Fiserv Inc (FISV) 2010 Q4 法說會逐字稿

Welcome to the Fiserv fourth quarter 2010 earnings conference call. All participants will be in a listen only mode until the question and answer session which begins following the presentation. Today's call is being recorded and also being broadcast live over the internet at www.fiserv.com. In addition, there are supplemental materials for today's call available at the company's website. To access those materials go 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. Thank you. You may begin.

Thank you. Good afternoon and thanks for joining us for our fourth quarter and year end earnings call. With me on the call today are Tom Hirsch, our Chief Financial Officer, and our new Chief Operating Officer, Mark Ernst. 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 margins, free cash flow, sales pipelines, 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. On January 3 we announced the addition of Mark Ernst at Fiserv's new Chief Operating Officer. Mark is a talented senior leader with more than 25 years of experience in the financial services industry.

As Chief Operating Officer, he will bring additional leadership to important opportunities such as integrated product delivery, service excellence, and the achievement of our new operational effectiveness cost savings goal of $250 million. I've known Mark for many years and am confident that he will further accelerate our progress. We're pleased with our performance in the quarter and the full year.

In 2010 we melt our commitments including each item within our annual guidance. Importantly, we returned to positive internal revenue growth, achieving just over 1% for the year led by full year adjusted revenue growth of 3% in the payments segment. Adjusted internal revenue growth in the fourth quarter was 2% versus a very strong comparable and sequential quarters.

We achieved 3% growth in our payments segment and 2% in our financial segment. Revenue growth in the second half of the year was stronger as expected. Adjusted earnings per share of $1.06 was up 13% in the fourth quarter. Full year adjusted EPS growth of 11% was at the high end of our 2010 guidance. We also generated a record level of $735 million in free cash flow which exceeded our full year guidance.

Free cash flow per share was even better, growing 13% to $4.85 for the year and over the last four years per share growth has averaged 23%. As you will recall, we established three key enterprise priorities in 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 increased differentiation and enhanced results for our clients.

Adjusted internal revenue growth improved from negative 1% in '09 to positive 1% in 2010, with growth accelerating in both segments. Our strong base of recurring revenue has helped us navigate the challenges of the last few years and provides a solid foundation for future growth. Our 11% adjusted earnings per share growth in 2010, which as I noted was at the top of our guidance range, also included important investments in innovation.

Adjusted operating margin, which we consider to be a key indicator of financial health, increased 70 basis points for the year and has expanded 650 basis points over the last four years. Changes in our business mix, integration benefits, and the success of our operational effectiveness initiatives have combined to significantly improve the quality of our earnings.

At our investor day in October we shared with you the progress we're making against our second priority to center the Fiserv culture on growth.Quota attainment was 145% in the fourth quarter, and a strong 115% for the full year. In addition, we continued to increase the level of add on sales to existing clients which is evident in our strong integrated sales results. Sales of our strategic solutions were particularly strong in areas such as electronic banking, biller solutions, and account processing.

In 2010, we sold Corillian Online, our industry leading integrated internet banking and bill payment solution to top financial institutions such as US Bank, One West Bank, Central Bank and Kern School Federal Credit Union. Our win rate in competitive account processing transactions continued to well exceed our market share.

And we recorded important wins internationally for our leading channel solutions including Virgin Money in the UK, Shenzhen Rural Commercial Bank in China, and the online channel transformation project for the West Pack Group in Australia. We'll continue our strong focus on growth and believe that should lead to even better results in the future.

Our third priority is around innovation. Through the downturn, we've continued to increase our investments in those areas which we believe are important drivers of the success of our clients. In the summer of 2010 we launched ZashPay, our P to P solution that enables a quick and easy electronic movement of money. As of December 31, more than 600 financial institutions have agreed to offer ZashPay to their customers. As some competing P to P solutions attempt to siphon deposits away from the banking industry. ZashPay can help build customer loyalty and if they so choose, generated much needed fee income. We continue to build momentum with Acumen, our next generation account processing platform for large credit unions.

We had five US credit unions commit to the Acumen platform in 2010. Notably, each of our new Acumen clients purchased a broad suite of products including high value payments products, demonstrating our ability to expand share and deepen our account processing relationships. Based on strong interest in Acumen and the strength of our pipeline, we anticipate additional important wins in 2011.

We believe we can move the market in new and unique ways through original innovation. As a proof point of our focus, we filed ten new patent applications in 2010. We believe these innovative concepts provide an opportunity to increase Fiserv's differentiation and boost revenue and earnings for our clients. Additionally, we were awarded 22 new patents during the year demonstrating the creativity and ingenuity of our associates around the world.

With that, I'll hand the discussion over to Tom to provide more detail on our financial results.

Thanks, Jeff. And good afternoon, everyone. Total revenue and adjusted internal revenue grew 2% in the quarter. This performance was in line with expectations given our strong third quarter performance, as well as last year's exceptionally strong fourth quarter.

Both segments contributed to our solid revenue growth in the quarter. Company adjusted operating income increased 8% in the quarter to a record level of $305 million. Overall adjusted operating margin in the quarter increased 160 basis points over last year to 29.7%. The margin increase in the quarter was due primarily to strong sales to existing clients, growth in our higher margin businesses, particularly in the financial segment, and a decrease in discretionary compensation costs compared to the prior year period.

Adjusted earnings per share in the quarter increased 13% to $1.06, which excludes an $0.11 charge from the early debt extinguishment in the quarter resulting from our debt refinance. Adjusted internal revenue growth for the full year was 1%. 2010 adjusted earnings per share was $4.05, an 11% increase over 2009. Importantly, adjusted operating margin for the year was 29.4%, up 70 basis points compared with 2009.

