Fiserv Inc (FISV) 2006 Q3 法說會逐字稿

Good afternoon, and welcome to the Fiserv third quarter earnings conference call. All participants will be able to listen only until the question and answer session that begins following the presentation. Today's call is being recorded and is also being broadcast live over the internet at www.fiserv.com. The call is expected to last about an hour, and you may disconnect from the call at any time.

Now I will turn the call over to Mr. Jeff Yabuki, President and CEO of Fiserv. Sir, you may begin.

Thank you and good afternoon, everyone. Joining me on the call today to discuss our third quarter results are Norm Balthasar, our Chief Operating Officer, and Tom Hirsch, our Chief Financial Officer.

Our remarks today will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. There are a number of factors that could cause Fiserv's results to differ materially from current expectations. Management will make forward-looking statements about, among other matters, revenue growth, earnings per share, operating margins, cash flow targets, sales pipelines, acquisition prospects, and our strategic review process. Forward-looking statements may differ from actual results and are subject to a number of risks and uncertainties. Please refer to our third quarter earnings release, which can be found on our website at www.fiserv.com for a discussion of these factors and a reconciliation of our non-GAAP financial measures discussed in this conference call.

Before we talk about our results, I would like to thank those of you who were able to join us for our recent investor day. During that conference, we shared our vision for the Company, which we branded Fiserv 2.0. It's our intent that Fiserv 2.0 will bring increased value, opportunity and growth for our key stakeholders. We will provide a brief update today and share our progress with you in the future.

We are pleased with our strong performance for the quarter. Our businesses delivered high quality results, organic revenue growth, margin expansion and solid earnings. Thanks go out to all of our employees for their focus and dedication in achieving these results. This quarter's result, together with our strong first half performance, keep us on track to achieve our full-year targets and build momentum for 2007. Revenues for the third quarter were up 14% to $1.2 billion and included increases across each of our business segments. Overall adjusted organic revenue growth was a solid 5%, both for the quarter and year-to-date, in line with our mid single digit growth guidance for the year. The financial segment adjusted organic revenue growth accelerated to 6% for the third quarter and is also 6% for the year. The revenue strength in the quarter came from a number of areas including our payments businesses, industry products, and core bank processing.

Termination fees for the quarter were $6.8 million, up $2.4 million over the third quarter of 2005. However, termination fees for the year remain sharply down at $10.1 million, a 38% reduction versus the $26.4 million in the prior year. While the reduction in termination fees creates a more difficult annual comparison, it's a positive indicator for 2005 -- 2007 revenues.

Our year-to-date sales performance remains strong. Sales quota attainment through September 30th was up 11% over the prior year and on track versus plan. These results compare favorably to a very strong second half of 2005, which was the highest sales quota period ever attained within Fiserv. We have a strong pipeline and believe we are on track to achieve our sales goals for the year.

Third quarter earnings per share from continuing operations were up 13% to $0.63 per share versus adjusted earnings per share of $0.56 in the prior year quarter. Through September 30, earnings per share from continuing operations were up 15% to $1.89 per share compared with adjusted earnings of $1.65 per share in the prior year.

Operating income and margin were particularly strong in the quarter, especially in the financial segment. Overall operating income was $186 million in the third quarter. Adjusted operating margin was 21.9%, up 70 basis points over the third quarter of 2005, driven by very strong results in our financial segment. As a reminder, we define adjusted operating margin to exclude pass through expenses and prescription costs and include share based compensations in both years.

Financial segment operating income for the quarter was $165 million, an increase of 16% over the same period in 2005. Adjusted operating margin in the financial segment was 23.9%, 150 basis points higher than the 22.4% in the prior year period. The strong margin performance was driven by a number of factors, including an increase in higher margin revenues in our payment and core bank processing businesses along with gains in operational efficiencies. For the year, adjusted operating margin was up 40 basis points to 24% compared to 23.6% in the prior year.

We are very pleased with the financial segment's strong margin performance. As we shared with you at our investor day, we believe we can sustainably increase operating margins over the next several years. Our results in the third quarter and year continue to increase our confidence in this attractive area.

