing. Initially it will be aimed at development so we're not outsourcing as much of our off shore development to other companies, but doing it ourselves. Over the long haul, however, it will look at other opportunities to participate in offshoring in the BPO area. We think it's a major move in the globalization of Fiserv as a company, and it will bring advantages not only to our companies but to our clients over time.

Okay. Great. Thank you.

David Cohen from Morgan Stanley, you may ask your question.

Good morning, Les and Ken.

Good morning, David.

Could you walk through some of the drivers of margin compression in financial institution outsourcing in the quarter? To what extent was that pressure from the new Australian check processing contract?

David, it's Tom. I think in our press release on page 11 we kind of talked about the factors from the second quarter, and as we indicated previously, we had higher software license sales in the first half of the year and our margin there in the second quarter in the financial segment was about 25%, and then the third quarter it decreased to about 23%. And again it was decreased software license sales. We had some increased product development costs in our lending group. The Australian contract, as you indicated David, also contributed to that, the ramping up of that, and we did have a slightly reduced termination fees from the second quarter. So all of those factors kind of contributed to a lower margin, but in the first six months we have had historically high margins in that financial segment.

Can you drill down a little bit on the Australian check processing contract? Because that has been a driver of improved internal growth what is the margin trajectory on that look like?

As we indicated when we announced that contract, that contract in the first year would be dilutive by 1 to 2%. Long term in the first year, and we would continue to have ramp up expenses in the first year of that contract. And -- but longer term, upper singles, lower double digits is the planned margins on those larger type contracts, in this one in Australia.

We expect a dilution of $0.01 to $0.02, not 1 to 2%.

That's correct. Yes. Yes.

Okay. Then on the free cash flow it's down about 20% year to date. What are your thoughts or the balance of the year?

David, I think it will pick up for the balance of the year. The first quarter, it was about $102 million. The second quarter it was $78 million. Third quarter here it's $100 million. We've been hurt in part because of our internal growth, it's been so strong, that that's generated more receivables than we have in the past when internal growth is less, but we'd rather have the internal growth. In addition to that, our tax situation has had a -- somewhat of a weird phenomena in that because we sold our securities business, the way you estimate taxes means that we end up having a tax hit of something like $50 to $60 million because we accelerate our tax payments relative to what we've done in the past. That's again because we had this gain that caused our first quarter to have a higher tax bill.

Okay. Just finally, Les, any thoughts on where you are relative to quota in the FIO business?

We had a very strong third quarter in the FIO business, and if you look at where we are to quota we are just about on -- slightly below but just about on quota. One of the things I would add, we obviously set quota for our sales professionals because it's a way to motivate sales professionals and track and drive growth, but what we really look at more today, as we should , is the organic growth rate, and that's one of the contributors to organic growth rate. And overall our organic growth rate in that segment, as you know, is improving.

If you compare us year-over-year in sales, we're ahead of where we were last year in sales. So overall we started slow and we talked about that in some of the earlier quarters. We had a very strong third quarter and our pipeline is excellent as we go into the fourth quarter. So I would expect a strong fourth quarter as well. We feel good about the sales performance in that -- especially in the financial segment.

Okay. Thank you.

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

Good morning.

Good morning.

My first question is back on the global business. Does that incorporate -- will that business incorporate at all the sales that you have of, I believe it's the CBS product, or will that remain a separate division?

It may get -- it will remain totally separate from a division standpoint. [Arum] is running an operating group. He sits on the management committee, which is now nine operating groups completely separate from CBS.

Okay. And then could you give us a sense of -- there's certainly been a lot written about the replace -- the opportunities for replacement of core systems, outside the U.S. Could you talk to us a little bit about how you might see that opportunity?

Well, we think there's good opportunity there as well. Our CBS product -- ICBS product is very competitive in that market and is having a strong year. The pipeline there is good as well. Over the past two or three years we've signed some very big deals with ICBS most notably the one in China in conjunction with IBM. So we think there's good opportunity for us there in the coming quarters.

