Feb 2, 2006
Executives
Jeffery W. Yabuki, President and CEO Norman Balthasar, Chief Operating Officer Kenneth R.
Jensen, Chief Financial Officer Tom Hirsch, Controller
Analysts
Pat Burton, Citigroup Analyst, Robert W. Braid Christopher Penny, Friedman, Billings, Ramsey & Company Greg Smith, Merrill Lynch David Toget, Morgan Stanley Kartik Mehta, FTN Midwest Securities Julio Quinteros, Goldman Sachs Glenn Greene, Thinkequity Partners Paul Bartolai, Credit Suisse Bryan Keane, Prudential Financial John Kraft, D.
A. Davidson Philip Mickelson, JP Morgan Roger Freeman, Lehman Brothers David Scharf, JMP Securities Nikolai Fisken, Stephens, Inc.
Scott Kessler, Standard and Poor's Craig Peckham, Jefferies
Operator
Welcome to the Fiserv Fourth Quarter Earnings Conference Call. All participants will be able to listen-only until the question and answer session begins following the presentation.
This call is being recorded and also it’s being broadcast live over the Internet at www.fiserv.com. The call is expected to last about an hour and you may disconnect from the call at anytime.
Now let me turn the call over to Jeffery Yabuki, President and CEO.
Jeffery Yabuki, President and CEO
Thanks and good morning. As all of you know this is my inaugural Fiserv Earnings Conference Call.
I am very happy to be here. Joining me on the call today are Norman Balthasar, Chief Operating Officer; Kenneth R.
Jensen, Chief Financial Officer and Tom Hirsch; our controller. Before I get started I’d like to remind everyone that our remarks will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
There are a number of factors that could cause Fiserv’s results to differ materially from our expectations including but not limited to statements regarding 2006 earnings and revenue targets, sales pipelines and acquisition prospects made during the course of this conference call. These statements may differ from actual results and are subject to a number of factors.
Please refer to the company’s year-end earnings release, which can be found on the company’s website at www.fiserv.com for discussion of these factors and a reconciliation of non-GAAP financial measures discussed in this conference call. As shared in our earnings press release Fiserv had a strong fourth quarter leading to record revenues and earnings for the year.
We are very pleased with our results and believe that we are well positioned going into 2006. For the full year 2005 revenues were up 11% to $3.7 billion with increases across each of our business segments.
Organic revenue growth was 8% for the full year. The financial segment’s internal revenue growth rate was a solid 7% in the fourth quarter and 6% for all of 2005, excluding a large contract termination fee received in the fourth quarter.
This was a dramatic improvement over the 2% level achieved by our financial segment in 2004. Adjusted 2005 earnings per share from continuing operations was $2.30 per share.
While overall GAAP earnings for the year was actually higher. We believe that adjusted earnings from continuing operations is the best earnings measure for investors to evaluate our performance.
For the fourth quarter our results were driven by a combination of strong organic growth and a mix of business that delivered solid results. Revenues for the fourth quarter were $988 million and when excluding the large contract termination fee were $961 million.
Our adjusted earnings per share from continuing operations for the quarter was $0.56 per share. Our balance sheet was strong at the end of the year.
In 2005 we generated over $430 million of free cash flow and over $900 million of operating EBITDA. We deployed our capital in 2005 primarily to value enhancing acquisitions and repurchasing company stock.
We repurchased 4.4 million shares in the fourth quarter and a total of 15.2 million shares for the full year at an average cost of $42.84 per share. Looking forward we will continue to build the company for the long-term while continuing to deliver solid financial results.
In 2006 we will be primarily focused on three key areas of opportunity. First, we will continue our focus on delivering sustained organic growth across each of our business lines.
We will accomplish this by acquiring new clients as well as increasing wallet share with existing clients. This is a critical element in continuing to build our base of recurring revenues and related earnings.
We recognize that consistently achieving above market growth rates is not easy given our size and market share. However, we believe that our 2005 performance is a strong indicator of our ability to do just that.
Next, we will allocate our strong cash flows in ways that maximize long-term shareholder value. We will continue to acquire businesses and specific capabilities that enhance our market position.
Additionally we will repurchase shares when it makes sense compared to other choices in allocating our capital. We have 3.1 million shares remaining under our existing repurchase authorization that could be completed this year.
We will revisit the question of additional share repurchase during the year. Finally we will invest in areas of the business that lead to long-term differentiation for the company and have the attributes to drive growth for the future.
We will continually monitor the emerging market opportunities and work closely with our clients to identify value-added solutions that will further our marketing leading capabilities. During 2005, we invested in a number of initiatives that have potential to drive significant growth.
Examples of future drivers including expanding our presence in Electronic Payments and in particular, Bill payments. We enhanced our position in 2005 through the acquisition of BillMatrix.
