Apr 25, 2006
Executives
Jeffery W. Yabuki, President and CEO Norman Balthasar, Senior Executive Vice President and COO Kenneth R.
Jensen, CFO, Treasurer, and Assistant Secretary Thomas Hirsch, Controller
Analysts
Christopher Penny, Friedman, Billings, and Ramsey & Co David Koning, Robert W. Baird & Co Patrick Burton, Citigroup Philip Mickelson, JP Morgan Kartik Mehta, Midwest Securities Bryan Keane, Prudential Paul Bartolai, Credit Suisse Julio Quinteros, Goldman Sachs Charles Murphy, Morgan Stanley
Operator
Welcome to the Fiserv First Quarter Earnings Conference Call. All participants will be able to listen only until the question and answer session begins following the presentation.
Today’s call is being recorded and also is 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 any time.
Now let me turn the call over to Jeff Yabuki, President and CEO.
Jeffery W. Yabuki, President and CEO
Thank you and good afternoon. Joining me on the call today are Norm Balthazar, Chief Operating Office; Ken Jensen, Chief Financial Officer; and Tom Hirsch, our Controller.
Before I get started, I would 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 first quarter earnings release which can be found on the company’s website at www.fiserv.com, for a discussion of these factors and a reconciliation and discussion of non-GAAP financial measures discussed in this conference call.
Let me first begin by congratulating Tom Hirsch on his appointment to Fiserv’s Chief Financial Officer, effective July 1st. I look forward to working with him in his new capacity.
I will have more to say on this change in a moment, but did want to recognize Tom’s appointment upfront. I’m also pleased to announce that we will hold our Investor Day on September 19, 2006, at the Millenium Hotel in New York City.
At this meeting, we will talk in depth about our strategic plans and view of the future. We will provide more details as we get closer to the date and hope you will be able to join us for this event.
Now, let me turn to our first quarter results. As you saw in our earnings release, Fiserv is off to a great start to the year.
Our results for the quarter were above expectations across our key financial metrics -- organic revenue, earnings, and free cash flow. In addition, we continue to invest in high opportunity areas during the quarter that will help drive future growth.
Revenues for the quarter were up 13% to $1.1 billion with increases across each of our business segments. Our adjusted organic revenue growth rate, which we believe is more meaningful when calculated to exclude the passthrough of customer reimbursements and pharmacy costs, were 7% for the quarter.
In the financial segment, we achieved an especially strong 8% adjusted organic growth rate for the quarter. We are especially pleased with our segment revenue growth rate in light of the negative impact of the large 2005 termination fees.
We achieved solid growth across most of this segment with standout revenue growth in our lending and credit union businesses, a significant increase in flood claims processing, and incremental revenue in our Australia check processing operations. We also experienced strong earnings growth in the quarter.
First quarter earnings per share from continuing operations were about 23% to $0.64 per share, which includes the charge of $0.05 per share for share-based compensation expense versus adjusted earnings per share of $0.52 per share in the year-ago quarter. Operating margins were also solid for the quarter.
Adjusted operating margin excluding passthrough customer reimbursements and pharmacy costs and including share-based compensation expense was 23% in 2006, compared to 22.4% in last year’s first quarter. Our performance in the quarter was impacted by certain items that warrant further explanation.
First, we benefitted from a large increase in flood claim processing volume in the quarter, which we don’t believe will recur for the remainder of the year. Second, we experienced a material decrease in termination fees versus the comparable quarter last year.
That said, we would always prefer for the long-term benefit of Fiserv to have decreasing termination fees as that is an indicator of higher future revenue and earnings. Third, we made a series of investments in the quarter that will continue throughout 2006 and especially into the second quarter.
These of course are dilutive to current earnings and compressed margin. Consequently, we expect that margins in the second quarter will be lower than the stronger than expected results we achieved in the first quarter.
For the full year, we expect that adjusted operating margins will be generally consistent with the level achieved in 2005. The investments we’re making in the first half of the year will begin to be accretive in the second half of 2006 and into 2007, which should have a positive impact on our margins.