Okay. Thanks. Then just finally on the health business, is profitability or any ability to get operating margin improvements there going to come really with top-line growth, and, understanding that the mix obviously with prescription has a big impact but how do you see margins I guess trending in that unit?

I would see the margins trending up. We're do some consolidation in operation efficiency work there that will help margins next year.

Okay. And I guess, Ken, if could you give us a sense, tens of basis points, or more than that? How significant are some of these cost opportunities?

I have not calculated that refined.

Okay. Thanks a lot.

Thank you, Carla.

[Carter Meader] of Midwest Research. You make ask your question.

Good morning.

Good morning, Carter.

Les, I wanted to go back -- you said you were ahead of quota and if you could just give a time for us when you meet quota and when those sales hit revenue, what's usually the timing? I guess the timing of the backlog.

In the business we're in, a large part of the sales are service bureau sales. It takes a conversion to get the revenue on. So it can be anywhere from 90 to 180 days or longer if it's a very large client. So it's not years but it can stretch out over months. And what I did say is that we are right about on to slightly below quota through three-quarters with a very strong pipeline going into the fourth quarter and a very strong third quarter in the sales area.

And so if you look at margins on the financial outsourcing business for the fourth quarter you said fourth quarter of last year also included flood claims, this year should also include flood claims. They obviously have good margin. Would you anticipate year-over-year margins to be somewhat similar in the fourth quarter or should they improve?

Tom, can you --

I would say somewhat similar, wouldn't you, Tom?

Yes. I would say that we're at the fourth quarter last year in the financial segment was around 23%, but I would also hesitate to say that there are a lot of things that go on in the business that's difficult to predict but I think 23% coming off 23% in the third quarter, that's a reasonable trend line going into the fourth quarter.

And I'd just stress our margins do jump around in that area. For example, last year it went from 24 to 24 to 25 to 23. So they will jump.

A lot of it has to do with you mentioned flood insurance is one of the factors. Software sales is another one, the level of software sales. Termination fees is another one that will vary quarter by quarter. So there are a lot of factors in there. When our margins move 23, 24, 25, back to 23, it's not a material event because of the nature of that line of our business. It's just the way the business moves.

And then one final question. One of the things you indicated as far as margins being lower in the financial outsourcing this quarter was lower software sales. Jack Henry yesterday also indicated they had a little bit lower software sales. Is this just something that's happened, or do you think there's a shift in type of services that banks are looking for, or is this one of those things that just happens and it's a coincidence?

I think it's just a coincidence. I don't think there's any trend of slowing down of software licenses. We're a little bit better protected than Jack Henry because the volume we have of service bureau business doesn't impact us as much percentage-wise, but I don't think it's a trend.

Thank you very much.

Thank you.

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

Sure. Hi, guys. Real quickly can you talk about the component in the other operating expenses the sequential increase and what's captured in that line item, expense item. Then also D&A it looked like it decreased substantially. Just want to understand how the D & A line actually went down this quarter.

Julio, it's Tom. I think regarding the depreciation and amortization it's fairly close to where we were last quarter, maybe down $800,000 on a base of about $45 million so I think the number is fairly consistent with where we were in the prior quarter. Regarding the other operating expenses, as we indicated in our margin analysis, we have a few things going on there. One, we have increased revenue associated with our lending systems and settlement services businesses versus software license revenues in the second quarter. That business has a higher proportion of other operating expenses which tends to increase that line item when we have revenue growth in that particular division.

What exact are the other operating expenses that go into that line?

They're sort of outside services that we have, either outside appraisers or outside consultants that we have in that particular line of business.

Got it.

And the other thing we had had is we indicated in our press release, increased product development costs in the lending group. We have invested a lot more and that's some outside development type efforts, and our Australian item processing contract as I indicated also had a higher proportion of other operating expenses, and those are the primary drivers of that particular caption.