We view the payments based as a significant opportunity for the company and will focused additional resources on high growth areas such as debit, credit, stored value, ATM processing, debit and ATM networks and merchant in brands check-image capture. In 2005 we also introduced the Fiserv Clearing Network.
This proprietary network allows our outsource and in-house check processing clients. The ability to clear both paper and image items in network and via external clearing options such as the Federal Reserve on a more cost effective basis.
This service allows financial intuitions to take advantage of the aggregation power of Fiserv. And is an example of how we can create unique advantages for the financial instutions that have a relationship with us today and those, which we will serve tomorrow.
In the lending group we are responding to our clients desire to bundle more mortgage for film and services and move to an all electronic paperless loan experience or eMortgage. In 2005 we made additional technology investments to provide a unique, fully automated system that electronically takes loans from origination through a secondary market sale.
These types of innovative technologies solutions lead to cause and process efficiencies that are only available for our clients and further differentiate Fiserv as a technology leader in the lending industry. We also began ramping up our capabilities last year to compete more effectively in the global economy through the formation of Fiserv Global Services or FGS.
We plan to leverage FGS to more effectively and efficiently serve our clients. In January we announced the acquisition of Caregain in Fiserv health.
Caregain provides advanced technology enabling customers to cost effectively create and administer consumer directed health plans. This acquisition allows us to better equip financial institutions and help plan providers to deliver products that will further accelerate the consumer-directed healthcare movement.
Our broad set of capabilities which include health plan management, electronic payments and core banking uniquely position us to intermediate nearly all of the touch points between patient, health provider, health administrator and financial instutions. We see an opportunity for Fiserv to emerge as the ultimate market leader in the expected convergence of health and wealth in the United States.
I am excited about the long-term growth potential of these and other initiatives that are currently underway. We will continue to update you on our strategic progress throughout 2006.
Looking forward to 2006 results, we estimate full year operating earnings to be in the range of $2.46 per share to $2.53 per share compared to adjusted earnings of $2.19 in 2005 which includes the effect of incremental share based compensation expense due to the adoption of FASB 123R. Based on what we see currently we anticipate our results in the second half of 2006 to be moderately stronger than the first six months of the year due largely to sequential quarter-over-quarter growth in our lending and payments businesses.
Beginning in 2006, we are modifying our precedent on earnings guidance. Historically we’ve provided updated annual guidance as well as an estimate for the succeeding quarter in our earnings call.
I believe it should be in the best interest of shareholders to focus on the delivery of annual results in the context of longer term targets, in that regard I view specific quarterly guidance as less meaningful and therefore we will no longer provides specific quarterly guidance. We will continue to provide annual guidance updated quarterly and focus our primary energy on delivering those results on a year-in and year-out basis.
As you would imagine we are in the midst of reviewing many aspects of our businesses. We are planning to host an Investor Day towards the end of 2006 at which time we will provide a comprehensive update on our long-term plans and vision for the future.
We hope to see all of you there. As was announced in November, Kenneth Jensen will retire as CFO sometime in the mid to late summer of 2006.
Kenneth is actively engaged in the business working closer with me, and the rest of the management team. I intend to name a new CFO in a timeframe that will allow a smooth transition and our plans are on track.
I also wanted to recognize the efforts of our nearly 22,000 employees who deserve the credit for our strong results. In the short time I’ve been here, I have been impressed by the organization’s collective focus on delivering both for our clients and our shareholders.
For that and the efforts of all of our colleagues I say thank you for a job very well done. Lastly I want to recognize Leslie Muma who wasn’t able to with us on today’s call.
Les, one of Fiserv’s co-founders retired on December 1st after more than 20 years of outstanding service to the company. Thanks Les for all you did to built Fiserv into a great company it is today.
Valerie, we’ll now open the lines for questions.
Operator
Operating instructions
Q - Pat Burton
Congratulations on the quarter and welcome aboard. My question relates to the strategic fit between the three reporting units now at Fiserv and what your view is longer term as it relates to the various different segments of the business?
Thanks.
A - Kenneth Jensen
Sure, you know we are looking at all the different businesses, and making determinations on what are the businesses that we have today, how do they fit together, and importantly where might there be other opportunities for us to expand the business. For today, the Financial Institution Segment, the Health Segment – I think we mentioned during the call that there is some interesting opportunities that come together in the health savings area, clearly the investment services business provides nice profitability and cash flows for the company.
But we are really in the process of looking at how it all fits and how it comes together to build value for shareholders.
Q - Pat Burton
Any timeline and how long, your decision process might be, I am looking at the different parts?
A - Kenneth Jensen
I would expect that by the time we come out publicly towards the end of the year at our investor day that will have all of those issues resolved and be able to communicate where we are going.
Q - Pat Burton
Thank you.
A - Kenneth Jensen
Thank you.
Operator
(Indiscernible) from Robert W. Baird.
You may ask your question.
Q -
Yes, good morning.
A - Kenneth Jensen
Good morning.
