Fiserv Inc (FISV) 2006 Q2 法說會逐字稿

Welcome to the Fiserv second quarter earnings conference call. [OPERATOR INSTRUCTIONS]. Today's conference is being recorded and also broadcast live over the internet at www.fiserv.com. The call is expected to call for approximately an hour. You may disconnect at any time.

Now we will different the meeting over to Mr. Jeff Yabuki, President and CEO. You may begin.

Thank you and good afternoon. Joining me on the call today are Norm Balthasar, our Chief Operating Officer, Tom Hirsch, our new Chief Financial Officer, and Ken Jensen, our outgoing CFO, who will be retiring from the Company on July 31.

Before I get started, I would like to remind everyone that our remarks will include forward-looking statements within the meaning of the Private Securities Reform Act of 1995. There are a number of factors that could cause Fiserv's results to differ materially from our expectation, including but not limited to statements regarding 2006 earnings, revenue and cash flow targets, sales pipelines, acquisition prospects and our strategic review process made during the course of this conference call.

These statements may differ from actual results and are subject to a number of factors. Please refer to the Company's second quarter earnings release, which can be found on the company's website at www.Fiserv.com. For a discussion of these factors and a reconciliation of non-GAAP financial measures discussed in this conference call.

Before we discuss our second quarter results, I want to remind you that we are hosting our 2006 investor day at the Millennium Hotel in New York City on September 19. We hope you will be able to join us as we review our long-term strategies and prospects for the future.

As we announced today, Fiserv recorded solid results for the second quarter. That performance, on the heels of a stellar first quarter, delivered a very strong first half of results for Fiserv. Revenues for the second quarter were up 10% to $1.1 billion, and included increases across each of our business segments. Our adjusted organic revenue growth rate for the quarter, which we believe is more meaningful when calculated to exclude past through customer reimbursements and pharmacy costs, was in line with our internal expectations at 3%. As expected, this quarter's organic growth rate was lower than the first quarter, but we or still achieved an overall organic revenue growth rate of 5% for the first months of the year, consistent with our 2006 annual guidance of mid-single digit revenue growth.

The financial segment adjusted organic revenue growth rate for the quarter was also 3%. You will recall last quarter we benefited from an acceleration of flood claims revenue. That, as expected, did not recur in the second quarter. The claim acceleration accounted for 300 basis points of organic growth when comparing the growth rates between the first and second quarter. Regular contract termination fees for 2006 have remained low this year which could positively impact future revenue growth. Second quarter termination fees were $5.6 million versus $7.1 million in the prior year's quarter.

Through June 30, termination fees in the financial segment were down 59% to $9.5 million versus $22 million in the prior year. Year-to-date adjusted organic revenue growth in the financial segment is a solid 6%. And in line with our full year 2006 guidance. As I mentioned, we have a challenging organic growth comparable in the financial segment this year. Last year's losses of a few significant clients have created a more challenging baseline for organic growth in the current year.

To achieve normal growth, we have to replace both the large termination fees and the recurring revenues from the lost clients. We estimate that the combined negative impact of last year's unusual large client losses on our 2006 organic growth rate to be approximately 210 basis points. While we always strive to improve performance, we are pleased with our organic revenue growth, given the circumstances surrounding our year-to-year comparison. We remain on track to achieve our stated guidance of mid single digit adjusted organic growth rate for the year.

We are experiencing strong sales performance through June 30. Sales quota attainment is up about 30% versus 2005, and up about 10% ahead of our internal plan. While these numbers can shift between quarters, depending on contract signing and implementation, we are pleased with our sales results to date. Our sales activity through June 30 combine with a very strong finish to 2005 increases our confidence in the organic revenue growth targets for the year.

Sales performance in 2006 has been solid across the board with growth spanning all of our segments. We have closed a number of transactions. such as the multifaceted agreement with Blue Health Care Bank, numerous wins in the bank and credit union core processing space, and continued growth and deepening integrated sales. We also signed several large multi-year client agreements to provide pharmacy benefit and administration services which began in July. Also of note, we mutually agreed currently to suspend contract discussions with J.P. Morgan Chase regarding a potential implementation of our Morgan servicing platform. While we are disappointed that this transaction has not come to fruition, J.P. Morgan Chase is an important client for Fiserv. We have multiple relationships and we will continue to work together in the future.

