Fiserv Inc (FISV) 2008 Q2 法說會逐字稿

Welcome to the Fiserv second quarter 2008 earnings conference call. At this time, all participants have been placed in a listen-only mode mode and the floor will be open for questions following the presentation. Today's call is being recorded and it is also being broadcast live over the Internet at www.fiserv.com.

In addition, there are supplemental materials that will be referenced on today's call available at the Company's website. To access those materials, go to www.fiserv.com and click on the Access Presentation link on the home page.

The call is expected to last about an hour and you may disconnect from the call at any time. It's now my pleasure to turn the call over to your host, Mr. Jeff Yabuki, President and CEO of Fiserv.

Good afternoon, and thanks for joining us for our second quarter earnings conference call. With me today is our Chief Financial Officer Tom Hirsch. Our remarks today will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

We will make forward-looking statements about, among other matters, adjusted revenue growth, adjusted earnings per share, adjusted operating margin, EBITDA, cash flow targets, sales pipelines, our CheckFree integration efforts, the disposition of certain Fiserv businesses and our strategic initiative Fiserv 2.0. Forward-looking statements may differ materially from actual results and are subject to a number of risks and uncertainties.

Please refer to our earnings release, which can be found on our website at 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. We're pleased with our results for the quarter and for the first half of the year.

Even in the face of market challenges, we are achieving our financial targets and moving the Company forward strategically. Our key financial results as shown on slides three and four of the supplemental materials were strong across the board for both the second quarter and year-to-date, and although internal revenue growth lagged a bit, adjusted earnings per share, total revenue, EBITDA, and cash flow were all up significantly.

We continued to align the Company with those areas where we have strategic advantage by selling the majority interest in our insurance businesses which closed in July. This transaction will allow us to focus on faster-growing opportunities where we have scale and a more differentiated market position such as payments, risk management and core account processing.

We received about $510 million in net proceeds to deploy in ways designed to increase long-term shareholder value, while retaining a minority interest in the insurance assets that we now believe is more valuable given the expertise and experience of our new partner. In our first quarter call, I shared our three main priorities for 2008.

First, to deliver earnings results consistent with our commitments regardless of environmental conditions. Second, to make significant progress integrating CheckFree and Fiserv, and last to enhance our level of competitive differentiation through innovation and integration which leads to superior results for our clients and shareholders. We made progress in the quarter across each of these fronts.

Our adjusted EPS from continuing operations was up 26% to $0.83. And for the first six months of 2008, our adjusted EPS is also up 26% to $1.61. We're very pleased with our significant earnings growth in a market that many believe is one of the most difficult in years. As important as our strong earnings performance is a conversion of those earnings to free cash flow.

We have generated $311 million of free cash flow through June 30, up 73% over last year. Most of our businesses, such as core account processing, bill payment, debit and EFT processing, have stable streams of recurring revenue, leverageable expense structures and required limited amounts of steady-state capital expenditures.

These attributes allow us to grow earnings and cash flow at attractive rates even in a challenging environment. This earnings and cash flow leverage should benefit us even more as market conditions improve.

Second, we continue to see solid execution with our CheckFree integration activities. As expected, this synergy impact ramped nicely in the second quarter leading to $20 million of pre-tax benefit realized through June 30. We are confident that we will achieve our $40 million to $50 million cost synergy target for the year.

In addition, we are in the early stages of our 2009 planning cycle and are optimistic about next year's overall expense synergy attainment. On the client side, we continue to get positive feedback on the combination with an openness to work together to create value. Importantly, we have not lost a single tier one bill payment client since we announced the acquisition which bodes well for our performance and market position.

Our third, and arguably most important, priority for the year is extending our level of differentiation through innovation and integration. We've made a lot of progress on this front in 2008 and the early returns are excellent. Our momentum continues to build as we deliver our market leading electronic bill payment services to banks and financial institutions.

In the quarter, we sold bill payment to over 140 clients and have signed nearly 290 so far this year. Of that total, about two-thirds of the sales were made to existing Fiserv core clients. We're also seeing early success in two new products, which we believe will drive attractive incremental revenue and extend our leading market position in Internet banking and payments over the next several years.

First, we're introducing an ASP version of the Carilion Internet banking platform which will allow clients to utilize those industry-leading capabilities in a hosted environment. We had a significant competitive win in the quarter with a large Fiserv core client choosing our new offering, displacing the existing Internet banking provider and beating out another competitor. The client was willing to spend more money to access these best-in-class capabilities.

We believe this is an example of the healthy demand for our hosted Internet banking services. We are also excited about the new CheckFree Online Advantage product, our next generation online banking and bill payment platform which will be in the market at the end of the year. This product is a highly integrated version of Internet banking and electronic bill payment and presentment which allows our clients to better serve their end customers through enhanced capabilities and a heightened experience.

Importantly, this new product will allow the financial institution to utilize the underlying data to generate new revenue for the institution. The early client and prospect reactions to this product are excellent and we believe this could materially change the rules of the game. We will share more with you on our Internet banking and bill payment strategy at our investor day in November.

We are starting to see revenue uplift by providing integrated products into the larger financial institutions which were traditionally served by CheckFree. During the quarter, we signed an agreement with a top 10 bank to handle a portion of its check processing volume by leveraging our distributed capture solutions with our national footprint of item processing centers. This type of innovative solution delivers meaningful economic efficiencies to our clients as they contend with the difficult environment.

There are a number of similar opportunities in our sales queue which we anticipate will come to fruition during the remainder of the year and into 2009. Before I turn the call over to Tom, let me share our perspective on the environment and its effect on our business.

Most people would agree that the dislocation occurring in the financial services industry and its impact on the economy is the most significant in memory. Over the last couple of years, we have been proactive in reshaping our Company, which we believe will allow us to deliver solid performance regardless of the economic environment.

