Fiserv Inc (FISV) 2015 Q3 法說會逐字稿

Welcome to the Fiserv 2015 third-quarter earnings conference call.

(Operator Instructions)

As a reminder, today's call is being recorded. At this time, I will turn the call over to Stephanie Gregor, Vice President of Investor Relations at Fiserv.

Thank you and good afternoon. With me today are Jeff Yabuki, our Chief Executive Officer; Tom Hirsch, our Chief Financial Officer; and Mark Ernst, our Chief Operating Officer. Please note that our earnings release and supplemental presentation for the quarter are available on the Investor Relations section of Fiserv.com.

Our remarks today will include forward-looking statements about, among other matters, expected operating and financial results and our strategic initiatives. 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 for a discussion of these risk factors.

You should also refer to our materials for today's call for an explanation of the non-GAAP financial measures discussed in this conference call, along with the 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. Unless stated otherwise, performance comparisons made throughout this call are year-over-year metrics.

With that, I will turn the call over to Jeff.

Thank you, Stephanie, and good afternoon, everyone. We delivered strong third-quarter results, highlighted by the sequential acceleration of our internal revenue growth rate to 5%, excellent adjusted margin expansion, and a 20% increase in adjusted earnings per share. These results are consistent with the ramp we expected this year and are indicative of the financial performance and continuing internal revenue growth acceleration we previewed at our June investor day.

Adjusted earnings per share is up 15% for the first nine months of the year, due to strong adjusted operating income growth and disciplined capital allocation. As a result, we have raised our full-year adjusted earnings per share guidance to $3.84 to $3.87, an increase of 14% to 15% over last year.

Consistent with our capital allocation strategy, and in the face of equity market volatility in the quarter, we repurchased 6 million shares. We remain very committed to that strategy and through September 30, had returned over $1 billion to shareholders.

Sales in the quarter was up sequentially over Q2 and came in at 86% of quota. This is a solid result in light of a tough prior-year comparison and heightened expectations for increased performance. We are set up for a very strong finish to the year.

Now, let me provide an update on our 2015 enterprise priorities, which are first, to continue to build high quality revenue while meeting our earnings commitments; next, build and extend client relationships with an increased emphasis on payment and channel solutions; and third, deliver innovation and integration, which enables differentiation and value for our clients.

Our first priority centers on building high quality revenue in areas of support, client value, margin expansion, and earnings growth. Third-quarter internal revenue growth accelerated 5%, with strong performance across both segments. Businesses with high recurring revenue, such as account processing, payments, including card services, lending and biller solutions all performed well.

For reference, our reported results include a negative currency impact of 70 basis points in the quarter and was 60 basis points year to date. Growing revenue in areas where we have operating leverage, along with flexing our operational efficiency muscle led to a 190-basis-point increase in adjusted operating margin in the quarter and was up 150 basis points for the year.

We believe our business model will produce continued operating margin expansion into the foreseeable future. We are pleased with our financial performance and are on track to meet our shareholder commitments.

Our second priority is to build and extend client relationships, with an increased emphasis on payment and channel solutions. One of our key strategies is to partner with financial institutions and drive higher levels of digital engagement for our clients. We continued to gain momentum with our industry-leading mobile solutions in the quarter.

With over 2,000 financial institution clients now live on Mobiliti ASP, we have seen a than 50% increase in subscribers to nearly 4 million users as of September 30th. We expanded our overall mobile footprint in the quarter, adding 100 new clients to the family. We are pleased that First Hawaiian bank, with $18.7 billion in assets, selected a full suite of digital banking and personal financial management capabilities from Fiserv, including Corillian online, Mobiliti ASP, CheckFree RXP, and Popmoney. These solutions will provide best-of-breed digital engagement to their customers and a lower total cost of ownership.

At our Investor Day, we also discussed opportunities to utilize payment speed and efficiency to create solutions that deliver unique value for consumers, financial institutions, and billers. During the quarter, PNC, the eighth largest bank in the US, selected Popmoney for Disbursements to do just that. This solution utilizes our Popmoney capabilities to simplify and expedite the business-to-consumer payment experience.

In a test of payment receipt options, nearly 50% of consumers opted to receive funds via Popmoney. This use case is an important part of our integrated payment strategy and is one of the distinctive growth opportunities embedded in our DDA-based payment approach. Seven DNA clients went live in the quarter, and we remain on track for 30 installs this year.

Importantly, we anticipate that six institutions with assets greater than $1 billion will go live in the fourth quarter, including Columbia Bank, with $4.6 billion of assets, and a $14.4 billion-asset institution Washington Federal, all contributing to increased growth in Q4 and well beyond. We continue to be very pleased with DNA's momentum.