Our solid performance in the second quarter led to earnings per share from continuing operations of $0.63 per share versus adjusted earnings per share of $0.57 in the prior year quarter. Our second quarter earnings include a one time income tax benefit of $0.02 per share, primarily related to a change in a state tax law. Earnings per share from continuing operations through June 30 were up 16% to $1.26 per share as compared to adjusted earnings per share of $1.09 in the prior year. Adjusted operating margin for the Company, as defined to exclude customer reimbursement and pharmacy passthrough costs was 22.2% for the second quarter, compared to 23.4% in the prior year, and 23% in the first quarter.

The primary driver of the sequential quarter decrease and adjusted operating margin was the expected decline in higher margin flood claims processing revenue, partially offset by increased software revenue and a reduction in share based compensation expense. Year-to-date adjusted operating margins were down slightly to 22.6% versus 22.9% in the prior year, of which the 2005 results included a very strong second quarter. This slight downtick for the year was driven primarily by a combination of investments and the effect of termination fees discussed earlier, somewhat offset by the positive impact of higher flood claims processing. Overall, our business mix continues to deliver solid results.

In the health segment, adjusted operating margin through June 30 was down 160 basis points to 15.5%, compared to 17.1% in 2005. This change primarily resulted from our continued incremental investments to support growth in high impact areas. While the $2.5 million we've invested this year negatively impacts margins in the segment by about 100 basis points, the magnitude of these incremental investments are not material to the Company as a whole. We do expect to continue these investments through the remainder of 2006.

We expect improved operating results in the health segment in the second half of 2006. Of note are the three multi-year pharmacy administration contracts I referenced earlier which should improve organic revenue and profit growth for the balance of the year and into 2007. We have also been implementing a series of operational enhancements in the health plan administration business, which we expect will be have positive impact on segment margins.

We believe actions in the first phase of implementation will provide a range of annualized expense savings of $6 million to $12 million. We expect the impact of these changes to begin towards the end of the third quarter of 2006 and be fully implemented by the middle of 2007.

Now let me turn the call over to Tom Hirsch, who will provide additional information on cash flow and our capital position.

Thanks, Jeff, and good afternoon, everyone. Year-to-date cash flow from operations was up 13% over the prior year to $283 million. Free cash flow increased at a lower rate of 3% to $187 million, due primarily to the higher level of planned capital expenditures in the first half of 2006. Capital expenditures were $96 million for the first half of the year, which is an increase of $27 million over the same period in 2005.

The increases in capital spending were driven primarily by a series of investments across our businesses. Including investments in our output solutions business, check 21 infrastructure, flood processing business and several lending initiatives. The majority of these investments are being made to support future client growth. Another driver of the increase in capital expenditures is a change in our financing choices. So far this year we have moved away from operating leases when compared to the 2005 levels. This change is due primarily to the nature of assets being purchased at a lower total cost of financing associated with our new debt facilities.

Even with the higher level of capital expenditures through the second quarter, we are still forecasting 2006 free cash flow within the range of $450 million to $480 million for the full year, which is consistent with our previous estimates. In the last two months, we have added two value enhancing businesses to join the Fiserv family. In June, we acquired insurance wholesalers to build on our insurance distribution capabilities, and in early July we acquired the Jerome Group, which will bring new capabilities in incremental revenue opportunities to our output solutions division.

Overall, our acquisition activity and pipeline remains strong. We will continue to look at transactions that add both economic and strategic value. During the quarter, we also allocated $121 million of capital to share repurchase in the second quarter, acquiring 2.8 million shares of our stock. Through June 30, we have repurchased a total of 8.2 million shares, returning $350 million to shareholders. At the end of the quarter, we had 4.9 million shares remaining under the current stock purchase authorization.