Combining the impact of our acquisitions and divestitures over the last year with our strong core businesses will lead to significant benefits for our shareholders and our clients. The weakness in the financial services industry is having an impact on certain types of spend. Specifically, we're seeing pressure on discretionary technology license spending among large investment banks and financial institutions.

At the same time, this pressure is creating opportunity as the entire financial services industry is aggressively looking for ways to increase efficiency. We're in numerous conversations with large institutions to utilize our vast array of technology products and infrastructure to help them reduce costs in this time of intense efficiency focus.

We are also seeing an increased discussion around our services offerings as clients look to us for advice and counsel which we believe will lead to deeper relationships and incremental revenue. The community-based and mid-tier institutions have been impacted less uniformly. Generally, that impact has tended to be more regional and somewhat dependent on the level of real estate concentration within their client base and portfolios.

That said, the majority of our clients are focused in the fundmental areas in which we deliver products and services: Acquiring deposits, extending client relationships, efficiency improvements and risk management. Our payments-oriented businesses continue to experience solid double-digit transaction growth rates across the various platforms such as bill payment, debit and EFT processing, wire exchange and remote capture. We expect to see continuing growth in these areas.

We expect license revenues, which represent about 5% of our total revenue, to continue to lag historic purchase levels. This will likely be more pronounced in those areas where the investments are non-mission critical and discretionary. However, the lion's share of Fiserv's revenue originates from recurring non-discretionary products, such as core account processing, and are typically based on accounts and transactions which tend to grow regardless of the external environment.

We anticipate the general weakness in the home equity and lending market to continue for the remainder of the year and into 2009. However, about 90 days ago, we began offering a home retention product centered on loan modifications to one of the largest servicers of mortgage loans in the country.

This product allows our client to proactively identify and interact with at-risk mortgagees and modify their loan arrangements before customers slip into default. Although it's early stage, we are quite encouraged by what could be a significant potential for this product to offset some of the weakness that we've experienced in our lending businesses.

On balance, while there are headwinds facing the financial services industry as a whole, we believe that our position as a solutions provider of mission critical, non-discretionary technology products and services better insulates us from material fluctuations and earnings. At the same time, the breadth of our capabilities give us an advantage in working with our clients today to increase efficiency and enhance their overall market position.

With that, I will turn the call over to Tom for a more detailed discussion of the segment results and our balance sheet.

Thanks, Jeff. And good afternoon, everyone. During my remarks, I will refer to the supplemental information included in the slide presentation which, as we mentioned earlier, is available on our website.

Revenues were $1.3 billion in the quarter, up 38% over the prior year. Year-to-date revenue was also up 38% to $2.6 billion. Adjusted operating income was $284 million for the quarter, with adjusted operating margin increasing 150 basis points to 25.5%.

Through June 30, adjusted operating income was $564 million and operating margin was up 170 basis points over the prior year to 25.2%. The increase in overall margin is primarily from continuing improvements in the business mix, including the addition of CheckFree, cost synergies attained through the CheckFree integration, and our continuous focus on operating efficiency.

In addition to earnings growth and margin expansion, we know that converting earnings into cash flow is a very important element in creating value for our shareholders. Our focus and discipline has produced free cash flow of $311 million for the first six months of the year, an increase of 73% compared to last year. In addition to proactively managing both working capital and capital expenditures, we believe that our current mix of businesses should produce improved levels of free cash flow.

Year-to-date capital expenditures are $92 million, up $14 million from last year's level which did not include CheckFree. We anticipate an increase in our second half capital expenditures as we continue to invest in future growth. Adjusted internal revenue growth for the combined financial and payment segments was 2% in the quarter and 3% for the first half of the year.

There are several factors compressing our adjusted internal revenue growth rate in the second quarter, including a more difficult comparison for the legacy CheckFree businesses given the second quarter was previously the close of their fiscal year. Some of our owners have asked for additional color on the items negatively impacting our growth rate including Bank of America repricing, float impact and the home equity business.

Slide six of the presentation shows a negative impact of these items on our internal revenue growth rate, which is about 2 percentage points both in the quarter and year-to-date. If you normalize for these items, our adjusted internal revenue growth rate for the combined financial segments would have been 4% in the quarter and 5% for the year-to-date.

It's our view that the Bank of America contract repricing, which we announced in the first quarter, and the interest rate impact on float income in our bill payment business will not materially impact our 2009 or long-term revenue growth rates. Our home equity lending business has now delivered two quarters of fairly stable revenue and while it remains subject to external market swings, period-over-period comparisons in the second half of 2008 and 2009 will improve.

Now, onto the segment results. The Financial Institution segment generated revenues of $558 million in the quarter, an increase of 8% over the prior year, with a majority of the growth being generated through acquisition. Adjusted internal revenue growth in the quarter was 1% for the segment due to the significant weakness in the home equity business.

Excluding the home equity impact, the adjusted internal revenue growth was 4% both for the quarter and year-to-date. This negative impact should lessen through the second half of 2008 as our lending revenue comparisons improve.

Operating income in the Financial segment was up 8% to $143 million in the quarter, with operating margin at 25.6% for the quarter and 25.4% year-to-date. The year-to-date increase in margin was 40 basis points and operating margin was flat in the current quarter compared to 2007 primarily due to lower license sales and a slight change in business mix.

Our Payments and Industry Products segment generated revenues of $514 million in the quarter, or $466 million on an adjusted basis, net of the pass through cost for postage, a substantial revenue increase over the prior year due primarily to the acquisition of CheckFree. As a reminder, this segment's net revenue is split with about 60% of revenue derived from bill payment, EFT services, and Internet banking. The remaining 40% of this segment consists primarily of our output solutions division, risk management software and services and the investment services division.

Adjusted internal revenue growth in the quarter was 2% for the segment and 5% for the year. If you normalize for the B of A repricing and the float impact the growth rate was 5% for the quarter and 7% year-to-date. On a sequential quarter basis, the segment's internal revenue growth rate in the quarter was negatively impacted by two primary factors. First, the combination of the B of A repricing that we announced in the first quarter and the float impact accounted for approximately 3 percentage points of the segment decrease.