Q -
The financial segment margins were down year-over-year for the second consecutive quarter when we exclude termination fees. And I am wondering what was the timeline is there for when you start to expect expansion again and maybe you could just explain a little bit why they were down year-over-year?
A - Kenneth Jensen
Why don’t I start on that then I will turn it over to Tom too. If we look at it on a year basis, our margins were actually probably 10, 15 percent going 24.1 to 24.2.
And as we’ve discussed before there are lot of moving parts in terms of what happens to our margins, they will vary fairly significantly from quarter-to-quarter. For example, I am talking about the margins without the large termination fee of $26.3 million.
For example, the margin in the fourth quarter was affected of course by our investments in particular Australian investment that has an impact on our margin of over 5-10 of a percent just by itself. The fact that we no longer having our Canadian business entry items has an impact of a little bit less than 5/10ths of the percent, and of course other things that had positive impacts too.
We would expect that our margins next year in this area would be approximately equal to where our margins were this year. Tom, would you like to add some stuff?
A - Thomas Neill
Sure, Ken. I think the other thing is, when you look at our business through the year, what we indicated is that the margins do jump around historically in the fourth quarter, our margin have been a little bit lower due primarily to the mix of business.
In the first half of 2005 our margins were higher primarily due to increased software license sales and also some contract termination fees. In the second half of the year, they were slightly lower because we continued to make some additional investments primarily in the lending group.
And those investments have come through in both the third and fourth quarter. The other thing I would say is our health segments is down a little bit also in the fourth quarter primarily these are investments there in our BPO operation.
So I think those are the primary factors for the year. It has been I think going forward as Ken indicated we anticipate ’06 will be equal or slightly above ’05 for the year.
A - Kenneth Jensen
And Dave, let me just add one other thing. I think from my prospective coming in a little bit on the newer side of the coin, it’s an interesting challenge to find the right point between maximizing current year margin in building for the future and the quarter was strong, there were opportunities for us to make investments and we took those opportunities and made them given the termination fees and frankly driven the healthy growth in revenues.
And I would expect that as we continue to grow, where we have opportunities to incrementally invest because of strength in a quarter or strength in a period of time that we will make that, but all of that is geared towards continuing to deliver I think very solid margins over an extended and sustained period of time.
Q -
That’s great detail, thank you.
Operator
Chris Penny from FBR. You may ask your question.
Q - Christopher Penny
Yes, thank you. Good morning, quick question on just kind of a qualitative discussion by termination fees, they have trended up the last couple of years, I think you guys have done a good job kind of keeping them out of guidance and they have been kind of above average on your typical quarterly rate.
Just kind of wondering, why – what you see in these termination fees, it’s from a consolidation most likely but I just want to get an understanding of what ’06 and ’07, do you continually to see them kind of at above average rates for those coming years?
A - Kenneth Jensen
We would expect them to go back down to more the rates that they were back in ’03.
Q - Christopher Penny
And just kind of again qualitatively what are the reasons that they have above average, is that just all are due to consolidation?
A - Kenneth Jensen
It’s consolidations yes.
A - Thomas Neill
And Chris this is Tom. You know these fees are very unpredictable, you go back two or three years ago they are probably around $10 million.
The last two years, excluding the large in the range of 30. And our plans for ’06, we have budgeted a less amount of those termination fees, but they are very unpredictable and they do range and this is primarily just due the acquisition in the marketplace.
A - Kenneth Jensen
And I think Chris, what you are hearing is its environmental, it doesn’t have any – its not related to the business model and you know we are to some extent subject to the whims of the environment. So, to the extent that M&A activity ramped up and it happened to be the banks that we have relationships with obviously that would increase the level of our termination fees.
Frankly, my prospective is I would rather have no termination fees because of the impact that has on our future earnings.
A - Thomas Neill
Yeah, just to clarify one more thing and that we do benefit also from our clients when they are acquiring other institutions also. And so it does go both ways.
Q - Christopher Penny
Okay, and a question on the BillMatrix, it is more of a Biller-Direct type model. I was wondering about as you integrate and leverage that infrastructure, do you feel that you could move it more towards a bank centric model or would you have to kind of acquire some assets on that side to kind of move in that direction, to favor, to help support some of your banks in their efforts to bring down their cost of bill payment?
A - Kenneth Jensen
Overtime it will probably become more integrated with our bank business. But, right now they are growing so well on their Biller-Direct model that that will be overtime.
A - Thomas Neill
And Chris, the other thing is the payment space is a pretty interesting space overall where you’ve got bank facilitated payments, you got Biller-Direct payments, you are going to have – I think ultimately you are going to see consumer, kind of direct consumer to consumer payments, different times in micro payments and other opportunities that we think loom very large for Fiserv and I expect that we will put – as we mentioned in our prepared remarks continue to put real emphasis on, what are those different elements of the value chain that we can own today as well as looking into the future how do we want to our invest to make sure that Fiserv has more than its fair share of payments in the future?
