Fiserv Inc (FISV) 2006 Q4 法說會逐字稿

Welcome to the Fiserv fourth quarter and year-end 2006 earnings conference call. All participants will be on a listen-only mode until the question and answer session begins following today's presentation. Today's call is being recorded and also being broadcast live over the internet at www.fiserv.com. This call is expected to last one hour, and you may disconnect from the call at any time.

Now I would like to turn the call over to Jeff Yabuki, President and CEO of Fiserv. Thank you, sir. You may begin.

Thanks. Good afternoon and thanks for joining us for our fourth quarter and year-end earnings conference call. With me today 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 our current expectations. We 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 fourth quarter earnings release, which can be found on our website at www.fiserv.com for a discussion of these risk factors.

You should also refer to our earnings release for an explanation of the non-GAAP financial measures discussed in this conference call and for a reconciliation of those measures to the nearest applicable GAAP measures. These non-GAAP measures are indicators that management uses to provide additional meaningful comparisons between current results and prior reported results and as a basis for planning and forecasting for future periods.

All right. With that formality handled, let's move on. Let me say upfront that we are pleased with our results for the year. In what some considered a transition year, we delivered on our commitments and made progress in strengthening your Company for the future.

Before we discuss the detailed financial results, let me recap several of our accomplishments. Adjusted earnings -- adjusted operating earnings per share from continuing operations were up 19% for the quarter to $0.64 cents and up 16% to $2.53 per share for the full year. As you will recall, this was near the top of our guidance range, which itself had moved up during the year. A special thanks goes out to the thousands of Fiserv associates whose commitment and effort make our results possible. We set an objective to enhance operating margins and made tangible progress against that goal. Our progress was particularly evident in the financial segment second half results. Adjusted operating margin was up 250 basis points in the fourth quarter after being up 120 basis points in the third quarter versus the comparable quarters in 2005. Full year adjusted margins in the segment was a very strong 23.2% overall.

Company-wide adjusted internal revenue growth was 4% for the year and 6% in the financial segment. We grew over unusually large client losses in 2005 represented by $58 million of 2005 termination fees along with a slowing mortgage market in the second half of 2006. These items combined to put downward pressure on our growth rate. While the Company's internal growth was on the low end of our expectations, the financial segment delivered solidly, even in the face of a challenging year.

We returned $560 million to shareholders in the form of share repurchase. We exhausted the 10 million share authorization approved last February buying back a total of 12.7 million shares in 2006. Over the last two years, we have repurchased $1.2 billion of our stock.

We shared our new strategic vision for the future, branded Fiserv 2.0, which is our quest to deliver more value to clients, enhance internal revenue growth, increase operating margins, and optimize capital allocation. All of these efforts should lead to superior financial results for our shareholders.

And finally, the Fiserv board approved a new 10 million share buy back authorization today that will allow us to continue repurchasing shares when it makes sense within our capital allocation strategy. I hope you will agree that our 2006 performance is a good start to what we believe is a very bright future. More on that a bit later.

Let me also comment on the change we made to our segment reporting and the rationale for creating a broad-based insurance segment. The new segment is a combination of the businesses previously reported in the health segment along with the insurance operations that were included previously in the financial segment. These businesses are focussed largely on creating and deploying transaction based technology solutions across the three primary insurance lines: health, life, and property casualty. That view of the industry is quite common and suits us as well. Internally, we will have the opportunity to leverage our expertise and management across the broad insurance market, which we believe will yield better results. By creating a broad insurance segment, we are providing investors with enhanced visibility into our businesses and results. Separating the insurance businesses into their own segment will isolate those results and also allow the products and services provided to depository institutions to stand alone in the financial segment.

We will continue to provide internal revenue growth statistics for our health businesses so you can measure our progress in this important area. You will note on page 14 of our earnings release that we provided fourth quarter revenue, internal revenue growth, and operating income for the previously reported health segment to close out 2006 with complete information. And by the way, that group had a very solid fourth quarter and we are optimistic that that momentum will carry into 2007.

Now, let me turn the call over to Tom, who will provide more color on our results for the quarter and the year.

Thanks, Jeff, and good afternoon, everyone. Revenues for the fourth quarter were up 11% to $1.2 billion. For the full year, revenues exceeded $4.5 billion, an increase of 12% over the prior year. Full year internal revenues grew at the low end of our guidance notwithstanding the solid performance in our financial segment.