You will recall that the bottom line impact of the float revenue decrease is very minimal as a rate-based reduction is effectively hedged from an earnings standpoint by reduced interest expense on our variable rate debt outstanding. The revenue issue will remain through 2008 and should not impact our 2009 or longer term growth rates.

Second, weaker installed license sales in the current quarter primarily related to risk management and other software products tied to larger tier one financial investment firms impacted sequential results. Also, we're experiencing lower overall account growth in the investments services business due to equity market weakness.

Our sales pipelines in Carilion, risk, and investment software solutions are solid and should positively impact the second half as we close the transactions in the pipeline. In addition, this segment is impacted by quarterly fluctuations from the legacy Fiserv businesses. We saw this last year as there was a 5 percentage point drop from the first to the second quarter, 13% to 8% in this segment.

This seasonality in the traditional Fiserv businesses, like output solutions, generally has more pronounced quarterly fluctuations based on customer delivery requirements which historically have been biased to the first and fourth quarters. Operating income for the segment was $134 million in the quarter with adjusted operating margins of 28.6%, up 330 basis points over the prior year.

Through June 30, operating income was $274 million and operating margin was up 250 basis points to 28.8%. The increase in margin is due to continued improvements in operating efficiency, business mix including the addition of CheckFree, and cost synergy benefits associated with the transaction. The legacy CheckFree business generated 311 million bill payment transactions in the quarter, up 13% year-over-year.

E-bills delivered, which represents a very important growth opportunity and competitive differentiator, were up 22% to $74 million in the quarter. We continue to see solid growth characteristics in each of these key bill payment metrics. Termination fees in the quarter were $18 million compared with $13 million in 2007.

The increase is attributable primarily to one client, who was acquired in the first month of an 84-month contract in the second quarter that resulted in a more significant fee. Overall, however, merger and acquisition activity is down substantially compared to the prior year, which should provide a boost to recurring revenues going forward.

Insurance segment revenues were $238 million in the quarter and $98 million on an adjusted basis. Adjusted operating income in the insurance segment was $20 million and adjusted operating margin was 20.2%, a solid improvement over first quarter results due primarily to normal seasonality in the flood processing business.

Beginning in the third quarter, due to the sale of the majority interest in this business we will begin reporting Fiserv profits related to our 49% ownership as a separate line item on the income statement. As Jeff mentioned earlier, we received approximately $510 million in net proceeds from this transaction.

As we explained last quarter, we are continuing to record a $2 million charge, or $0.01 per share, each quarter during 2008, which was the result of the employment agreement amendment related to our offshore captive we announced last year. Our net interest expense for the first half of the year is $130 million, with $62 million recorded in the second quarter.

Our year-to-date effective tax rate is 38.7% and we expect that for the remainder of 2008. In connection with our insurance transaction in July, we announced the new $10 million share repurchase authorization to replace our previously completed authorization. For the year, we have repaid approximately $900 million of debt and have $4.5 billion outstanding as of June 30.

You will recall that our targeted debt to EBITDA ratio is 2.5 to 1 by the end of 2009. For the first six months of the year, our EBITDA was $685 million. We have scheduled debt repayments for our debt outstanding of $4.5 billion totaling $500 million over the next two years. Now let me turn the call back over to Jeff.

Thanks, Tom. We have again delivered strong result against our key Fiserv 2.0 initiatives. Our integrated sales performance continued to gain momentum as we closed about $20 million of recurring revenue in the quarter. For context, it took us nine months to break the $20 million mark in 2007, something we did this year in just one quarter.

For the year-to-date, our integrated sales are $35 million or 54% of our full year objective of $65 million. Bill payment, debit, EFT, the Fiserv clearing network, Internet banking, and remote capture products are contributing the bulk of our sales results. Our operational efficiency goal for the year is to realize an incremental $20 million in 2008 in addition to the $20 million achieved last year.

Through June 30, we've realized $13 million, or 65% of our full year goal and we're on track for the year. Sales quota performance was strong in the second quarter and our year-to-date quota attainment now stands at 99% of goal. Sales results and pipelines continue to gain momentum, which is an affirmation that our products and services are desired by the financial institution marketplace even today.

You will recall that sales quota performance does not include integrated sales that I highlighted a few moments ago. We are having increased success in the bank core processing space this year. Overall, there are fewer new core opportunities available for two primary reasons.

First, a greater reluctance by clients to switch which given our scale we believe we'll benefit from and also fewer de novo banks opening this year. However, through June 30, we have won a much larger proportion of the available deals than we have over the last several years.

We mentioned one such win in our earnings press release earlier today, our new core processing relationship with Omaha Financial Holdings, the new banking division of Mutual of Omaha. This institution has already acquired three banks and very recently announced the acquisition of two additional institutions. We are currently working with Mutual of Omaha to bring the processing of all of those accounts to Fiserv.

We are providing core account processing solutions integrated with a number of ancillary products to help Omaha Financial grow as rapidly as they can. We see this as a clear example of how our breadth and knowledge can help institutions grow in today's environment.

Overall, we feel good about our sales results and our Fiserv 2.0 progress. We believe the opportunities in the back half of the year will build our second half performance and help us jump start 2009. We expect our full year adjusted earnings per share from continuing operations, which includes the $0.02 to $0.03 dilution from the sale of the majority interest in our insurance business, to be within our range of $3.28 to $3.40 per share.

We anticipate that the results in the fourth quarter will be stronger than the third due primarily to the addition of CheckFree, a synergy ramp and the impact of divestitures on current year results. We expect internal revenue growth in the combined Financial and Payment segment to be at the low end of our 4% to 6% range.

This range includes the 2 to 3 full percentage point negative impact related to the B of A pricing, float income, and also the impact from our home equity processing business. As we stated at the beginning of the year, our second half revenue growth should improve as our lending comparisons improve.