Q - Christopher Penny
Okay, thank you.
Operator
Greg Smith from Merrill Lynch. You may ask your question.
Q - Greg Smith
Hi guys.
A - Kenneth Jensen
Hi
Q - Greg Smith
Can you size the flood claims processing revenue in 4Q and expectations prospects, just trying to get an idea of how big, now that you have a little more visibility into it, the impact from Katrina and Rita it is going to be on the business?
A - Kenneth Jensen
Yeah, we have a – as we anticipated we have a good fourth quarter. We don’t disclose the dollar amounts there at that level of a business unit, but it was good activity in the fourth quarter, we anticipate that to continue into the first quarter of next year and then probably tail off into the second and third quarter of 2006.
Q - Greg Smith
Okay, thanks. And then just a quick follow-up, any way to detail what your assumptions are for buyback in the guidance and also the tax rate we should use for ’06?
A - Kenneth Jensen
The tax rate for 2006 we’ll be using 38.7% and just to highlight that a little bit. I think our earnings growth that we have out there for the year-end ’06 is about 12% to 16% on an EPS basis and in 2005 as you are aware.
We did have some one-time tax benefits that generate about $0.03 per share. So when you look at the higher effective rate in 2006, our EPS growth rate is above 14% to 17%, which has been double-digits.
Regarding the buyback, we are not going to comment on that fab, we do have 3 million shares authorized currently but we will continue to revisit that during the year.
A - Thomas Neill
And Greg, the other thing is stock repurchases, nearly one of the different options that we’d look at for allocating our capital, I think it depends on a number of different factors, which obviously include in Impact acquisition.
Q - Greg Smith
Okay, thank you very much.
A - Kenneth Jensen
Thank you.
Operator
David Toget from Morgan Stanley, you may ask your question.
Q – David Toget
Thank you, can you comment on new contracts signings last year in the financial institutional outsourcing business and how you perform relative to quarter?
A - Kenneth Jensen
Yeah sure, David, its Ken. We are a little bit above our quota for the year and we had some very good signings, some of it which are listed in the press release and we expect to be able to continue to have very good growth this coming year.
Q – David Toget
Just as a follow-up Ken. Can you comment on the operating cash flow, which was down of 15% in ’05, it looks like the key drivers really were DSO and deferred revenue, how do you see those trending in ’06?
A - Kenneth Jensen
I would expect the DSO’s and it’s not even necessarily, I think that the DSO is were up that much as much as our business was up because of the internal growth rate. So that’s going to be something that we will continue to hit drive down the free cash flow from the few point of receivables.
I think our receivables should be better next year though than were this year in terms of not being as much of the drag in the free cash flow. As you probably calculated our free cash flow was considerably better in the fourth quarter than it was in the previous quarters.
A - Thomas Neill
And I think the other thing that’s impacting the receivables is as we continue to do business with some of the larger financial institutions. Frankly they just, they don’t pay quite as fast as some of the other institutions that we deal with.
A - Kenneth Jensen
And David, the other thing, when you are comparing ’05 free cash flow the ’04 as we did have that tax side of that where we just had to pay our estimated taxes, that was about $50 million negative impact on ’04, that should not I mean ’05 compared to ’04 that should not be recurring in ’06. So that was a fairly unusual item, which had a significant negative impact.
Q – David Toget
Okay, thank you.
A - Kenneth Jensen
Thank you.
Operator
Kartik Mehta from FTN Midwest Securities, you may ask your question.
Q - John Connor
Good morning this John Connor for Kartik. Had a question on the health segment, there has been some headlines out there that there should be some changes with our HSA accounts are planned, and some of the limits that might be set on those, is there any opportunity for health segment to continue to benefit for some potential changes and how HAS accounts are setup in the limit that they have?
A - Kenneth Jensen
John, overall we think that the whole health savings, health reimbursement account the consumer driven health area is a really interesting and potentially lucrative opportunity for the company given the relationships that we have with so many financial institutions as well as obviously having a very robust help business on our own. We’ve mentioned that we had acquired in January, CareGain.
CareGain is a really is the equivalent of middleware or the interpreter that’s going to allow the banks and the health plan administration firms to work together to make it easier for consumers to make these kind of choices and their services are important to us but also uniquely situated in the marketplace and we see that to be a very important and interesting growth driver. So, yes we do think we are going to benefit from that and I think you will see us continue to make strategic investments in that area.
Q - John Connor
Thanks so much.
A - Kenneth Jensen
Thank you.
Operator
Julio Quinteros from Goldman Sachs, you may ask your question.
Q - Julio Quinteros
Sure, good morning, I just wanted to ask Jeff this quick question on, as you have been on board now as the CEO here, just trying to get a sense for what has probably been sort of the biggest surprise to you as you look at the company and how do you sort of extrapolate that forward in terms of opportunities for Fiserv as we move forward here?