As Jeff mentioned up front, our performance against each of these important financial metrics was within our annual guidance ranges presented in early 2010. Pre cash flow for the year was again exceptional, increasing a more than expected 10% to a record $735 million and exceeding our guidance range of 5% to 8% for the year. Free cash flow performance in the quarter excludes an $89 million combined dividend and loan repayment from Stone River, an entity in which Fiserv owns a 49% interest.At Jeff noted earlier, free cash flow per share was up an even stronger 13% to $4.85 over 2009 and continues to reflect our disciplined capital allocation, and the quality of our earnings.

Now onto the segment results. Payment segment adjusted revenue was $530 million in the quarter and $2 billion for the year. Our fourth quarter and full year internal revenue growth was a solid 3%. For the full year, each of our major businesses within the payment segment grew except Output Solutions, which was down over the prior year.

Flow of income remained at historically low levels. Bill payment transaction volume increased 6% in the quarter and 7% for the full year. Excluding our two largest bill payment clients, who experienced slower than normal growth this year, we continued to see double digit average transaction growth on our large base of transactions.At the same time we have continued to expand our client base, adding more than 1,500 new bill payment clients since the acquisition of CheckFree.

Interest remained strong in channel solutions as financial institutions around the world consider how to update their online and mobile banking experience to meet the demands of a digitally connected world. Debit transaction volume increased 21% in the fourth quarter and 22% for the year.

The growing utilization of debit across our financial institution base, coupled with our demonstrated ability to add new debit clients, is driving better than market growth for this very important solution. Even in the face of regulatory change, we expect to see continuing, attractive growth in our debit related businesses. Operating income for the payment segment was $167 million in the quarter and $625 million in the year.

Adjusted operating margin was 31.5% in the quarter and 31.2% in the year, down 60 and 50 basis points, respectively, from the prior year periods. This is primarily due to the incremental investments we made in 2010 in the areas such as mobile banking, ZashPay, online banking and smart connections within our biller solutions business. The financial segment generated revenue of $506 million in the quarter and $2 billion for the year.

Internal revenue growth at 2% in the quarter was I a solid finish to 2010. Although adjusted internal revenue growth was up just slightly for the year versus 2009, we experienced good quarterly revenue progression through 2010. We continue to see strong performance in our market leading account processing businesses both in terms of sales to existing clients and winning more than our share of available clients in the market.

This growth was partially offset by weakness in the mortgage businesses and a continuing secular decline in item processing. Financial segment operating income was $161 million in the quarter and $591 million for the year. Operating margin in the quarter was up sharply to 31.7%, an increase of 320 basis points over the prior year period driven by a favorable mix shift to higher margin revenue, operational effectiveness saves and lower discretionary compensation costs.

For the full year, operating margin in the segment was up 100 basis points to 30.3%. Adjusted operating loss in our corporate and other segment was $23 million in the quarter, up $1 million over the prior year. For the full year adjusted operating loss in the segment was $61 million, a $13 million decrease versus 2009.

Total debt at year end was $3.4 billion, representing about 2.5 times 2010 EBITDA. In the fourth quarter, we completed the tender offer to repurchase $250 million of our outstanding 6% senior notes due in November of 2012. We also repaid an additional $100 million of our term loan in the quarter. The $750 million refinancing completed in the third quarter extended our average maturity significantly at a historically low interest rate of roughly 4%.

Our next mandatory debt repayment is in November of 2012. Our effective tax rate in the fourth quarter was 40% due to a non-cash deferred tax expense originating from a tax versus book base difference attributable to our equity investment in Stone River. While this is partially offset by the reinstatement of the R&D tax credit, the combination of these items still resulted in a negative $0.02 per share impact, both in the quarter and for the year.

Our effective tax rate was 38% for all of 2010, which is slightly higher than what we expect in 2011. We repurchased 2.9 million shares of stock in the quarter for $164 million and for the year we bought back 8.1 million shares of stock for $418 million. Since the beginning of the downturn in 2008 we have repurchased about 14% of our outstanding shares, or nearly 23 million shares at an average cost of about $45.50 per share. As of December 31, we had about 6 million shares remaining on our existing repurchase authorization.

Now, let me turn the call back over to Jeff.

Thanks, Tom. As you know, at the beginning of 2010 we established a global sales organization to better focus the Company on growth and improve our go to market execution. We're very pleased with the early results. Quota attainment for the year was 115%, fueled by strong second half performance, even as compared to last year's very strong fourth quarter sales.

Given the 2010 sales quota level was increased over the prior year, we feel even better about the actual results. The outlook for predicted IT spending has become slightly more positive over the last quarter which has helped fuel our pipeline even in light of our strong sales finish to the year. However, clients and prospects remain disciplined in how they deploy their capital and we believe that the pairing of an undefined regulatory landscape with environmental challenges will continue to impact sales cycle.

Integrated sales were strong at $44 million in the quarter and $132 million for the year, achieving 126% of our 2010 target. Sales of payment solutions continue to be strong along with channel, risk, and efficiency based products. As of December 31, total program integrated sales reached $365 million eclipsing our original integrated sales goal of $360 million two full years early.

Payments momentum continued with 537 new bill payment clients and 218 new debit clients, added in 2010. We've had over 600 clients commit to our new P to P service ZashPay since its introduction in 2010. In these three areas alone over 1,300 clients made a Fiserv payment decision, which should convert to attractive streams of recurring revenue and financial institution value over the next several years.

We achieved $55 million in annual cost savings in 2010, which represents 138% of our operational effectiveness target for the full year. Since 2007 we've delivered over $270 million in annual cost savings, surpassing our $250 million target more than one year early. As we shared with you at our October Investor Day, we believe there is material opportunity to gain efficiency and we're confident that we will achieve our new operational effectiveness target of $250 million over the next five years.