We now expect adjusted operating margin for the full year will increase by at least 125 basis points for the full year versus our previous guidance of 100 basis points. And given the exceptional cash flow performance through the first half of 2008, which includes the negative cash flow impact from the insurance sale in the second half of the year, we anticipate that full year free cash flow growth will now be in a range of $550 million to $575 million.

I mentioned at the top of the call that we're on track to achieve our three key priorities for the year. As you've seen in our results, the strength of our business model is allowing us to absorb market fluctuations and still deliver earnings growth and cash flow in excess of our long-term performance outlook. We have made great strides in integrating CheckFree to enable our clients and you, our shareholders, to realize the benefits of this powerful combination.

Our sales pipelines continue to grow even after a very solid sales performance in Q2. We are increasingly confident that our new products and innovation will lead to enhanced revenue growth in late 2008 and into 2009. We will manage the Company prudently in this time of industry flux with a strong focus on building the Company for the long term.

We believe the uncertainty in the environment is creating material opportunities which play well to our strengths. At the same time, we will not grow revenue for revenue's sake. We will continue to take the position that our role is to build value for the long-term. We've made significant progress in that area and we will continue on that path.

As always, I would like to recognize the hard work and commitment of our associates around the world, who are responsible for the results that we deliver each day. Our people are the manifestation of our privileged client relationships and they work closely with our clients to ensure we're providing them the solutions they need.

Finally, before we take questions, we will be holding our 2008 investor conference on November 11 in Boston. Please mark your calendars for the event and contact our Investor Relations group to register as space is more limited than it has been the last couple of years. Stacy, we'll now open the lines for questions.

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from David Koning of Baird.

Yes, hey, guys, nice results.

Thanks, David.

I guess first of all, if we just summarize kind of your thoughts around the environment, is it fair to say that it's pretty much business as usual excluding kind of the home equity and license headwinds, maybe of a couple percent, but other than that it feels generally business as usual?

Certainly, for where we are today on July 29 that certainly is the case and it's hard to ignore all of the headlines and all of the noise out in the environment, and so I think our people would say they're quite pleased with the performance given all of that noise. But as much as -- I just have to agree with that. We are -- it's largely business as usual.

And maybe if you would, could you kind of outline what would happen if tomorrow we wake up and we see headlines that 100 banks failed in the last week or something like that, how would a scenario like that affect Fiserv?

That's a great question. One of the things that's interesting is that as banks fail the accounts don't go away and the transactions don't go away. They merely transfer to either a receiver or to an acquirer, and in those cases we believe, and obviously, there are some regional differences, but in many of those cases we believe we will actually benefit from that kind of move given the scale that we have.

So if we were to see situations where these banks failed, if we were the contract holder in that case, we suspect we would continue to process for the receiver, and if they were acquired, we would believe that based on our scale that more times than not we would actually be the core processor for those banks.

Again, I'm assuming in this question we're really talking more on the community-based institution front where we have a very significant amount of share, and in those cases we think we would be likely neutral, but -- I'm sorry, we would be no less than neutral, but in most cases with would be actually net positive.

That's great, thank you. One quick final one. The payments margin has come down sequentially for a couple quarters. I know part of that is due to BofA. I'm just wondering, should we expect that to ramp back up towards 30% plus over the next few quarters?

I think, overall, David. This is Tom. We'll continue to see leverage in that payments industry product segment. Obviously, in the current quarter we did have the impact compared to the first quarter of the BofA repricing and the float impact that does drop to the bottom line there in the operating income. But going forward as we deliver cost synergies and leverage that business we're going to continue to see improved margins.

I would also add to that, David, that that segment, as much as its labeled payments and industry products, or payments, there are about 40% of the revenues in that segment are payments related not pure payment margin product.

And so while I do believe Tom is right, it will revert, I think it will revert back kind of in a nice gradual build because there's a variety of different businesses in there, all payment related but not necessarily just in EFT processing or bill payment business.

Yes.

All right, great job, thanks.

Thank you.

Your next question comes from Bryan Keane of Credit Suisse.

Hi, good afternoon.

Hey, Bryan.

Jeff, could you explain again how the sales quota numbers translate into future revenues, again?

Sure. We measure our sales quota, each year we set quotas and they're distributed across our sales force. The reason why we don't talk in terms of revenues and we talk in terms of percentage for purposes of sales quota is we have different ways of measuring them.

In some cases we measure recurring revenue. In some cases we measure a combination of recurring revenue and one-time -- especially if they're consulting oriented engagements. But from our standpoint, we set quotas in a way that allow us to be able to achieve the growth that we believe we should attain in subsequent years.

We have quota, we have -- quota attainment, we have integrated sales. We also have a group of sales to existing clients that don't fall into either of those two buckets when they're products that are delivered through the core. But if you added all of those up, you would get a good indication for what our subsequent revenues will look like.

And so where they ramp in with expectation, ex the amount of attrition we might see or any changes like that. To the extent we're performing at or near 100% that is at least a positive tailwind for us in looking at our revenue performance in subsequent years.

It's not an immediate impact. It's probably a six to nine-month lag at least?

The way we look at quota, most of it is on an annualized recurring revenue-type basis. We call it normalized. So there is always going to be some performance so that what we've sold to date will have some impact in Q3 and Q4.

What we sell in Q3 will have a very limited impact on Q4, but all of that will have an impact in the subsequent four quarters so on a rolling four-quarter basis.

Okay. And the reason for the pickup from -- I think it was 91 or so last quarter to 99, was that just better closing. Better business leads? What happened exactly to increase that percentage?

You may remember us talking, Bryan, that at the end of the first quarter our pipelines were the biggest they've ever been, and so we had just the good fortune of having that pipeline begin to convert to sales. Our pipeline is still pretty strong and so we believe that we will continue to have good performance throughout the year.

But it was a little bit slower in the first quarter, although it usually is, and then the bump was a little bit larger in Q2 than we had seen historically. But I would really attribute that to the size and breadth of the overall pipeline as well as, I think, we mentioned that we're starting to see some larger, larger sales transactions making it into the pipeline.

