Fiserv Inc (FISV) 2010 Q1 法說會逐字稿

Welcome to the Fiserv first quarter 2010 earnings conference call. All participants will be in listen-only mode until the Question and Answer Session begins following the presentation. Today's call is being recorded and 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 the material goes to the Company's website at 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.

Now I will turn the call over to Jeff Yabuki, President and CEO of Fiserv.

Good afternoon and thanks everyone for joining us for our first quarter 2010 earnings conference call. With me on the call 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 internal revenue growth, adjusted earnings per share, adjusted operating margin, free cash flow, sales pipeline 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 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 measure. 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.

One quick housekeeping note. Please mark your calendars for our annual Investor Day to be held on Tuesday, October 5th in New York City. Invitations will be sent out in August.

Let me say up front that our Q1 results were consistent with our internal expectations given our strong fourth quarter's performance, a tight spending environment, and the relative strength in last year's Q1. We delivered record free cash flow, solid growth in adjusted earnings per share, and continued to make new product investments. Most important, our full year guidance remains unchanged and we are right on track to achieve it.

Our bellwether recurring revenue based businesses, namely account processing, electronic banking and card services, performed well in the quarter. Despite positive revenue growth in many of our business lines, total adjusted revenue in the quarter declined by 1% to $954 million.

There were three primary drivers of the revenue decline that were generally anticipated going into the quarter. First, revenue was comparatively weak in output solutions against a very strong first quarter in 2009. Next, continued secular weakness in the check processing space negatively impacted revenue growth. And, last, we experienced a decline in license fees and specialty consulting services in the quarter. Tom will provide more detail in a few minutes.

Adjusted earnings per share was up 6% to $0.95 compared with the first quarter of 2009, in line with our expectations. Adjusted operating margin was 28.9% in the first quarter, down a mere 20 basis points below 2009's high watermark of 29.1% in last year's first quarter. Margin was up sequentially over Q4 and importantly was 20 basis points higher than the 2009 full year results. We're satisfied with our margin performance in the quarter given the decline in some higher margin revenue, the extremely low levels of termination fees and float income, and our increased investments in new products. Free cash flow continued to be excellent, generating an all time high of $225 million in the quarter, an increase of 15% over the prior year's quarter.

As you know, we have three key enterprise priorities for 2010. First, to deliver positive adjusted internal revenue growth and meet our earnings commitments. Next, to center the Fiserv culture on growth leading to improved enterprise win rates and a higher share of our strategic products. And, third, to provide innovative solutions that increase differentiation and enhance results for our clients. As I mentioned, we're on track to obtain our full year revenue growth and earnings per share targets. We continue to see steady growth in our recurring revenue businesses and will also benefit from a large number of new implementations coming online during the year.

I can't overstate the importance of our second priority, centering the Fiserv culture on growth. As I mentioned on our last call, we created a single global sales organization which includes new sales and enterprise account management. The sales changes have been very well received and momentum is high. Sales for the first quarter were better than expected and the pipeline has grown substantially from the end of the year. In addition, there were several significant transactions in the pipeline that we expect will close in the second quarter. In fact, one is already closed which should have a positive impact on 2010 revenue. We closed 139 new debit and bill payment clients in the quarter, reinforcing our commitment to increase the size of our strategic payments businesses. We're also in full swing with our new person to person payments capability and recently announced that over 40 institutions have committed to launch our new product this summer with a pool of millions of potential users from our CheckFree RXP user base.

Centering on a growth culture is not just about sales. It is also how we serve clients, the quality of our service delivery, and the ability to develop technology solutions which anticipate the needs of an evolving market. We're confident that our transformation will enhance loyalty, extend wallet share, and increase win rates even further.

To our third priority we're continuing to invest in areas that will increase value to clients and enhance the power of our existing solutions. For example, products such as Mobile Money, P2P, and integrated debit will create both standalone new revenue and also accelerate transaction growth across our existing payment businesses. Late in the quarter we hosted our Bank Solutions Conference which is one of our largest client events of the year. We had nearly 1,000 account processing clients, about 1,500 attendees who clearly see the value of adding new and differentiating capabilities to their institution. Our solutions center was jam-packed showcasing many of the Fiserv wide technology solutions. As a result, clients requested over 2,400 product and solutions sales proposals this year, more than twice the number requested last year, providing us with increased confidence in the direction of our solutions and the sales opportunities ahead. As important, that level of increased activity is a positive sign of a potential return to a more normalized technology spending environment.

Now, let me turn the call over to Tom for more details on the financial results.

Thanks, Jeff. Good afternoon, everyone. Throughout my discussion I will refer to the supplemental information included in the slide presentation. As shown on slide three, adjusted revenue in the quarter was down 1% to $954 million compared with the first quarter of 2009 and consistent with our expectations that we will produce stronger second half revenue and earnings growth. As Jeff mentioned in his remarks, we saw growth in a number of our areas including our core account processing, electronic banking, and card services businesses.

This performance was offset by several factors including a tough year-over-year comparison in our output solutions business related to higher margin revenue in 2009 that did not recur in 2010. This alone negatively impacted our revenue growth rate by 1 percentage point in the quarter. The revenue in this business will generally have more quarter to quarter variability than our typical recurring revenue base businesses. In addition, declines in license and specialty consulting revenue compared to a strong first quarter of 2009 negatively impacted quarterly revenue growth by 1 percentage point. Finally, volume reductions in our check processing business contributed an additional 1 percentage point drag on overall revenue growth in the quarter.