Before I get to guidance, let me update you on the environment and our 2011 priorities. Regulatory actions in 2010 were up 15% to 181 institutions, impacting 157 banks and 24 credit unions, or about 1% of all financial institutions in the US. Total assets impacted were down 50% versus 2009. Since the third quarter of '09 there has been a downward trend in the number of actions each quarter both in terms of number of institutions and the impacted assets.

However, as the number of institutions on the FDIC watch list has continued to grow, we believe that will lead to continuing regulatory actions. Since 2008, our net client losses have been less than one half of 1% of our total account processing client base and assuredly less than we would have experienced in a normal M&A environment. We expect the number of regulatory actions to be down year-over-year and in a range of 130 to 170 in 2011.

For reference, through January 28 of this year, there have been 11 regulatory actions versus 16 in the comparable prior year period. We expect traditional de novo activity to remain low during the year and we also expect a number of organic acquisitions, non FDIC assisted, to increase to a higher level than we have seen over the last couple of years as stability slowly returns to the market and scale opportunities become more attractive.

Given our share, we know we will have wins and losses in the acquisition category. However, when a client is acquired in a voluntary M&A transaction, we typically receive a termination fee which is a normal, high margin component of our revenue. During the last two years termination fees have been far lower than we have seen historically. The impact of the comprehensive changes in the regulatory environment continues to be an unknown and Washington still needs to turn thousands of pages of legislation into specific rules and regs.

While at first blush it appears the largest institutions will be affected the most. We believe that the entire industry will change as financial institutions look for new ways to replace earnings that are under pressure. Even with the Fed's current interpretation of the Durbin amendment, we continue to believe that the risks and opportunities for Fiserv of the evolving regulatory environment are balanced.

While the confusion is being sorted out, we will continue to help our clients leverage technology to take advantage of emerging digital channels, grow assets, increase revenue, and drive efficiency throughout their entire organizations. Before I get to guidance, let me share our 2011 priorities, which are by design very similar to that of 2010 and focused on creating value for our primary stakeholders.

First, to deliver an increased level of high quality revenue growth and meet our earnings commitments. Next, to center the Fiserv culture on growth leading to more clients, deeper relationships, and a larger share of strategic solutions. Third, to deliver innovation that increases differentiation and enhances results for our clients. Our outlook for 2011 is based on an assumption that technology spending and the overall environment will be incrementally better than 2010, but still not at the average rate of growth we expect to see over the next three years.

We also believe that client spending will again be weighted towards the second half of the year. We expect our 2011 adjusted internal revenue growth to be in a range of 2% to 4% and that revenue growth will be higher in the payment segment. We also expect our growth to be stronger in the second half of the year due to the environment and the implementation effect of our strong sales year.

As a footnote to our internal revenue growth for the year, we have two items conspiring against our 2011 growth rate which are included in our guidance. First, we anticipate that the majority of the conversion of the Wachovia bill payment business from CheckFree RXP to Wells Fargo's proprietary technology, which began in the later part of 2010, will be substantially complete by the end of the year. And, second, we will experience a larger than expected decline in the check business in 2011 due to volume declines and the impact of electronicfication on paper items.

Together these two items create a drag of about 150 basis points on our 2011 revenue growth rate, which we expect will moderate materially in 2012. We anticipate 2011 adjusted earnings per share growth of 9% to 12%, or a range of $4.42 to $4.54, compared to the $4.05 earned in 2010. As with revenue growth and giving weight to seasonality, we also anticipate earnings to be stronger in the second half of the year.

We expect that overall adjusted operating margin will increase at least 50 basis points over the 29.4% achieved in 2010. We also anticipate free cash flow will increase 5% to 8% over 2010's record level of $735 million. Our guidance for the year contemplates continued investments in strategic solutions which enhance our competitive differentiation and strengthen the foundation for long term sustainable revenue growth.

These investments are in areas such assist P to P, mobile and online banking, Acumen and business intelligence. We'll monitor changes in the market environment and continue to balance investment levels with our earnings commitments. 2011 marks year one of our new five year targets for both integrated sales and operational effectiveness, which are $950 million and $250 million, respectively.

Our integrated sales target for the year is $155 million which will include the new non account processing client focus. Our target for operational effectiveness in 2011 is $25 million which, as we shared at Investor Day, will exclude any non recurring costs related to the multiple year cost saving effort. Lastly, as we have for the last several years, we will continue to supply key business metrics along with earnings each quarter. Given the strategic focus shared at our recent Investor Day, we anticipate some additions and deletions to our current metrics to allow you to gauge our strategic progress.

We will share the new metric lineup when we report our first quarter results in April. In 2010 we saw a return to growth and delivered on our financial commitments. We're creating value for our clients and will continue to invest in strategic solutions that can deliver even more in the future. Although the last several years have been challenging, I am optimistic about our future.

Our solutions are the strongest in areas that matter most and we have momentum going into 2011. Each of our associates play a key role in the Company's success and it's that talented group that will create value for clients and you, our shareholders, for years to come. With that let's open the line for questions.

Glenn Greene from Oppenheimer, your line is open.

Thank you. Good afternoon.

Hi, Glen.

I guess the first question just wanted to ask, talk about the market, the macro sales climate and the industry growth expectation at your analyst day back in October, you talked about 3% growth for the market.

Kind of sounded like maybe you were tempering that a bit. Not sure if I heard that right, and if it is still 3%, just curious at the midpoint of your internal growth smack in the range there?