Great. Thank you. Just real quickly on the global services business, the operation itself, just to make sure I understand, is going to be mostly an internal resource for development purposes in the initial phases?

That's correct.

Okay. And then over time do you guys see that as being a resource pool that you could use to, say, compete against some of the other sort of global software companies that are out there, I'm thinking of like Pinnacle, some of the guys that we see pop up out of India that have financial services software packages, is that sort of a defensive move to eventually compete with those guys, or how do you --

To some degree it is. It's also just building a capability to do some business process type outsourcing work offshore. There's a lot of reason to look to the offshore capability from a cost performance standpoint, and that is certainly one of them. I think it is just a major move of Fiserv towards the globalization of our business, and it's going to touch us in a lot of ways and should touch us in a lot of ways in the coming year if we're going to stay competitive.

We've certainly seen the whole phenomena take hold here. Related to that, then, the only question I guess I have is with regards to pricing. Have you guys seen any sort of shift as the global services model continues to take hold in your ability to actually get pricing leverage, and is this an opportunity to sort of help yourselves out with that regard?

We haven't really seen any pricing pressures at this point but as you see this offshoring continue to develop, we feel like we've got to stay ahead of it because we could see price pressures down the road the more people use that capability, so I think this is more of a positioning for the future than any kind of defense of what we're seeing right now.

Great. My last question is just related to the BillMatrix acquisition. The expense associated for that, I think it was reported -- apologize -- was it $359 for the current quarter in the -- as the acquisition expense?

You mean as far as purchase price of that?

Yeah, in that range.

And were there any contingent liabilities that we'll see down the road associated with that?

Not really.

No. Okay. Thanks, guys.

Thank you, Julio.

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

Thanks. Good morning. You mentioned in a previous question about the flood claims processing margins being strong. Is there any way we could quantify that a little bit more or at least get some sense that those margins are above the FIO average?

They are above the FIO average but we do not plan to release them.

Okay. Fair enough. When you talked about your guidance for Q4 you mentioned termination fees, the large one is not in there. Should we assume other termination fees and the flood claims boost you may get is included in the guidance?

Yeah, the regular termination fees and the estimated flood claims are in the guidance.

What we did not include in there are the three that we talked about in the last quarter.

Right. Okay. And then --

Tom wanted to clarify something.

It's just one large termination fee that we did not include and we mentioned it in the second quarter and that's the only thing that's not in our guidance for the fourth quarter.

Right. Okay. Then just the last question, curious if you could talk a little bit about the competitive environment especially in light of the Fidelity announcement in the core bank market.

We haven't seen nor do we anticipate any immediate competitive environment change because of that. Certainly they plan as we've all read a lot of synergies between those organizations and we'll have to watch that over time, but there have been acquisitions in this business over the past ten years and we do some and they do some and we all weather the storm and move forward.

Great. Thank you.

Thank you.

Tim Willi from A. G. Edwards, you may ask your question.

Thank you. Good morning. Two questions, first , Les, could you give us any update on the search for your successor? Is there any note worthy developments along that time line?

At this stage I'd just tell you our Board is doing a very diligent job, as they should, and we hope to have a decision soon. Right now they're interviewing both internal and external candidates, some very good internal and some very good external candidates and we'll have a decision soon, we hope, but I appreciate the effort that our Board is putting in on picking my successor. Makes me feel good I must be hard to replace.

Second question is on internal growth. First part is, when you give an internal growth calculation historically and then talk about forward guidance, that does include termination fees; is that correct?

Yes, does it.

Okay. The math that I'm doing -- and I'm just curious if this is along the right train of thought, if we exclude the grow-over you had on termination fees this quarter, since there are about $8 million lower, it would actually look like internal growth, ex your termination fees, was probably about 7% this quarter, and actually looks like it's been moving up sequentially throughout the year. Is that the correct train of thought? Does that sound correct?