We had one of those close in the second quarter and we're hopeful that we'll see a couple of additional opportunities like that come to fruition in the second half of the year.

And, I think, to add to that, Bryan, the core account processing in the banking area has been strong as Jeff indicated. We've done a nice job of closing a majority of those transactions that have been available out there and that's continue to bode well for the long-term because most of that has been generated on the outsourcing side. So that's the other positive thing that we see in the pipe.

Okay, and then last question on CheckFree, the bill pay transaction volume sequentially when we're flat. I guess are you happy with those numbers or is there seasonality in there or anything to explain? I would have thought it would have picked up a little more than that.

It's up about 1% to 1.5%, I think, over the first quarter. The first quarter has historically been stronger. We do see, at least in July so far to date, we see good activity there and so overall we haven't had really any significant changes from that standpoint.

Okay. Congratulations on the execution.

Thanks, Bryan.

Thank you. The next question comes from Greg Smith of Merrill Lynch.

Yes, hi, guys. The weakness on the license side, is that primarily coming from the legacy CheckFree business, their software business?

Greg, it's Tom. Yes it is, it's primarily because of the tier one focus both on the risk management and even a little bit with the Carilion, the larger software licenses because that's going to those tier one financial institutions.

The other thing I'd say is that while the quarter from an installed license standpoint was a bit lower from a recognition of revenue standpoint. As you can see in our cash flow statement, our deferred revenue is actually fairly positive this year as far as growth compared to where it was last year.

Some of that is timing as far as installation of that. But, nonetheless, it was primarily in the risk management and software components that really geared that -- and it was difficult compare to the second quarter of last year also.

Okay. As we look at your guidance range, I think you had said when you initially provided the range, the low end of the range reflects the possibility of some larger deals that could include some start-up costs. Just wondering if we can get an update on are there any of these larger deals out there? What is the likelihood that guidance could come in at the low end of the range?

I think what the majority of that discussion on kind of the larger deals with start-up costs and lower margin, as I recall, was really centered on the level of our operating margin. I think we had said it would be at least 50 basis points or at least 100. I can't remember right now.

I think it was a lot of discussion on we would be willing to take in revenues that were below our average margin if they were scale and we thought they would -- that they were long-term and they would add value to the client base overall. And so while that would have some impact on the lower end of the range it was really more of a margin discussion.

The reason that we -- you may remember -- the reason why we had the broader range this year than we had historically was really just kind of some of the uncertainty facing the market and really to your earlier question, what would happen in the license sales and what impact would that have, obviously, a change in license revenues has a fairly material impact on your overall profitability.

From our standpoint, as we think about guidance, while we didn't take guidance down as a result of the insurance transaction, we did -- we do see that to be dilutive in the second half of the year and, obviously, we'll work hard to redeploy the proceeds to make sure that we mitigate that dilution, and it's one of the reasons why we were able to maintain guidance at the level we have is because we had good performance this quarter and our outlook looks good for the remainder of the year.

Okay. And then just last question, on the insurance business, can you just talk about your confidence that the new majority owner will be able to grow that business and what do you think is the ultimate outcome here? Is it an IPO, a full sale to them, a full sale to another private equity firm. How are you thinking about that?

Yes. Great question, Greg. The deal we did with Stone Point Capital is we looked at a lot of different options. Stone Point is really a firm that is specifically insurance-based. I think they're kind a derivative of the old MMC, which is Marsh McClellan.

So they have a lot of expertise and, frankly, industry connections that we think our assets will benefit from. And, frankly, they also have the time and energy to put into making sure that it gets managed well. So we do believe that we will be able to have that asset build in value over time. I mean, obviously, from my standpoint, I like the efficiency of potentially being to spin or something like that.

We'll look for ways that are most tax efficient, but if we can -- in a few years, if we can figure out how to create a lot of incremental value, we think we have a good track record of redeploying capital and so we wouldn't mind taking that in either.

We'll look at a variety of different options, but, obviously, tax efficiency will be at the very high end of how we think about this, given the tax benefits that we experience now, the remaining dollars that come in the future are obviously going to be subject to tax at fairly high marginal levels.

Cool. Thank you.

Thank you, Greg.

The next question comes from Tien-Tsin Huang of JPMorgan.

Hi, thanks. Jeff, I just wanted to check your confidence level in achieving the 4% internal growth for the year. How much visibility do you have into that?

We have, Tien-Tsin, we have a reasonable amount of visibility. We have a fairly disciplined way -- we reforecast the Company every month.

We spend a lot of time looking at this data, and so given what we can see in the environment today, we have a fairly high degree of confidence that we will have growth that's higher in the second half and that will turn us into achieving the low end of our guidance range as we suggested. I can lay out all of the caveats we talked about earlier, but for right now we're confident we'll make it.

Okay. Then on the insurance deal, congratulations on that. How soon do you expect to be back in the market to buy back stock, and maybe do you have an update on your appetite for share repurchases versus debt retirement?

Yes, this is Tom. Our investment criteria really hasn't changed from a capital deployment standpoint. Obviously, first, we look to fund our internal investments, acquisition, share repurchase and debt repayment.

We've made a lot of progress on the debt repayment side, paying down about $900 million to date. So, we did announce that share repurchase authorization in early July and we plan on utilizing that over the next couple of quarters, along with deploying that capital in other areas, both internally and also looking at acquisitions to the extend they're there.

I would add to that, Tien-Tsin, that given the success that we're having in executing the business right now, kind of putting the two companies together, everyone saw the $311 million of free cash flow and we expect that to continue to perform well.

It's really raised our confidence and I think made everyone comfortable that we're going to be very easily able to meet our debt obligations. And so given where we are today and given our strong desire to minimize the level of dilution in this transaction we'll take appropriate actions as soon as we're able.

Excellent, excellent, and then the final portion of the ISS sale. That's still on track, right, for the end of Q3?