Now let me turn the call back over to Jeff who will give you an update on our 2006 guidance and our strategic review process.

Thanks, Tom. Given our strong first half operating results and one time tax benefit in the second quarter, we are increasing our full year operating earnings guidance, which will now be from $2.48 to $2.54 per share. Our previous full year earnings range was $2.46 to $2.53 per share. Again, we continue to expect that organic revenue growth for the full year will be mid-single digits for both the company and the financial segment.

Now let me briefly update you on our strategic review process that will be the primary focus of our Investor Day on September 19. I will provide a brief update on the three things we have shared previously along with our preliminary view on the directional impact of revenue and operating margins. The three primary strategic themes are, first, optimizing business performance. enhancing client relationship value, and lastly, the role of acquisitions.

Optimizing business performance involves both performance management and cost effectiveness. We seek to move beyond a strict internal performance measurement system to include a combination of internal and external benchmarks. We believe this philosophical change will allow us to better optimize results against a broad range of performance dimensions.

The second element of this theme is cost effectiveness. As you know, Fiserv has come together as a product of over 130 acquisitions, which have in many cases been left to run independently. This was done largely to preserve the entrepreneurial spirit supporting our business model today. I believe we can increase our cost efficiency without negatively impacting this important element of our structure.

We believe the largest near term opportunities lie in back end, non-client-facing areas such as purchasing, supply chain management, internal technology infrastructure and process improvements. Our goal would be to utilize these savings to increase profits and/or create additional capacity to invest for growth without negatively impacting short-term profitability. The benefit of this theme should be slightly accretive to organic growth and positive to operating margins.

Our second theme is enhancing client relationship value. We are doing this by examining the products and services that we deliver today, how we deliver them, and with a we must do to further extend and deepen our client relationships. A key goal is to further expand the size and breadth of our client relationship network. For example, in the banking and credit union groups, we have over 5500 core system clients, that in effect create a sizable distribution system.

Today, we distribute both proprietary and third party product to our core client base. In many cases, Fiserv product compete with third party product that we also distribute. So we are looking for ways to bring more integrative value to our clients through our own products, or alternatively where we have third party distribution relationships, ensuring that Fiserv is receiving a fair distribution fee. In all cases, we are looking to maintain, and wherever possible, increase the value we bring to Fiserv clients. This second theme should accelerate internal organic revenue growth and maintain or grow margins, depending on the pace of adoption and future investment.

Our third theme to discuss today is a role of acquisitions. We want to be more deliberate in the acquiring -- in the acquiring of businesses that represent significant growth opportunities, be they unique capabilities for us to expand our businesses, products and services which provide clear industry leadership, or acquisitions that leverage existing competencies and capabilities to improve margins and profitability. We will continue to be disciplined buyers and leverage our highly developed acquisition competency as one of the ways we allocate capital.

Lastly, let me comment on speculation that we may target bank and credit union core account processing systems as a way to achieve cost efficiency or streamline our competitive offerings. At this time we are not pursuing a consolidation of our client-facing platforms and would not, unless we determined it was truly in the best interest of our clients. Fiserv has historically consolidated core platforms only when our clients have decided it is best for them to migrate to another solution. And that philosophy will likely continue.

Over the past several months I have come to better appreciate the marketplace value of having multiple platforms. Today, retaining the value of our multiple core system client bases outweighs the potential cost savings of any platform consolidation and mitigates the intended list of client loss by a forced core system conversion. So rather than consolidation, we will instead look for efficiencies in supporting our core platforms, and as we develop new functionality, look for ways in which it can be rapidly integrated across our multiple core platforms.

There is growing enthusiasm across the company. Our business leaders are working together to identify ways in which we can deliver more value for clients, shareholders and employees. We look forward to sharing our plans with you in September.

Before we open the lines for questions, allow me to recognize Ken Jensen for his over 20 years of service as Fiserv's CFO. Ken has been here from the beginning and made significant contributions across almost every imaginable area of the Company. In fact, given all of the people and businesses that have been acquired by Ken over the years, it may be fair to call Fiserv the house that Ken built. Ken, on behalf of all 22,000 Fiserv associates, investors and our clients, thank you for your relentless commitment, passion, and dedication to Fiserv. You have made us all better.