Financial segment revenues increased 9% to $2.9 billion for the year. Fourth quarter adjusted internal revenue growth in this segment was 5%. Revenue growth for the quarter was impacted positively by strong performance in our core processing and payments businesses offset somewhat by the slowdown in the mortgage market and the effect of last year's client losses. As Jeff mentioned earlier, we are pleased with our full year financial segment adjusted internal revenue growth rate of 6%, in line with our expectation of mid-single digit growth, especially given the headwinds we've faced going into the year, much of which is now behind us.

The newly formed insurance segment, which includes our insurance businesses along with our formerly reported health segment, experienced a 5% reduction in adjusted internal revenue in the fourth quarter, primarily due to the expected decline of $14 million in flood claim revenues. Excluding the impact of the flood processing business for the quarter, which included the decline in flood claims along with the modification to an ongoing client relationship, adjusted internal revenues increased 4% versus the prior year's fourth quarter. Good performance in our pharmacy businesses and property and casualty insurance businesses led the way in the quarter. Although full year adjusted internal revenues in the insurance segment were flat, excluding the impact of the flood business, internal revenues grew approximately 2% for the year.

Investment segment revenues declined 3% for the quarter. Our revenues have been pressured by a decrease in deposit levels, resulting from the strong equity markets which negatively impacts investment income and corresponding revenues. Full year internal revenue growth of 2% in the segment was below expectations.

Adjusted operating income and related margins were strong again in the fourth quarter, especially in our financial segment. Overall Company-adjusted operating margin was 22.1% in the fourth quarter, up 160 basis points over the fourth quarter of 2005. For the full year, adjusted margin was 22.3% or 40 basis points higher than 2005.

Financial segment adjusted operating income for the quarter was $150 million, up 20% versus the fourth quarter of 2005. Adjusted operating margin in the financial segment for the quarter was 23.6%, up 250 basis points over the 21.1% in 2005.

In addition to ongoing efficiency improvements, we had strong performance in many of our businesses with payments, bank and credit union core processing leading the way. Full year adjusted margin in the financial segment was 23.2% compared with 23.1% in 2005. 2006 results were negatively impacted by the loss of several large clients near the end of 2005, larger than expected losses in our Australian operation and lower margins in our lending division, all of which we expect to improve in 2007.

Insurance segment adjusted operating margin for the quarter was down 190 basis points to 17.8% from the fourth quarter of 2005. Margins in the quarter were negatively impacted by a significant decline in flood claim processing revenue and, as has been the case all year, the continuing investments in our consumer directed health care initiatives. This was partially offset by stronger margins in the Company's health and property and casualty insurance processing businesses.

Our health business had operating income of $22 million in the quarter, recording its best quarter of operating income over the past seven quarters even with the higher level of investment spending. Full year adjusted operating margin was up 140 basis points to 20.1%, driven by higher operating margins in the Company's flood and property and casualty insurance processing businesses.

As Jeff mentioned earlier, we are pleased with our progress on expanding operating margins. We continue to see ample opportunity to enhance margins, which is a key measure of our success going forward.

Adjusted earnings per share from continuing operations were up 19% to $0.64 in the quarter and $2.53 for the full year, up 16% over 2005. Adjusted earnings per share in 2006 excludes a one time $9 million pretax charge or $0.03 per share taken in the fourth quarter, which relates to the closure of a small lending business that began operations in 2005.

We had shared with you previously that we have been evaluating several activities which, if terminated, could have a negative earnings impact in a range of $10 to $20 million, which was outside of our 2006 earnings guidance. This $9 million charge was part of that range.

We work diligently to complete all of our analysis by the end of the year. However, we still have one pending evaluation that may not be complete until the end of the second quarter. If we were to exit the business under review, we estimate we would incur a 2007 pretax charge in the range of $10 to $15 million. We will update you on our progress next quarter.

Full year cash flow from operations was $635 million compared with $601 million in 2005. Our operating cash flow in the quarter was very strong at $182 million. The full year operating cash flow was affected by several nonrecurring items as compared with 2005, which we believe are important to highlight. First, 2005 operating cash flow includes incremental termination fees of $35 million compared with 2006, which negatively impacted the 2006 operating cash flow comparison by about $22 million after tax.

Second, the treatment of excess tax benefits from option exercises due to the adoption of FAS 123R was moved from operating cash flows in 2005 to financing activities in 2006. This negatively impacted operating cash flow in 2006 by $11 million.

Our base expectation is that operating cash flow should grow at a level similar to that of our operating earnings. We are also focussed on improving working capital where it makes sense.

Capital expenditures were up about $23 million to $187 million compared with 2005. Full year capital expenditures were 5.6% of net revenue, consistent with our historical trend of spending between 5% and 7% of net revenue. In 2007, we expect to make progress in rationalizing investments across our new client segment based organization.