Yes. It's still tracking towards the end of the third quarter.

Last one, I promise. Pricing, any changes in the pricing environment for either Financial or Payments?

No, there's been a lot, I think the first quarter there was a lot of discussion on pricing and price compression. I don't think there's anything any different in the environment.

I think you're seeing actually a less of a willingness by incumbents -- the incumbent clients to make switches on their technology. And we know that and they know that, but clients are smart and they're continuing to push hard. And as I mentioned, our transaction growth is still pretty robust and that's going to continue to lead to kind of I think similar levels of compression that we've seen historically.

I actually am a little bit more comfortable today on compression than I was in the first quarter. I think people are settling down and I think we're focused on execution as are the clients.

Very good, thank you.

Thank you.

Thank you, the next question comes from Chitra Sundaram of Cardinal Capital.

Thank you. Congratulations.

Thank you.

I just want to clarify one thing.

On the payment side, when we say 1% organic growth you have to add back another percent for the BofA and float income, and so the remaining when you compare to Q1, the 5 percentage points that is because of other license and risk management and all that?

Did I understand that correctly?

I think so. Maybe I can just clarify that a little bit. Are you talking just about the Payment segment?

Yes.

Yes, the Payment segment, the actual rate just in Payments was 2%, a little bit over 2% for the quarter. And then we had the Bank of America and the float impact which, for the quarter was roughly about 3 percentage points.

So, it was roughly 5% and, again, what I tried to focus on is the impacts that we had in the quarter and we do have things that impact us on a quarter-over-quarter basis, was primarily the 40% of revenue in this segment that is not tied into bill pay EFT. That's our output solutions and the risk management pieces which were a little bit lighter in the quarter as far as installed licenses, and also the difficult comparison we had to the second quarter of last year.

So, we are at 5% on an adjusted basis for the Payment segment, and year-to-date we're at 7% on an adjusted basis, excluding the BofA reprice and the float, which, again, as we look forward to '09 and into the future should not be an impact. That's where we are for the year as far as that segment goes.

Okay, brilliant, and then in amortization it's $44 million for the quarter. Should we just extrapolate that for the rest of the year?

I would not extrapolate that full amount. We did have a slight catch-up because of true-up of some of the purchase accounting with CheckFree. I would take the first half of the year and double it and that should get you to right about where you need to be.

Okay, and CapEx trends for the rest of the year, how should we think about that?

I think we'll continue to, as I indicated in my opening comments, we will have a little higher level of CapEx in the second half, which has been factored into our revised free cash flow estimates.

Okay, and lastly the number of shares that in your guidance you're assuming flat share count year-over-year?

What we've indicated is part of our capital allocation, we did receive the $510 million after taxes. We'll be redeploying that into share repurchase as we announced our $10 million share reauthorization. So I think over the next couple quarters you'll probably see that come down a little bit.

Thank you. Our next question comes from Kartik Mehta of FTN Midwest.

Good evening, Jeff.

Hey, Kartik.

A question on CheckFree, Jeff. As you look at CheckFree now, looking back and at least in the short run. What do you think's gone right and what do you think could improve? I'm trying to figure out where you really having success with the acquisition and where you really have the opportunity over the next 12 to 18 months, or even longer?

That's a great question. I think the areas where we could improve is had we done something like this before, we would have known -- we would have had a better idea of some of the -- just the general cultural integration challenges that you have. And while, frankly, we haven't had very many because we've really learned that CheckFree associates and the Fiserv associates are actually, interestingly, fairly in synch.

You just go through a fair amount of assimilation to come to the decisions on how you're going to execute your business. That took some time and so I wish we would have been able to better anticipate that.

From a kind of an end market, I don't think there's a lot we could have done differently. I think we're making great progress in working with the large financial institutions.

We are just actually thrilled at how our bill payment delivery is going and integrating that into the core and probably the thing that I'm most excited about right now is we have a very unique opportunity to integrate our capture, kind of remote capture, distributive capture solutions with our item processing footprint and really go out and do things that CheckFree couldn't have done on its own, and we couldn't have done on our own, in a way that could have really attractive returns for shareholders.

So I'm pretty happy with really how the acquisition is going in general, and, Kartik, you know I'm always going to be able to come up with a much longer list of things I wish I would have done better. But on balance our people in both organizations are doing a great job and we're pretty happy.

And, Kartik, I'd just like to add a couple of things from my perspective. First of all, from a client standpoint, not losing any clients through this acquisition has been tremendous. The RevE component of the Carreker business has been some very nice upside.

That business has been incorporated into our Financial Institution group and we have seen a lot of positive on that particular business. And just overall from an execution, from the financial standpoint, the cash flow of the business and just the associates and their commitment working with Fiserv in our integration activities has really been fantastic. So I think just a lot of good things have happened out of this particular acquisition.

Jeff, I wanted to get your thoughts on the overall growth of the market. We're always talking about the internal growth and, obviously, comparing it to the year ago quarter. And I'm trying to figure out what you think is the overall internal growth, or organic growth of this market, so maybe we have a comparison to the industry?

Well, there is no, unfortunately, Kartik, there is no perfect -- there's no industry benchmark for what kind of the aggregate growth is for all of the data processors, et cetera. So the proxy that I believe people have used historically is what's technology spend for banking and financial institution space which has been the four to six range.

I've seen a number of different reports and consultants and pundits who are talking about the fact that number could be substantially less. It could be more like 2%. The problem I have in using any of that data is because we have such a wide array of products, we have over 800 different products in our mix, the growth rate associated with debit is much different than the growth rate associated with servers.

And so I don't have a good proxy for the industry except to say that I believe that Fiserv should be able to grow at a level that is a multiple of whatever the industry is given the kinds of things we're doing. That's our take right now.

We'll talk about this in more detail in November as we really lay out how we see -- how we see the future and kind of breakdown the different industries and the growth rates inherent in those industries. I would also say that I have become increasingly confident that the revenue that we need to generate, the internal revenue that we need to generate is -- can be less than I thought two years ago given the leverage that we have in our business model.