Our free cash flow was up 39% to $143 million in the quarter when compared to the first quarter of 2005. The increase in free cash flow resulted from increases in management focus on accounts receivable collections in the quarter.
As for acquisitions, we completed three transactions in the quarter. We acquired two health businesses included CareGain and one acquisition completed in our insurance group.
Our pipeline is strong and we continue to be optimistic about our acquisition prospects for the year. Finally, during the quarter, we also deployed $229 million repurchasing 5.4 million shares of our stock.
Over the last 18 months, Fiserv has returned nearly $1 billion to our shareholders through our share repurchase programs. At the end of the quarter, we have 7.7 million shares remaining under the current stock purchase authorization.
Based on current market conditions and our strong cash outlook, we may complete the majority of the remaining authorization by year end. We will continue to evaluate the most appropriate ways to allocate our strong free cash flow to maximize long-term shareholder value.
Now, let me turn to our outlook for the full year. We believe that operating results for the full year 2006 will be the same as we had communicated previously, within a range of $2.46 to $2.53 per share.
Additionally, if we complete a significant percentage of our 10 million share buyback authorized earlier in the year, we would experience an incremental earnings benefit of $0.01 to $0.03 per share in 2006, which moves us towards the higher end of our earnings range. We continue to estimate that our adjusted internal revenue growth rate excluding passthrough customer reimbursements and pharmacy product revenue will be in the mid single digits for the full year.
Lastly, we continue to believe that earnings results in the second half of the year will be moderately stronger than our earnings in the first half of 2006. Now, let me update you on the strategic review process.
We are making good progress from the development of the long-range plans that we will share with investors at our September 19th presentation. Over the past 20 years, Fiserv has built a wonderful set of assets, a strong market position, and a large number of long-term client relationships.
Building on his foundation, we can accelerate revenue and profit growth over the long term. We believe we can accomplish this without losing the entrepreneurial spirit that has been a driving force in our culture.
There are three preliminary themes to share with you today that support this drive for higher growth and profitability. First, enhancing ongoing business performance, capturing added value opportunities, and third the future role of acquisitions.
Let me take a moment to outline our preliminary thoughts in each of these areas. There are two key elements inherent in enhancing ongoing business performance, performance management and cost effectiveness.
In terms of performance management, I have a working hypothesis that we are not consistently maximizing financial performance for the overall company. While it is still early in the evaluative process, I see several ways in which we may be able to modify our management processes to deliver better financial results.
I have been encouraged by the widely held belief of our business leaders that we can improve our existing business line economic performance. Even more important, our leaders view this refresh of our strategic plans as an important catalyst to take those actions that will be necessary to enhance results.
We will continue to make progress on this element of our plan and we’ll share our results with you later in the year. The second element of enhancing business performance is to better rationalize our cost structure.
Today, we operate in what I would call a dispersed cost and process model. This stance has been taken largely to preserve the entrepreneurial spirit supporting our business model today.
I believe we can increase our cost efficiency without negatively impacting this important element of our culture. At the starting point, we are currently spending about $1 billion annually excluding personnel cost across the entire company.
At a high level, it appears that we capturing only a portion of the efficiencies that could be available to a company of our size. The early indications are that this opportunity could be meaningful.
By managing our cost structure more proactively, we should be able to redirect existing spend to fund future investments and/or increase profits. Our goal is to create additional capacity for us to invest in organic growth as we choose, without negatively impacting short-term profitability.
The second preliminary theme is to gain significantly greater value from our existing client base. This is not a new idea at Fiserv and you’ve heard us say this before.
However, I’m pleased to tell you that our planning process is producing new thinking and insights into how we can serve our clients in increasingly more valuable ways. We see attractive opportunities emerging across business and product lines.
A unique opportunity showed itself recently as we were selected to provide both banking and health savings administration services for the proposed Blue Healthcare Bank. The growing convergence of health and wealth is an example of how we can bring our assets to the marketplace in exciting new ways.
Within our banking business, we have built long-term relationships with almost 6000 institutions in the US for which we provide the core technology. Historically, we architected our core systems to connect with a variety of ancillary systems such as lending, Internet banking, bill payment, and EFT, which were not Fiserv products.