We also spent $187 million on acquisitions in 2006 compared with $510 million in the prior year. We continue to pursue acquisitions that are aligned with our growth strategies and are priced at levels that we believe represent the best return for shareholders when compared to other capital deployment options.

We ended the year with almost $750 million of debt, up $150 million from the end of 2005. We retain significant flexibility on our balance sheet.

Finally, our effective tax rate for the quarter was 38.5%, an increase of about 100 basis points over both the sequential quarter and last year's fourth quarter. This increase resulted in a negative impact of approximately $0.01 per share in the fourth quarter compared to previous quarters. For 2007, we are forecasting a 38.5% effective tax rate.

Now let me turn the call back to Jeff who will provide you with an update on our sales performance and 2007 guidance.

Thanks, Tom. Our sales quota attainment for the year was at 95% of planned. The small shortfall to plan was due to weaker than expected sales quota performance in our lending operations. The non-lending groups attained about 112% of their 2006 quota. Our sales pipeline is active, and we believe 2007 will be a solid sales year.

In 2006, we had a strong sales year in the core account processing area for both banks and credit unions. Our payments businesses continued to grow, capitalizing on our strong offerings and positive secular trends. We made significant progress in delivering more value to clients through products like EFT, bill payment, PBM services, internet banking and the like.

We also moved forward with new innovations such as the Fiserv Clearing Network, which signed 289 new clients in 2006, or more than one per business day, leading to what we believe could be a $100 to $150 million annual revenue opportunity.

Lastly, we gained important ground in the consumer directed health care arena with wins in transaction processing, banking services, and sales of proprietary CDH technology as we helped our clients better compete. Whether it be processing HSAs for the Huntington National Bank, providing core account processing for United Healthcare's Exante Bank or enabling an end to end solution for the start-up of Blue Healthcare Services, we are committed to achieving a leadership position in this important growth area.

In early December, we announced organization changes designed to achieve the potential we see within Fiserv 2.0. We realigned our leadership structure to better address the key needs of our client segments. The essence of the change was to begin moving away from our traditional business unit centric approach to a much more client centric approach that will define our future. Enhancing the overall value we provide to clients will help us expand market share, increase product penetration, and deliver higher levels of growth and profitability for the Company.

We now have five key client facing groups, which ultimately form our three reporting segments. First, our investment group continues to be led by Bob Beriault.

Second, Mike Gantt is now leading our new insurance group which, as we mentioned earlier, includes insurance and health businesses.

And last, our largest area, the financial segment, is divided into three main groups. The first group, led by Tom Neill, has responsibility for all of our core account processing businesses. Tom and his management team are focussed on expanding share and delivering more value to the market. Tom and his leaders also have the primary responsibility to deliver the $360 million of incremental product revenue identified within Fiserv 2.0 through deepening client relationships.

Next, we formed a group focussed on the delivery of services to the largest financial institutions. This group is led by Tom Warsop, who joined Fiserv this month from EDS where he most recently led their financial services industry group. Tom and his management team will be focussed on expanding relationships with the large financial institutions where we do not have a core processing relationship. Although we are pleased with the progress we have made against this client segment over the last few years, we believe there are even greater growth opportunities available to us in the future.

Lastly, we formed a group focussed on growing our payments capabilities and also our non-core account processing product offerings. We have hired Rahul Gupta who is most recently president of E-funds U.S. to lead this group. We believe the opportunities embedded in this area to be among the most attractive. And accordingly, expect a large amount of our future revenue growth from this segment of the Company.

We are building our leadership team with a healthy mix of existing leaders and outside perspective to help us deliver on our potential. I'm pleased with our progress to date.

Our 2007 earnings guidance is $2.86 to $2.94 per share, an increase of 13% to 16% over 2006. As you know, we don't provide specific quarterly guidance. However, we want you to know that we expect our second half results to be stronger than the first half of the year related to the acceleration of Fiserv 2.0 initiatives and market improvements we anticipate later in the year.

We expect our 2007 internal revenue growth rate to be in the mid single digit range and be at or above the 2006 level for both the Company as well as the financial segment. Again, we expect our internal revenue growth rate to accelerate in the second half of the year.

We expect improved operating margins for the Company as a whole, led again by our financial segment. This margin improvement will be driven by a combination of acceleration and internal revenue growth and operational efficiencies.

Our initial estimate is that free cash flow for the year will be in a range of $490 million to $520 million.

With that said, there are a few items to highlight which have been incorporated into our 2007 guidance. We have assumed a very low level of flood claim revenue in 2007 as compared with the $36 million in 2006. This expected decrease will result in a difficult year-over-year comparable for internal revenue growth, operating earnings, and margins. The majority of the shortfall will be contained in the first quarter.