A - Jeffery Yabuki
Sure it’s a good question. You know I have been here just about 2 months now, and the biggest surprise is that I would – that are kind of big box of surprises are: The first one is the breadth of the company in total.
As you well know there are many different facets of the company. You know within each of our reporting segments we have many different businesses that I think lead to you know some potential opportunities for the company, to some extent diamonds in the rough, things that capabilities that are out there for Fiserv that because they are relatively small in proportion to our core businesses that I think represents some growth opportunities which you know the CareGain acquisition that we talked about a moment ago was an interesting opportunity just because by virtue of the industries that we operate in.
So it’s the breadth of the company and the opportunities that maybe adjacent to that breadth. And then number two and this is not a surprise per se but I’ve been pretty impressed by the quality of the people here in terms of their commitment to clients and their desire to do the right thing for shareholders.
And you see a good balance there of the people who really care about what they are doing and I think who are going to continue to drive us forward in the future.
Q - Julio Quinteros
I guess this relates back to the comments you made about and sort of all the multiple facets I mean the way that Fiserv was currently structured today, do you see any need to rationalize the infrastructure further or rationalize some of the pieces that kind of exist out there on their own to gain that leverage that you are identifying?
A - Jeffery Yabuki
I think its premature to answer that question in totality but what I can tell you is we will clearly look at the different opportunities to, whether you call it rationalizing infrastructure or sharing capabilities where we have the ability to in a common way access the marketplace. I think you clearly have to do that but I think you have to look at the core, what are the opportunities, how can you best attack them and how much capital do you need to do that?
So it’s not as simple as I think you would say coming in to do the rationalization that said because of the dispersion in the company, it feels likely that there will be some opportunities to gain efficiencies by looking for common or shared utilities.
Q - Julio Quinteros
Okay great thank you. And one just quick follow up for Tom.
On BillMatrix did you guys talk about how fast BillMatrix was growing in the current quarter?
A - Thomas A. Neill
No we don’t disclose that type of detail, this continues to grow well and we expect that market to that acquisition and continue to perform well and provide growth in 2006.
Q - Julio Quinteros
Okay thank you.
A - Thomas Neill
Thank you.
Operator
Glenn Greene from Thinkequity Partners, you may ask you question.
Q - Glenn Greene
Thank you. Good morning.
I am just wondering if you could talk about the trends in the FI organic growth, that clearly had picked up here in the fourth quarter and I understand you did have some head win I guess with CIBC coming off this quarter. So I want just some color on the commentary related to the organic growth trend in the quarter and serve your outlook heading into next year, you clearly have some more difficult comparisons in the first half than the second half, just some color on what the drivers overall in terms of FI organic growth?
A - Jeffery Yabuki
Let me give some higher-level observations then I’ll turn it over to Tom, who can correct me I’m sure. The big growth for the year we had obviously the new venture in Australia, which was very helpful for us.
And then we saw some really strong growth in our lending operation, and frankly we saw some very solid growth in our core bank. And basically a number of the businesses we are hitting on all cylinders but some of the things that got more public display: Australia.
I would say that we’re very pleased with what’s going on in lending, in delivering different services or new services and some more innovative services, and frankly not only are we seeing revenues in that area but we are continuing to invest because we see a lot of opportunity there. Tom, why not you add some more color there.
A - Thomas Neill
Yeah I’d thank Glen too in the fourth quarter, we really had a great quarter of organic growth. I would say it primarily came from what Jeff indicated previously about our bank and credit union areas that performed very well in the fourth quarter.
And that have to do with a lot of products and services that we sell into our existing customer base and we just did very well at that in the fourth quarter and sequentially over the year we will continue to grow that. And as I look down into 2006 we’d given mid single-digit organic growth guidance for the year.
And that strong guidance given the fact that as we indicated previous quarters were loosing about $40 million of annualized revenue. So when we look at that mid single-digit organic growth we feel good going into next year, and the quarters are going to bounce around the penny as we talked about software license fees and other types of factors but overall for the year we are confident the financial segment to be in that mid single-digit range.
Q - Glenn Greene
And some more drivers in ‘06 as ‘05 in terms of the macro and also give some color in the Australian JV, how that is progressing?
A - Thomas A. Neill
Yeah I would say similar areas, I think we are going to continue the push on the payments then as Jeff indicated earlier and that’s going be an area avenue of growth that we didn’t have as much maybe in 05. Regarding Australia that continues to move forward, it will be slightly dilutive in 2006 and towards breakeven towards the end ‘06 but it continues to be on track.
Q - Glenn Greene
Okay thank you.
A - Thomas A. Neill
Thank you.
Operator
Paul Bartolai from Credit Suisse you may ask your question.
Q – Paul Bartolai
Thank you good morning. Just a follow-up on the prior question about the core bank market.
Can you talk about what you were saying just in terms of competitive trends and maybe if you are seeing any impact from the Certegy, Fidelity merger?