Today, we have a robust set of add-on products to more fully serve clients through the extension of our trusted relationship. In effect, we’ve ended up building a distribution system with thousands of financial institution endpoints.
Within this system, we have multiple opportunities to capture a much greater share of the value chain, and while it’s too early to talk about this in depth, we believe there are multiple ways for Fiserv to unlock this value. Doing this well should allow us to improve the overall value proposition for our clients.
We are working on our plans in this area and are excited about the potential to deepen our client relationships. We are absolutely committed to bringing on the power of the company to bear on market opportunity.
The last of our preliminary themes to discuss today is the role of acquisitions. Business acquisition will continue to be fundamental to the Fiserv story.
We have well-developed acquisition competencies across the organization. This broad-based capability will allow us to continue acquiring businesses in a relatively low-risk fashion.
We have been disciplined buyers and that will continue. Our changes and acquisition strategy will be centered primarily on the defining of what a target opportunity is.
My goal is to be more deliberate in the assets that we target and to put a strong focus on those areas that represent significant growth opportunities for the future. We will also look for businesses in which we can achieve expanded economies of scale that deliver attractive earnings and margins.
Lastly, we will view acquisitions as only one of several alternatives in deploying our strong cash flows to deliver long term shareholder value. These preliminary themes will continue to evolve and new ones will emerge as part of the planning and review process.
Fiserv’s strategy for the past 22 years has produced tremendous shareholder value. Our management team is committed to continuing that stellar performance.
Again, we’ll have much more to say about all of this at our September investor meeting in New York. Finally, let me comment further on the personnel changes we announced today.
As I mentioned, we appointed Tom Hirsch as Chief Financial Officer, effective July 1, 2006, replacing Ken Jensen who is retiring. Tom will work closely with Ken over the next few months to ensure a smooth transition.
As many of you know, in addition to his Chief Financial Officer responsibilities, Ken has managed Fiserv’s overall acquisition process for the last 22 years as well. Over that time, Ken has effectively trained an entire organization to do the substantial majority of the company’s acquisition.
In conjunction with Tom’s appointment as CFO, we also announced that Jim Cox will assume the lead acquisition role for the company. Jim, who joined Fiserv during acquisition in 2001, is currently the President of Fiserv Health.
He has built a health organization through a combination of acquisition and organic growth and also has had substantial acquisition experience in his career. Jim will work directly with Ken in a transition period through July 1st and then will report to me.
As noted earlier, acquisitions will continue to play an important role in our future growth. Lastly, after his retirement this summer, I am personally delighted that Ken Jensen has agreed to act as a special advisor to me and the company.
This will further ensure a smooth transition and rich knowledge transfer. Before I open the lines for questions, allow me to thank all of our Fiserv employees who really deserve the credit for our strong results.
We understand that it is our people who work hard to serve our clients and shareholders each and every day. Our people are what make Fiserv a truly great company.
Now, let’s open the lines for questions.
Operator
Thank you. During the question and answer session, please limit yourself to one question and one followup question to allow for other callers to participate.
You are welcome to dial back into the question queue for additional questions. At this time, if you’d like to ask a question, please press “*” and “1.”
Again to ask a question, please press “*” and “1” and you will be prompted to record your name. One moment please.
Our first question comes from Chris Penny, please state your company name.
Christopher Penny, Friedman, Billings, and Ramsey & Co
FBR. Thank you very much for taking my question.
Just a kind of quick general question on the earnings progression; when you talk about margins, I believe you said that margins were going to progress to be flat and that you’re going to have accelerating growth in the second half of the year. But if you runrate, the earnings you did in this quarter, it’s obviously a little bit higher than your current guidance right now.
Can you kind of talk to as how we should expect to kind of see the earnings progression. I know you don’t give the quarterly expectations, but I just want to understand how we should expect earnings to grow throughout the year.
Jeffery W. Yabuki, President and CEO
Sure, Chris, what we had said at the beginning of the year and reiterated today and we still believe, is that we expect the first half to be moderately weaker than the results in the second half. We had a very strong quarter, frankly stronger than we anticipated, and there were some items that were accelerated, one of those items would be the flood claim processing that ended up SKU’ing a stronger result to the first quarter.