Health segment financial performance for the quarter was down due to the impact of investments that we are making to spur growth over the mid to long-term. These investments are being made in several high-growth areas, including consumer directed health care. Operating income for the quarter was down to $15 million versus $20 million in the previous year's quarter. Operating margin was also impacted by the incremental investments totaling $4 million in the quarter and $6.5 million for the year, which reduced adjusted margins in this segment by 340 basis points and 180 basis points, respectively.

At the same time we are investing, we are also implementing operational enhancements in our health segment. As we mentioned last quarter, the impact of these changes should provide savings in the range of 6 million to $12 million per year. The segment will experience some incremental benefit in the fourth quarter and the program should be fully implemented by the middle of 2007.

Now, let me turn the call over to Tom Hirsch who will provide an update on cash flow and capital deployment.

Thanks, Jeff, and good afternoon, everyone. Year-to-date, cash flow from operations was up 15% over the prior year to $453 million. Free cash flow for the year increased 7% to 303 million. We have continued to allocate our cash to fund internal capital needs, acquisitions, and share repurchase. Through September 30th, we have deployed $150 million on capital expenditures, $184 million in acquisitions, and $421 million to share repurchase. Our debt level has increased by $234 million for the year, leaving us with significant financial flexibility.

For the year, our capital expenditures are up about $40 million over the same period in 2005. This increase was driven by increased spending related to new business growth and financing choices in our output solutions division along with continued investments in our lending and health businesses. At 6% of net revenues, the $150 million of capital spending this year is consistent with our historical trend of allocating between 5 and 7% of net revenues on capital expenditures.

We have spent $184 million in acquisitions through September 30th compared with $495 million in the prior year. During the quarter, we acquired two businesses: The Jerome Group, which will bring new capability and incremental revenue to our output solutions division and InsureWorx, a provider of core workers' compensation insurance processing software solutions, which will enhance our property and casualty insurance solutions.

We will continue to pursue acquisitions that we believe are aligned with our overall growth strategies and represent returns that are commensurate with our other capital deployment options. As we have all seen, the acquisition market is very active. As a strategic buyer, we are being disciplined in the type of assets that we may acquire and also the price we are willing to pay.

We also repurchased 1.6 million shares of our stock in the quarter for $72 million. Through September 30th, we had repurchased 9.8 million shares for $421 million and had 3.2 million shares remaining under our current share authorization. We expect to complete the remaining authorization in the near term.

Finally, let me make a couple of comments on our income tax rate for the quarter and the year. Our effective tax rate for the quarter was 37.4%, slightly higher than our year-to-date rate of 37.3%. On a comparable basis, the 37.4% rate in the third quarter was 240 basis points higher than the third quarter of 2005, which benefited from several one-time items. We are forecasting a 38% effective tax rate in the fourth quarter.

Now let me turn the call back to Jeff, who will give you an update on our 2006 guidance and Fiserv 2.0.

Thanks, Tom. Given our strong quarter and year-to-date operating results, we are updating our full-year operating earnings guidance range to $2.51 per share to $2.54 per share. As we shared at our investor conference in September, we are in the process of evaluating our ability to continue several business line investments, which are in a range of 10 to $20 million. We continue to evaluate these investments and believe we will be in a position to make a final decision by year end. Our 2006 earnings guidance has not factored in any negative impact that could result from this evaluation and subsequent decision.

We expect full year adjusted organic revenue growth in the mid single digits for the Company and the financial segment. In the health segment, we expect adjusted revenue growth to be in the low single digits. Also, we believe free cash flow will be at the lower end of our previously communicated full-year range of 450 million to $480 million.

We continue to focus on improving performance in our Australia check processing operation. We are focussed on two key areas to improve operations. First, we are implementing a series of initiatives to get our expense structure more in line with the current environment. Second, we are working very closely with our banking partners to realign the contract economics to better reflect the spirit of the arrangement. We are working very diligently to resolve this issue by year end.