A - Thomas A. Neill
We’re seeing really no impact from the Certegy, Fidelity merger yet or if ever we will. I would say that the competitive marketplace remains pretty much the way it has been.
There are pockets where it’s very competitive and we seem to win more than our share.
Q – Paul Bartolai
Alright then this is a follow-up on the health side. What type of it, may be you talked about low double-digit organic growth in ‘06.
Can you talk what we should expect for pass through costs there and should that gap between reported and growth as you start to know?
A - Thomas A. Neill
I don’t believe so. I think similar trends to what we have in the current year.
I think you are talking about the pro forma without the prescription cost.
Q – Paul Bartolai
So that we should still expect that in the low single-digits for ’06?
A - Thomas A. Neill
Right and that’s consistent with the market that we are serving there, and - but that’s correct.
Q – Paul Bartolai
Okay thanks.
A - Jeffery W. Yabuki
I think we’ll see the real growth in that areas is probably a year to two years down after the HSAs take off.
Q – Paul Bartolai
Great thank you.
Operator
Bryan Keane, Prudential Financial, you make ask your question.
Q - Bryan Keane
Hi good morning. The financial 7% organic growth, the flood claim processing, did that help or was that about a neutral effect to that in the quarter?
A - Thomas A. Neill
It didn’t have that strong of an impact as we had very strong fourth quarter of 2005. The primary effect is that we talked about where our bank and credit union core really have the tick up is like that rate has improved where it is.
Q - Bryan Keane
And then remind me going into Q1 and Q2 ’06, is the flood stuff going to be a positive or negative trend versus the year ago period?
A - Thomas A. Neill
Next year?
Q - Bryan Keane
Yeah, going and just for modeling purposes when we go into Q1 and Q2 ‘06 is it a positive or negative effect I can’t remember what the…?
A - Thomas A. Neill
It will be as I indicated in my previous comments Bryan, the first quarter ‘06 is going to be stronger in that particular area and probably going to tail off in the second and third quarter.
Q - Bryan Keane
Okay. Any comments on acquisitions and what your appetite would be for that going forward in 2006?
A - Thomas A. Neill
Our appetite remains very, what would you say. Robust strong, Yes we want to eat a lot then I think we will continue to have plenty of acquisitions too, we got a great pipeline and you will see more.
Q - Bryan Keane
So we’ll see more than the last couple of years, it seems like - if you look at the last two years it has been a little less than maybe it was the previous years we’ll see a pick backup to more a bit below?
A - Thomas Neill
You’ll continue to see it bounce around a lot, '03 was a very big year because one of our large acquisitions we closed on I think was December 31st.
A - Jeffery Yabuki
Yeah Bryan we still spent roughly $450 million in acquisitions in the current year and that’s just another deployment of our capital, you know that’s one area including buying back our stock and other internal investments that we are making.
Q - Bryan Keane
Okay.
A - Jeffery Yabuki
Hi Bryan, I would just add that, well, clearly we will at acquisitions and I suspect as Ken said, our appetite is relatively robust. I think as we think about how to deploy against acquisitions, so things that represent, the areas that represent significant growth opportunities for us are ideally where we want to have more focus.
So to the extent that, good properties are available that are well within our targeted opportunity, you should expect to see us to be aggressive in that space.
Q - Bryan Keane
It sounds like the lending in the payment space are probably areas of focus?
A - Jeffery Yabuki
Yeah, as well as, I mean, our core banking, I mean the things that we will do well that we believe that we can bring both management expertise and product expertise and to make those business better both on a operating prospective as well as having them be complimentary to our strategy are areas that are very, very attractive to us.
Q - Bryan Keane
Okay, thanks for the color.
A - Jeffery Yabuki
Thank you.
Operator
John Kraft of D. A.
Davidson, you may ask your question.
Q - John Kraft
Good morning. I just want to follow-up on a comment you said at the beginning, the opportunity that you’ve got in the Fiserv Clearing Network.
Talk about how that rollout is going and uptick but specifically how many FIs are signed out?
A - Jeffery Yabuki
The network has, we began putting the network together in 2005. We currently have enough partners to cover about 75% of the US.
The network won’t be complete until, a kind of the end, say the middle of 2006. And we had about 300 active clients during the year, again we are still on the building phase, and we don’t want to, we are not going to push this really hard, until it’s complete.
But we see this to be an interesting opportunity and again one that’s proprietary to us given the size of the install base that we have today.
Q - John Kraft
Great, that’s it from me.
A - Jeffery Yabuki
Thank you.
Operator
Philip Mickelson from JP Morgan, you may ask your question.
Q - Philip Mickelson
Yeah, just wondering, what’s kind of your outlook for bank spending growth this year, I mean, do you see, how did 2005 shake out, I guess, versus your expectations, where do you see banks spending overall going?
A - Jeffery Yabuki
Hi Phil, probably be spending about the same rate that they did this previous year, the same percentage increases to be below single-digits for the most part.