So, I think we could grow -- I think we'll be able to grow our earnings at rates that are higher than I thought we would be able to do historically given the addition of CheckFree and some of the other things we've done on the efficiency side. But, again, we'll talk about that in some detail in November.

One last question, Tom, you talked about the Payment segment. I just wanted to make sure I understand the Financial segment and maybe the sequential margin improvement you'd anticipate out of that segment for the rest of 2008?

That was, I'm sorry, Kartik, was that the Financial segment?

Yes, Tom.

Yes, we've had very solid margins in there. We're not, obviously, giving segment guidance.

We're say that in total we're going to be up at a minimum 125 basis points. We have had the lending have an impact in that particular segment, obviously, that business is down. It has a margin impact, and licenses were a little slower as far as installed until the second quarter. But overall we should continue to to see improvement going forward over the long-term. And, again, we gave combined guidance on the Financial and Payments of 125 basis.

Notwithstanding the license revenue impact on a quarter-over-quarter basis, our margins are continue -- over the long-term going to continue to improve.

Thank you very much.

Thanks, Kartik.

Thank you. Your next question comes from Julio Quinteros of Goldman Sachs.

Great, thanks. The 125-basis-point and the improvement in the organic revenue growth for the year what is the implied assumption there for termination fees in the back half of the year?

We typically have not had a lot in the back half of the year. There's not a lot baked into that for that particular area.

Great, and for the growth in EBITDA and free cash flow as we think about that in the second half of 2008, is that beginning to moderate or how do we think about the pace of it given how strong it's been so far in the first half of '08?

We've increased our guidance for free cash flow. We've taken into that guidance for the year, the increase in capital expenditures. We, obviously, have done a substantial job in the working capital front in the first half of the year, but we're very confident in that free cash flow guidance.

And the only thing in the second half that's a little different, Julio, is, obviously, the insurance piece will be less compared to the first half where we have the full cash flow from those businesses versus potentially our share of that particular cash flow. So that's the only thing to consider.

Okay, and then on the clients that you added on the bill pay. I think it was 146 bill payment clients, what is the general sense on the average revenue per client that you're adding there?

Julio, it's a little bit of -- it depends the client. We typically have not talked about that. We've not talked about it specifically on a client-by-client basis. But I would say -- it biases to be smaller than what CheckFree would be doing on its own because a lot this is going to core, and we think even though it will generate nice revenue gains over the next 12 months that as you know because this is a fast-growing transaction business that we will benefit from that growth for a number of years to come.

Great, and then finally, just where are we in terms of thinking about international opportunities, international sales strategies? Any updates that you can give us there in terms of where you're thinking about going as we think about more of the global opportunity for Fiserv?

Yes, we will talk a little bit about that in November, Julio, but kind of the shorthand version we've been really focused on integrating CheckFree and making sure that we have a sustainable model here in the U.S. We think we're getting quite close to that and I suspect that 2009 will be the year in which we put extreme amount of focus on what to do internationally.

Great, thanks, guys.

Thank you.

Thank you, your next question comes from Charlie Murphy of Morgan Stanley.

Thanks, Jeff. Flood processing revenues have been week, or they seem to have been weak for a while. What do you expect in that business for the back half of the year? I know that's very profitable revenue.

We are changing, Charlie, we're going to have a 49% share of that. So as the transaction closes we're going to be reflecting the income on a one-line item net of tax. It's not going to have any benefit from that standpoint, but I think that business is a well-run business.

We hope to leverage more from our partnership with Stone Point and that business should improve over the second half of the year due to the premium gains they've had in that business along with other efficiencies. But that won't be reflected on our top line just because of the transaction closing that we did here in regards to that insurance sale.

Okay, great. As a very quick follow-up is it fair to assume in the second half of this year that the home equity business will not be a material drag on organic growth?

That's right. It's going to continue to improve as we go through the second half of the year because a couple of things are happening there. One, the comparisons get much easier as we go into Q3 and then much easier as we go into Q4.

That being said, we have had stable revenues in that business in the first and second quarter, but it is something that we continue to watch closely. But we are going to have improvement -- forecasted improvement in the second half just because of those comparisons if we stay where we're at in that business.

Thanks very much.

Thanks, Charlie.

Thank you. Our next question comes from Glenn Greene of Oppenheimer.

Thank you, good afternoon, guys.

Hi, Glen.

I just want to go back to the macro environment, Jeff, and just get your thoughts on it sounds like business as usual. Generally business as usual. If you sort of looked out six or nine months how would you handicap what you would be worried about whether it's increased bank consolidation, further pricing pressure. It sounds like you're not too worry about bank failures meaningfully impacting you. How do you think about the issues that may or may not impact you and the order of magnitude?

Sure. I should probably clarify for the good of the e-mails that I'll get after this. Business as usual is kind of more of a broad moniker. Again, I think there's a lot of consternation and pensiveness in the marketplace, whether it be consumers or their financial institutions, I think a lot of people are paying attention.

When I talk about business as usual, I mean that for the most part, people are still focused on getting new clients, gathering lower cost deposits, extending services, and then, of course, you have to look for efficiency and manage regulatory risk and those kinds of things. That doesn't go away. That's kind of the mandate of being a financial institution.

Much of our revenue is connected to that kind of activity. When we talk about business as usual that's kind of broad strokes. In terms of you look out six to nine months, and I think we're going to continue to see the weakness that we're seeing in the general landscape now.

I think we'll continue to see at least for one more quarter, if not two more quarters, the continuing headline noise and I think that will continue to affect people psychologically. The bank failure point. You would have to go back to the late 80s to see the kind of failure rates that people are talking about now.

Again, it's our sense in really trying to break down the businesses that failures are really kind of a brick and mortar issue and not an account and transaction kind of issue. So, again, as a scale participant there I believe we could have accounts switching from institution to institution, but on balance I believe that the net wins will overtake any losses that we would have in that space.