Next, we've assumed the termination fees will be consistent with the more normal level of what we experienced in 2006, which was down from 2005.

As Tom mentioned, we are forecasting an effective tax rate of 38.5%, up 90 basis points from last year, which is due primarily to some one-time benefits in 2006.

Lastly, we have not included any potential negative impact from the pending business evaluation in our 2007 guidance. As Tom said earlier, if the activity under review ceases, we would anticipate a charge in the range of $10 to $15 million on a pretax basis.

When speaking with investors, I am often asked about my confidence in the Company's achieving a higher level of internal revenue growth and in particular, the sustainability of growth in the financial segment. To that point, over the last nine quarters, our financial segment's internal revenue growth rate has averaged 6%, and over that same period, the growth rate has been no lower than 4% in any quarter. Our solid existing performance along with the anticipated lifts from a more client segment focussed, go-to-market approach, along with the $360 million of integrated value revenue opportunities within Fiserv 2.0 gives me a high degree of confidence that our long-term internal revenue growth outlook of 6% to 9% is very achievable.

In summary, we feel good about 2006. We delivered strong results and made some great strategic progress. We expect another strong year in 2007 while continuing to build for the future. With that, let's open the line for questions.

[OPERATOR INSTRUCTIONS] And our first question comes from Bryan Keane with Prudential. Your line is open.

Yes, hi. First question is just on the flood. Obviously the flood's a tough comp in the first quarter. I just did some back of the envelope math. It looks like, just so we can model it correctly, it looks like almost about $0.05 or so that you're going to just lose immediately with the lack of flood claims. Can you give us, help us with just the ballpark? Is that about right?

We're not going to comment on the margins in that business, Bryan, but it is about $30 million of incremental revenue. And as you know, as we've talked about before there, since we have a lot of infrastructure in that business, there is a lot of leverage associated with that additional revenue. So it is going to be a tough compare in the first quarter. We're not going to comment on the EPS impact but that's all we've got.

Yes, Bryan, as Tom mentioned, with the high fixed cost leverage business so there is a fair amount of incremental profitability when we have the unusual weather patterns that we over the last couple of years.

And obviously, Bryan, it's compared to the first quarter of last year because in the fourth quarter, our flood claims were roughly $1 million or so of this year.

Right. Right. Just turning, you talked about some of the things that was dragging this year that you expect to improve in '07. I think Australian JV is one of them and lending, I think, was the other. Could you just go through why you think those will improve in '07?

Yes, Bryan, one of the things that we mentioned is our kind of the challenging performance we've had in Australia and we have been working closely with our banking partners in Australia to really do two things. To look at the cost structure that we're operating with there to make some changes that we believe will lighten that expense load as well as looking at how we priced that agreement. We're making some very good progress with them. That combined with the volume that we foresee for 2007 tells us that we'll see a very healthy improvement in 2007. That said, as we mentioned before, we would continue to expect that investment to be dilutive both in 2007 and in 2008. So that's something that we see continuing.

And I think, Bryan, your question, was it more on the organic growth going forward?

Or just on profitability and organic growth, as well.

Okay. Yes, I think, Jeff kind of hit on it a little bit as far as organic growth goes as far as some of the headwinds that we had in 2006. And we did finish the year strong with 6% organic growth in our main financial segment. And that, at the end of last year, we knew we had 2 or 3 larger customer relationships, including our INTRIA Items venture and a couple of other large acquisition of our customers that had some significant drag on our growth rate in the current year. So that being behind us in '06, that is positive for '07.

Regarding our lending business, we were very strong. We gained a lot of share through the year. Our volumes did drop off in the fourth quarter. They have stabilized here in January, but we have continued to grow that business through share. But that is tied a little bit to our home equity volumes that, in that particular business, so it's slightly more volatile than what our normal financial segment would be. And Jeff, if you want to add anything further to that.

Yes, I mean Bryan, I think that your question was why do you think lending's going to improve. I think Tom's point, we're seeing stabilization. We are in the fortunate position of, as Tom mentioned, both gaining share by new clients as well as link into transaction volume. So we feel comfortable that we're going to see increases in performance in 2007 over 2006, kind of in the second half of the year.

Okay. And then just last question, Jeff. Just kind of on Fiserv 2.0. We know in the past we've talked about the 77 different units. Can you talk about any of the changes? Does that number decrease, increase? And then secondly, the -- an opportunity that I think Fiserv's pointed out before is changing some of the distribution agreements with third party vendors. We see, recently we've seen some sales of a couple. Just can you talk about those two things?