I would just say that in the third quarter as we indicated in on our press release on page 11, that's correct. If you look at the termination fee decrease that we had, it adds about 1% to the financial segment internal growth rate we reported 5%, and if you excluded the decrease we had there that would add another percent. So it would be around 6%.

I'm not sure what that would have been on a trend in terms of the previous quarters, quarter over quarter. We'd have to go back and look at it.

I calculated it and it looks like you're short 5% in 1Q, 6% in Q2, and I'm calculating 7% in the third quarter, but maybe it's 6, as Tom articulated. Definitely looks like things haven't, per say, dropped off. And maybe marginally disimproved over the course of the year.

There's a lot of things going on in the organic growth initiatives that we've got going that are gaining traction and we're doing better.

Great. Thanks a lot.

Glenn Greene from Thinkequity Partners, you may ask your question, please.

I was wondering if you could give us some color surrounding the BillMatrix transaction. First, your thinking, looks like a little bit outside your normal evaluation parameters and also just talk about it strategically and what kind of growth prospect and margin prospects you see for it.

The reason it was a little outside of our parameters on acquisition is because it's in a very fast growing area. It's a fast growing market. We feel like it's one that will continue to grow. It has a nice strategic fit with the other things that we do, BillMatrix was beginning to move into looking at clients in the mortgage area and insurance area and auto finance area, all that we have clients in already. We think we can leverage that. They also have a technology, this real-time technology where they access the biller's accounts receivable directly. Has a nice tie-back to our bill payment capability on the bank side. So it's in a rapidly growing area and a high-margin business, and it was worthy of a higher multiple on the acquisition side. We also think we've picked up an excellent management team there who is very creative and can continue the move into this electronic area with us.

You may have disclosed this before, but could you just refresh us on what the revenue magnitude was on the margins for it?

I think we disclose in our press release that the anticipated revenues in '06 would be roughly $90 million.

And the profitability level?

We the margins we didn't talk about other than to say it was a nice margin business.

There's been some issue or some push-back that I've heard on the, quote, convenience fee and whether it's going to be ultimately some pricing pressure there. How do you see that?

They don't see that as a major threat. It's obvious something we looked at during the acquisition process. This fee that is paid is quite often paid by the individual paying the bills, sometimes part or all of it is paid by the biller themselves but it's a mix, and it's -- we believe obviously that it's sustainable at a nice level.

Thank you very much.

Bryan Keane from Prudential, you may ask your question.

Hi, good morning.

Hi, Bryan.

Les, I just want to clarify, the impact the flood claims is going to have next quarter, is it just going to offset the 4Q '04 strain or do we expect a boost in revenue growth and margin as a result of higher flood?

I think it will be the same to slightly higher based on the projections that we've seen.

Okay. That's helpful. Then 2005 in some of your comments in the release, you mentioned 2005 had a little bit better organic growth. Part of it is increased volumes and new clients in the lending division. Do you think that can carry on in '06, the increased volumes in new clients, or is that something that will become a tougher comp year-over-year?

The lending business has had a significantly better year this year than next year -- Than last year.

-- than last year and we see no reason for that to slow down materially as we move into '06. We think the lending area will continue to expand and grow not only in number of clients but in volume from existing clients. We've got a very nice business there. As we talked about earlier, we're continuing to invest in that business, and we have some nice software, new software that is being worked on for releases in the coming months and year.

In fact, I expect the growth rate to be higher in the lending area next year than this year.

Okay. Just looking at the organic growth in financial, obviously I think it's up 5% in the quarter but if I look at operating income year-over-year in the financial, it's down 2%. I understand some of that is due to the termination fees. But even if I add back the $7.9 million, operating income only grew 3.5% year-over-year. And I know we talked about some reasons, software and flood quarter- over- quarter, why the decline in margin, but I guess I'm curious to know year-over-year what else is impacting margins.