As we look ahead, we want to pass on a reminder about two events that occurred in last year's fourth quarter, which we believe may impact the comparison of results. First, we recognized $16 million in flood claim revenue in the fourth quarter of 2005 from Hurricane Katrina. Currently, we are not anticipating any material flood claim revenue in this year's fourth quarter.

Also, last year we received an unusually large $26 million termination fee resulting from the acquisition of one of our larger bank clients. We excluded that fee when calculating both our full-year adjusted earnings per share of $2.19 in 2005 and our adjusted organic growth rate. Accordingly, we will exclude this fee from our 2006 revenue and earnings comparisons to be consistent with our 2005 treatment of this item.

Before we take your questions, I want to spend a couple of minutes updating you on some of the Fiserv 2.0 items that we discussed at our investor conference. I'll keep this discussion brief since it's only been a short time since we spoke with you on this subject last. There are five themes that provide the foundation for executing the strategic vision behind Fiserv 2.0, all with an eye towards enhancing the value that we deliver for clients.

First, portfolio management, actively and continually reviewing business performance and fit of our businesses to deliver shareholder value. Next, enhancing client relationship value, delivering highly differentiated, integrated solutions which provide our clients as well as us with marketplace advantage. Third, operational effectiveness, optimizing our expense structure to enhance our competitive position and increase our capacity to invest in future growth. Fourth, capital allocation, maintaining discipline and rigor in allocating our cash flow to deliver superior returns for shareholders. And last, innovation inside, delivering on new product and market opportunities that build our value proposition for clients and prospects.

As Tom has already updated you on our capital allocation activity in the quarter, I will focus on a few of the others. An integral element of our plan is to enhance the value of our client relationships. We are focussed on the opportunities that we believe are lowest risk and should result in incremental annual revenue of approximately $360 million by 2012. We are working through the steps that we must take for our plans to take hold in 2007. These changes are primarily around organization structure, reward and incentive systems and the limited amount of product integration. We are making good progress and anticipate that the majority of the changes will be in place by year end.

We see an important opportunity to use operational effectiveness as a way to both increase earnings and enhance our ability to invest in future growth. Currently, our expense base is about $2.6 billion, excluding pass through expenses and prescription costs. At our investor conference, we described the benefits, which resulted from the first phase of our review, where we examined about $850 million of our total expenses.

As a result of that review, we said we would reduce our cost base by $125 million over five years, net of one-time costs. We are continuing to examine our remaining cost base to determine what additional efficiencies may be available. We anticipate that we will complete our evaluation over the next 12 to 18 months.

In terms of innovation, we continue to make good progress with the Fiserv Clearing Network or FCN. It's a way we are meeting the needs of our clients to respond to the requirements of check 21 and image exchange. FCN leverages our item processing capabilities and lets us provide high quality paper and imaging services to existing and new bank clients at a superior value that saves them money and requires little up-front capital investment.

We signed 81 new FCN clients in the third quarter. We now have 425 clients signed up for this service, nearly double the 220 clients we had signed up at the end of 2005. We continue to believe FCN is a 100 to $150 million annual revenue opportunity. We are currently examining ways we can both accelerate our implementation capability and increase sales capacity to take advantage of this great opportunity.

We continue to be bullish about Fiserv 2.0 and our prospects for the future. At the same time, you can be sure your management team is focussed on delivering value each and every day. We will continue to update you on our progress on both fronts. Now I'd like to turn the call back to the operator for questions.

During the question and answer session, please limit yourself to one question and one follow-up question to allow time for other callers to participate. You are welcome to dial back into the question queue for additional questions. [OPERATOR INSTRUCTIONS] Our first question comes from Bryan Keane with Prudential. Sir, your line is open.

Hi, this is [John Lovallo] stepping in for Bryan.

Hi, John.

How are you? Quick question on the cost cutting initiative. Is there any way you could break down what percentage you plan to get from labor management, supply chain management, maybe shared services?

No, at this stage it's really three buckets of opportunity. At the same time, we -- we see a number of factors that could cause those allocations to change. Again, I think what's most important is the 850 million was Phase 1 review and we're going to continue to look at all of those opportunities throughout the different phases to make sure that we're capturing all that we can. We had indicated at the investor conference, for example, that labor costs was about 400 million in the bucket. But we're not going to give the detail on how much is coming out of that.