We remain confident in our full year adjusted internal revenue growth guidance of 1% to 3% due primarily to the following factors. First, our core businesses continue to perform well, particularly in the account processing and payment areas which represent the majority of our revenue. We expect revenue growth to be stronger in the second half of 2010. Second, as Jeff mentioned, we expect to win several significant transactions this year which will positively impact 2010 revenue. And as we shared, one of these large deals has already closed. Third, there are a number of client conversions in process from sales in 2009, some of which are quite large, that should ramp up as we progress through 2010. Examples of these significant wins include American Savings Bank and Tesco. Typically these larger transactions have significant professional services revenue included in the relationship. This overall effect has contributed to a $10 million increase in deferred revenue in the current year and a $17 million increase over the prior year's first quarter which should convert to revenue in the coming months. Fourth, the combination of an uptick in client buying patterns and improved sales execution should boost performance as we proceed through the year. Finally, we don't expect the grow over issues in businesses such as output solutions to persist.

Adjusted EPS in the quarter was $0.95, up 6% compared with the prior year. You will note there are no income statement adjustments for CheckFree integration costs or similar items given the time that has elapsed since the acquisition. However, we still expect to incur a couple of million dollars per quarter this year of integration costs, severance, and various other expenses which have been incorporated into our full year guidance. On balance, we do not consider these amounts to be material to our results. For example, in this quarter we incurred nearly $3 million of incremental costs for call center consolidation in our payment segment that previously would have been treated as integration costs. Adjusted operating margin in the quarter was 28.9%, a decrease of 20 basis points from the first quarter of 2009. Given the increase in investments and the decline in higher margin revenue in the quarter, we are satisfied with the results. Additionally, as Jeff mentioned, adjusted operating margin was up sequentially for the quarter and 20 basis points better than the full year 2009 results. We are on track for our expected full year margin improvement.

Now onto the segment results. The payment segment generated adjusted revenue of $486 million in the quarter which, as shown on slide four, was roughly flat with the first quarter of 2009. Growth in our electronic banking and card services businesses were primarily offset by the decrease in the output solutions business which negatively impacted the segment growth rate by 2 percentage points. We also had lower license fees in the segment and a large client which took the management of its ATMs in-house at the beginning of 2010. Although this is relatively low margin revenue, it will negatively impact segment revenue growth by about 1 percentage point for the year. This did not have an impact on our traditional ATM driving business.

We are also seeing strong interest in our channel solutions domestically and around the world. We anticipate some significant wins in this arena which should positively impact revenue growth in 2010. Pooled income in the quarter was basically nonexistent as interest rates remained at historically low levels. Growth in card services was driven primarily by continued strong, double-digit growth in transaction volumes from our debit products. Our combined debit processing and network transactions grew 23% versus the prior year's first quarter. These strong results reflect the continued macro trend towards debit card usage and strong integrated sales to our account processing base.

Bill payment transactions grew 6% in the quarter compared with the first quarter of 2010. Excluding volume from a remittance only large bank client that was acquired in 2008 and moved off of our platform in the fourth quarter of 2009. Overall transaction volume growth was negatively impacted by cyclically weak volume at some larger clients that have higher levels of bill payment penetration.

Turning to slide five, operating income for the payment segment was $148 million in the quarter. And adjusted operating margin was 30.5% was down 140 basis points compared with the first quarter of 2009. The reduction in adjusted operating margin for the segment was driven primarily by decreases in higher margin revenue in our output solutions and risk management businesses, the margin impact of product development investments that we have highlighted previously, and as I mentioned, incremental integration costs including severance of nearly $3 million related to a call center consolidation expense within the segment. These impacts were partially offset by continued operating leverage and overall attainment of operational efficiencies.

The financial segment generated revenue of $472 million in the quarter, down 3% compared with the first quarter of 2009. Declining volume in the check processing business accounted for 2 percentage points of the segment revenue headwind in the quarter. Decreases in license fees and specialty consulting revenue also negatively impacted segment revenue growth in the quarter by an additional 2 percentage points. And importantly, in spite of historically low termination fees and lower levels of discretionary spending by our clients, the account processing business continued to exhibit steady growth in the quarter.

As Jeff mentioned, we saw demand increasing for a number of products, and we expect that to translate to a stronger second half of the year. We continue to efficiently manage our business, reducing overall operating expenses in the segment by 3% compared with the first quarter of 2009. We are using these efficiencies to help offset the impact of increased investment funding in areas such as Acumen, our state of the art account processing platform for large credit unions, and our new PEP-Plus ACH ASP solution. We are also building innovative deposit transformation solutions designed to help financial institutions deal with the impact of financial regulation including Reg E which will have a significant impact on fee revenue for the financial industry.

Operating income in the quarter was $136 million, and adjusted operated margin was 28.8%, a 50 basis point decline compared with the first quarter of 2009. The reduction in adjusted operating margin in the segment was driven by decreases in higher margin license and specialty consulting revenue, and the impact of incremental product investments partially offset by operational effectiveness benefits. Adjusted operating loss in our corporate and other segment improved by approximately $7 million in the quarter compared to the first quarter of 2009 due to a combination of reduced corporate spending and a gain on the sale of an operating facility of $4.5 million. Capital expenditures were $42 million in the quarter, down 7% compared with the first quarter of 2009. Our capital expenditures primarily reflect investments in technology equipment and purchased software. Most of the labor and operating costs related to product development are expensed directly through the income statement.