Now, let us open the lines for questions.

[OPERATOR INSTRUCTIONS].Our first question is from Greg Smith. Merrill Lynch, your line is open.

Good afternoon. First, Jeff, regarding the strategic initiatives, do you anticipate taking any restructuring charges along with that?

No.

Okay. It's all going to be expensed. Okay. And then you mentioned that the potential mortgage processing deal with Chase, I missed what you said. Can you repeat what happened there and if that's going away? Is it going to a competitor or what happened there?

We indicated that we -- both parties for now have agreed to suspend discussions. We got to the point where we were unable to agree on of all the terms and conditions and we thought it was best for both parties to step back and take a break. Given there was a press release issued back in November, we thought it was best to give an update to everyone on what was going on with that. I would also say that we had not at that point, nor now included any of the possible revenue and/or income factor from that transaction in our forward guidance. We had -- we had not counted that -- on that, and we will just sit back and see what happens for now.

And then just lastly, you announced the signing of a couple significant clients in the health segment. I realize a lot of that revenue is passthroughs, but it looks like you did not adjust the organic growth outlook as we move into the second half. Are they not that significant when you X-out the passthroughs or am I missing something there?

Clearly the pass throughs are a important large piece of what we said in the press release was 190 to $230 million of annual revenue. There was a ramp up period associated with that. It's a nice, high attractive high margin fairly attractive business when you take out the pass-through cost. So that we like that a lot. From a margin -- from an organic revenue growth perspective, we do think it will have some impact and we have accounted for that in terms of the fact that it will offset some of the weakness that we saw in the health segment this quarter.

I will concur with that. We were currently at 2% organic growth and none of the prescriptions through six months and that's why we gave our guidance of low to mid single digits for the year.

Okay, thank you very much.

Thanks, Greg.

Julio Quinteros, Goldman Sachs. Your line is open.

One quick question on the three strategies. I was hoping for a fourth, and Jeff, I would love to get your current view on the capital structure plans as far as you guys are concerned going forward.

And the three topics we were talking about, Julio, are not meant to be all inclusive. We will definitely talk about capital structure when we get together in September and so I'm just going to wait for September 19 on that one.

Okay. Thanks. And Tom, one quick follow-up regarding ESO. employee stock option expenses for the calendar '06 is there a difference in the expectation from the beginning of the year versus now for the total ESO comp?

No. We initially have given -- the share base comp?

That's correct.

The same guidance has been there for the year which is $0.09 to $0.11. That's the guidance we put out initially.

Dave Koning, Robert W Baird, your line is open.

I wanted to pursue the margin in the financial segment. The last few quarters, it's been down a bit on the year-over-year basis, and you've vested, and I'm wondering from the back half of the year we were going to see year-over-year improvement and if so, what is kind of driving that.

David, I will start with that and turn it back over to Jeff. Overall our operating margins, adjusted operating margins were very strong in the first half of the year. When you compare those to the margins we had in the first half of 2005, adjusted margins are in the range of 22%, and were very strong. Our guidance for the full year has been that our adjusted margins for the Company would be up over the prior year. When you go back into 2005, our adjusted margin when you exclude the large termination fee in the fourth quarter, was 21.9%.

So our overall guidance as a company for operating margins are, we will be at or above those levels for the full year while we are making a lot of investments in the current year. When I look at our actual operating margin again, adjusted at 22.2%, for the Company in the second quarter, we don't anticipate any significant changes in regards to those margins in the second half of the year.

Not withstanding businesses affected by mix of acquisitions and mix of business depending on software license fees versus other source of our business. We don't anticipate any significant changes from those margin levels that we have to date in the Company total.

So similarly in the FI segment itself, somewhat similar comments that sequentially probably stays around where it's been the last couple quarters?

I'm not going down into the detailed segment. I would say that the first half of the year is very strong in that segment. But as a Company, that's how we will give our guidance from that standpoint.