Sure. So, Glen, when we were at Investor Day, we talked about our belief that over the next few years that IT spending for the sector would average around 3% over that period, but that that would build over the next several years and we didn't expect that to be a flat line over the period and we see 2011 building into that average, so if you just use a simple math, you would expect it to be arguably lowest in 2011 and highest in 2013 just if you were seeing that kind of a build, and our guidance contemplates that kind of a build.

Arguably we have seen more optimism in the space over the last few months than we'd seen really all of last year that was apparent in our pipeline. It was apparent in our sales results, and frankly there is a good level of optimism. You know, I think we're taking a more measured and pragmatic approach knowing that we need to see more than a month or two or three to believe that's enough to base all of our guidance on, so we're really using data points that stretch back from what we saw during the majority of 2010, what we're seeing more recently, and the sales results that we had during the year.

So all of that measures up to be, we would say we're slightly more optimistic or I would say our clients are slightly more optimistic than they were several months ago and we would like to see that continue over the next quarter or two.

Okay. And then different direction. Maybe a little commentary related to Durbin as it relates to exclusivity, what you're hearing coming out of DC and the potential for you or how are you thinking about the opportunity as it relates to exclusivity?

Sure. I mean, clearly the first cut at the Durbin rules made that about as clear as you can be that that's going to end up being the standard.

Now perhaps that will change, but certainly the first cut looked like that, and we believe that given the success that we've had with the Accel/Exchange Network over the last few years and the conversations that we're having right now, I would say that's one of the areas that we would say there is reasonable opportunity and we will continue to work with the marketplace to try to take advantage of those opportunities where it makes sense for the clients and us.

Again, I think it is too soon to call that, but we feel good about the conversations that we're having today and believe, again believe that to the extent there is benefit to be derived from the marketplace that we'll be one of the beneficiaries of that opportunity.

The other thing I would add to that, Glen, is we built up our capabilities significantly over the next several years, both from a sales standpoint and a delivery standpoint for the tier 1 and 2, so we're excited about that opportunity but as Jeff indicated it's early, but I think clearly we view we're going to have some larger opportunities in that particular space as we go through 2011.

Great. Thank you very much.

Thank you. Dave Koning from Baird, your line is open.

Hey, guys, nice job on the year.

Thanks, Dave.

First of all, I just wanted to look at the margin progression. This year the F5 margins were up about 100 basis points for the full year and payments were down about 40 basis points for the full year, and I am just wondering if you can just review that again?

I remember, I know on different calls you talked about that and now we have a full year under our belt. Maybe you can talk about that a little and how do you look at the segments going forward? Would you expect both to expand in 2011?

Yes, absolutely, Dave, that's a great question. I would say on the payment side as you highlighted our margins were down. I think that is the area that we have made more investments and as you know most of our investments continue to run through our income statement, our P&L because a lot of that is head count related, and Jeff went through some of the items I think in his remarks, around ZashPay, around mobile, in our debit business, in our bill payment business, in our online channel.

Online banking business, which as you know we've had some significant wins there, in our biller solutions business which we kind of highlighted at Investor Day, so those areas have been incremental areas of investment to really drive longer term growth, so we have invested in there and those opportunities and we'll continue to do so going forward because we think that's very important to drive growth in 2011, 2012 and beyond. And so I would say it is really a higher level of investment in there.

Nothing's really changed from the margin characteristics of that business, but again we just continued to invest more there because there are more opportunities to really grow our top line in that particular area. In the financial segment we have just continued through our operational effectiveness initiatives, et cetera, and also the check processing business which I know we have talked about before as that electronifies, we pick up on the margin, but we also have very good scale businesses as you know, Dave, in the financial segment and our account processing area.

As we continue to sign those core clients and pull them on to our platform, we really have some good scale businesses there, so we're going to continue to see good increases going forward. Our guidance next year is 50 basis points plus depending on the level of investment, but we're going to continue to see good margin expansion.

As you know, we've done about 650 basis points over the last four to five years, at a good year this year and finished the year really at a record level from a margin standpoint in the quarter, so we feel good about that going into next year.

Okay. Good. Two real quick ones. Just term fees in the quarter and will StoneRiver continue to generate about the same affiliate income for you even now that they paid out the $89 million? I guess just those two quick ones.

Yeah, Dave, on the first one we had about 4 million of term fees which is up I think $2 million to $3 million over the fourth quarter of last year. Our license fees were still down slightly over last year although also in the quarter they were down about $4 million to $5 million. We still had a good quarter sequentially in license revenue over the third quarter, and so good there, but term fees were up very small again in the current year from that standpoint.

Regarding the StoneRiver question, to highlight what you said, we did get a dividend and loan repayment of about $89, $90 million. We did back that out of our free cash flow, but that should not impact their equity earnings going forward, so as far as their level going into next year it should be right around the same level or so.

Sounds great. Thanks a lot.

Yep.

Thanks, Dave.

Thank you. [ Operator Instructions ] Bryan Keane from Credit Suisse, your line is open.

Hello. Good afternoon, guys.

Hello, Bryan.

My first question is just about the check business. I know, Jeff, you noted as that business volumes are declining, can you size that business for us and going into 2012 is it just becoming so small that it is not going to be material by then?

Yes.The business is in the $200 million, $250 million range in terms of overall revenues and its the drag, the percent size of the drag is pretty material. That's why we called it out this year.

There is another factor, so it is not just that you have people writing less checks, but you have many more people converting those paper checks specifically at merchant, converting paper checks to electronic or wherever the case may be, so those -- you have not just less checks but you have less paper overall in the system, and that's really a function of all of the capture, the remote capture and things like that, that have moved into the system over the last few years. As that's gotten up to scale, that's tipping or accelerating the level of decline in that business. Now, again, that will level out at some point, but it is going to continue to drag on us for a while.