Okay, fair enough. Just one quick follow up then. Just so I understand this, the first 125 million is over the course of five years, is that correct?

Yes.

So the remainder would be over the additional years, the remainder of the 850?

Let me clarify that, John. The -- of the 850 million, that is part of our expense base. The 125 is the actual save amount net of any one-time cost. So what we've said is out of that 850 million, we will save 125 million. So the 125 is what we're trying to -- is the goal that we're trying to achieve, not the 850 million.

Got it. Thank you very much.

Thank you.

Our next question comes from [Eric Schliss] with Robert Baird. Your line is open, sir.

Yes, I guess the first question's around the health care margins. I was curious, I know you had the $4 million investment this quarter that was a drag. But kind of as we look into '07, '08, can we think about the margin of that business, ex the prescription costs, can we see that back in the mid teens? Is that how we should think about it or kind of talk about these growth areas you're investing in, how we should think about the margins around those?

Yes, Eric, this is Tom. I would say just what you've stated at least in the question is what we're looking at. Today, as you can see in the quarter, it's primarily in the consumer directed health care area with our acquisition of CareGain that we're investing a lot of incremental dollars. And when you net out the prescription cost, those have a pretty significant impact as far as those additional investments on our margin in the quarter. But we would hope through a number of things. One, the savings in the TPA, which we talk about, the consolidation savings that are going to start to ramp up here in the fourth quarter and into next year. That is the 6 to 12 million.

We plan some reduced spending in '07 in regards to our investment initiatives. We also signed some larger pharmacy contracts that started up here in the third quarter. And on a net basis, we did have some incremental start-up costs in regards to that to the third quarter. So while we're not going to give official guidance into '07 and '08 at this particular time, we envision that those margins will trend upwards as we continue to move forward.

Yes, Eric. Thanks, Tom. We believe in a year where we are not making the significant investments that we're making right now that natural margins for that business are kind of mid teens plus. And so we would expect to see those kinds of margins certainly by '08. But we would definitely look for improvements in 2007.

Okay. And from the mid teens when you back out the investments, correct?

Yes.

And just one, another question here is kind of a higher level question on competition. You talked about a low level of termination fees this year versus last year. I'm curious as to your thoughts around, we've seen Fidelity in the market for call it, nine, ten months here. We saw the recent open, going private transaction. Do you think that has any, any impact on why you're seeing a lower level of termination fees or is that just the natural lumpiness going on there?

We'll all, I'm sure, help out in this answer a bit. The termination fees frankly have much less to do with what's going on in our competitive environment than it does what's going on in our clients' competitive environment. So as more banks are more active acquiring -- acquiring other institutions, there's a choice made on the core processing system at that time and it's either our system that's chosen or, if we're involved in it, or a competitive system.

At this point, the way we would read the activity this year, I believe, is to say that our banks, if they're being acquired, we are prevailing as the system of choice to the extent that the other possibility is that our banks are just not being acquired very often. And so therefore we're not having termination fees. From our perspective, we think that it's a very good thing for future revenue.

As you know, we've had to grow over a number of large termination fees this year -- not necessarily just in terms of the termination fees themselves, which obviously create lumpiness, but most importantly, you lose that underlying stream of recurring revenue. So we are most satisfied with the fact that it will make the growth challenge a little bit easier in 2007 at least when you make it on a relative comparison to 2006. But let me throw it to Tom and Norm to see if they can add some more color.

I would just say that they can be lumpy depending on just the nature of the customer that's being acquired. If they're being acquired early in the contract term, we get a larger fee, later in the contract term, a smaller fee. The other thing that I'd highlight is that in the current year, these fees have just ranged each quarter from maybe 4 to $6 million on our base revenue in the financial segment of about 700 million a quarter so they are fairly small in relation to the total revenue that we have in that particular segment.