Dave, let me add a couple of other points here. A little bit of additional color. One of the things that is -- I won't say it's wreaking havoc with our margins this year because that would be too strong. I would say that the change in termination fees is actually a pretty interesting component of our margins to date.

Termination fees for the first half of the year are down $13 million. And termination fees have been at fairly -- regular termination fees have been at fairly stable levels for the last two years. In 2006, termination fees are down importantly -- we think it's a very good sign so it's a little bit of -- you're a little bit schizophrenic on that. But we will always bias to wanting the long-term benefit of having lower termination fees and higher levels of future growth and future revenue.

Great. Thanks. One final follow-up. Are you still sticking with the long-term growth expectations, five to 9% revs and 14, 18% earning EPS growth?

Yes. We haven't changed that at all, Dave. We won't -- we won't do anything to that until we get together in September until we talk about the changes we may make to the guidance at that point. Again, we believe that the business is performing fairly well right now given the trough that we are recovering from versus 2005 with both the termination fees and the loss of the recurring revenues related to the large clients that left in 2005.

Great, thank you.

Thank you.

Pat Burton, Citigroup Investments, your line is open.

Thanks for taking the call. Just to be clear, the second half '-6 organic growth rate then takes into account the large termination fee received in 4Q-'05, is that correct?

No it's not. When we give guidance on the organic growth basis, we had that very large termination fee in the fourth quarter.

Right.

You will recall that when we -- we adjusted our earnings for that, when we looked at earnings growth on the year-over-year basis and revenue growth on the year-over-year basis. So being consistent with how we treated this item in the fourth quarter last year, we will treat it that way in our compares also. So our mid single digit guidance does exclude that one large termination fee that we had in the fourth quarter.

But you said that from the beginning.

That is correct.

And then the other factors that you mentioned in the quarter, the anniversary of the -- the anniversary of the Australian deal and the flood claims revenue shifting round, all those issues are taken into -- as you move into the back half of the year as well?

Correct.

Okay, thank you.

Thank you, Pat.

Scott Kessler, Standard and Poor's, your line is open.

Thanks a lot. Related to the strategic initiatives, a few questions, first, are benefits associated with related efforts already incorporated into the guidance you provided and then are you planning on potentially reducing the number of operating businesses that you currently have through consolidation and divestiture? And my last question I promise, what timetable do you foresee for the implementation of efforts related to the strategic initiative? Thanks.

Thank you, Scott. Can you repeat the second question?

Yes. It's basically are you going to reduce the number of operating businesses that you currently have through consolidation or divestiture?

Thanks. To the first question, which was are the benefits included in our guidance, we would say that's one of the main reason we would look to update our guidance in September to the extent that there are impacts from the strategies that we are going to choose. Moving forward we will clearly update our guidance. I would say they are not specifically included in there yet. We will do that on September 19.

To the second question, will we reduce the number of operating businesses or reduce the operating businesses that we have? I think it is possible that we will look at where there are like businesses that we can put together to gain efficiencies whether that be management efficiencies or cost efficiencies. But more importantly, can you get market and client efficiencies that will have us having an improved level of performance, that you would clearly see us do that and I think the timetable for that would basically follow whatever it would take for us to put these businesses together where it makes sense, if it makes sense, in a way that has us not have any risk or increase our risk of execution in any way.

Thanks a lot.

Thank you.

Charlie Murphy, Morgan Stanley, your line is open.

Thank you. Could you refresh us how large the payments segment was in the quarter in terms of revenue, revenue growth, operating income and operating margin? Chase took away volume from nice this quarter in the debit business. Have you seen any of your banks do that as well?

Regarding the first one, we just don't disclose those assets. We don't have that amount of detail as far as the break down and our payment group goes. We disclose it by segment and we just don't have that information available.

To the second question of, at least I'm not aware -- we have not heard that people have been moving volume around any of the switching systems.

And then a quick follow-up on the health business, what type of margin -- operating margin do you think you can put up there in the second half of this year?