Our third priority is to deliver innovation and integration, which enables differentiation and value for our clients. One of our primary areas of innovation are solutions that create revenue for our clients. We recently highlighted our new CardValet product at our fall client forum. This solution enables debit card holders to take control over their spending patterns through the comfort of their mobile device.

The early indications are extremely positive, with CardValet users adding an average of five incremental debit transactions per month. On top of deeper customer engagement, financial institutions should also benefit from additional interchange revenue. Although early, over 200 clients have already signed up for CardValet. When live, this group of FIs will further empower their more than 4.5 million underlying debit card holders, which should translate to new revenue over the short and midterm.

We're also excited about our Immediate Funds solution, which provides financial institutions tools to allow consumers real-time access to deposited funds across branch, ATM, and mobile channels. This is another example of a Fiserv solution, which creates value for consumers and new revenue for our clients.

EMV continued to progress in the quarter with an additional boost from the October 1 liability ship date. As you know, Fiserv both manufacturers and personalizes EMV cards, giving us a competitive advantage along with multiple sources of revenue. Although demand has picked up, we only recognized about 10%, or $1 million of the incremental EMV revenue generated in the quarter.

The remaining $9 million will be deferred until the manufactured cards are personalized. We expect to see incremental revenue growth from EMV in the fourth quarter and well into 2016.

Lastly, we were very pleased to sign our first Agiliti client, Think Money Limited in October. Think Money, which been in existence for more than 20 years, provides a broad range of innovative financial products for personal financial management, mortgage, and insurance services across more than 100,000 personal accounts today. The Agiliti pipeline remains strong and we expect additional signing's before the end of the year.

Now let me turn the call over to Tom to provide additional detail on our financial results.

Thank you, Jeff, and good afternoon, everyone. We are pleased with our performance in the quarter. Internal revenue growth accelerated sequentially to 5%. These results include a 140-basis-point negative impact due to a combination of unfavorable currency impacts, and the EMV revenue deferral that Jeff mentioned earlier.

Adjusted earnings per share was up a very strong 20% over the prior year to $1.03. Adjusted revenue was $1.2 billion in the quarter, and $3.7 billion in the first nine months of the year. Internal revenue growth was 4% year to date. Our continued focus on recurring revenue acceleration was highlighted by a 6% increase in processing and services revenue this quarter, offset by a decline in product revenue, due primarily to lower card reissuance revenue in Output Solutions. Combined license and termination fee revenue benefited revenue growth by 60 basis points in the quarter and 20 basis points year to date.

Adjusted operating income growth was excellent, increasing 11% in the quarter and 9% year to date to $411 million and $1.2 billion respectively. Adjusted operating margin was up 190 basis points in the quarter to 33.1%, and year to date was up 150 basis points to 32%. Margin performance across both segments was primarily driven by revenue growth in our scale processing businesses and cost efficiencies, including savings from our operational effectiveness programs.

Now on to the segment results. Internal revenue growth in the payment segment was 6% in the quarter, versus our strongest prior-year quarter, and up 5% year to date. Growth in our card services and biller businesses led the segment performance.

While EMV production in our Output Solutions business increased, much of that revenue, $9 million, was deferred to future periods due to cards, which have been fully manufactured as of quarter end, but not yet personalized. We have added nearly 100 new debit clients through September and have a solid pipeline of future activity. Our double-digit transaction growth so far this year remains ahead of the market.

Our integrated debit value proposition, along with continued solution innovation such as CardValet and CardFree Cash, has resonated well with the market. Bill payment transaction growth remained in the low single digits, and we saw good traction in value-added services, such as same-day bill payment, which has transaction growth of 36% over last year.

Mobile users continue to grow as we approach 4 million Mobiliti ASP subscribers at the end of the quarter. We continue to believe digital transformation is still early in the cycle, and expect to see even more growth in the future as demand for digital services continues.

Payment segment adjusted operating income grew 8% in the quarter to $217 million, and year to date is up 9% to $616 million. Segment adjusted operating margin expanded 80 basis points in the quarter to 33.7%, and through September is up 110 basis points to 32.7%, driven primarily by growth in our scale, recurring revenue businesses, and cost efficiencies. Internal revenue growth in the financial segment was 4% in the quarter and 3% year to date. Growth in the quarter was driven primarily by strength in our account processing and lending businesses, along with the positive impact of higher combined termination of license revenue, partially offset by currency.

Adjusted operating income in the financial segment was up 13% in the quarter to $218 million, and up 9% to $631 million in the first nine months of the year. Adjusted operating margin was 35.5% in the quarter and has increased 180 basis points to 34.8% year to date. Strong margin performance in the quarter was driven by scaled business growth in areas such as account processing and lending, higher one-time fees, and benefits from our continued focus on operational efficiency.