We had record free cash flow in a single quarter generating $225 million, a 15% increase compared with the first quarter of 2009. Free cash flow per share grew 16% in the quarter to $1.46 compared with $1.26 in 2009. We used our strong free cash flow to prepay $126 million of debt in the quarter representing nearly one half of our debt repayment obligations for the entire year. As a result, our total debt is approximately $3.5 billion at March 31st resulting in a trailing twelve-month debt to EBITDA ratio of approximately 2.7 times. Net interest expense was $45 million in the quarter as compared to $54 million in the first quarter of 2009. The decline resulted from lower debt balances and the expected positive impact of interest rate hedges that rolled off at the end of 2009. We also repurchased 1.4 million shares for $67 million in the quarter. As of March 31st we had 5.8 million shares remaining in our outstanding repurchase authorizations.

Our effective tax rate for the quarter of approximately 38% was negatively impacted by the R&D credit not being authorized in the first quarter of 2010 compared to 2009. This had a negative impact of about $0.01 per share on first quarter earnings compared to 2009.

Now I will turn the call back over to Jeff.

Thanks, Tom. As you know, our fourth quarter sales were quite strong. And December in particular was the highest sales month in the history of the Company. Sales in January and February started slow and we rebounded a bit in March ending the quarter at about 82% attainment. While this is short of our ratable full year objective, it is important to note the quota for 2010 was again increased versus the 2009 level. Total contract value of closed transactions was higher in the quarter compared to the first quarter of 2009. We had numerous competitive take-aways in the account processing and payments businesses and new clients often continued to buy multiple Fiserv solutions. We were also encouraged by how quickly the sales pipeline was replenished during the quarter.

We continue to expect longer and somewhat unpredictable sales cycle times given the environment. However, given our visibility into the pipeline, we expect to meet or exceed sales targets for the year. Integrated sales were $23 million in the quarter, a 22% attainment level against our full year target of $105 million and 15% growth over the first quarter's attainment in 2009. We are on track to meet our integrated sales target for the year. The leading areas of integrated sales continue to be payments, customer channels, such as internet banking and brands, and efficiency based products. As I mentioned up front, we signed 93 new bill payment clients and 46 new debit clients in the quarter. Since the acquisition of CheckFree in late 2007 we have added over 1,500 new client relationships in these two strategic payment solution areas and we still have significant room to grow.

We generated over $19 million of cost savings through our operational effectiveness initiatives in the quarter, almost 50% of our $40 million full year target. While we don't expect to attain cost saves at this pace through the remainder of the year, we fully expect to meet or exceed our operational effectiveness target for 2010. As we said in our last call, we believe there are significant opportunities to further optimize our cost structure which we will share with you in more detail at our Investor Day.

Before we take questions, let me update you on our view of the environment and guidance for the year. There have been 64 regulatory actions through April 23rd, 31 more than at the same time last year. This increase in resolutions is within our range of expectations for the full year. Even at these levels, the number of institutions impacted in 2010 would represent between 1% and 2% of the more than 16,000 financial institutions in the country and much less than the 3% average decline in the number of financial institutions seen over the last 20 years or so prior to 2009. Overall, we are down slightly in terms of wins and losses since the beginning of the regulatory actions in 2008, and we still expect to be about neutral over time. On balance we expect to lose far fewer clients to regulatory action than many thought possible at the start of the banking crisis.

Although capital is still tight within the financial institution landscape, there does appear to be a loosening of discretionary spending. And although this will be more prevalent in those institutions that are healthier, there is a broad realization that some level of discretionary spending is required for any institution to be able to move forward. In addition, there are early stage conversations happening in the industry around organic or non-resolution acquisition by institutions who want to quickly capitalize on market opportunities instead of waiting to see what may be available via the resolution channel. We believe our wide range of market leading solutions, along with the portfolio of new product investments we are making, have us extremely well positioned to accelerate revenue growth as the financial industry moves closer to a new normal.

As I mentioned up front, our 2010 expectations remain unchanged from the guidance we provided at the beginning of the year. We continue to expect 2010 adjusted internal revenue growth to be in a range of 1% to 3% which should include stronger growth in the payment segment. And as we have said several times, revenue growth will be stronger in the second half of the year. We expect 2010 adjusted earnings per share growth of 8% to 11%, and that full year free cash flow will increase between 5% and 8% to over $700 million. Lastly, we anticipate adjusted operating margin for the Company will expand by at least 50 basis points for the full year.

Although the market has not returned to its pre crisis level, there are some early signs of improvement. We continue to make the strategic moves necessary to position Fiserv to deliver client and shareholder value. We would not be where we are today if it were not for the tireless efforts of our nearly 20,000 associates around the world. I continue to be impressed by the quality of our people and their commitment to delivering superior service and value to our clients.

With that, let's open the lines for questions.

(Operator Instructions). Our first question comes from Bryan Keane of Credit Suisse. Your line is open.

Good afternoon. Just want to ask you about some of the large deals. How many large steals are we talking about? Can you help us at least with the size? Are they $5 million, $10 million in size? And then help us understand what type of deals these are. I know you don't want to name the names, but how about what type?

We have several deals in the pipeline that are of what we would say significant size and maybe we would define that to say it would be material to our growth rate for the year. So we think they're larger than call it $5 million or $10 million, and these are deals that are recurring revenue, services oriented deals, some of them have license. But they're big deals that will be additive to our run rate revenue for the Company.

What segment are they in?

They're in both segments. They're in both segments. We mentioned in the call one of these has already been signed and in. It just happened between the end of the quarter and today and we just haven't gotten to the point yet where everything is ironed out to do an announcement. Clearly we'll talk about it in the next quarter call if we don't do a release before that. And we expect another deal to happen in the quarter and perhaps several more. Or let me say it a different way, perhaps more in the second half of the year.