Year-over-year I would say, Bryan, when we go back to the third quarter of '04, just to begin with, I think our operating income there was about $174 million. If you go back to the second quarter or the fourth quarter '04, it was around 160. So we had an extremely strong fourth quarter -- third quarter of 2004 that we're comparing to. Regarding the margin impact again I think we've hit on them. We've had the contract termination fees, as you know, $8 million, which is a large item that has very high incremental profit as you know which was a big factor. We had a little change in the mix of our business, was a little bit more in the lending services area, and those increased product development costs along with the Australian check processing contract, which is another big piece of that, and so a combination of those factors is really where we're at.

We are at still a very strong margin at 23%. We'll continue to see that going forward. Our overall operating margins on a year-to-date basis in the financial segment, they're 25%. Last year they were 24%. So, again, what we look at on a year-over-year basis we're up nicely as far as our profits go. We should be able to maintain that as we go forward.

That's helpful. Thanks for the color, Tom. Finally, Ken, on the free cash flow, I know we discussed that a little bit, but do we get back to equal levels of last year by the end of the year for free cash, or there should be a little decline because of the tax and the receivable issue and the working cap?

I think you'll see more of a pickup next year because of the tax phenomena that I mentioned will go away, so you'll get a pick up from that. And I would expect the fourth quarter you'll get some pick up, but as long as we continue to have strong internal growth, you're not going to have account receivable working against you.

Right. How much was the tax issue?

Tax impact there was something like $50 to $60 million.

Thanks very much, gentlemen.

Thank you.

Patrick Burton from Citigroup Investment Research, you may ask your question.

Hi, it's Rob Tung for Pat. Wondering if you guys could kind of update us on your acquisition focus in terms of tuck-ins. Are you still going to -- are you going to focus on the payments area, on flood insurance claims, on health processing?

Strategically -- let me make a couple comments then I'll throw it over to Ken. Our eight, now nine, group presidents kind of go out and search for acquisitions to aid in the business they're growing. So we don't focus on one over the other. Where the focus comes in is based on what's available and how they're priced and how they fit. So we will look at them individually but I can assure you that the thrust is pretty much across all of our product lines. Ken, can you add to that?

We do look at everything across the lines. Right now we happen to have more in the payments and insurance area than some of the other areas, but that will probably change in another two months.

In the payments area, what are some of the areas that are a good focus for you, and would it be more on kind of augmenting your product portfolio or building kind of your scale in your existing --

It would really be both to get into more detail would not be proper.

Okay. Sure. And just in terms of, use of cash or need for cash, do you guys anticipate, doing it through cash flow from operations or maybe going to the market and recapitalizing your balance sheet?

Are you asking with respect to future acquisitions?

Yeah, just in terms of funding future acquisitions or maybe some of these initiatives like global services, et cetera, just in terms of funding it.

When you get down to the global services and initiatives like that it's purely free cash flow. In terms of acquisitions, if the acquisition was large we'd probably go back to the debt markets and increase our debt.

Okay. And just finally, apologize if you may have already covered it, but in terms of your Capex and D&A guidance for the full year of '05 and then kind of looking into '06 in terms of, where it would roughly be as a percent of revenues.

I think our Capex is around $110 million with our cap software and that's been increasing roughly around $30 million, in that range. We're not going to give exact numbers but we're probably going to be on point last year in that $140 to $150 type range for the current year and we'll be covering our '06 estimates in our year-end conference call, but I anticipate no significant increase in the Capex and cap software. Maybe 8 to 10%. But we'll give you more guidance on that in our January call.

And the D&A in the fourth quarter probably won't be much different?

Nope.

All right, thanks.

Thank you.

Chris Penny from FBR, you may ask your question.

Thanks. If you look back on a broader scale in the last five years, you guys have done an exceptional job as far as compounded growth rate and earnings by about 20%. Les, as you sit out, and I know your departure is in the middle part of next year but as you sit out and look at the environment kind of where you are today, based on your organic growth and what you've got on your plate as far as acquisitions, would you see that changing over the next five years, or is that kind of how we need to think about Fiserv?