We aren't going to comment separately on segment margins out into the future, but we would say we have a number of initiatives there that we talked about that we are getting started on as far as some of the operational efficiencies we are having in the health segment and we have some new client wins. We have given company margin guidance as I spoke to earlier, and that's where we are at. But we have some of those things that should begin to have a positive impact.

Charlie, to amplify that a little bit. The two big changes that we see on the horizon for the second half of the year and into 2007 are, the first one is these three pharmacy benefit administration contracts that we entered into this year which will be large, and I would guess, have some net of the pass-through costs. It will have a positive impact on margins.

Then secondly, we indicated that we are doing some operational efficiencies, some enhancements to how we are managing our processes. The first phase of implementation we have a pretty wide range but we see anywhere from 6 to $12 million of basically middle line improvement that will flow through margins not fully in until 2007, but again that should begin to be positive in this current year. So I think you have more upward opportunity in that segment for the remainder of the year and certainly into 2007.

Okay, thanks very much.

Thank you.

Chris Penny, FBR, your line is open.

Thank you. Two quick questions. First of all, on the debt load, the interest expense line, what's the forecast for the remainder of the year? Just a use of cash, the use of cash flow for the remainder of this year.

I would say the use of cash flow, the interest expense is higher in the second quarter when you go back compared to last year because our debt level is up around $800 million. And last year we did sell our securities operation where we were generating some investment income. As far as on a go-forward basis, the first use of our capital will be -- we are looking at acquisitions and we also look at share repurchase as we go through the year.

We take into a lot of factors when we consider where we will be spending our capital. Right now our current interest forecast, we don't anticipate that will change dramatically from the levels we are at currently. But that can be impacted by the level of share repurchase that we have and also by acquisitions.

Okay. And Jeff, a quick question on the recent acquisition of the Jerome group. If you look at their client list and some of the industries they talk about, financial services really isn't a big industry for them, at least it seems like that. And in your stated comments you talked about output solutions extra investment there. I think this is one of the first times we heard you talking about output solutions and there is a lot of activity in there when you couple in what bill matrix could be.

I was wondering if you could give us a little bit of insight as to what you are thinking about customer care and does bill matrix and the like do they kind of work into that environment? And are you looking to go a little bit more horizontal and different verticals, especially when you talk about the Jerome Group?

Let me get a little clarity and I will ask norm to answer the question. You were talking about the Jerome Group and then output skewings and then bill matrix?

I was wondering if that fix -- fits into that at all in terms of working with the customers that the Jerome Group has and what they do. I know it's not apples to apples right now but there seems like a lot of cross selling opportunities.

At a high level one of the opportunities that we saw in the Jerome Group, they brought some unique capabilities, some special services that we don't provide today within our Personics business which the matchup of the Jerome group. We thought it would be a positive. We also know that some of the clients the Jerome Group have were attractive for Personics. There were products that were being delivered in Personics that the Jerome group didn't have. So from that perspective we saw synergy. Whether there is synergy or maybe synergy across other businesses like bill matrix, it's just too early for us to tell, but let me -- Norm, do you have something to add?

Just a couple things I would add regarding Personics, is some of the investments that we talked about are in the additional new business outside the Jerome acquisitions. They bring -- Jerome brings some assets and capabilities that will augment our health care portion and also what they call smart direct marketing where they can target down almost individual levels and be very effective. Direct marketing seems to be on the upswing, especially since the no-call situation has gone out with solicitation from the phones. So we find that as an area that will grow in the future.

Okay. Thank you very much.

Kartik Mehta, your line is open.

Good afternoon, Jeff. Question for you. One of statements you made said that sales were up 30% compared to last year. Is that a reflection of the market getting better? Or is that a reflection of changes you might have made and incentive plans or anything else that's been done from a company standpoint?

The 30% really was, we use a -- we have what we call a sales quota attainment which is a measurement system that the Company has been using for a number of years and that's where we said we were up 30% over the prior year and up about 10% to our internal expectations. That system measures sales across all of our -- all of our different businesses and we have not made any material significant changes to our incentive systems. Really, a couple of things that are going on there is you've got -- we have a fair amount of business that we have gotten. We are seeing more -- what's the right way to say it?