I think to Jeff's point there, Brian, I think a lot of that electronification though we should be, by the end of '11 we believe we'll be significantly along that ramp as far as that electronification goes, so that compression as we look into 2012 should become much better because we just won't have as much as what we're going to experience here in '11 and going into '12 we are going to be in a much better position because that electronification is not going to be fully 100%, but it is clearly ramping to that particular level.

Okay. And I just want to ask about the operational effectiveness of $25 million. I guess that's kind of below last year's objective of $40 million and I know the goal is over five years, $250 million, so can you just help us understand does number get greater as we go forward?

Yes, it will, continue to build, Bryan, and that really is the same number that we presented on Investor Day, that $25 million because the next area of savings in the $250 million comprises data center transformation and number of other areas, but that $25 million ramps up significantly to year two to over $50 million.

We're not giving guidance on that right now, but clearly it is going to ramp up and we have our plans we're executing along those plans and continue to refine those to accelerate as much of that as we can into 2011, keeping in mind the quality of our delivery and pacing that correctly over the next few years, so we are, continue to refine those plans. Mark will be helping out a lot in that regard to execute that over the next five years and we remain very confident in our ability to be able to attain that $250 million.

And, Bryan, the other consideration on that is if you go back and look at how we paced in the 270 or so million that we have adjusted our structure for, including the CheckFree Synergies, you saw that build I think it actually started around 15 million or so and then that built up to a crescendo and begins to tail off and that's really what's been going on that 44 I think is less than it was last year, and that number will -- there may be something,

but remember that whole 270 is now built into our cost structure and then this new 250 is additive to that, so by the end of this five-year period we'll have actually adjusted our cost structure by over a half a billion dollars assuming that we get this right. There are different streams, that $25 million to Tom's point will grow to be a much larger level and then that 2 will tail off.

It doesn't mean they're going away. It just means there is no incremental saves. These are all incremental saves each year.

Okay. That makes sense. Thanks for the color.

Thank you.

Thank you. Chris Schulter, William Blair and Company, you may ask your question.

Thanks a lot. Good afternoon, guys. Jeff, looking at the 2% to 4% internal revenue growth guidance what are the one or two biggest swing factors particularly get to the high-end of that range?

I would say the biggest opportunity that exists today and earlier in 2010. we talked about the fact that there were some larger transactions that we were in pursuit of. Some of them we could announce publicly and some of them we could not announce publicly, and one of those happened to be Westpac, and we announced it was a large transaction.

Well, during the year we ended up winning the transactions we thought we would be able to win. We didn't announce them because they were not announcable, but these are transactions that will be implemented over time, and the constraints that we have are really around having to contend with resource constraints within these very large financial institutions. We have to effectively get into their development queues.

And some of the projects that we are working on to the extent they can be moved in earlier would have upside into our numbers for 2011. So that's the upside. I think on the downside to the extent that the economy itself begins to deteriorate, down to levels below what we saw last year, in 2010, I think that would create some downside in our numbers.

Beyond that, I would say that on balance we would say there is probably more opportunity in our numbers if the economy stays as strong as people are talking about it staying right now, but we just don't see any reason, Chris, to get ahead of ourselves. We feel like we have got a reputation of doing what you say you're going to do and that's what we're focused on right now.

Okay. Fair enough, and then second question is actually on e-bills, grew about 2% to 3% this year. How confident are you guys that that growth rate can materially accelerate at some point either in '11 or '12 off of that base and with Wells taking their bill pay in house how do you think about the risk of other large FI' s doing the same thing.

Those are great questions. I will take the latter first and we'll come back. Wells Fargo did not take their bill pay business in house.

Wells Fargo, a number of years ago spent significant money and built their own bill payment system. What they did is they bought Wachovia back in '08 I guess it was or '09 now, early '09, and they have planned all along to convert that. They began converting the Wachovia business over to their own proprietary system and they plan to complete that in 2010.

Okay.

So that's what happened in that case. As it relates to others, we're very close to -- not surprising we're very close to what's going on in the market beyond Bank of America which is a well known large client of ours, Wachovia was about a 1% client of ours.

We have a handful of other clients, bill payment clients that call it a half a percent, and then beyond that there is little concentration and even a half a percent is not material concentration. The great news is we have renewed most if not all of those agreements over the last eighteen months and we feel quite comfortable with that base of clients, so from that standpoint we don't see any current risk, so that's the good news.

That's good news. And then just final question on ZashPay. Looks like you're charging just on looking at the website about $0.75 per transaction on your own website, but I just would be curious to hear how you're seeing most of the time FI's at this point price the product or if most are giving it away.

Thanks, Chris. I will get to that e-bill question I forgot to answer, too. I got slapped by Tom for that. On ZashPay, on the consumer site we are charging $0.75, but most of the financial institutions right now are looking at this. They see it to be a very high value solution.

They think it is going to move into the kind of the daily habits of their consumers and they see it as a way to build fee revenues, so most of the clients that we're talking to right now are looking at ways to either charge for it.

Many of them already implemented it and are charging for the send element, and I have heard some clients talk about, well, if you use a debit card X number of times they will let you have Zash transactions, so there are a variety of ways that you could bundle these solutions to try to create more value for clients, so my guess is it is going to become a fee generating item, and I think it will actually be quite helpful over the next several years for financial institutions as they look for that fee revenue.

Just a quick comment on the eBill. We continue to think eBill is critical, not just for the fact that it unlocks growth but it is extraordinarily differentiating as it relates to the bill payment experience. Tom, I think mentioned, that we are investing in our biller area and through our spark connect product so we have -- we are investing there.