Q - Philip Mickelson
Neill, the core business, have you seen any shifts in 2005, license revenue is strong one quarter, not that you know, is there any trends as far as outsourcing versus in-house. And then also is the license is that more driven from non-core license sales or can you can give us some color within kind of a strength in the core business?
A - Thomas Neill
I think that it’s going to pretty much continue as it has in the past, it bounces around sometimes we will have more license sales and up from quarter-to-quarter. I think that there is still most of our software license sales are to existing clients, which also adds to the stability of our earnings.
Q - Philip Mickelson
And then I was just trying to understand, they talked about a few months ago, a Chase RFP for mortgage processing. Can you give us some color on the conclusion of that, was there revenue in the fourth quarter, was that deal signed, was it in-house or an outsource contract?
A - Jeffery Yabuki
We announced or the JP Morgan Chase announced that they have chosen our product in their due diligence space. We have not signed a contract with them, we continue to work on that in the first part year of 2006, well we don’t have a significant revenue in our budget as of right now for that transaction.
But we are heading down the contract angle and we will be updating you later in the year as that goes forward.
Q - Philip Mickelson
And then with regard to GMAC, I believe you did the mortgage processing for GMAC and that business is up for sale from GM. Is that contractual limitations on change of ownership, is that processing contract could be at risk?
A - Thomas Neill
We would have standards termination fees in that contract. But today, we have no reason to believe that there is any particular risk.
I would guess if the, it is so but we would continue to be the process here.
Q - Philip Mickelson
Thank you
A - Thomas Neill
Thank you.
Operator
Roger Freeman from Lehman Brothers, you may ask your question.
Q - Roger Freeman
Hi, good morning.
A - Jeffery Yabuki
Good morning.
Q - Roger Freeman
I just wanted to come back to the rationalization question from earlier, specifically I am wondering, do you think is there any opportunity on the product side, I think you historically let the market decide which products succeed in the process and a number of products that seem to overlap and I am just wondering if you are going to be more actively managing that portfolio?
A - Jeffery Yabuki
You know Roger, I suspect that it’s too early in the evaluation process to add a lot more color to that, what I will say is, we will evaluate this really ensuring that we take the steps that will allow us to both maximize shareholder value over the long-term as well as ensure that we maintain a very strong competitive presence and there are both positives and negatives to having a multiple similar products in the marketplace as it relates to how you fit within the competitive landscape. So, it's a complex problem but one that we are giving a lot of attention to and I believe that when we come out towards the end of the year and have our Investor Day that we will be able to articulate our strategy very clearly in this area including the implications of what actions we are going to take.
A - Kenneth Jensen
Roger, just to add to that that we having a core for instance in the core bank area. We’ve continued to consolidate platforms over the years, you know Fiserv 8, 10 years ago will probably had 10 to 15 bank platform.
We are probably down in the range of 5 to 6 and for instance in the fourth quarter we took a little bit off a charge for one product that we are phasing out in the bank area. And we have done that behind the scenes and so we have done some of that, and the rest has just been answered.
Q - Roger Freeman
Okay, thanks, that’s helpful. I guess my follow-up question is, on a slightly separate topic is: is there anyway to quantify how much some of the faster growing parts of your business are growing for example, is there any pocket of revenue that encompasses imaging, health, savings accounts and bill payments that you could say is growing at 10% plus or do you have any plans and try to segment that out later in the year?
A - Thomas Neill
I mean, Roger, one of the things that we are clearly looking at is, how, what are the attributes of the different business is, what businesses might you lump together that in the aggregate would create, could create or create or have higher growth characteristics than the reporting segments that they are in. So, again, I would ask for some patience in latitude and when we talk about the business in depth later on in the year, we’ll certainly talk about areas like that.
It’s one of the reasons why for instance, we talked about our payments business and our lending business discretely in the 2005 highlights.
Q - Roger Freeman
Okay, great thanks, looking forward to that update.
A - Thomas Neill
Thank you.
Operator
David Scharf from JMP Securities, you may ask your question.
Q - David Scharf
Hi, good morning. I lost track over the several quarters of net revenue basis, really how to look at the mix in the health segment.
And as we look at the TPA business, the pharmacy benefit and some of the newer services such as CareGain, is there a rough mix of that segment you can provide us?
A - Thomas Neill
No, we haven’t brought that out. As you can see through the prescription ingredient cost, David, that continues to increase on a quarterly basis.
That kind of gives you a feel that business continues to grow as part of the total of the peek and of the health segment. The TPA business as you know, has been very competitive, that’s the nature of that marketplace, we continue to consolidate some of our areas there.
We are looking forward into the future, we are going to see greater proportion of growth in ‘06 and ‘07 coming from a couple of areas that Jeff indicated earlier, one of those areas is CareGain and the administration of these the HFAs and consumer directed healthcare. And we are also going to see in the BPO area with our relationship with EDS, some more growth in that area as we look out into ’07 and ’08 so that’s the kind of mix there that we see going forward from that standpoint.