We are seeing people taking more Fiserv products and services which is delivering more revenue on a per-sale basis than we have -- at least over last year. That's a big driver. As we noted in our press release, we are seeing some additional integrated selling efforts where, for example, in our EFT business we had 111 new clients signed up in the first half of the year of which almost 80% of those clients were existing Fiserv clients.

So we are starting to see the cultural bubbling up of the benefit of delivering more Fiserv products and deepening that relationship. And that's without again changing any of the systems. So I would like to say that we have done -- we made -- we have done things that have really accelerated this, but I think this is the benefit of the last several years of the Company's management and focus paying off for us.

And from when these sales happen, how long before you realize revenue, Jeff? Is it fairly right away? Or is the average for the next six months, you will see revenue? What I'm trying to get to, will you see the benefits of these sales in 2007 or are you already seeing the benefits now?

Yes, like many questions, it depends. For example, the pharmacy benefit, the pharmacy benefit contracts which there is a number in there for those contracts, those are already on-line and creating revenue. In some cases, it could be a quarter, two quarters, three quarters, it depends when contracts finally get signed. When implementation begins.

Generally though, one of the reasons why we indicated we have confidence in our 2006 organic revenue growth guidance for the year is we had a very strong 2005 Q4 and we believe that will have the requisite impact on our results during the calendar year of 2006. We are thinking about it in no less than one to two quarters before we kind of start to see the run rate of all these sales start to hit -- start to hit the ledger.

Thank you very much.

Thanks.

Bryan Keane, Prudential, your line is open.

Good afternoon. Tom, you said CapEx if I look at it to the six months, it's up 38% and you mentioned Check 21 and flood and lending and some of the areas. Are those higher investments in CapEx? Is that a one time year event and then it goes back down or should we expect that elevated event going back down in '07?

I think it's early to say but I would say we are making a number of investments as we said earlier in the year particularly in the output solutions and one or two areas such as Australia that are of a nature of a one time. We will be getting more detail out to you on the '07 when we get there. I do think there is some of that that is one time in nature, but we are making these investments for future growth.

For the full year we anticipate that our full year capital expenditures will be in the range of roughly 15% up from where we were last year. And we were very comfortable with our free cash flow estimate for the year which is 450 to $480 million.

Okay. And then in the financial segment, the adjusted operating margin for 2Q06 was 23.7. I didn't get what it was a year ago period in 2Q '05.

Q2 '05 was a very good quarter as far as that goes. It was up around 24.7. So we are down a little bit from that adjusted margin in the previous year period, the second quarter. But Brian, that was our best quarter of the year in 2005. And was substantially higher than what we have in some of the other quarters. So that was a good quarter for us.

In the current year we have talked about it. We have had some investments in our lending business.

Also, investments in our Australia contract that is ramping up and that's why we are down really on a quarter over quarter basis there but that was a high point in '05. It's down about 100 basis points year-over-year, but it's explained by the lending investments and some extra investments in Australia?

Yes. The Australia startup expenses of that contract are the primary factors there.

Great. Thanks.

Thank you.

Paul Bartolai, Credit Suisse, your line is open.

Question on guidance. You guys raised guidance by $0.02 on the low end and $0.01 on the high end, but just given the 1Q performance and the tax benefit in 2Q, I was surprised it wasn't raised a little more. I guess any comments you can give us on expectations on the second half and what you are thinking on the macro or spending environment that might be impacting that?

Yeah, we had a very strong first quarter as everyone knows. The second quarter was stronger than we expected it to be. You will recall during Q1 and actually in Q4 of 2005 we indicated that we expected the results in the second half of the year to be better than those in the first half of the year. Now as we move through the first half of the year and we saw Q2 be stronger really than we were thinking it would be, we think it's prudent to just hold back and see what happens really with some of the license, software license sales and some of those things that can move around quarter to quarter. And for right now we are very comfortable with our guidance and both on the earnings side and on the organic revenue growth side and don't see any need to modify it.