You will hear more about that over the next year and we are maniacally focused on unlocking some of the value that exists there. You may remember we've got call it $100 million of embedded latent revenue that's sitting there and its a fairly fixed cost business, so there is a lot of opportunity there, so we are focused on that as well.

Okay. Thanks so much, guys.

Thank you.

Thank you. Greg Smith, Duncan Williams, your line is open.

Hello, guys.

Hello, Greg.

Tom, the tax rate in 2011 is 37.5% about what we should look at.

I think that's in the range. It is going to be slightly better than 2010 which I said, which is around 38%.

And then the high tax rate in the quarter that clipped you for $0.02, when did you know that I guess is the question? Is it fair to say that was unexpected by you guys? It certainly was by me.

Yeah. Fairly. We had an item there that was associated with our equity investment which is fairly unusual. It is a non cash item, Greg, so again it has nothing to do with what we're ultimately going to pay in taxes and it just was a FASB 109 requirement, so recorded that. It was offset a little by the R&D tax credit and about $0.02 negative impact in the quarter for those two items.

Greg, I think it is one of the challenges of having an equity investment and to some extent you take what you get.

Yes. Sure. And then the float, I know it is de minimus, the float income but what is it going to take to move that? Is it going to take the Fed raising rates? You in invest that all short term. Is that the case?

That's correct. Exactly what you said.

You are right, though, Greg. It is de minimus may actually be an understatement.

And is there a rule of thumb? What's the latest 1% move in the Fed funds rate, what that would do to EPS?

I think every, if we get a percent or so, it is a couple pennies for every percent that we have.

Okay.

Great. That's all I had. Thank you.

Thank you.

Thank you. David Togut from Ever Core, your line is open.

Thank you very much. Two quick questions. First, Tom, can you comment on unit pricing that you have seen in the last six months both in the financial segment and the payment segment and then what you see going forward in 2011?

Yeah. I think, David, we appreciate that question. I think from a compression standpoint which I think is what you were referring to is the market continues to be competitive. We have not seen a great change over the last six months as far as pricing goes.

There hasn't been any improvements or really any detriment from that standpoint, so that continues on about the pace it was. We clearly run into situations as we always do where competitors that want to get into a certain client and/or a certain area and that does happen on occasion where it can get aggressive, but overall there really hasn't been a significant change in the environment over the last six months, Jeff? I don't know if you have anything to add to that.

The only thing I say, David, is to some extent in at least a growing percentage of the time the notion of unit pricing is changing as we see bundles being a more predominant way to think about the pricing of the different solutions that are out there, but I would agree with Tom beyond that.

Okay. And then the second question relates to capital allocation and specifically, Tom, what is your appetite to buy back stock at current prices and perhaps if you could compare that to your appetite to acquire at current valuations?

Well, as you know, David, and as you followed the Company over the last several years, from a capital allocation standpoint share repurchases are capital allocation benchmarks. We continue to be buyers of our stock.

We run an intrinsic value model inside the Company clearly from that standpoint and we'll continue to be buyers of our stock because that is really the benchmark that we use, and we continue to look clearly at acquisitions in the market place as we always do, but we do compare that. That's our capital allocation benchmark and I think our history speaks for itself as far as what we've done in that particular area.

I would say I think this year we generated just south of $5 a share in free cash flow. I think Tom, we're talking about being able to grow free cash flow and you can see our history in reacquiring our shares and I think Tom talked about around 14% of our outstanding over the last three years alone.

So if you just put those metrics together, and you think about what's the right multiple against cash flow per share, that just applying the bottom of our rate, bottom of our free cash flow rate would be, get to a healthy number above 5. I think you can make some assumptions on what the intrinsic value model might look like.

I see. Thank you.

Thank you. Brett Huff from Stephens, your line is open.

Good afternoon. Congrats on a nice quarter and year end.

Thanks, Brett.

Thanks, Brett.

Two quick questions. One is, can you tell us just more specifically about the very nice margin expansion that you saw in the financial segment that you detailed a little bit and I wanted to make sure that I understood exactly all the moving parts on that and going forward you pulled out a few things that will help continue with that cost savings and things like that, but will the thing that happened in the fourth quarter repeat itself?

I think we don't -- the fourth quarter and let me just talk about the quarter for a moment. We did have a lot of good growth there from a top line. If you compare it to the third quarter right, revenues were up in that particular segment about $20 million. Most of that dropped to the bottom line.

Typically in the fourth quarter, Brett, we do have some good purchasing from clients as far as license revenue goes compared to the third quarter so when you compare the Q4 to Q3, we just had a lot of good incremental drop through in that particular quarter because really our license revenue in that particular segment was up on a sequential basis.

And we had a really solid quarter from that standpoint as far as that drop through goes, and in comparison to the quarter four of last year, again, good mix of revenue but also we had some discretionary compensation expenses last year which did not recur in the current year which helped that year over year comparison, but I think going forward we look at margins. Sometimes these license fees will fall into the fourth quarter.

Sometimes into the third, sometimes into the second, but overall we're going to continue to grow our margins in both of our segments. We continue to have a number of opportunities and we continue to have more outsourcing revenue in this segment and we have again good scale businesses. We have our new $250 million target for operational effectiveness. We have a lot of things going on in our check business with electronification, so we continue to have solid opportunities there.

The other thing I would add in there, Brett, is for the last couple of years at least, we've been trying to especially as revenue growth was hit so hard by the economy, we have been trying to point people to the fact that in places where we have been losing revenue, so take item processing for an example, we are replacing that revenue with much higher quality, much more attractive margin characteristics carrying revenue, and so we talked about some of the drag that we're going to have this year on our organic growth rate.