Corporate segment's adjusted net operating performance for the quarter and year to date are both in line with our expectations and consistent with the comparable prior-year results. Our adjusted effective tax rate was 34.3% in the quarter, and year to date is up 100 basis points to 34.7%, resulting in a $0.04 per share negative impact year over year. We expect our fourth quarter rate to approximate 36%.

Free cash flow was $666 million through September 30. Results were negatively impacted in the quarter by the timing of working capital, including a $60 million increase in tax payments compared to 2014. Our free cash flow does not include a $32 million cash distribution from our StoneRiver venture in the quarter. We anticipate stronger fourth-quarter results due to working capital favorability, including lower tax payments. Free cash flow per share is up 5% year to date to $2.77.

Total debt at September 30 was $4.2 billion, or 2.3 times our trailing 12-month adjusted EBITDA. We are deeply committed to creating value for our shareholders through disciplined capital allocation. We repurchased $514 million of our stock in the quarter, nearly equaling the amount in the first half of the year.

For the first three quarters of the year, we have allocated over $1 billion to share repurchase, acquiring 12.9 million shares at an average price of $81 per share. As of quarter's end, there were 229.5 million shares outstanding and 6.9 million shares remaining under our existing share repurchase authorization.

With that, I will turn the call back over to Jeff.

Thank you, Tom. As I mentioned up front, sales in the quarter were 86% of quota. Actual sales performance was down a bit compared to the prior-year's results, primarily from deals pushing the future quarters. Pipelines were solid across the board, including good traction with our newer solutions. We expect to finish our sales year strong, leading to excellent momentum going into 2016.

Integrated sales in the quarter were $57 million, led by solutions such as debit and credit services, Mobiliti, bill payment, source capture, and statement processing. With integrated sales of $168 million through September, we expect to meet our $250 million target for the year. Operational effectiveness savings were up sequentially in the quarter and are now at $44 million year to date.

In addition to solid in-year performance, we are building the foundation to achieve the new $250 million target we shared at Investor Day. We were pleased to complete the construction of our Alpharetta campus in the quarter. 80% of our nearly 2,000 Atlanta-based associates from a number of locations are now housed in our new state-of-the-art facility. In conjunction with this project, we also consolidated two of our largest data centers, which we also expect will generate meaningful savings.

Although the financial institution environment remains generally stable, the conjecture and implications around interest rates were front and center in the quarter. M&A activity is progressing at elevated levels, which we expect will continue. While regulatory and efficiency remain in focus, we are starting to see early movement by financial institutions towards revenue-focused solutions that deliver end-user value at the intersection of real-time, digital, and evolving consumer expectations.

As I mentioned up front, we are well-positioned to achieve our 2015 financial objectives, which include our third consecutive year of increased internal revenue growth. We are tightening our internal revenue growth guidance to 5% for the full year, which would translate approximately 6% revenue growth in the fourth quarter. That performance would cap off a strong second half of the year, and serve as an attractive exit run rate for 2016.

We have raised our full-year adjusted earnings per share target to a range of $3.84 to $3.87, which at 14% to 15% growth is above the top end of our previous guidance of $3.73 to $3.83. We also expect that adjusted operating margin will increase well over 50 basis points for the full year, and that free cash flow per share will be at least $4.12 for the year.

Although we are inside of delivering our 30th consecutive year of double-digit adjusted earnings per share growth, we are far more excited about the future. We are providing a unique set of solutions that enable our clients to best serve their customers, which should drive high quality revenue growth for Fiserv into the future. We know our success is dependent on the more than 21,000 talented associates who partner with our thousands of clients around the world. We are grateful for the difference they make each and every day.

Speaking of talented associates, earlier today, we filed an 8-K announcing that after more than 20 years at Fiserv, the last 10 of them as CFO, Tom Hirsch intends to retire on March 31, 2016. Tom is leaving for personal reasons and does not have plans to pursue comparable employment outside of Fiserv. He will also be available as needed after March for special projects and to ensure a smooth transition.

Tom is a stellar executive, with deep business acumen and tremendous passion for the Company and its clients. He has been instrumental in the transformation of Fiserv, working with the team to deliver strong results and set an even more attractive course for the future.

On a personal note, Thomas been a great partner, confidant, and friend. In typical form, he will be more than fully engaged until he walks out the door, and when he closes the ledger for the last time, he will be missed. With that said, transition and change breed opportunity. Tom and his family will embark on a new chapter of their life and so will the Company.