Absolutely. Bryan, one of the things, one of the center points of the organization structure that we shared in December was to be able to move these different business groups into client facing groups in a way that we really had not done before, and to basically task our leaders with figuring out what are the best ways for us to go to market, whether it be in the community bank space or whether it be in the credit union space or whether it be in the internet banking space. So wherever it is, we're looking at how can we best rationalize our products and our investments so that we can have the strongest product in the market, obviously get more wins and deliver more revenue.

My sense is that we certainly won't be increasing the number of business units. I mean I think over time we all see that it makes sense to put those resources together. I think we'll have less infrastructure moving forward than we do today. And frankly that's one of the inherent points that we talked about in September where I think one of the examples we used is having about 68 separate e-mail systems so we see some efficiencies there and we're certainly working hard to rationalize that moving forward.

As it relates to the distribution agreements, we mentioned also in the fourth quarter that we hired an individual to be focussed on that. We continue to see that as a big opportunity and we're out there looking at again what are the right tolls for us to be, to be charging for people who are getting access to our system. We think that's a pretty interesting opportunity. Really for 2007, we've not assumed that we're going to see a lot of benefit within our, within our guidance. We have new people, new on the ground and we'll have to see what happens there. But again, over time, we expect that to be a nice driver for growth.

Okay. Great. Congratulations on the solid progress.

Thanks, Bryan.

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

Thank you. Jeff, I have a question just on the health business. As you look at this business, do you believe you're well positioned in this segment and I guess what I'm getting to is are there other parts of the business that you need for you to compete better, or with the product you want to go to market, you feel fairly comfortable?

How you doing, Kartik?

I'm well, thank you.

The -- we think we have a pretty good set of products in some specific markets. I mean frankly, we don't have the network scale to go out and sign up the, a Wal-Mart or something like that. We just don't have that kind of scale. But for certain clients who -- who have kind of self-sponsored plans, they tend to be a little bit smaller, kind of more middle market clients, whether they be -- we talked, I think, in September about some. We see the casino again or the gaming space to be an interesting space. We see the hospital space and the health care space, again, to be an interesting space. One of the things that we've done historically is we've kind of gone out, gone out very wide against the market and not been very targeted on a client segment basis on those folks that where we have, we think a compelling value proposition. And that's really one of the changes that we made late in 2007.

We also have, we think, a very attractive set of add-on products. You'll recall that one of the things that we talked about as we have the TPA business, which is kind of our foot in the door, and then one of the metrics that we look at is how are we doing on PEPM? What's your per employee per month revenue, and that really links into things like [Inovian,] which is our PBM, [Avidyne,] which is our care management, other kinds of higher value products that we can bring to bear, package up in a way that we think is very compelling. And again, we have to make sure that we stick to those client segments where we are well positioned and where we do that, we do quite well. We had a pretty good sales quarter in Q4 and we believe we'll continue to see successes through 2007 and beyond. But I'm going to give you the same caveat today that I gave in September and that is that we expect to -- we expect to continue to have some attrition at the higher end of the -- of the client base as we've seen for the last couple of years.

And then, Jeff, you indicated you still would like to pursue some acquisitions. In that regard, what would be the focus? Will it be the financial outsourcing? Will it be the health side of the business? And the size of acquisitions, are we talking relatively small stuff or is there, is there larger stuff that you have in the pipeline that you'd like potentially to complete?

Sure. The acquisitions -- when we think about acquisitions, we really think primarily on how can we add to one of two -- one of two -- how can we add to the enterprise in one of two ways. Number one, how can we add to our existing scale? So -- so when we think about the financial segments specifically, and by the way, we are probably most interested in the financial segment. We think that's where we have the most strength. We think that's where we have the most power.

Second we would say in the insurance area. We think the insurance area has a lot of fragmentation and we think we can actually go in and do some interesting, interesting consolidation of technology and providers to the extent that we can buy them right and have a pretty compelling value proposition across those three lines.

But back to the financial segment because we spend a lot of time on that in that area. We want to add to our existing scale so core processors are interesting for us to the extent we can add the that, to the size of our distribution system. That helps us not just on our strong recurring revenue, but also as we think about what are the right products and services for us to distribute to that channel, which is really the segue to the second thing we're interested in, and that is what are those acquisitions that we can look at where we can add real value to our core -- through our core processing relationship. Payments, risk management, some marketing, kind of CRM-type solutions, those solutions that will allow our clients to best compete in the marketplace. So that's really the way we think about acquisitions today. It's possible that we could do an acquisition in a space that we're not in. But frankly, we see a lot of room in our existing markets and that's really where we're focussed.