As far as our growth rate goes, we look at earnings per share growth rate, which is probably what you focus on as well, and we've -- historically been in the 18, 20%, although in the past year we started giving guidance down from that. I think, our last guidance was 14 to 17 or 14 to 16%, somewhere in that range. As we get bigger obviously our percentage growth is going to come down by size. The beauty of the business is with the percent of recurring revenue and recurring earnings that we have, significant drop-offs just aren't in the cards, but size, the law of large numbers are going to start to bring that number down gradually over time.

Okay. And as it relates to the floods, I believe last year's hurricanes really helped kind of the first quarter and second quarter. Obviously with the scale of these hurricanes, I would think that that's also going to flow into the first and second quarter of next year. Is my thinking there right?

That's correct. It will start impacting us in the fourth, then go into the first and start tapering off as we get into the second and third.

Okay. Thank you very much.

Thank you.

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

Good morning, gentlemen.

Good morning.

The expected tax rate for '06, do you have a good idea for that yet?

We project it out into the fourth quarter which was 38.4% and we will be updating that on our year-end conference call.

okay. Then maybe a more -- a bigger picture question. The status of your middleware integration initiative, how's that going? How are clients receiving that, and is that saving you guys integration costs?

That's an area that we're very pleased with. It is going extremely well. We just had a technology meeting in Chicago this past week with 170 developers. And not only are they embracing the middleware technology, they are now, as a team, coming up with better ways to improve on it and more things we can do with it. It is saving us integration dollars. It is aiding our clients in what they can deliver and how they can deliver product to their customers. It is so far been everything we expected it to be. It certainly has a lot more growth in the coming years. So we're very pleased with progress there.

Can you estimate roughly the number or the percentage of your cross-sellable products that are in that program?

I haven't got the foggiest idea in the world. I mean, I really can't. Overall we track how we cross-sell, and we know we're doing better and better on that. Obviously some of it has to be impacted but to pin it down is just very difficult to do.

Thanks, guys.

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

Thanks a lot. Can you talk a little bit about what you were describing on the call as I guess a one-time tax related benefit that accounted for up-lift of $0.03 per share for the quarter? The other question I had involved the press release you put out two days ago related to revenue opportunities in China. If you could detail those a little bit and just give us a sense as to the types of revenue opportunities that are possible, what you guys are pursuing, when they could become material, is it as soon as next year. Thanks a lot.

I think the press release that went out this is Tom, I think it was one of our top people, Mark Seawright who gave a presentation in China about how the opportunity is for banks to generate revenue, and he looked at it from an opportunity of how banks and how well they could do in China as far as growing their noninterest income. And regarding China, we continue through our ICBS product to continue to look at that marketplace and it continues to expand we've had had some wins there also, so long term I think it's a good opportunity for Fiserv also.

Regarding the first part of your question, on the income taxes as we indicated in the press release it was a $0.03 one-time benefit in the third quarter, primarily related to a number of different things, as we indicated. Tax law changes, some tax audits closing and just a finalization of various tax returns. So it was a combination of those items that led to the one-time benefit of $0.03 per share.

If I could follow up on the China question, is it fair to say that some of the opportunities described in the press release and obviously talked about in a more general sense could possibly accrue to you even as early as next year? I mean, when do you really see the opportunity becoming material in terms of revenue for Fiserv?

You want to answer that?

I would say it is a longer term. As you know, our business today is, you know, 5% of our business is internationally. I would say over the next three to five years we're going to continue to try to expand that growth through the things we're doing, Fiserv global services and general expansion. So when I look at next year do I think it's a major impact on the company? No, but I do think over next few years you're going to continue to see us expand our growth internationally.