We intend to consider a full slate of internal and external candidates for this highly desirable role. We have a strong finance leadership team, which we believe will ensure a smooth transition, and we expect to make a decision on a new CFO no later than January 31st.

With that Cindy, let's open the line for questions.

(Operator Instructions)

Glenn Greene of Oppenheimer & Co.

Thank you, good afternoon all of you, and Tom, sorry to see that you are leaving.

Thank you, Glenn.

The first question would be, maybe, Jeff, if you could give us a little bit more in terms of the environment? The sales outlook, it sounds like the sales was okay in the quarter, not great. Maybe a few deals were pushed out. Maybe just more about -- just from a bigger picture perspective, the sales environment not only into the fourth quarter but heading into 2016? And then I have got a follow-up.

Sure, Glenn. And we -- I would say that while sales were little bit lower than obviously 100% in the quarter, we have had two really great years in a row, two record years. And I think to some extent, we are focused on transitioning from a lot of the things that we've sold historically. We had a big burst of energy right as we brought DNA in; we're in the midst of bringing those live, and we're getting some very strong traction with some of the newer solutions that I talked about today, whether it be Popmoney for Disbursements or Immediate Funds, CardValet, a number of different products.

So while the first few quarters have been a little bit light, we expect quite a strong fourth quarter. We typically have had larger deals in the middle of the year. This year, those deals have been a bit bifurcated. We had a little bit early, we expect to see several of them late, and we feel very good about our pipeline and the momentum going into next year across -- really across the entire Company.

And then could you just remind us where you are on the conversion pipeline, both for DNA and the account processing pipeline? It sounds like you are going to complete 30 of the DNAs this year. Is there -- what is the balance going into 2016 and then just an update on the account processing pipeline too, conversion pipeline?

Sure, absolutely. I would say still the majority of our larger deals have not yet been converted in this year. I mentioned that we have got six $1-billion-plus institutions going live on DNA alone in the fourth quarter. We haven't given any visibility yet into what next year's conversion cycle looks like. We will give a little bit more visibility into that when we get into February when we give guidance next year. But we are making good progress.

We -- our biggest clients, I mentioned Washington Federal, which is our largest DNA conversion, that will go live in the fourth quarter. Much of that revenue will start to show up in Q4, and then turn into next year. And across the rest of our platforms, most of our larger conversions are going into next year. So we will not have benefited from them in 2014 -- 2015, I am sorry.

Okay, so you still have the comfort and the visibility to think that organic growth will further accelerate in 2016?

Absolutely. We stand very clearly by our conversation at Investor Day. We are going to exit the year, as we said, at approximately 6%, and we expect to have that be a good foundation for our growth going into next year.

Great. Thank you.

Thank you.

Jim Schneider of Goldman Sachs.

Good afternoon. Thank you for taking my question. I was wondering if you could maybe talk a little bit about the margins and the sustainability of them. Obviously, some good upside and some one-time items in the quarter, but can you maybe talk about what really drove that upside? Was that purely the incremental margin contribution from the payments type business? Or are there also some ongoing benefits from data center consolidation that were in there in the quarter?

Yes, it's a great question, Jim, and I think our margins, we are very disciplined with what we do. We clearly had some benefit from our operational effectiveness initiatives and just general cost efficiencies. I think, again, combined with really high-quality revenue, a lot of our revenue growth, again, is coming in our card services or our biller business, where the incremental margins of those particular solutions are fairly high. So you can see on a cost dynamic that our overall costs have increased this year to date about 2% only.

And again, we have a lot of factors that contributed to that. High-quality revenue. We have scalable model and our operational effectiveness, including as Jeff talked about, are some of our data center consolidations, which are actually going to have a greater impact as we look out over the next several years. So we continue to be confident and [continually] margin expansion over the next several years as we go into our next phase of operational effectiveness.

That's helpful, thanks. And then maybe one for Jeff, just a follow-up on the sales question. Can you maybe talk about the types of deals that pushed out into Q4 into 2016? Were those manly on the core processing or DNA side or were there more ancillary things like bill pay and Popmoney?

Yes, they tend -- the deals that you manage from a slippage perspective tend to be the larger broad solution, multiple solution deal. So they did bias to the account processing, core processing side. We had a couple of other deals flip on the lending side, but it is really on the account processing pieces of the business.

Great, thank you.

Thank you, Jim.

David Togut of Evercore ISI.

Thank you, good afternoon.

Hi, David.

I am not sure whether not to congratulate you, Tom, but you will certainly be messed.

Okay, thank you, David. I appreciate that.

David, we're going to go for congratulations.