Tom, the strong free cash flow growth, I saw the full year guidance of free cash flow is still the same at 5 to 8 even though the quarter was up at 15%. Were you expecting that strong of start to the year and it should even out as we go through or are we looking at potential upside for free cash flow?

We had a great quarter in free cash flow. I think some of the things that happened there is clearly our backlog from a deferred revenue standpoint increased more than anticipated. And we're just off to a good start to the year so we're not changing our guidance but clearly we feel very good about our free cash flow generation as a Company and we'll continue to focus on it, as we always have.

It is probably too soon, Bryan. We need at least another quarter to see how it looks.

Last question for me. Can you help us quantify the license and professional services that sound like it was a little bit down year-over-year. Can you quantify that for us? Thanks.

I will start with that and turn it over to Jeff, Bryan. As we've talked about historically, the license revenue for the Company is about typically on average about 5%, and each quarter that can vary anywhere from 4% to 6%. Clearly in 2009 we had a very strong fourth quarter which is at the higher end of that particular range. In the first quarter of last year, our license revenues were about 5% of total revenues, and they were down, as I indicated, roughly about 15% to about 4% of total revenues in the first quarter. And some of that had to do with clearly we had a strong Q4 and clearly this year, as we indicated, as our pipelines are building in demand we anticipate those license fees will continue to accelerate as we go through the year.

Regarding the professional services, to the second part of your question, really the professional services revenue was pretty solid in the first quarter. We do have a specialty consulting business that we talk about, and that's our revenue enhancement consulting business. And we have really transformed that business over the last six to nine months to really focus on the new financial regulation, Reg E, and have retooled that for our clients, and spent a lot of investment dollars in that and rebuilding our pipeline over the last six to nine months. That business, too, we look forward as the pipeline has grown and we have signed more client contracts, and so that's a nice thing we're looking forward to as we proceed through 2010.

Okay. Thanks a lot.

The next question is from Dave Koning of Baird. Your line is open.

Hi, guys. I just wanted to pursue the organic growth negative 1%, and you explained a few 1% headwinds to growth. So it looks like it would have been 2% excluding those. And I am just wondering is that the baseline for the rest of the year, is 2%, plus on top of that we get the benefit of some of these new sales so that we should model the ballpark just 2% to 3% for all the rest of the quarters?

Dave, let me give that a shot. I think your math for the quarter sounds a lot like our math for the quarter. So I can't debate that. I would say, we said last January when we gave guidance or February, when we gave guidance and now that we do expect to have more revenue in the second half of the year as opposed to the first. But on balance we expect to be between 1% and 3%, so you can do the math. I would say there will be more revenue growth in the second half of the year versus the first, but the math that you're doing is about right.

I think the only thing I would add to that, Dave, is we did talk about the output solutions which is really timing of that particular revenue and the comparison which was about 1%, to your point. The licensing and specialty consulting was really 1%, which also really had an impact on our margins. And some of that new business we talked about is also going to be incremental to that number that you put out there.

Okay. Maybe the question is, are there other headwinds that could happen the rest of the year that could keep it less than 2% the rest of the year? Or maybe it is just a little tough to say right now.

I would say, for example, the specialty consulting business that Tom talked about in his prepared remarks, that business probably won't generate any material business until the second half of the year. We basically have had to retool that business because it used to be based significantly on optimizing fee revenue from financial institutions into new consulting offering which is catching a lot of steam on now looking for different ways at institutions to make up for the fee revenue they're no longer going to have. And so we wouldn't see that generating any material revenue into the second half of the year. So that's, for an example. I think the other caveat that, unfortunately, I think every one of us in the industry right now have to put on this is sales cycles are just not predictable. And some of the sales, like license revenue that just happens in a quarter or doesn't happen in a quarter. And the challenge that we have, Dave, as you know, is we've been pretty disciplined about not managing the business on a quarter by quarter basis, and so we really look at things on a full year basis. So we're quite comfortable on the 1% to 3% for a full year basis, but it is difficult for me to say will it be 2% each quarter, will it be 1% and 3%? How will it all stack? I just don't know right now. The visibility that we have that gives us comfort is for the last nine months of the year, not for what's going to happen in a particular quarter.

That's great. One last quick one. Term fees in the quarter, what was the revenue from that?

They were fairly small. I think they were roughly $1.7 million this quarter compared to I think in the first quarter of '09 roughly $1.3 million, so they up about $400,000 on a year-over-year basis.

We haven't said term fees have been up for quite a while.

That's great. Thank you.

The next question comes from Greg Smith with Duncan Williams. Your line is open.

Hi, guys. Tom, can you just review, what is the sum in your mind of the total costs that you would have normally treated as integration? Is it just the $3 million or were there more that you mentioned?

I think we had the $3 million that we identified there. I think there are some other costs that we have. And we told, I think, in my prepared remarks that it is really a couple million a quarter and if you annualize that we may be up $8 million or $10 million for the year. Clearly those are not material from a standpoint of a quarter or the year, and so those are just incorporated into our full year guidance. So that was one piece, but that was the largest piece we had this quarter.

And, Greg, to that point, because we knew we were no longer going to be reporting them separately, we don't have the kind of definitive rigor we had about tracking that all, so it is difficult for to us say anything other than that estimate except in the case of the call center that we talked about because it is a fairly sizable activity.

But then it is obviously fair to think you don't have the integration expense and you got a lower run rate of expenses from beyond this point, right?

Absolutely. Those will keep waterfalling down. There is no question.