We're still going to grow in a range of 2 to 4% but we're going to replace all of that revenue and the IP side of that revenue is very low margin revenue. We'll replace that with much higher margin revenue and we have been doing that for a number of years and that will continue as that low margin revenue bleeds off. We will replace that and are replacing that with typically recurring revenue that has pretty attractive incremental margins.

And that's a big driver, probably the single largest driver of the 650 basis points gain we've had over the last four years is the swapping out of lower margin revenue for higher margin revenue and we will continue to do that, whether it came via the CheckFree acquisition or whether it has come from just internal revenue growth or swapping of revenue. You will continue to see that for a long period of time.

Great. That's helpful. Last question, and then on the two large clients that are having a little slower growth on bill pay, what's the game plan to address that? How much help can you provide them? What are the -- are there solutions or things around the edges that you can help maybe restart some of that growth or is that just an economy or even just a saturation thing?

Well, in the case of -- it is a little bit of a different story for each one. I would say on balance we try really hard to help point out areas of potential growth, but in the case of our largest client, they're at a penetration rate that is probably one to two times larger.

Their penetration rate is one to two times that of everyone else, so there is a lot of opportunity for everyone else to get up to their rate or for them to really grow significantly they would have to do some things that would be fairly different, and unfortunately right now given everything that's going on in the economy, I don't think people -- the institutions aren't spending a disproportionately large amount of their time focused on how to move that forward.

So I don't think there is a lot we can do there beyond changing and modifying our own experience to make it even more differentiating than it is today and easier to transact and that's part of how we think about our own technology in terms of doing that.

The untapped opportunity here in these other clients that we have and the other signs that is we have is tremendous, and we are investing more in that also. When I talk about investment in this particular business of bill payment we're spending a lot in the consumer side, and a lot in the consumer adoption side and making sure how we can help our FI's continue to grow consumers that are on bill pay because it helps them a lot also from a retention standpoint on profitability standpoint, so that continues to be an area of investment for us via this critical to continuing to increase our long term growth profile.

Great. Thanks for your time.

Thank you.

Thank you. Darrin Peller from Barclays, your line is open.

Thanks. Good afternoon, guys. Just a quick question first on, can you just help us understand how much payments margins are being impacted collectively by the investments in some of the newer initiatives?

You know, Darrin, I'm not going to go specifically into that. Although I will say that our core businesses both in bill payment, debit, et cetera, continue to have nice fall through, but from a standpoint of incremental margins, those businesses and how they operate and the incremental drop through margin continues to be very positive.

But we are making these critical investments in a number of different areas and we talked about them already, mobile, Zash, analytics, a number of different things, so it is quite a piece of the expense growth that we've had in this particular segment because we view it as very critical to the future growth profile.

The other thing that we have going on is in that segment you tend to have longer implementation cycles, bigger institutions, bigger projects which also tends to get your expenses a little bit ahead of revenue because of how, as Tom mentioned we tend to have things run through the P&L.

Okay. I mean, I may have missed it. Is that driving the margin drop down in the payments year over year, that payments margin.

That's correct. That's been going on all year and that's really where a lot of our investment as a company is focused and Darrin, I think earlier I addressed this question but the issue around most of our growth comes through head count which is expensed and if you look back we're investing seven or eight or nine different things here that are very critical to us and will help our growth rate as we get into '11 and '12 and '13, so they're critical things that we're very excited about.

I guess on the top of the margins, you put up a nice margin expansion 70 basis points over last year and I think that was on revenue growth of about 1.5%. When we consider your guidance of 3% to 4% and we also note that about 60% of your revenues are transaction processing driven like you said scalable, I mean, I would have expected to see more than 50 basis points margin upside just given the revenue pickup, so I guess that's why I am trying to figure out understanding why it wouldn't be more than 50 basis points. Is it just because of the payments growth initiatives?

Darrin, I would say first of all this may be how we talk about this. I would accentuate the at least part of that, at least 50 basis points. We're not not saying nor are we saying it will be 50.

Got you.

Try to have me say that again. It is kind of our normal guidance we now just adopted that says at least 50 basis points, so I would not necessarily use 50 as the right answer.

Yes.

If you look at our history is where we performed over that, Mark, we are going to meet our commitments, our earnings commitments and we gate our investments appropriately.

Thanks. Jeff, last question for you. When do you see the client base seemingly getting through some of their inhibitions around spending over regulatory reasons?

When do we see that -- the spending loosening up?

Yes. When do you see the concern by some of your clients abating I guess is really what I am getting at?

Well --

Ongoing.

Well, really it is a rules question. Once there are rules, I think people will know what they can do and what they can't do and when the Durbin rule first cut at the rules were introduced, there has been a lot of noise in the system obviously because of that and I think we have to get the proposed regulatory changes quantified and have people and as soon as they understand them, I think people will move past.

I think really the issue is understanding what is going to happen. It is -- if they were final, things would be lot better. No matter what they are. They need to be final and people will move on.

Understood. All right. Thanks, guys.

Thanks, Darrin.

Thank you. John Williams from Goldman Sachs, your line is open.

Good evening, guys.

Hey, John.

Most of our questions have actually been answered. Was just curious, we haven't really heard a lot in the way of commentary on the larger Bancorp upgrade cycle. I think a lot of us have hitched our views to the smaller and the mid sized banks coming back, but what color can you give us on the bigger banks and those bigger projects? Are you seeing anything different now versus a few months back?

Well, John, I would say that if you asked, if the question was directed at the size of projects, there are some magnificently large projects out there. They just tend not to be in the US they tend not be to core centric. There are some core changes going on outside the US and frankly there is one or two large core changes going on here.