Okay, well definitely a bittersweet moment. Question on DNA, I know with the previous generation product acumen, one of the big challenges you faced was much longer than expected conversion timeline. What are you finding on these big DNA wins in terms of timeline to convert versus your expectations?

That's a very good question, David. We are actually very, very happy with the implementation work that's happened with DNA, especially given that this was new to the family just in early 2013, and we have meaningfully ramped up their implementations. I would guess that we will do more implementations in the fourth quarter than that business did in the prior 12 to 18 months. So we have ramped it up nicely, and we are finding to the extent that there are any issues, and there have been very few, but if there are any issues they are not coming from us. They're coming on the client side.

And these have also tended to be larger, multiple product implementations. Again, so they've got a level of complexity, and the team has dealt with them beautifully. Most of the clients are referenceable, if not on day one, on day three or four, so we are feeling very good about the implementations today. And that's one of the reasons why we have great momentum in the market.

Great. And then do you have any data on attach rates? You have highlighted your surround strategy with DNA. Any data on attach rates or products like payments and so forth?

I would say that we are seeing at or better than what we've seeing across the enterprise. If you remember, when we acquired Open Solutions, one of our strategic hypotheses was that because Open didn't have the value of the surround set, that there was something that had been missing from that value proposition. As we brought it in, as we shared at Investor Day, we have been very happy with the level of both sales within the new DNA win since we have acquired it, but even more important, have been the ability to penetrate the existing base. So we are not going to give that data right now, but I would say we remain as optimistic and with the same level of conviction as when we talked in June and when we talked prior to that.

Your cost savings appear to be running ahead of plan. As we see these big implementations with DNA, should we expect the operating leverage of the business to improve even further?

I would separate the cost savings from the point of operating leverage. Primarily when we're talking about operating leverage, we would be talking about the ability to add new revenue to our scaled businesses at a pretty low incremental margin -- pretty low income incremental cost to very high incremental margin. And at the same time, at some point, we will likely be able to reduce the size of our implementation team within DNA, but frankly, that's the last thing we want to do. I would like nothing better than to be building that implementation team out even further because we are winning lots of deals there.

The majority of this next phase of $250 million of operational effectiveness saves is going to come from looking to become more efficient in our real estate footprint, looking to bring together some of our dispersed data centers, and also looking for ways to get better leverage out of our dispersed workforce. So those are the big three ways that we see that we are going to knock down that $250 million.

And remember also in our operational effectiveness savings, they are going to be a little lumpy by quarter. So we had a very good quarter this year. I think we're just about $5 million or $6 million away from our target for the year. Hopefully we will stay ahead of that as we can, but we continue to build that muscle, and we feel good about our ability for the next few years to use that to create supplemental margin moving forward.

Got it, just two quick housekeeping questions. Can you give the debit volume growth in the third quarter, and then if you could call out the termination fees standalone outside of the software license fees and what the year-over-year compare is?

Yes, David. I think the -- I don't have that in front of me, but the year to date is around 10%. I think the third quarter is somewhere in the high single digits for debit. Exactly. And roughly around 10%, I believe, on a year-to-date basis. Again, good growth in that particular area. Regarding the termination fees, I know, David, as you well know, it's a normal part of our business and they vary period to period. The combined license and termination fees were up about $6 million to $7 million in the third quarter and year to date compared to the prior year.

To your question specifically, termination fees overall were up by approximately $10 million year to date and for the quarter. This was offset, however, by a decrease of about $5 million in license fees year to date and for the quarter. Just as a reminder, we had negative currency impact in the quarter of about $8 million and $20 million on a year-to-date basis, which more than offset those increases. And as Jeff highlighted, we had to defer about $9 million of EMV revenue in the quarter, due to the fact that we have completed the manufacturing element, but have not personalized the cards which is a smaller part of that, which will happen. And so with that, that is the numbers on the termination fee side.

Thank you very much.

Thank you.

Dave Koning of Baird.

Yes, hey, guys, and congratulations, Tom, a ton of good quarters in the last 10 years for sure. And my first question, the EBIT growth on an organic basis, you could say it was about the strongest it has been probably the last eight years or so, maybe even longer, and so I know you isolated high-quality revenue and some cost initiatives and stuff. But it was so strong relative to the last several years that is it more on the high-quality revenue and maybe what is changing compared to the last several quarters?

Yes, I think, Dave, I don't always look at one quarter, right, there's always puts and takes in every quarter. But if you look at on a year-to-date basis, right, our operating income is up 9%, which is very strong. Our expense base is up a couple percent, and I think it is a combination of all those factors that we have been really focused on. And there is not one thing, as you well know, that drives us, from a result standpoint; it's a combination of all the things that you talked about.