I think the last part of your question, Kartik, was kind of on a size basis. And we're not, we are not limiting ourself on size of acquisition. We're really limiting ourself to does it meet the strategic screens that we've set up. If it meets the strategic screens and we're interested, assuming it's a fit, but frankly we're spending the majority of our time with transactions where we think that we don't run the risk of throwing ourselves significantly off kilter on transactions that will allow us to best pursue the marketplace.

Thanks, Jeff.

Thank you.

Our next question comes from Dave Koning with R.W. Baird. Your line is open.

Yes, hi guys and congrats, Jeff, on the great job in your first full year.

Thank you.

In terms of the FI margin, great job in Q4 expanding that. Is there any way we can think of next year, certainly not the same expansion as you got in Q4, but is there any parameters sort of on the expansion, and then what drives that? Is it just general incremental margin or cost cuts or the Australia loss getting smaller, et cetera?

Dave, I'll take that and then Jeff will follow up on it. How you doing today?

Great, thanks.

Good. I would think as far as the financial segment goes, we made a lot of strides in the current year in moving our margins upwards but as we look into 2007, we continue to believe we have expansion opportunities, primarily in the financial segment as we look into 2007. We know that some of the the client losses we had, some of the larger ones with INTRIA and a few others that kind of hit us in the current year. And so looking forward into '07, we're very confident that we can expand the margins in the financial segment.

Regarding the insurance segment, we do have the headwind that we talked about in regards to the flood processing business. Outside of that business, though, we believe in the health areas we've shown in the fourth quarter, we can continue to do well with those underlying core businesses as far as margin expansion, but the flood piece will have a sizable impact on our margin in the first quarter there.

Yes, I think the other thing that I would say is as it relates to the FI segment alone, the improvements, obviously things like improving Australia, that will certainly help. We also believe that as we get better at selling additional or delivering additional value through our core processing relationships that we do that on a much more efficient basis. We're also looking, frankly, at products that have better underlying margins, some of our payments products. We're working on a bill payment product that we're pretty pleased with. So we've got both the, what I would say some of the continuing operations improvement with, in addition the whole operating efficiency item that we talked about in September, but also to add on these products and services that clients want, that they need, that are higher margin products for us. And while we can't talk about -- we can't talk about specifically what those margins will look like in '07, we feel that they'll be at or above where we were this year.

That's great. Thanks, and if I might have just one follow-up. The image business seems to be growing fast. It's still relatively small. Is that enough to offset any declines in the check or in the item processing division?

Yes. We've -- we have continued through the years, and even in this current year, when you look at, we have seen some small growth. None of the checks have gone down, the image has gone up, and that's another thing as we look forward to margins your point, David, going forward. We have continued to grow margins nicely in that particular business line as we've expanded that image capability. And as that changes, we lose a little bit on the top line, but overall our margins have increased in that business on the U.S. operation side. And Norm, I don't think -- do you have anything to add to that?

Yes, the only thing I'd add is we've also grown market share. We had a particularly strong year in the sales and the -- the community market and so that's helped us as well. Also, some of the volume declines that have gradually occurred.

Thank you.

Thank you.

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

Thanks very much. At the September analyst meeting, you had a very helpful slide called "Long Term Segment Outlook" that broke out net organic revenue growth and adjusted operating margin for the financial health and investment segments. I was wondering if you could basically update that slide for the three new segments?

We are -- we anticipated that this would come up. And we are going to be out in February, at the end of February, and we'll do an update. But generally what I would say is that we haven't seen anything on -- in the underlying business model that would change any of the outlook. The only reason why we're going to update it in February is obviously we now have the new segment that we'll break out and show separately, but we'll do that in February.

Yes. We don't anticipate any significant changes to that.

Okay. Could you break out what fourth quarter '06 adjusted organic revenue growth would have been in the old FIO and old health segment?

The fourth quarter of '06, I think we did disclose that, Charlie, on page 14 of the press release. We did disclose the numbers. I think it was 3% for the old health. And as Jeff indicated, we want to continue to give everyone visibility into that business going forward so we'll continue to disclose some metrics around that. But the fourth quarter adjusted internal revenue growth rate was 3% for the health segment and for the financial segment, I think it'd be a couple percentage points lower because of the insurance business which had a tough fourth quarter regarding the flood business. Does that answer your question?

Yes. Thanks very much, appreciate it.

Thank you, Charlie.

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

Thanks, guys. Good evening.

Hey, Julio.

My quick question, just wanted to relate back to the metrics to measure the progress on Fiserv 2.0. Can you just kind of recap what kinds of items we should be looking for? Obviously the revenue and the margins. But were there any other underlying metrics that you wanted us to also focus on within the new subsegments here?