And then is there anything else, since you don't give quarterly guidance, anything else seasonally that you think people may not be thinking about as we think about 1Q versus 2Q on a sequential basis?

I don't think there is anything. Again, we don't focus on quarters. What we said is our Q4 has the typical end of the year. Our Personix business, our output solutions division which can have a little bit more variability. But other than that, we just don't manage the business quarterly. License fees can move around from quarter to quarter, and we've said that before also, and that's really the other trigger that can move between quarters.

Greg, I would say that at least for the last couple of years license fees have been sequentially lower in the second quarter versus the first quarter. And again it could because there was just a larger license that moved, but at least for the last two years that's what we have been seeing happening.

And then just lastly, any comments about your new credit union platform and how that's performing versus the competition?

We are very happy with the Acumen platform. We won another deal in Canada. We announced our first conversion for Acumen at the end of the calendar year, '09. That pipeline is quite robust right now. A lot of activity. And we expect to be announcing transactions throughout the year. And again the key element of that platform is in addition to what we would say is the best in market technology is everything, all of the key technologies are fully integrated on day one, so we're able to deliver a lot more Fiserv total value each time we deliver that product.

Excellent. Thank you.

The next question is from Tien-Tsin Huang with JPMorgan. Your line is open.

Thanks. A few questions. On the macro fund, with all the regulatory activity that's over hanging the banks here, like I think you talked about Reg E, the Card Act, is that stealing discretionary spend that normally would go towards Fiserv at all? Is there a way to think about that? Obviously that will ease at some point. And as a follow-on to that does Reg E and overdraft regulation, could that have any impact on your business positive or negative?

At least right now the way we're thinking about this is that all of the elements of the crisis in aggregate are having an impact on discretionary spend at the institution level. What we began to see in the first quarter, perhaps a continuation what we saw in the fourth quarter, was more early preliminary buying signs coming from the institution. So I think for the majority of the community based institutions out there right now, it is relatively clear who the survivors are going to be and that group is certainly looking to ramp up their level of spend. I do believe that people have already internalized the fact that there is going to be significant financial regulations and so they have been thinking about it. And to the point we were making earlier around the specialty consulting, we have a lot of different products that we are bundling together to deliver a deposit transformation solution which is basically our nomenclature for filling the hole that's going to be created by some of the interchange oriented and fee oriented issues. So we do see a lot of interest on that front for institutions to look for ways to fill that hole.

There is no question that EFT and some of the other payment solutions are going to play an important role in that, especially given where we talked about where our clients are on the general maturity curve relative to others. So I do think that that will continue, that discretionary spending will continue to loosen up over the next couple of years. I don't think we're going to get to a normal level for a while, but I think it will slowly move up as people have to take actions against some of the negatives that will obviously be included in the financial regulation. Now, who knows what that regulation will finally end up looking like, so there may be things in there that could offset some of the desire clients have to fill those holes and close those gaps, but for now we think they will actually be net positive.

As far as is there anything in there that could impact us, we don't actually have revenue tied to fees. We don't have revenue tied to interchange. So to the extent that consumers continue to act generally as they have, I think that should not have any material impact on us. I suspect that depending on how some of the card legislation is impacted, if it ends up changing how consumers transact, that could be something that affects everyone in the card business, and given we're a processor there could be something there. But for right now, at least on the surface, we don't see anything that will have material impact on our business model.

I think to add to that is the path, and I think Jeff highlighted this, as clients continue to spend a lot of time in this particular area it has had an impact in the past as far as the sales cycles go. And I think the other thing the regulation will have an impact on is clients push for efficiency over the long-term, as they're going to continue to have to be more and more efficient over the next several years. And clearly the number of solutions that we provide from an outsourcing standpoint I think play into that over more of a macro trend standpoint over the next three to four years.

I would agree with that. That's good to hear from you guys. Thank you. The follow-on to Bryan Keane's question on the large transactions, you talked a little bit about the nature of it. It sounds like you're pretty confident that to the extent that you win it that you can ramp them pretty quickly? It sounds like there won't be a lag there in terms of converting those wins into revenues?

Yes. One of them is already won. Typically when you do these, you have an idea of when the project will come online. At least for a couple of the large ones that we have extraordinarily high visibility into, we're actually already doing work, so we have a high degree of confidence. These are not like some of the core conversions where you could be a year, year-and-a-half, who knows how far out. These are projects that are already in process and so we're fairly confident in the ones that we have high visibility to right now.

Okay. Good. Last one just real quick for Tom. On the corporate side I think you mentioned that there was a gain on sale of an operating facility. How big was that again?

It was roughly $4.5 million. That was included in our corporate segment expenses.

Net.

Okay. So that gain of $4.5 million was netted out in the corporate. Understood. Okay. Helpful. Thank you.

The next question comes from Brett Huff with Stephens. Your line is open.

Thanks and appreciate you taking my questions. I want to dig in a little bit on bill pay. It grew 6%, and I didn't catch -- Tom, I think you talked a little around the metrics on it, there was a deconversion. Can you go through that nuance again for me?

Sure. The bill payment volume grew about 6%, and we did have a client that was remittance only, and they were acquired back in 2008, and that volume came off in 2009 ratably each quarter. So the transaction volume trend that we have there at 6% excludes that particular remittance only client. That's what we indicated on the 6% growth. We're seeing very good growth in our clients. We have one or two larger clients that regionally have been impacted on some of the bill payment volume currently, just given the economy. But clearly we have a lot of clients in that particular space, large ones, that continue to grow very well. But the 6% was excluding that one client that actually got acquired.