It is the revenue mix of high quality revenue; it is the operational effectiveness areas that we're making good improve on. It's selling the right things that are dropping that through, and just continue to focus this organization on continuing to be more efficient across the board. So again, there is not really one or two things that stand out. It really is when you look back at it, the overall business model and just making sure that our teams are executing that business model as well as we possibly can.

Dave, I would just add one thing, to your point of this notion we talk a lot about high-quality revenue. And in the quarter, we had lots of different discrete benefits, high-quality revenue, Mobiliti, Mobiliti users, some one-time revenue. We were able to offset some smaller term fees -- smaller license revenue, you have all kinds of things going on. The only point I would make is because of how we have shaped the model, whether that revenue comes in through a Mobiliti user or it comes in from a one-time or occasional revenue, the drop-throughs are going to get better and better because of how we are managing the cost base overall.

And we like that because, obviously, it gives us some margin and some business model and expense leverage, but it also gives us the ability to invest at times where there are opportunities for us to invest. And so we, as you know, we are committed to raising margins 50 to 100 basis points a year. And when things are going a little bit better, we will look for ways to invest to take advantage of those where the perfect storm comes in our favor.

Got you, okay. Well, that is helpful. And then I also looked back at -- it looks like your guidance is for EPS to be down just a bit in Q4 sequentially. And I looked back, the last time that happened was Q4 of 2007, it looked like. So is Q4 a quarter where you are going to invest some of that away, or maybe, I think you paid some bonuses a few years ago or at different times to spend a little extra away. Is that maybe what is happening this year?

That's a good memory, Dave.

Yes, it is.

Good memory. I think it was Q4 of -- was it Q4 of 2007 or Q4 of 2008? I think it was an interesting time.

We do have a couple things going on in the fourth quarter that are going to have those expenses a little bit higher than what we had in Q3 [tier]; there's a couple of investments there. We do have a couple -- a little bit of business mix. We are also going to experience higher commissions. As Jeff indicated earlier on, we're going to have some strong sales results in the fourth quarter. We also have our fall forum client conference in the fourth quarter. And then last but not least, we are self-directed or self-insured for our health claims, Dave, and we are going to have a pretty significant ramp in the fourth quarter this year compared to the other quarters.

There's normal seasonality there, but it's going to be much bigger. And so, those are all four or five different events that are impacting our Q4, a little bit higher expense level than we normally would have. And so again, none of these things are really when you look at from a year standpoint. Overall it is just the way that things are hitting that quarter.

Okay, great, well great job as usual. Thanks.

Thank you, Dave.

Andrew Jeffrey of SunTrust Robinson Humphrey.

Hi, guys, thanks for taking the question. And Tom, you certainly will be missed, no question about it. Jeff, one of the things you've talked about as one of the overriding themes from a strategic perspective is real-time payments. Could you just step back as you talk about high-quality revenue and the margin improvement you've been enjoying, and certainly disbursement is an interesting new offering and new functionality.

Generally speaking, faster settlement, real-time settlement, is this all part of everything that is going into Fiserv's innovation when I think about Mobiliti suite and so forth? Or is there a separate call out that we are going to be talking about a year from now or 18 months from now around a real-time payment suite of products?

Well, we started to talk about that, Andrew, at Investor Day. And we have used a label of now to try to capture this notion of real-time beyond point of sale. There is a big war that is going on at point of sale, whether it is MCX or whatever is going on out there, there is a lot of that. And we are focused on the DDA-based payments beyond point of sale, and that is both payments and deposits. And so the product that we talked about that was a Immediate Funds, that's around deposits, the disbursement product. That is not necessarily leveraging real-time, although certainly, the businesses will have the opportunity to decide if they want to use a real-time rail to make that payment.

And I only set that up as context because the answer is I am optimistic that over the next several years, we will have lots of conversations that talk about leveraging all of the construction that is going on in the real-time space and linking that construction into our front-end applications, and weaving that construction into the backend of our real-time payment system. And that will, whether it is Mobiliti or Popmoney or RXP or Immediate Funds or something that we haven't thought of yet, all of the different functionality that exists in the DDA. I think the example we used at Investor Day was being able to make a payment through bill pay and get immediate credit at a bank where you have -- where a consumer has a credit card account. We see that all as options and ways to help consumers use the real-time networks that are being built right now.

I think one of the confusions, as you well know, is which rails are going to be built? And so while we are, to some extent, in the business of constructing those rails, we also don't think that there is a single ubiquitous rail that we can build. We think we can enable people to use some of our technologies and we will connect to other peoples' technologies. But we -- our ambition is to bring that real-time capability to our applications to enhance the consumer experience, to hopefully drive revenue for the financial institution and value for the different users. I know it may be a longer answer, but that's how we are thinking about it right now.