Fiserv is going to become more and more globally oriented, and you've seen that with our move into Australia. We have had had some very nice wins in China. We are partnering with other companies like IBM in some of those initiatives. We see this as an opportunity to continue to grow, and Tom is correct in cautioning you that we're still only talking about 5% of the company's revenue today. I would be surprised if over the next five years that percentage doesn't continue to move up, because of the initiatives we've got going on. Not the least of which is this new operating group that we just started.

One last question, if I may. You obviously acquired BillMatrix and I think reading the tea leaves it's pretty obvious to me that at some point in the not so distant future, that company's capabilities are going to be increasingly used to enable Fiserv to offer on-line bill payment capabilities to its banks, and I was just wondering if you could detail your plans related to that in a specific or general way. When should we start seeing perhaps BillMatrix being sold perhaps alongside what Fiserv is already selling? Is this a couple of months? Is this further out than that? Thanks a lot.

You are right in that that's the general direction of initiatives we've got going on to be more active in the bill payment area for our bank clients, but to give you a time frame other than to say it's more like a 12 to 18-month window before you'll start seeing any activity I think it's unfair. I can tell you right now we're looking at ways to develop that and to develop it faster but it's going to be over time.

Okay. Thanks.

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

I was just wondering with the lumpiness of the Australian contract coming on can you quantify at all how much that helped organic growth in the third quarter in financial services?

In the third quarter? We said like $25 million this year, and in the fourth quarter we were expecting $8 to $10 million.

I think it's been $8 to $10 million I think we said a quarter.

Okay.. And I guess just a general question on, I come up with the same calculation of organic growth having improved in the third quarter. How would you look at the improvement in terms of your efforts over the last couple of years on the cross-selling front? How much of this improvement is cross-selling as opposed to new customer wins?

To quantify it exactly is very difficult. I would tell that you certainly is we've had continued new sales. We've had the lending area turn back around. We've had the international market, which was giving us trouble a year or so ago, start to stablilize and look good. At the same time, our cross-sell initiatives are ongoing. The use of this middle ware product to allow to us integrate and sell multiple product at the same time has been a plus. So when we really started pushing and concentrating on the organic growth of top-line organic growth, which is something that we really concentrated on over the past couple of years, we've had a lot of initiatives going on that have contributed , and certainly cross sales is one of them.

Okay. And I guess just one other question. On your stock buy backs, you were obvious very active again this quarter, and it looks like you're taking a view that you will lever up a bit to buy back stock because debt levels went up. Obviously that was influenced in part by the acquisition. But I'm just curious as to what your view longer term on stock buy backs is. I mean would you continue using debt to buy the stock back?

We might but we have made no final decision on that.

Okay. Thank you.

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

Thanks. I wanted to ask a follow-up on the global services initiatives, Les. Would you characterize this as kind of move slow or go fast in terms of what you want to do there? And how agressive or how big is your appetite for acquisitions to help you build the capabilities?

I would say we're going to be fairly aggressive. We're looking at that as an opportunity to grow. We think we've hired a very good leader of that. We're encouraging Arum to look at acquisitions that might help him grow in that market so that's certainly going to be part of the plan. We would like to see ourselves go up significantly obviously from the 100 employees we have over there and to get ourselves to 500 employees and 1,000 employees in a very short period of time is something that we've challenged Arum to do. So look for a lot of activity. It's not going to be a sleepy area of Fiserv in the coming months.

Can you tell me where in India those 100 employees are? Are they concentrated in a specific region?

No we don't.

Does that mean no, or --

That's Russian for no.

Phil Mickelson from JP Morgan, you may ask your question.

All right, I've got to go down the list on the questions printed out here. Wonder if you can give us a little bit of color regarding the two different markets within credit union markets and also then your core banking market as well. Has there been any changes in kind of spending as we've gone along through the third quarter of 2005 and, has the spending patterns kind of materialized to what you guys thought, the beginning of the year?