Okay. And then on the FIO organic growth, sounds like you expect it to pick up a little bit from 2Q. Is that mostly from sales that have already been closed and are just starting to ramp up? Or is that from the activity you are seeing?

It's really a combination of both. It is the -- we have good activity going on as we noted with the increase over the prior year. And just the general momentum that we have in the marketplace. Market momentum is looking pretty good. It doesn't suggest any shift in the environment during the year, but we are just feeling good with what we seen to date. We thought all along that Q2 would be our weakest quarter of the year and we continue to believe that.

One last one, if I could do you have the ending diluted share count at the end of the quarter?

The diluted shares at the end of the quarter, it should be on our press release there but quarter ended at 177,551,000.

That was the average. Do you have the ending quarter?

I don't have that handy right now. We will publish that in our 10-Q.

Thanks.

Thanks, Paul.

Craig Peckham, Jefferies and Company, your line is open.

Good evening, first of all congratulations to Ken Jensen. I don't know if he is in the room any more.

He is right here.

Back to business here. On the EFT segment which you cited had particularly strong sales activity, you give us a sense for what kind of pricing dynamics you are seeing within that market? Call that in the past that's been a pretty competitive business pricing-wise, and as a corollary, is there any impact here to kind of go forward margins as a result of some of the strong sales activity?

Craig, I will ask Norm to answer that and we will add in if there is any --

Sure. Current EFT, think that's still a very competitive area. There has been pricing -- continues to be some. I don't think it's unusual but still to be very accretive, especially see at the upper end of the market.

And Craig, to the question on margins, we are seeing obviously some price pressure as Norm notes, but we're picking up good levels, good healthy levels of volume. On a per client basis we have some pressure but not surprisingly that's a business that is a high fixed cost leverage kind of business. So incremental revenues flow through at a very attractive margin. Therefore we are seeing stability in margins in the aggregate.

And maybe if you can give us an update on what's happening on item processing in the U.S. side, also sort of paint some picture here of pricing and margin implications there.

This is Norm again. The pricing I don't think is anything unusual. We seen a lot of activity in the IRDs, the image replacement documents that has ramped up quite nicely. We are also having quite a bit of success with our SDN, the Fiserv network we have 350 clients set up on that. Newer products and services are ramping up very nicely.

I would add to that, Craig, that business tends to be a lower -- the check business, the item processing business tends to be a lower margin business. And so we are looking when we talk about ways to gain efficiency that's an area where we are looking to manage our costs as sufficiently as we can.

Okay, thanks a lot.

Thank you.

Our next question is from John Evans, Wells Capital. Your line is open.

Can you just talk a little bit about the share repurchase? You bought 2.8 million roughly in the quarter and I guess that's the least that you bought since the Q1 of '05. Can you help us understand maybe the strategy or what you are trying to do to -- what you are trying to achieve there?

I think we announced earlier in the year, I think we have bought back over the last 18 months or so, roughly a billion dollars of stock part of that was due to the sale of our securities operation. In the current year we set aside roughly a 10 million share repurchase authorization which is about a full year's of free cash flow.

We will continue to buy back our stock as we go through the year and as we see other needs for capital. And so it's going to fluctuate on a quarter over quarter basis depending what else we have going on in the company. We will continue to buy back that stock under that authorization through the remainder of the year and that's really where we are at.

Is the 2.8 kind of a run rate with the free cash flow and then the extra that you had the last several quarters has just been because of the sale of the business?

When you go back to the last year, when we were purchasing more stock, it was primarily due to that. But on a go-forward basis we have about 5 million shares remaining. We will be looking to purchase that on a go-forward basis as we look at other needs in our business. We do have a run rate and it moves around a little bit. But we plan on repurchasing stock as we go through the remainder of the year until 2007.

Thank you.

Thank you.

Thank you now I would like to turn the call back over to Mr. Yabuki for closing statements.

I want to say thanks to everyone for joining us this afternoon on the east coast in the evening. If you have further questions don't hesitate to call our investor relations team. Thanks again and we look forward to seeing you in September.