Okay, so more to come in terms of this theme of really giving your customers, your [VFIs] the ability to drive more revenue in their businesses.

Exactly. And we have been planting a lot of those seeds, whether it was through the 2,100, 2,200 Popmoney institutions that we have today or the 6,000 -- 5,000, 6,000 RXP institutions we have today. And now bringing Mobiliti, all kinds of those -- so those -- the flags are being planted. The rails have to actually get caught up to allow more ubiquity in the backend.

And then just as a follow-up, with regard to international, are there assets out there that might make sense for Fiserv in terms of the significant step up in international exposures? Is that still something that is central to the long-term growth plans?

I would say that we have never said that international is essential to our long-term growth plans. What we have said is we see a couple of discrete opportunities, Agiliti is one of them, where we can create a boost to our internal revenue growth rate. But at the end of the day, I think we have 6%, 7% of our revenue is international. It's going to be hard, even if you're adding 1% of internal revenue growth, it's going to be hard just to call that essential to the Company. To date, we have not seen large international acquisitions. I assume that you're asking a question around large, that, that would make sense for our model.

Frankly, we have seen so much opportunity in the US right now that that's where our focus is. We certainly look at some of the assets that become available. But for right now, the majority of the opportunity that we see international beyond the 6% or 7% of revenue that we are focused on today is really trying to make the world smaller. So allowing money to move more simply between the US and Australia, or the US and India, or the US and wherever and back. So looking at different technology solutions that may make that easy so that banks and others can facilitate the global movement of money simply, easily, and securely.

Helpful. Thank you.

Thank you.

Tien-tsin Huang.

Hi, great. Thanks. I wanted to ask on a build-up on Dave's question, just on the margin front. I'm curious, given that you guys have outperformed year to date and I caught the fourth-quarter commentary, have you considered changing your investment philosophy or the discretionary versus non-discretionary mix for example, just as we look forward into 2016 and 2017?

I think, Tien-tsin, what we said is that historically, where we have been meaningfully outperforming our margin guidance, that to the extent that it makes sense for us and our shareholders and our clients, if there are ways that we can further invest and still ensure that we meet our financial commitments, we take a look at that. I think Tom was also talking about some of the timing of expenses that we believe that will hit us in Q4.

But that said, one of the things that we have talked about over time is the combination of the revenue model that we are building and the benefit of the operational effectiveness program really gives us more capacity to invest and grow the business. Or frankly, not invest and let it flow through to the bottom line. So we're looking at that all the time, quarter on quarter, year on year, month on month, depending on what is going on.

Now, you know well that we don't make large -- it's hard for us to decide in a heartbeat to make a big capital investment. Most of our investment is through our P&L. It is length of labor, so you have to hire people. So you can't make big decisions to change -- I can't make a big decision to change my expense trajectory next week. But you can be sure that we have investments keyed up that we have an idea that where it makes sense, that maybe we should deploy money in a different way.

Okay, understood. Yes, that's why I was thinking about longer term because resketching that, I know it is tough in the short term. Just on the core system conversion side, I wanted to ask a question there. I know there's been a lot of DNA wins. You've had some good wins also, like First Hawaiian and et cetera, including some Corillian stuff. I'm just curious, year's almost done. Have you seen in hindsight here a bigger appetite for conversions? And how does that feel going into next year on the conversion side?

We have seen more activity in the larger end of the base in 2015 than we have probably in the last -- at a minimum, in the last five or six years. There is more discussion and movement on the real-time core processing side of the house. We are not seeing a lot more activity below that level. We are seeing a lot of competition in that -- in the smaller -- in the $1 billion and below, in the below space, and so there is a lot of activity there.

But we are seeing processes, RFP processes, evaluation processes going on. We have been pleased that we have been involved in that. We have actually been down selected once or twice in pretty big evaluations, which is something that we would not have been able to do, frankly, had we not acquired DNA. So we are seeing some activity there. I think that will manifest over time.

One of the beauties to that is the institutions that are doing the evaluation tend to know us because maybe they are a Corillian client, they are very likely a bill pay client. In that space, we've got a number of really important solutions, Pep Plus clients, so they are using our technologies and so we have a relationship with them. Whether that will ultimately get us over the finish line, we will see. But we do think it has them give us some more consideration than if we were one of the new kids on the block.

Okay, thanks, that is good color. I appreciate it. And Tom, thanks to you and obviously wish you the best.

Thanks.

Thank you.

Ramsey El-Assal of Jefferies.