Did you see in general a decline of one bill paid per user per month or do you have a metric around that that's it declined that you attribute to the economy?

We do.

We, Brett, won't talk about it publicly at this stage, but we can see, Tom made reference to some regional differences. Depending on what area of the country you're talking about, you can clearly see people are not paying certain kinds of bills, they may not be paying or they may have just eliminated a service. So we do think the bill payment business is on the surface having some impact from the economy. But I do want to stress the point that Tom made. But for our largest client, the transactions are actually growing at a pretty high level. They were actually up 12% in the quarter, but for our largest client. And we actually have a high degree of comfort that our largest client who is in some of these areas that have been hit the hardest will actually turn back around. We have also been slowly, as we talked about, we have been gaining a lot of clients on the bill payment side, and the transactions are growing and growing and we are slowly expanding the size of our base, and to some extent reducing our dependence on our largest client.

Can you detail a little bit more what your expectations are for the P2P product that you're going to launch? I think you said second half.

It will launch in the summer. Right now the initial phase of the launch is basically an incremental capability being delivered in a CheckFree RXP service pack. So to the extent the institution wants it, we basically turn it on, and that capability will ride the rails of the RXP system. In theory, I think today we have about 16 million users on the RXP system. So right now we have 40 institutions who have said yes, and obviously we're working very hard to get that number to be much larger than that because we believe that we can increase both new users, introduce new users to the system because of what P2P does and is, but more importantly, or as important, increase the number of transactions, to your earlier point, by users. We think it is a fabulous capability but to be honest it is not in the market yet. Demand has been pretty high for it, it's pretty interesting, and the great thing about this capability is it is already in many of the institutions in the US today.

Is the revenue model similar to the existing bill pay?

It is similar. One of the larger differences is the institutions will have an opportunity to charge for these transactions, depending on when the sender wants the money to be delivered. So not unlike a foreign ATM fee, although substantially less. We think consumers will very quickly get used to the fact if I want to send Tom Hirsch $20, depending on the pricing strategy of that institution, it might cost a quarter or $0.50, who knows. But the institutions can choose what they want to do if they want to charge or how much they want to charge in order to perhaps create some incremental fee revenue. So we think it is a pretty attractive option because that choice is at the discretion of the institution.

Great. That's what I needed. Thanks for the color.

The next question comes from Kartik Mehta with Northcoast Research. The line is open.

Good evening, Jeff and Tom. Jeff, I just wanted to make sure I understood when you're talking about organic growth, is it that you already have these contracts signed that are in the pipeline that will get to you where you're going or you just have a high degree of confidence that there is enough, that enough will close that gets you that organic growth?

The comments that were in the prepared remarks were that we have several, for us, significantly sized transactions, much larger than we typically close, and one of those has already been closed in the quarter. The other ones, at least one of them in particular, we have an extraordinarily high degree of visibility to, and we expect that will close in the relatively near term. There are others, as well, that are probably a little bit further out into the cycle, but there are several that are pretty close in, that give us a large degree of comfort in our guidance for this year, especially when you couple that with the sales we have been chunking out for the last several months including last year's Q4. The significant transactions are the ones that we have an awful lot of visibility to.

So, then, Jeff, would it be fair to say, you have said the second half will be stronger, so would it be fair to say that maybe in the second quarter you again have slightly negative internal growth and then the third and fourth quarter really is when we should start seeing improvement in your organic growth as a Company?

Again, it is difficult. There are so many puts and takes for an individual quarter. I would say that it will be strong. We will be stronger in the second half. Clearly these transactions, everything ramps over time, so I think the build will happen more in the second half of the year than it will in the first. And so I would say that we'll stick to the, it will be stronger in the second half comment, not knowing exactly what will happen on the edge of any quarter.

One last question, Tom. You talked about the cash flow. You said the only out of the ordinary event in first quarter was that you had all the deferred revenue and all the cash from all the deals. So if that was the only odd thing that happened in the first quarter, would you not think the same thing would happen for the remainder of the year as a lot of these deals have professional fees associated, or license fees, as you have said?

Typically, as you know, and historically when you look at our free cash flow, the first quarter is historically strong. This was a record quarter for us. The second quarter we typically have our tax payments and interest payments on debt, et cetera, so it comes down. But again I would just like to say we're off to a good started in free cash flow. We're going to stick with our guidance. We're going to exceed $700 million of free cash flow in 2010. We're early in the year, but again we're focused as usual on getting good business, focused on cash generation of the businesses, and we'll continue to just drive that hard as we go through the rest of 2010.

Thanks a lot.

The next question is from Darrin Peller with Barclays Capital. Your line is open.

Jeff, just a more general question. Can you comment a bit on the competitive landscape, some of the pricing since some of the recent mergers directly in your space, and maybe some of the implications of the Indian outsourcing players getting more involved in the industry as well?

Sure, Darrin. I would say that the industry continues to be as competitive as it has been for at least in the four plus years that I have been here. I think people continue to be aggressive in terms of winning new transactions, and I don't anticipate that to change. I think there are a few less fields out there right now because you don't have de novos coming in, so I think that puts a little bit of incremental pressure on people's pricing strategies. But it is about the same as it has been. I would say that we have not run into, at least where we are playing in the US, now outside the US we do run into the outsourcers, but inside the US we are not running into them on a very regular basis. So I would say we haven't seen any material impact from that group.

Just to comment a little further on outside the US, any updates on your international strategy?