Back in the early part of the year we talked about the strength of the credit union business and we also talked about the fact that our bank presidents were starting -- and our banks in general were starting to show a positive sign in spending money on technology. And I would say that certainly in the first and second quarter and into the third quarter have not disappointed us. We still see optimism in the bank area. So we would consider -- we would think that our growth in that area would continue. I would go back, though, to mention credit union. ur credit union business has been extremely strong for the past several years. We've done some acquisitions in that area but they've also had some nice growth. Competitive area but one that we compete very well in and we continue to see credit unions do well.

And then when you kind of look at the pricing environment, you said that you don't see -- maybe it's no changes in pricing, but as far as with the bank base and the credit union base that you have to keep that business at the incumbent side, what would you characterize the pricing of keeping incumbent business? Do you find that that's going to become more challenging?

It does in spots and in certain geographic areas and with certain competitors where we'll have to be a little bit more aggressive but I don't think materially different from how it's been over the past ten years. We've always had competitors in certain geographies that will come in and low ball, bottom fish, as we call it. Most of those guys over time will get themselves in trouble. You can't compete, especially on the service bureau side of the business, price-wise, over the long haul. So no material change. But it's still there a little bit.

Shifting gears to the acquisition side, Fiserv has always had a pretty strict kind of criteria of what prices they're going to pay for an acquisition. It looks like the BillMatrix was outside of those parameters. Is that what we're going to see to find growth opportunities? Are we going to see those kind of multiples paid?

If we can find another exceptional company like BillMatrix, yes. But in general, that's an exceptional company, so in general I would say that you won't find those kind of multiples in the future.

High-margin growth areas, we'll pay up for it. The normal business that is just moving along as we as a company do, we're not going to change the discipline that we have in place.

Is it so much an exceptional company, or is it just you were so -- behind the curve as for as bill payment, et cetera?

Well, it's both an exceptional company and it's an exceptional industry growth trend.

Great. Thank you.

Thank you.

Nik Fisken from Stephens, you may ask your questions.

Morning, guys.

Morning.

Ken, the increase in accrued expenses in AR sequentially is that from BillMatrix?

As far as the -- no, it's not from -- I don't think it it's specifically from BillMatrix. You mean on the cash flow?

No, on the asset side, your AR went up about $40 million, and your accrued expenses went up about $50 million sequentially.

You mean on the balance sheet standpoint?

Yeah.

Well, the accrued expenses I think generally have headed up over as we go through year, mainly because we have a lot of other payments that we make in the first and second quarter. But as for as the AR goes, that continues to increase. Did the acquisitions contribute to that increase? Absolutely. And we did have a number of those but it also is reflective of the cash flow statement. It's up $40 million compared to 13 in the prior year.

So nothing -- no big impact from anything? Just normal course of sentence.

Normal business.

It always bounces all around. In fact, I saw someplace that some people speculated that it was -- our prescription business that caused it. Actually, our prescription business had a decrease in receivables.

Okay.

Had an increase in payables in terms of the negative impact on payables, but net it had no increase.

Okay. And then, Les, if -- not that we want to see you go, but if you look at the management expected change, it seems like it's delayed, and now we're talking about external and internal prospects. Can you shed some color on what's going on on the management front?

I would just tell you, looking at the outside is not new. The Board has been looking at inside and outside candidates all along. And to go any deeper into what's going on obviously at a board level is just something we can't do. Does it concern me that it's taking this long? I would say, overall, no. I'm more pleased with the job that they're doing than I am concerned about the delay. Would I have rather had it done six months ago? Sure, we all would. But we're going to come out with an outstanding leader for this company and obviously we'd like to see it sooner rather than later and I think we will.

So is there something you can give us -- an idea of by the end of this year?

The safest thing for me to say is, I've learned over the past six months, they will announce it when they announce it.

Okay.

And I just hope it's sooner rather than later, and we all do, and think it will be.

Thanks so much.

You bet.

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

We thank you for your interest. I notice that a couple of other callers popped into the queue. I would encourage to you call us directly. We'd be happy to answer your questions individually. Thanks again for your interest in the Company and the questions this morning. Have a good day.