So from my perspective I'm not too worried about that item. So I think we're going to have generally just an extension of what is going on now or an elongation of what is going on now, and I would reiterate, though, that the place that business is usual is not the case is really in this term of our art that we're playing around with and that's non-discretionary, non-mission critical technology licenses.

And I do think that people are going to be -- they're going to keep their hands on their wallets a little bit more in those categories because until we can see signs that we have hit bottom, I think people are going to save up for a rainy day. I think that's the area that the industry in general has the most risk.

On your, your neighbor had his conference call a couple of days ago and he talked about his biggest worry was increased bank consolidation. That's what I was kind of getting at was if you look at the various factor where there is pricing, slowdown in discretionary spending, increased consolidation, bank failures, what not. Would bank consolidation be the most worrisome thing?

That's a little bit of a nuanced question because we are in the interesting position, the majority of our core processing is done with community-based institutions whether they be banks, thrifts or credit unions. And I don't think you're going to see a massive amount of consolidation in that space that would actually take the core processing out of that space.

If you go up to the tier 2 or the mid-tier of the market, you can easily see scenarios where the core processing that occurs there could be consolidated across the mid-tier or even more interesting is could that mid-tier go into tier 1? And most of the tier 1 banks do their own core processing. And so if you're providing services to that group, I think you'll have more risk.

Our risk profile doesn't carry that because, again, our core processing is centered on the community-based institution space and the services that we provide at the mid-tier and the top tier tend to be our Internet banking, our bill pay, our risk management services. We think in those cases, given our scale, that we won't be affected in any event -- at least not materially.

Okay. That's very helpful, and just a different direction and you alluded to it a little bit. Just sort of an update on the discussions with the larger financial institutions, the pace of activity, has it stayed strong like it was in the last couple of quarters, and your optimism about landing some meaningful deals by the end of the year?

We are a little bit less focused on deals at this stage given all we have going on and the level of opportunity we have.

We'll continue to survey the landscape as there are transactions that may become available, but our priorities around capital deployment are fairly clear, and we've stated them. And we have a lot of capital and a lot of ability to do things, but we want to be focused on delivering value for shareholders right now.

Thank you, our next question comes from John Kraft of D.A. Davidson & Co.

Good afternoon. I'll just make these, hopefully, very quick clarifications, but ,Jeff, the bill pay wins, the 140, obviously, nice number. Two-thirds of those were to existing core clients. Are those primarily being sold by your core account reps or by CheckFree reps?

That's an interesting question. These are being sold primarily by our account managers who work in our core processing businesses.

We've worked very hard as part of our team two initiative to educate our account managers on the different products that we have, and we have put significant energy since we acquired CheckFree to be able to educate our people in how to work with our core processors, whether those are greenfield opportunity or competitive displacement.

That really is being done by our account managers with support coming from both the CheckFree organization as well as our Paytraxx organization.

And CheckFree reps primarily still cater to where they used to, the larger bank market?

Absolutely. Call it the top 200.

Okay, and then this Online Advantage product you mentioned, it sounds interesting, presumably you're using some of the Carilion technology. Is that going to be sold both as an Internet banking and a bill pay offering and will there be subscription?

In fact, the initial release of the product is the hosted model and we probably won't have the license model available until late in 2009.

It is a very tight integration between the Carilion and the Voyager platform and our EBPP, and so there will clearly be the capabilities, both computer experiential, as well as some of the revenue things that I referenced that will only be available in that product, and so we think we'll see some pretty nice capabilities there.

We plan to actually do some fairly deep dive and do demos of this in November. We're excited to show it to all of you.

Okay. Great, and then lastly, the recent success in the de novo market. What would you attribute that to? What are you doing differently now?

It's really not so much in the de novo market because the de novo market actually has shrunk a lot. It's in competitive displacements where the majority of our wins have come this year.

And I really think it comes from us having a more robust value proposition because we're going to market as one Fiserv in terms of not just making sure that we're having the right core processor at the table, but making sure that we have the the breadth of capabilities that we have, whether they be CheckFree's bill payment or whether it be Voyager's Internet banking platform, EFT, net economy, bank intelligence.

Whatever it is we're really bringing the entire enterprise to bear on the market and, frankly, that's paying some pretty big dividends.

Okay, great. Thanks, guys.

Thank you.

Thank you, your last question comes from Pat Burton of Citi.

Hi. Congratulations on the quarter.

Thank you.

My question is on the 10 million share buyback is that just from the sale or is there an additional authorization still in place from prior to that announcement?

No, that's a new authorization. There's nothing remaining on the previous one. That's the one we just did here in July.

Okay, and with the strong free cash flow year-to-date and the sales proceeds, I guess I'll just ask (A) the timing it and (B) how you came up with the 10 million share number because it seems to me you could presumably have done 15 or something like that million shares. Thanks.

Thanks, Pat, and I think from my perspective is that the -- we've done 10 million share authorization. We're going to continue to allocate our capital effectively for our shareholders. We have shown that before in the past as far as our repurchases go.

We're going to balance that with our internal investments, acquisition opportunities and, obviously, the debt repayment that we have to do to get to that 2.5 times leverage by the end of '09. We do have good flexibility right now with our strong free cash flow and we will allocate that capital appropriately.

I guess one last question. How much money do you anticipate coming in when the last piece of shareholders service is sold?

That's not going to be that significant. The more significant piece came in already, but that will be around in the range of 100. Somewhere in that range.

The timing of the buyback just pro rata over the --?

Yes, we'll continue to buy back over the next couple of quarters.

Couple quarters. Okay, thank you.

Thank you -- .

Go ahead, Stacy, sorry.

Thank you, I would like to turn the call over to Mr. Yabuki for closing comments.

I guess at this hour I was a little bit anxious. Thanks to everyone for joining us. I know our call went a little bit longer than we typically do, but if you have further questions please don't hesitate to call our Investor Relations team, and as always thanks for your support.