Q - David Scharf
When I think about the comments you’ve included in the last couple of press releases, particularly the growth in competition in large commercial employee market, I assume that it refers primarily to the TPA area which is probably still the majority of that segment, is that competition coming from carriers who are offering their own administration services or is that coming from other TPAs. And is your mix that heavily weighted in the larger market, I thought it was more focused on small and medium sized self-insured employers?
A - Jeffery Yabuki
Yeah it is focused more on the small, medium and, so that the overtime that’s going to have less of an impact in the large employer market its United Health, Blue Shield.
Q - David Scharf
I see, thank you.
Operator
Next is Nikolai Fisken from Stephens, you may ask your question.
Q – Nikolai Fisken
Hey. Good morning everybody.
A - Jeffery Yabuki
Good morning Nik.
Q – Nikolai Fisken
What’s the share count you guys you used for your guidance?
A - Thomas Neill
You know we are not disclosing that Nik, you know where we are at in the current quarter, as far as our share count goes so you can use that for your model as going forward.
Q – Nikolai Fisken
And then the only other question I’ve got is left is, if I look at the hiring that you guys have got, and my understanding is that we have to hire a new CFO and a different person to run M&A, is that correct a) and b) do you expect that to be internal promotions?
A – Jeffery Yabuki
To the a) question, we could make the decision to split Ken into pieces, and take his roll and split, we are still evaluating that as an option, and we have a strong internal management team and so we are evaluating our internal folks as our primary desired result.
Q – Nikolai Fisken
And what’s our timeline on this?
A – Jeffery Yabuki
Well, without being specific my goal if I could have one in this area would be to make the decisions, make the hiring decisions within the time that would allow maximum crossover between the time that Ken is here and the time that we have new candidates in place.
Q – Nikolai Fisken
Great, thank you so much.
A – Jeffery Yabuki
Thank you.
Operator
Scott Kessler from Standard and Poor’s, you may ask your question.
Q – Scott Kessler
Thanks. Lot of my questions have been asked and answered but one question I had is, Jeff, if you could talk to us about how you look at Fiserv relative to essentially speaking about what on the margin you might want to change about the company for example, you now we noticed for example that you put guidance in the press release and you indicated during the call that we are not going to be getting quarterly guidance, can you give us any inside as to other changes you might be thinking about in terms of how the company is run or how you are communicating with the investor community, that would be helpful?
Thanks.
A – Jeffery Yabuki
Sure thanks. There are a variety of areas that not to be overly repetitive, that we are looking at, but my personal goal is for us to identify where there are opportunities for us to grow at levels that are in excess of market growth and to invest accordingly in those areas.
Philosophically how we think of – the things that are important to me is what do we have to do to make our products and services put them at the highest level of competitive differentiation. What are those streams of earnings that we can create that are sustainable over a very long period of time and that translate into very high levels of cash flow and then lastly how do you take those cash flows and invest it in a way that delivers the best return for shareholders.
So philosophically the way I think about the businesses are where do you get real differentiation and sustained cash flows. How do you take those cash flows and invest them, and then lastly what are the attributes of management that you need to have to make sure they are organized in way that perpetuates the first two items.
So that is a little bit of a philosophical statement. Things like quarterly guidance, I have a hypothesis that where you have a quarterly guidance out there that you may stand a disproportion amount of time ensuring that you are obviously meeting the targets that you’ve set, well I’ve not seen that per se, I want to make sure that we make decisions that are good for the long-term, 100% of the time which is why I have moved us away from quarterly guidance, but it’s reinforce I believe whole-heartedly in annual guidance and long-term guidance when we get together towards the end of this year.
We’ll certainly give framework for what the people should expect from Fiserv over the long-term, be that revenue growth and earnings guidance. So certainly we’ll put long-term targets out there that are based on the evaluations that we are doing today.
Q – Scott Kessler
Great, thank you.
A – Jeffery Yabuki
Thank you.
Operator
Our last question comes from Craig Peckham from Jefferies, you make ask your question
Q - Craig Peckham
Good morning, really just a modeling question as we look at 2006 I wondered if you could help us understand how the additional equity compensation expense will break out across the segments?
A – Jeffery Yabuki
We are not disclosing that at this particular time but most of our operating income and earnings are primarily in the financial segment, so correspondently you are going to have majority of our expense that’s going to be correspondingly in that particular segment. And our expense will be if you look our ‘05 ramp-up by quarter it’s generally higher in the first quarter that will be the remaining part of the year, mainly to the nature of our option programs.
So I would anticipate that trend will continue in 2006.
Q - Craig Peckham
Thank you.
Jeffery Yabuki, President and CEO
Thank you. Well thanks for joining us this morning, if you have any further questions please don’t hesitate to call our Investor Relations team and thanks for your support.
Have a good day.