This is Norm. As far as the day-to-day competition in core banking, it's certainly a very competitive market, but we don't see any appreciable differences regarding any kind of acquisition, merger activity within the competitors themselves. The folks on the street that are selling are pretty well dedicated as they have been all along.

Great. Thanks a lot.

Thank you.

Our next question comes from Pat Burton with Citigroup. Your line is open.

Hi, congratulations on the quarter. I'd like to actually follow-up on the previous question about Open Solutions going private and you've also obviously had the Sunguard transaction and Fidelity Information has done some things in the past using debt. What is the Company's view of an appropriate leverage ratio, especially given that now a number of your competitors are highly leveraged? And do you have a competitive advantage with a less leveraged balance sheet? And then I have a follow up question, please.

Thanks for the congratulatory comment on the quarter, Pat. It is obviously there's a lot going on in the marketplace and I won't, I won't go through it again. Our take is that the private equity activity in that type of activity is only one step in whether it be a larger consolidation, but a change in the industry dynamic right now. And so we actually, when we sit back thinking about how do we approach the marketplace, at some point these assets are going to have to move from what you could call a holding point in the private equity world or in the hedge fund world, wherever they're sitting in this middle ground. They're going to end up having to be somewhere whether that be spun out as a public company or sold to a strategic buyer.

Tom made some comments about how we're thinking about the world from a strategic buyer perspective. And we are -- we are trying to kind of keep as much flexibility as we can when there is either an event in the marketplace that has some of these assets free up or at such point where some of these current owners need to turn their investment. So from our standpoint, we're going to maintain that flexibility so long as we believe that is the right formula for delivering shareholder value. We spent a lot of time back in September talking about, people querying us on should we take more debt for purposes of buying shares. And we said we really like that flexibility and for right now, at least where we've come down on the point of more flexibility is best than less.

Yes,and I think just to add to that regarding our debt capacity is you're aware, Pat, we, we're fairly underlevered today. Our ratio, our leverage ratio is probably 0.8 to 1 as far as debt to EBITDA. We have increased our debt levels a little bit this year by $200 million dollars, and we will in the future continue to have share repurchase as one of our capital deployment options. But we like the flexibility that we have to be able to react to those opportunities that happen in the marketplace when they do. So we will continue to be disciplined with our capital allocation, but know that we have that flexibility.

Thanks. My follow-up was on the Australian contract. How easy will that be to effectively renegotiate it or from the outside, what kind of milestones should we look for? And thanks and congratulations on the quarter.

Sure. Thanks again, Pat. Our -- we -- it's never easy to go in and restructure and renegotiate an agreement. We take a lot of comfort in the fact that when we entered into this joint venture, we entered into this with the parties believing that there were a set of economics that each of the parties were entitled to and at least our belief is that all the parties, at least right now, understand that we may not be getting all the economics that at least we had bargained for originally.

So from our perspective, we're relying on that as part of our equation. And the other half of the equation is frankly we're being very aggressive in how we align our cost structure with that current economic reality. We're taking steps in that area. We're very comfortable that we're going to make those moves that we need to do to better align our cost structure. And I think it'll be a bit of a battle, but we feel confident that we'll get it done and get to the finish line. And from a metrics, we'll keep you updated on it.

We think it's a big enough and sizable enough venture that we'll just update you each quarter on how we're doing on that initiative overall. Norm is there -- ?

No, the only thing I would say is from a process standpoint, we've identified with our Australian clients certain steps to take and we're tracking quite well on those.

Thank you.

Thank you.

Our next question comes from Kartik Mehta with FTN Midwest. Your line is open.

Hi, Jeff. Question on internal growth, and I guess what I'm trying to find out is how predictable is internal growth? So you've had a great run at some new sales or sales. How much of an impact will that have in 2000 and your ability to predict internal sales for financial institution segment?

Well, one of the nice things about Fiserv is much of our growth, much of our revenue base is installed on the basis of longer term contracts, pretty stable revenue, so that's good news. We're able to, we're obviously able to predict with some degree of certainty what's going to come out of our sales efforts and so that helps. But each year, we go into the year with some level of what I would call or what we would call uncommitted revenue, and our goal is to close that delta each year. One of the -- one of the challenges that we had in 2006 is we had to replace two fairly sizable ventures.