But in the US we're just not hearing a lot of energy on core. Most of the energy that we're hearing tends to focus around channels, so around internet banking that's a big topic around the world right now, and lots and lots of renewal, and these are very, very large projects that are going on, so that we are hearing, but domestically there is not a lot of discussion, real discussion around core renewal because that's just not differentiating from the consumer perspective.

And I think until people are able to move on with the business of banking, I just don't see them putting the energy in that it would take to do, if you can imagine one of the top three or four banks doing a core change, I just don't see it.

Okay. That's fair. Just to go back to one of the earlier questions on pin debit specifically, I know historically you guys really haven't been all that active at the point of sale. It seems like most of the cards are ATM, network oriented Cards.

I guess what specifically can you do if indeed Durbin does disaggregate some of the volumes away from the bigger networks on pin debit? What can you do specifically to try and capture more point of sale volumes? Because that seems like the biggest way you could maybe make a dent in the industry if you can grab some more of those volumes.

I would say, John, over the last several years, and when you were making that comment it made me think we probably hadn't done a good job talking about this. We have actually spent a lot of energy and effort over the last few years in expanding our presence to point of sale.

I think we're about 98% or 99% acceptance at this point through the US, through our direct efforts, and some partnerships that we formed, so we're out there. It is one of the reasons the Accel/Exchange Network has been growing rapidly, and it is one of the reasons why we're involved in a lot of the conversations that are occurring around the industry right now, in what I would call the second network conversation, so I agree with you. There is a lot of opportunity there and we hope that we will be a benefactor of that as the rules become final and as people make choices if in fact the rules require that.

Okay. Thanks, Jeff. Appreciate it.

Thank you.

Thank you. Our last question for today is from David Parker from Lazard Capital. Your line is open.

Thank you. Good afternoon.

Hi, David.

Just wondering if we could actually get Mark to comment on his decision to join the team and just how he views his role going forward and what he will be focused on initially?

Sure, David. Probably the thing that I was most attracted to in looking at Fiserv is the management team. I have known a number of folks, not just Jeff but a number of people who are part of the management team for a while, and so the opportunity to work with people who I respect, who I think have a lot of passion for the business and serving the clients in the way that this management team seems to want to serve clients was very attractive to me.

I also believe that there is a lot of opportunity to think hard and long and hard about how to be innovative and create new sources of revenue growth for this company, and I find that to be an interesting challenge that I am excited about, and clearly Fiserv as I think you know probably as well as I do is in the midst of a transformation from what it was in the earliest incarnation of the company to Fiserv 2.0, and while a lot of progress seems to have been made, there is still a lot of opportunity.

So things like this $250 million expense challenge, that's this next stage is fundamental restructuring of the way in which the business gets done as opposed to simply cost take outs. That's fascinating for a business guy like me, that's fascinating work to figure out how to do that and not just take out costs but enhance quality for clients at the same time, so it is just an interesting opportunity to work with some really good people and do really interesting work.

That's all I had. Thanks, guys.

Thank you, David.

Thank you. Tien-Tsin Huang from JP Morgan, your line is open.

Thanks for squeezing me in.

Sure.

Good operating results this quarter. I just had a couple quick ones so you guys can go. The capital question I wanted to ask I think 2.5 turns of leverage, is that still the leverage target you guys expect to stay true to you this year or can we see that change? I ask because it could imply heavy repurchase activity again this year absent any deals.

Yeah. Our target is 2 to 2.5 times and within that range of that target we're going to continue to allocate capital some to debt repayment but again we're going to be focused on share repurchase as we have been in the past as our capital allocation benchmark.

Really nothing has changed from what we have talked about for the last couple of years.

Okay. Just want to make sure. Your guidance does assume some level of repurchase then, right?

Absolutely as far as allocating our capital.

Okay. Last one for me, just the bill pay outlook, Jeff, I know you and I talked about this before and figured I would ask it again and see if things had changed. Just want your thoughts on what lower debit interchange means for the bill pay outlook. I can certainly argue it is positive and negative but just wanted your thoughts on that.

Tien Tsin, are you talking about our classic CheckFree bill pay?

Classic CheckFree bill pay not the walk in, not the other stuff. Just bill pay and on the tail of that the eBill as well? Just with the cost of taking debit being cheaper could we see more biller direct or because you have more optionality now with debit could you see it open up more billers to take that and aggregated under the banks? I am trying to get a feel for how that shakes out because I am still kind of confused about it.

I understand. So I think we're all working our way through the complexity of what will happen. From at least from my standpoint I am still a firm believer in the aggregator model and so whether debit creates another quasi form of payment and especially if you can put a rewards umbrella around that, does that begin to help bill pay?

I think you might begin to see some different economics. As different economic models emerge I think you could see rewards end up centering around not just transactions but around bill pay and other kinds of services that aren't currently covered by that.

I think the biller direct is certainly going to be an option for people who like biller direct but at the end of the day I think the aggregator model wins, and I especially believe that mobile as a way to allow people easier access when they want that access will actually accelerate trends towards aggregators, and as we talked about before we do believe that bill payment follows bills and the propagation of eBill is getting that right, I actually think begins to diminish the biller direct value proposition, because you have the amounts and the other relevant information right at your finger tips.

Kind of a long winded way of saying we still believe in the aggregation model. We think biller direct is there to stay. We do a lot of that work but we think that the aggregating model will win even in a period or a time of lower interchange depending on if that continues in that form, I guess, will also play a role in the ultimate decision.

That's helpful. I agree with you. Have a good night, guys. Thanks. Take it easy.

Thanks.

Thank you, everyone, for joining and if you have further questions, please don't hesitate to follow up with our Investor Relations Group. Have a good night.

Thank you. That concludes today's conference. Thank you for your participation. You may now disconnect from the audio portion.