We are actually having a fair amount of success on the channel side. One of the things we did is narrow down where we thought we had the best products to compete outside the US. And on the channels, whether they be internet banking, branch, merchant, teller systems, those kinds of things. So we're having some good success there, and we actually think we'll be able to build on that quite nicely. We have some interesting payments opportunities that we're exploring outside the US, so we feel good about that. And then we are actually slowly bringing some of our different Fiserv operating groups together in some countries. So generally we're making good progress against the things that we laid out last Investor Day.

And then lastly one of the things that we are focused on, as we have been, is continuing to build our own outsource capability, our Fiserv global services capability. We're having great success there. We recently received our CMMI level 5 certification, so we're doing a nice job there. And we have begun to do a little bit outside of our own internal work, so some good success there, and we're going to be able to leverage that capability in delivering some of our channel strategies outside the US as well.

As a clarification to FGS, we have about 2,000 associates in India, and we've really built that competency in the management team there which is very strong over the last several years and continue to build that part of our business as we are in 2010 here and going forward.

All right. Building off that, if you looked out a year and then maybe long-term, call it four or five years, Jeff, what percentage of revenue do you think international can actually get to?

Five years out, I am not sure any of us have a crystal ball that is that accurate at this stage. But we would like to see a material amount of our revenue come from outside the US, and the strategies that we're working, our organic strategies we're working on, are focused on just that. If I was going to throw a rock into a pond, I would like that pond to be about 10%. That's what I would like to get to.

All right. Thanks, guys.

Your next question comes from Karl Keirstead of Kaufman Bros. Your line is open.

Thank you. I appreciate the candor about the sales performance in January and February being a little slow, and I had two related questions. First of all, to what extent is this driven by the fact that the 4Q sales were so strong and might have, at least for the first part of the quarter, drained the pipe a little bit? And then secondly, given that start, what exactly gives you confidence that you, in fact, as you said, are going to meet or exceed the sales targets given that sales cycles, as you are, are still unpredictable? Maybe something precise around what gives you the confidence that perhaps has changed in the last month or two after the slow start in January and February? Thank you.

Sure, Carl. I would say if not 100%, 99% of the slower than desired but consistent with expected sales in January and February was because of the very strong Q4. There is no question that our sales force did a phenomenal job in Q4 and we walked into the quarter knowing that it was going to be some tough slogging out there. I would say that we have been very pleasantly surprised at how quickly we were able to refill that pipeline, and not just refill it, that pipeline is actually larger than it was at the beginning of Q4. So the pipeline is very strong. Part of it is, again, because we have some larger transactions in the pipe which helps us.

But we've got a lot of fundamental activity. Our sales force is very focused on activity. We're very focused on managing it. One of the things we announced at the end of the year was the creation of a new global sales organization and that has raised a ton of visibility across the Company. So myself and Tom and others, we're getting a lot more visibility into what's into the pipe. We're helping to make sure that deals are getting done, and we're very close to that level of activity. Part of it is we're a lot closer to know that we're going to get there. Part of it is we're involved and we know we're going to get there. And part of it is we've got some wonderful momentum that tells us we're going to get there. So it is really those three factors combined that give us the confidence that we're going to either meet or exceed our sales number for the full year.

Okay. Great. Good luck.

The next question is from Glenn Greene of Oppenheimer. Your line is open.

Thank you. Good afternoon, Jeff and Tom. The first one is just on the operational effectiveness, the $40 million objective for the year and you're essentially 50% there for the first quarter. Are you being very conservative? Did you book some cost savings earlier than you thought? Just trying to understand that and why it wouldn't be higher than $40 million for the year?

I think we continue to make progress. We had a big impact in the first quarter from some of the final pieces from the CheckFree cost synergies, Glenn. That was a big part of that particular piece. We did announce, as you know, we're doing a call center consolidation. So we continue to be very active in that regard and we're doing a lot of work right now, before our investor day in October, around the next areas we're looking at hard which is in the data center area and a few other things there, and we'll continue to lay out that opportunity at that point in time. So strong first quarter, some of that was derived from some of the last pieces related to the CheckFree acquisition which had a big impact in the quarter, and we're just going to continue to drive that as we normally do through the year. And then we'll be laying out on Investor Day in October the next phase in regards to our operational effectiveness initiatives.

Should we be expecting a slowdown in the relative cost savings going forward given that you were so strong in the first quarter?

I think clearly, yes. We're not going to have -- we almost achieved 50% of our goal in the first quarter, so ratably going forward it is going to be a little less, and we factor that into our guidance for the year, et cetera. But we are pleased with the progress we're making in our next phase, and we'll lay that out on Investor Day.

Tom, also on the debt costs it sounds like there were some hedges that rolled off the end of the year that helped you on the effective interest rate. Can you help me with the color there?

We have still a large proportion of our debt that's fixed. I still think we're right around a 5% all-in effective rate. But we did have a piece that fell off that we're actually paying off right now, but some of that debt was fixed a few years ago around 5%, 5.5%, and that did fall off to variable, but we're still heavily fixed. That's the way, I believe, is more appropriate for the long-term and our all-in cost of debt is somewhere around that 5% right now. But some of that did come off so we did get a benefit, a couple million dollars a quarter this year, in regards to the fall off from fixed to variable, just given where the rates are. But our long-term strategy is always to have a larger proportion of fixed rate debt.

Are you roughly 80%, 85% fixed?

Somewhere up there.

And then just a final question just to clarify. On the bill pay transactions, just to make sure I understand it, if we did reflect that client that rolled off at the end of the third quarter, by my math the transaction growth would be roughly 1%? Is that the right way to think about it?

That's correct. I think 1% to 2%, somewhere in there, had about 3%, 4% impact. Again, it wasn't a full service client. It was remittance only.