We had to replace the Canadian [Entria] venture, and then we also had to replace the revenue associated with the unusually large $26 million term fee that we got in the fourth quarter. Now there was a bit of an offset because flood claim revenue was quite high in the first quarter of this year and all indications are, and thankfully, for -- for the communities that were affected, that won't recur. So, but we will have a bit, we think we'll actually have a bit of an easier grow over challenge this year. And we're working hard to deliver additional products, highly valued products to clients to be able to continue to grow and to close that uncommitted delta.

That's a long-winded way of saying it's easier in our business than others that I've seen, but it's still a challenge. And I don't think we can sit here today and give an exact number for what our '07, '08, and '09 growth is going to be. But we do know what's contracted and what's uncommitted at this point.

I think just to add one quick comment to that, Kartik, is that in 2005, our organic revenue growth adjusted was roughly 6%, I believe in the financial segment,and through nine months, we're at 6% also. So given the fact that it is lumpy and we do have flood claims or termination fees that impact that and the quarters over quarters will fluctuate depending on sometimes softer licenses. I think when I look at it over an extended period of time, we've kind of hit the guidance that we've given to the Street, which has been this mid single digit and around this 5, 6% at least in the financial segment area.

And one last question. Tom, I think you said the acquisition market looks really strong. You want to be, obviously, a disciplined buyer. So Jeff, as you look at what's happening in the acquisition market, is it just a matter of there are opportunities which you really like and they're just too expensive, or is it that the acquisition market is strong, but they're just not businesses that you would want?

Yes, my take right now is it's more the former than the latter. But I wouldn't say they're necessarily too expensive. I do think that we're being very prudent and pragmatic in how we evaluate acquisitions to fit into the strategies that we've laid out around Fiserv 2.0. So we're really looking at where can we take that capital to be able to add more to our value proposition.

To me, that's far more important than buying revenue. I'm much more interested in making sure that the acquisitions that we are -- that we are considering are going to add real breadth to how clients view us as opposed to the addition of revenue. And that's a different, that's a bit of a different tack for the Company, and one that Jim Cox is doing a nice job of running for us. But we're all, we're all learning at the same time.

And Tom, if I may, just one last question. For fourth quarter, what type of acquisition revenue would you anticipate?

I'm sorry, Kartik. What do you mean by that?

A dollar amount of revenue that you'll get from acquisitions in the fourth quarter.

It really depends, but I think you know given our run rate, I think we disclosed the -- most of the acquisitions. The big acquisition we did last year was BillMatrix, which is kind of lapsing. But we'll have, and I'll have to get back to you with the exact number, but I think in the range of 20, 25 million across the group. But let me get back to you on that, Kartik, as far as that impact goes.

Okay.

That should be the rough range. I don't think it should be much different than what we had in the third quarter.

Thank you very much.

Thanks, Kartik.

Our next question comes from Julio Quinteros with Goldman Sachs. Your line is open sir .

Hey, guys. Real quickly, just on the tax rate benefits for this year. We had seen about $0.02 in the second quarter and looking like another $0.01 to $0.02 this quarter. And then if you factor in the buy back activity for the rest of the year, and then sort of translate that back to the guidance change which is about $0.03 to flat on the top end, what exactly is the benefit that we're seeing from the buy back in the fourth quarter and as you look at the tax rate benefit, if you were to strip that out, where would our estimates actually end up for the current calendar year?

There was a lot of questions in there, Julio, so I will --

Yes, it was one question in five parts. Sorry.

That's right and there were a lot of numbers flying around so I --

Sorry, Just real quickly, all I'm trying to understand is the tax rate benefit that we've seen for this year and then secondly the buy back benefit that we should see into the fourth quarter and then just kind of relate that back to the guidance change, which when you look at it, it doesn't really seem to be moving too much.