Yes, and it's a good question, Julio. We are -- we indicated in September that in the -- at the end of the first quarter, we would deliver some additional metrics that we think will be helpful for those purposes and we'll certainly do that. It is, but from our perspective, the things that we're looking at, that we're looking at internally, obviously margins is an important piece of the equation.

Sure.

Revenue growth is an important piece of the equation, although frankly we see the margins to even be ahead of the revenue growth. We don't expect to see the revenue really tracking until the second half of 2007. We'll start -- we think we'll have enough there that we'll start to see a little bit of incremental growth. And then, and then there are some take-up rates that at least we're looking -- looking at internally and to the extent that we can gain a high degree of confidence in that data, we'd begin to share it outside. I think the last thing is overall sales. I mean we believe that to the extent that we get this value proposition right at the segment level, that frankly we're going to see better sales, more wins, especially in the -- in the core account processing, the bank and credit union space, and that's one of the important measures that we'll certainly be looking at going forward.

Okay, and then just lastly for me, the LFI market strategy, as you guys begin to push into large financial institutions. Can you just give us a sense on what that strategy will consist of? In particular, how important will it be to have a platform that you guys can come to the market with and which areas do you guys sort of see as sort of the most immediate opportunities within the LFI segment?

Well, when you say platform, Julio, what do you mean?

Do you guys actually need a core system to address the LFI market needs?

Yes, I assumed that's where you were going. We think having a core platform for the large institutions -- now I should caveat that by saying we think we actually have some pretty attractive core platforms for some larger institutions. But when we talk about the larger FIs, we're really kind of talking about the top 25 banks in the U.S.

Like super-regionals and money --

Exactly. And so we really look at that to say what are the products that we can bring to bear today that we can use to obviously help the banks achieve what they want to achieve, and today we look largely at our lending platform, so all of the different products and services that we have in lending. We look at some of our IP products, and even some of our payments capabilities, some of our imaging capabilities. And again one of the things that we're seeing happening in the large FI space is almost, I won't call it a full transformation, but the early stages of a shift in how the larger institutions have bought. Historically, the large institutions, at least from our standpoint, have tended to buy on the basis of a clear single best-of-breed product and that's why people bought, and the level of strategic partnership or strategic integration was complete, almost completely unimportant. Now when we talk to clients, we hear much more about strategic relationships and bringing assets together in a way that's really, it's really different. And that's one of the reasons why we think we have a very, a very nice opportunity to go out and penetrate that space. For us, the nice thing is we're a pretty small player today, even though it creates revenue on a share basis. That's obviously the fastest growing space in the entire FI space. And so we think the opportunity to build share and to kind of take advantage of the secular growth that's in the largest FIs to be attractive.

Great. Thanks, guys. Good luck.

Thank you.

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

Hi, thank you. My question is how big was the loss in the unit that you charged off in the fourth quarter, and if you do take the hit in the first quarter, what are the losses that will go away on that business?

You mean for the charge-off? Yes, we're not disclosing that, Pat. But the -- that's just a small start-up business. We had some assets and some building costs that we really had to write off in regards to that but the lending business that we're talking about here was fairly insignificant. And regarding other business, we're still in the evaluation phase of that, but I don't think the loss is by any sense ongoing would be material.

Okay, and then, thank you, Tom. I have a follow-up actually for Jeff and that is a competitor of yours just went private this week in a, or late last week, in a very leveraged transaction. Is there any opportunity there if the credit rating is so important to in this space to perhaps take advantage of that?

Yes, when you say take advantage of it, what do you mean?

Well, is there customer concern in the market about the new balance sheet open has?

Got it. I wasn't exactly sure if that's where you were going, and obviously there's been a lot of noise in our space generally. I mean, I wouldn't want to -- I wouldn't want -- I can't comment on how clients would perceive these -- perceive these transactions. What I can tell you is that at least anecdotally I've heard some situations where -- where we've been in a competitive bidding situation. Clearly there has been at least some further evaluation when the balance sheet looks the way that balance sheet looks and we think it's at least, it's at least neutral to positive for us.

Thank you.

Our next question comes from Peter Heckman with A.G. Edwards. Your line is open.

Good afternoon. You had talked in the analyst meeting about some of the potential from rationalizing the distribution channels within FI and potentially realigning some of the compensation plans to incent more cross-sells. Can you give an update on how that process is going and how much should we expect of that in the first half of '07?

Sure, and a fair amount of the earlier part of your question is on the rationalization or on the cost saves. I think we laid out in September we expected to see about $15 million of pretax benefit in the, in the numbers in -- I'm sorry, in 2007's results and so that was our kind of stake in the ground there. You will remember that what we said is that 2000 -- the number in each of the years so that in 2007, the $15 million, that was kind of net of any costs that we would have to incur to get there. So we're on track for that. We're actually working quite diligently on how to bring those efficiencies into bear. The organization is doing a great job in that area so we continue to be confident in those cost saves.