So it was low revenue and low margin type client.

That's the point, Glenn. That's an important point to make. The translation to revenue is a little different there.

Got it. Thank you very much.

The next question comes from David Parker with Lazard Capital. Your line is open.

Great. Thank you. Good afternoon. Just wanted to talk about the core processing side of the business. Your competitor talked about some wins that they had. We assume that those were more on the second tier and there weren't any take-aways. But can you just talk about your retention on that side of the business? And then on the flip side with these larger deals that you have in the pipeline that you're winning, can we assume that you're replacing and in-house solution and they are not competitive take-aways as well?

To the first part of the question, many of us, we all have pretty high degrees of client retention, the industry in general has high degrees of client retention because the switching obstacles are as big as they are. I would say, David, that we continue to win a very large proportion of the deals that are available in the market, and I would say that we play in all of them. We are very cautious and careful about how we evaluate all of the deals. We evaluate each deal on its own merits. And when we lose a deal, it is almost always because there are things that may be included from another provider that we just, frankly, aren't willing to do, and so from our standpoint we think we have the opportunity to win the deals that we want to win. We want to win them all, but there are just certain things that we won't do, there are opportunity costs every time you do a deal. And so we just take that all into account and make conscious decisions on each deal on a one by one basis.

On the larger deal, I think we should wait until we actually make the announcements. I think it will be more clear as to what these were because they're so sizable I just don't think we can have the entire conversation until we actually make the announcement.

Okay. Fair enough. And then just looking at the mechanics of the check processing business, we all know that's weak. Consumers are shifting away from that. Our assumption would be you would be more on the receiving end of some of that shift and some of that change. At some point are we going to see more of a pickup in bill pay and debit because of that shift or that weakness in check processing? Can you just talk about the dynamics in those businesses?

We would say that we are currently the recipient of certainly some of that. If you think about the check processing business, that business, which is also known as item processing, is literally the processing of paper, and so today there are in theory less checks being written. We know that. And there is also the conversion of paper to electronic and so that item itself no longer has to clear. So we have technologies like Source Capture that are in the middle of that. Our Source Capture suite. We have obviously bill pay and debit and other products. So we are benefiting from that.

The challenge is that even though we're getting benefit on one side, we have the loss coming on the other side on the item processing business itself. And while the team has frankly done a yeoman's job in realigning our cost structure against that, it takes time for that to happen. The check business, unfortunately there are some days when you feel like it would be easier if checks would just be gone day after tomorrow, but it is not going to work that way. It is going to be many, many years, and we'll have to look for different solutions for different ways to solve that problem. In the meantime we're picking up that revenue. It is higher margin revenue. It is better revenue over the longer haul, but we still have to figure out how to mitigate the negative that we have on the, quote, check processing side of the business.

I think, David, to Jeff's point, it is transitioning over to higher margin, more scalable solutions for us, but we do lose a revenue. So if you look at it on a pure revenue basis, it clearly hurts us from that standpoint when it transitions.

Depending on where it goes.

That's correct.

From a top line standpoint. Clearly from a bottom line standpoint that's why you have seen the increases in margins you have over the last several years because some of those other areas are a little bit more profitable for us.

Great. Thanks, Jeff and Tom. Very helpful.

The final question comes from Paul Bartolai with PB Investments. Your line is open.

Just a couple quick follow-ups here on these new deals and how it relates to guidance. First, were these new deals, these larger deals, were they contemplated in your initial guidance that you gave in January?

Yes.

So you're assuming they closed.

We always have a pipeline we build and we assume generally that we're going to close a couple of those as we go through the year.

Okay. Great. And then you have the one that's already closed and the second one that sounds like it is very close to closing. For some reason if that were to get pushed out, would you still be comfortable with your 1% to 3% revenue guidance?

Yes.

Okay. So that's just incremental. Great. And then just trying to work through some of these tough comps and some of the issues. The issue with the output business, does that bleed into 2Q and 3Q with the tougher comps or was 1Q really the biggest issue there?

I think it was really 1Q. If you look at our revenues last year, and if you look at them on a quarterly basis, they started the year at $970 million, came down to $950 million and $940 million. So clearly at least in that period of time Q1 benefit more from that business. You can see it in the payment segment also with a decline in Q1 to Q2, and we just won't have that big of a grow over Q1 to Q2 in that business.

It won't be quite as big, but that business is very seasonally strong in Q4, so keep that in mind.

Great. And then last one for me is just the $3 million incremental integration expense you had in the quarter, is that something that bleeds in again to the rest of the year or is that largely a 1Q issue?

That was largely a 1Q issue of what we're doing in our call center consolidation plans. But again, as those activities occur in the companies, as we continue to generate efficiencies, we'll highlight those to the extent they have a margin impact or need to be disclosed to the extent they're at that level.

Just to make sure we have been as clear as we can, when we pulled that out in the remarks as an example of some integration costs that we had in the quarter, that if we were still highlighting those integration costs separately and adding them back, that we would have done that. And I think Tom also mentioned in his prepared remarks that we expect in this calendar year to have a couple of million dollars each quarter of that kind of expense. We won't be talking about it. It is built into our guidance. We accounted for it there, but those expenses will degrade over time even though they're going to end up in our numbers in 2010.

All right. Okay, got it. That's all I had. Thank you.

Great. Thanks. Thanks, everyone, for joining us. I know we went a little long. We appreciate it. If you have further questions, please don't hesitate to contact our IR group.

This concludes today's conference. Thank you for participating. You may disconnect at this time.