Hi, guys. On EMV, I'm trying to understand better whether that $10 million in EMV revenues in the quarter, putting aside for a second the deferral issue that you pointed out. Does that represent the material increase versus EMV revenues last quarter? What I'm trying to get a better sense of is does this result signal any type of ramp that we are finally seeing this delayed EMV ramp, or is it just still business as usual?

I would say, I will take it first, and then turn it over to Jeff, Ramsey. I think we are seeing a tick-up, clearly. We didn't have this activity in the first half of the year, and clearly in the third quarter it's building as we anticipated. So we did $10 million of EMV -- incremental EMV manufacturing in the third quarter, which was much more significant than the second.

We had to defer $9 million of that to future periods. But as we laid out on Investor Day, as Mark laid out, this 2015 is going to be the low water point and it is building nicely as we look out into 2016 and 2017. And so that's the way I would phrase that. But Jeff, I don't know if you wanted to add something else to that.

Yes, the way -- probably just a little bit more context. So the $9 million that we ended up deferring, we ended up deferring it -- first of all, we had to defer it because it was the first time we had really meaningful EMV activity. But if you think about the $10 million of production for the quarter, before the deferral, 10 times 4 is 40, that's $40 million in a year.

If you go back and look at what we laid out for Investor Day, that would have been the start of a very attractive run for us. So the answer is yes, we saw a lot more production. We ended up needing to defer the $9 million of the $10 million, and we believe that deferral will stay constant for a while. And so if you look through that, we would expect to be able to recognize a more normal amount of revenue moving forward.

Okay, got it. Changing topics here. The clearXchange had a recent change in ownership. It seems like the banks are trying to fuse it up with some sort of fraud and risk-related assets that they have, and potentially maybe focus a little more on the real-time side of things. Does this change the competitive landscape at all for you guys in that space?

Yes. It does. Actually, I would say it does more than change the competitive landscape; I think it's quite a positive move for the landscape in general. Early Warning is famous for having very high quality risk and analytics, and they do a great job. We announced a partnership with them at our Investor Day. We're doing some very interesting work on the real-time side. They have not traditionally been in the real-time payment world. They are in the real-time data exchange world, and they're going to build out some capabilities. We are building a nice partnership with them, and we expect this to be quite positive for the industry.

Remember, clearXchange is really the back end of the process, where they are enabling some of the engines for those institutions. Those institutions still need front-end applications. A number of those institutions that are in clearXchange as well as another 2,000, more than 2,000 are on the system use our front end. So I am hopeful and optimistic that this will move the industry closer to more ubiquity in allowing consumers to move money at the speed of their choice. So we are quite excited about it.

The rising tide, lifts out the (inaudible) mentality it sounds like, which makes sense. One quick last one for me. On Agiliti in the UK, is the rollout there still tracking to your expectations? I think you mentioned potentially rolling a customer out there towards the end of the year, the beginning of next year. Does that still sound like a reasonable goal?

We would expect to be live. I would say at this stage, because it has taken a little bit longer to get this first contract signed, it is a little bit more difficult when you are building a business from scratch, subject to all the regulatory approvals and everything else. But I would expect us to go live in the first half of next year with multiple clients. So we're really excited about that.

Terrific. Congratulations, Tom, and that is all for me.

Thanks, Ramsey.

Thank you.

George Mihalos of Cowen and Company.

Hi, this is Allison in for George. Tom, let me add my congratulations on your retirement. I just had a quick question within the financial segment. I'm curious if you could just aggregate a bit what growth trends you are seeing across core processing, item processing, and the loan servicing businesses? I am wondering if it is fair to say that the core processing business is growing above total segment revenue growth, while the other businesses are below?

I would say in the financial segment, as you are aware, the larger share of our revenue comes from the core processing areas. So clearly, that is growing faster than our areas like check processing, which is in decline. So that is correct. I think the other areas that we have in there, lending has been growing nicely.

But we have been impacted, our international business is in there, so our currency has negatively impacted that segment. And we should, over time, continue to see international contribute to that. But to your point, item processing is a bit of a drag. The core is the big piece of growth that is in that particular area, along with our lending area.

I would say, just for clarity, that we have both seen some good growth trends coming out of the lending businesses. And that we would expect, over the next couple of years, to see lending, itself, be an important part of how financial institutions are obviously going to drive revenues. So those trends we think will look better moving forward than they have historically, as people have not really been spending in that space.

Great, thank you.

Thanks, everyone, for joining us this afternoon. We appreciate your attention and support. If you have additional questions, feel free to contact our IR team. Have a great day.

Thank you. That concludes today's conference. Thank you for participating. You may now disconnect.