Yes, first of all, I guess on the tax rate, what I'd say is that I always look at things, if you're comparing us on how we're doing on a year-over-year type basis, our effective tax rate for the full-year, which I'm looking at last year in 2005 when we reported adjusted earnings of 2.19 was 37.5%. Now I think on a year-to-date basis this year, the effective rate is 37.3%. So you're just talking fairly, it is down over our history going back a year and a half, two years, but from a standpoint of a year-over-year comparison standpoint, they're basically roughly in line on a year-over-year basis.

When I looked at the notes for the beginning of the year, I think you guys had suggested 38.7% so I'm just trying to understand what that delta is.

Yes, that is the beginning, our forecasted rate. e have had a number of items that have driven our tax rate down, and those have continued over the last -- over the quarters that we have had, and I'm fairly conservative with the guidance that I send out. And we did give a fourth quarter forecast of 38% as far as that effective tax rate goes.

Okay.

Going forward, as far as our earnings guidance goes, we have given, tightened up our range from where we were at our last from 2.48 to 2.54 up to 2.51 to 2.54. You can do the math as far as what that means for the fourth quarter.

Yes.

And we indicate we are going to do share repurchase in the near term. So that's really where we're at for the year.

Great. Thank you.

Thank you.

Our next question comes from Chitra Sundaram with Cardinal Capital. Your line is open.

Thank you. Congratulations, nice quarter. Just had a quick question on the free cash flow. So just to confirm the definition as far as a percentage of operating cash flow less CapEx, right, when you say 480 million?

That's correct.

So it looks like it's been pretty good year-to-date and I'm just wondering is it CapEx that's going to be the key driver of bringing it to the low end or is it operations?

I think it'll be a combination of working -- some working capital improvements and consistent CapEx into the fourth quarter for us to hit the lower end of the that range which is what we indicated on the call.

Very good, thank you.

Thank you.

Our next question comes from Paul Bartolai with Credit Suisse. Sir, your line is open.

Thanks. Good afternoon, guys. First question, maybe is it possible to quantify or at least provide some of the timing around the larger client losses you had last year just so we can try and get a sense of when we'll anniversary that and what the impact might be?

Most of those client that we ended up, as far as the impact in the current year, the running through the fourth quarter, one of those will run through the full-year because it went off actually in December of last year and the other one went off also in the middle point of the fourth quarter, so those things should pretty much annualize through the end of the year. And then we should be in pretty good shape going into 2007.

Any rough quantification there? Is that 1 to 2 points of growth in FIO?

I think what we disclosed last time around those customers was around 180 basis points, somewhere in that range, as far as the negative impact in the current year.

Okay, great. And then again sticking with that growth. As you mentioned, you've kind of been in that 5, 6% range for a few quarters now, which I think is kind of towards the low end of what you guys expect going forward. What do we need to see or is it macro driven or stuff you guys have with Fiserv 2.0 to get us toward the higher end of that range?

Yes, Paul, it is a combination of, I think, continuing to make sure we're executing as well as we can with what we have, where I think we've continued to make some progress there. And then secondly it really is the benefit of capturing that $360 million that we talked about at our investor day, which is to some extent contingent upon us reshaping our organization, making sure our incentive structures are aligned, and then to some extent doing some limited integration. It's far more around the first two than it is on the third. And we're working those and we expect to have them in place so that very early in 2007, we're beginning to execute against that.

I would also say that while being at 6% being the lower end of our revenue guidance, we see that to be a basically an outlook over time and that and that we will accelerate into that range and that there will be years when we will actually be below that range and there will be years and we will be above that range. But from a modeling and from a planning perspective, we provided that outlook data to basically say here's what we think you can expect from us given Fiserv 2.0.

Great,if I could just sneak one more in. Switching to the health segment, ex the prescription costs, organic growth of 2%. Again, we've kind of been stuck at that level for a few quarters here. I think you've talked about some of the client wins. When should we expect to see that accelerate or what is holding that back, I guess?