On the second half of your question around compensation, we -- we've restructured the organization as we said we would. We are working through our compensation plans. We expect in the next several weeks that we'll be communicating what we're going to do from a -- a sales and a management compensation perspective and we think we're going to create some incentives that have not existed before for people to do what we believe is the right thing for clients, and all of that's been generally factored into our guidance.

And we have already -- as far as our account managers go is at the business level, et cetera, those programs have started to be put in place as we speak. So there's been a lot of work in that area and we continue to make good progress on both of those initiatives.

Okay. That's very helpful. And then just could you comment on any international opportunities that you're seeing, whether they be acquisitions or opportunities to move into let's say the European market or Asia-Pacific and replace some of the older core banking systems?

We have our CBS worldwide business and obviously we're out there. CBS actually had a pretty good year last year and so we see opportunities out there. There are lots and lots of interesting opportunities on the acquisition front internationally. One of the things that we've been doing because it's a bit of a conundrum is we see all these interesting opportunities but we also want to be pragmatic about making sure that we have the right level of what I would call leadership bandwidth to attack those opportunities aggressively and at the same time really deliver for the shareholders all of the opportunity that we see here within our domestic businesses. So it's a bit of a -- it's a bit of a balancing act, but we're out there, and we see it to be a big opportunity, and we're focussed on getting out there, not just on the core side, but I think there's some interesting payments opportunities out there internationally, especially in some of the emerging markets that we're paying a lot of attention to.

All right. Thanks, I appreciate it.

Thank you.

Our last question today comes from John Kraft with D.A. Davidson. Your line is open.

Good afternoon, gentlemen.

John.

Just hoping to ask a -- hopefully easy question on a few of your faster growing and more interesting, I think from my perspective, products that you guys are cross-selling. Jeff, you just mentioned that you are working on and excited about you newer bill pay product. I'm assuming you're talking about [Paytracks]?

Yes.

Just a few questions on that. Are all of your core platforms integrated and all of your sales groups equipped? And then I guess the last part of that is are you still using some third parties for some of the final remittent settlement?

Well, the, of course the question that was to be simple is always complex in our environment. We would say, I would say that we are making progress on, on that front. We are -- we are working now on integrating Paytracks into all of our cores. Today we have, we have gotten into most of our major cores. We're out selling the product. We've got -- had a very warm reception across the system. And we, we believe that that product is going to be one of the first showcase items for what we think we can do when we rationalize our investment spend, really make it focussed where we have the support of our core processors. We also are still using third parties across our system as we typically do and I can't sit here today and say that we're going to displace all of those third parties. We'll do what the client thinks is best. Our goal is to develop kind of the best value proposition that we can for the client, given the relationships that we have and we think Paytracks is going to meet those criteria. Norm, do you have -- ?

I think I'd add is over time as we get Paytracks more and more integrated and the other portions of our system work more in unison with them, we'll have much more compelling value proposition. I think the growth will come from some displacement, but also some of the users who have not implemented bill payments so we're going to go in both directions.

Sure. Okay. That's helpful. And then I guess the sort of the same question on your, your merchant remote deposit. I guess bigger picture, how do you, how do you -- how could you outline, I guess, your strategy there? And then second, what sort of response in bank appetite are you seeing out there?

This is Norm. We've gotten a lot of interest in that and that is kind of an alternative delivery form for us. It gives us the ability for our clients to have some geographical reach where they can install those in branches, corporate customers and be able to transmit the images as opposed to physically transmit items which would in turn be imaged. So it gives a lot of capabilities geographically. I think it's an alternative. It's not going to replace all our, all our conventional processes. And give me, again your second part of your question, please?

Well, I guess let me change the second part. The platforms that are integrated, are most of them, or is it independent, I guess?

Well, it's integrated in a standpoint that it works in unison with our processing centers, our image processing centers.

So independent of the core system?

It can be independent of both. It works out, obviously quite well with the core system, but also if we have a item processing only relationship, that works as well.

It's really both.

Yes.

Okay. Interesting. And it's image or ACH, correct?

They have the capability to do both as well. I think predominantly right now it's the remote capture is going into an image form. But it could also conceivably go into an ACH. You'll see more of that probably at a point of sale situation rather than a back office.

I appreciate it. Thank you all.

Thanks, John. Well, I think that's it for today. Thanks for joining us this afternoon. If you have any further questions, please don't hesitate to contact our IR group. Thanks for your continuing support.