Yes. I mean, we are still -- we are still working through some client losses within the TPA space, the HPA space, and as we work through them, unfortunately, it takes losing a couple of those clients will wipe out a bunch of progress that we're making on what we would call the, the additional products or add on higher valued products. But we're -- we're moving through the -- we're moving through the process and we believe that we -- well we're not going to give 2007 guidance right now, that next year we will begin to see the, some fruit bearing from our efforts.

Okay, thank you.

Thank you.

Our next question comes from Charles Murphy with Morgan Stanley. Your line is open, sir.

The 10 to 20 million of internal investments you're currently making, what keeps you in the now, how does it help the firm and what revenue do those investments generate?

Sorry, can you just repeat that one more time?

You talked about you're currently evaluating 10 to 20 million annual investments? What are they tied to? Why are you doing them now and what revenue, on an annual basis, do those investments generate?

We're not going to go into that much detail on those. Those are a couple business line investments which we wanted to make you aware of as we did in September that we're taking a look at as far as what we're going to do in the future. And so we will have that resolved here by the end of the year and we'll communicate that appropriately in January.

Charlie, one of the things that we, that we -- one of the pieces of our review process was to go kind of deep on all of the different business lines that we have, looking at what they're doing and what investments are being made either within an entire business line or an investment that is part or a product within a business line. As we went through that process, not surprisingly, there were some items that popped up where we had to question did it make sense to continue in -- in that investment.

Those are the kinds of things that we're looking at and it's just -- it's a long process and we want to make sure that we're being pragmatic and prudent. But the point is we're committed to doing it and making those decisions by the end of the year.

Okay, great. And then EFT debit business. What are the key reasons why a Fiserv bank would switch from another debit network to the Fiserv network and could you describe how fast the payments business is growing year-over-year in the third quarter?

Norm?

Sure. There's a lot of advantages in the economics, as well as obviously we have the core relationships so the debit transactions, the flow of the funds works quite a bit better. And if you'd repeat the second part of your question, please.

The payments business. I wanted to get a feel for if that business is growing above or below the organic growth rate of FIO?

I would say the majority of the aspects of that, especially on the electronic side, are on the high growth side. We see a lot of activity both in new clients and also in volume growth, transaction growth, within existing product line so that's an area that we feel very strong about as payments in the future, as well.

Yes, Charlie, one of the things that we indicated in our prepared remarks is that one of the drivers of our stronger growth this quarter was -- was our EFT and our payments businesses in general. So we're seeing good growth from those businesses and we expect to continue to see good growth from those businesses.

Thanks very much.

Thank you.

[OPERATOR INSTRUCTIONS] Chitra Sundaram of Cardinal Capital, your line is open.

Thank you. Could you help me understand the seasonality, if there is any, in working capital usage and generation because of two main items, clearly just receivables and accounts payable, I'm thinking.

Yes, there's some timing that fluctuates from quarter to quarter depending on the businesses. If we get some in our output solutions division, depending on when that growth occurs, they can kind of fluctuate on a quarter to quarter basis just due to timing. But over the years, our working capital, if you look back at last year, it's been fairly -- it was a little negative last year, but it's been fairly flat as far as a positive or a negative. And so we continue to work our receivables and that's really the only major item typically that can move around.

And I guess as a follow-up, when you look at it on a quarterly basis, it does seem to turn strongly positive in the fourth quarter, sometimes in the third quarter itself. That's just part of the contract cycle or something, is it?

Yes, the -- just to take you back through the first couple of quarters. What we generally have there is we do have some in the second quarter, we have some larger tax payments. We also typically pay out our profit sharing or our 401-K match type payments in the first quarter of the year. So over the last couple of quarters, that kind of builds.

The other thing I would say is the fourth quarter growth, which historically, if you go back even to 2004, we've had free cash flow around 140 million. I think last year in the fourth quarter it was around 150, and that's generated by customer deposits that we get in generally in the fourth quarter where our deferred revenue does a little bit better than what it does in the other quarters, and so that's been another aspect.

Okay, great. Thank you so much.

Thank you.

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

Thanks for joining us everyone this afternoon. We appreciate it. If you have any further questions, please don't hesitate to contact our Investor Relations team. Thanks for your support and we'll talk to you next quarter.