So, there were some things like that that we had mentioned within our call, but generally when you take those accelerations into account and the continuing investments that we’re making, we believe we’ll be on track for the year, but in fact the second quarter will end up being weaker than the first quarter, at least that’s what we can see today.
Christopher Penny, Friedman, Billings, and Ramsey & Co
Okay, and follow up on the cash flow items, you mentioned that in the cash flow you had a strong working capital improvement there, can you kind of give a sense what you’re requirements of working capital for the rest of this year, and how should we see cash flow coming out for the rest of the year?
Thomas Hirsch, Controller
Chris, this is Tom, and…
Christopher Penny, Friedman, Billings, and Ramsey & Co
Congratulations, Tom, by the way.
Thomas Hirsch, Controller
Thank you very much, Chris, I appreciate that. The pre-cash flow, I think our estimate that we gave at year end is probably going to follow our earnings growth for the current year, so I think what we’ve said is our working capital is going to be better in 2006.
Our free cash flow last year was about $430 million, so we assume for the year that we’re going to be up at least 10% net free cash flow number, and in the first quarter we did benefit from our tax payments, which we didn’t have any significant tax payments and those will come through in the second quarter. But for the full year, we’re going to be up around that 10% range and our working capital should be better than receivables to what we had in the prior year.
Christopher Penny, Friedman, Billings, and Ramsey & Co
Okay, thank you very much.
Operator
Our next question comes from Dave Koning, and please state your company name.
David Koning, Robert W. Baird & Co
Robert W. Bair.
Nice quarter and congrats to Tom.
Thomas Hirsch, Controller
Thanks a lot Dave, I appreciate that.
David Koning, Robert W. Baird & Co
Just a question on the SI margin, I guess the flood claims had a positive impact, I’m wondering how much profit came from those in the quarter, and then I guess secondly how you look at that margin for kind of the rest of the year?
Thomas Hirsch, Controller
Dave, this is Tom, and we’re not breaking out incremental profit on the different product lines that we have, but like in our businesses, our processing businesses, we do have a lot of fixed cost, and so while we have incremental transactions, whether they be in the flood business or whether they be in EFT, those incremental margins are higher. So, we did get a benefit from that in the quarter, but as you also saw in our press release, the termination fees on a first quarter compare basis were down $10-11 million as the margin compression from those items.
So, overall though, a good margin quarter. We did benefit from that and as Jeff indicated earlier, we do have a number of investments going on in the company that’s going to impact it.
You’ll see a little bit in the first half and then it will be stronger as we get into the second half of the year.
David Koning, Robert W. Baird & Co
Great, and then just one followup, I’m wondering if you could provide year-over-year variances from the first quarter 2005 margins to the first quarter 2006 margins, last quarter you talked a little about Canada, Australia, etc.?
Thomas Hirsch, Controller
Excuse me Dave, can you repeat that again?
David Koning, Robert W. Baird & Co
Sure, I think last quarter you gave us some of the year-over-year variances in the margin, I think you mentioned the Australia business had a little bit of an impact in Canada, I’m wondering if you can provide the same thing this quarter.
Thomas Hirsch, Controller
Yeah, you mean just qualitatively? I would say as we just spoke about it, the flood claims were positive, the customer termination fee decrease was negative.
We had a number of investments in our lending and also in our health area that compressed margins a little bit, and typically in the first quarter of the year, as we had in the first quarter of last year, we have a little better mix of business that we did like in the fourth quarter, where we have a little higher software license revenues. So, those combines were a little bit more positive impact, and we are still making investments in our Australia operation also.
David Koning, Robert W. Baird & Co
Great, thank you.
Operator
Our next question comes from Pat Burton, please state your company name.
Patrick Burton, Citigroup
Hi, Citigroup. Fist of all, congratulations on the quarter and also from me congratulations, Tom, on your appointment, great choice there guys.
Two-part question, first one deals with the changes, Jeff, operationally with moving Jim over to M&A. Does that say anything about the long-term plans you’re looking at for the health plan management business or should we not read into that?
Jeffery W. Yabuki, President and CEO
I would not read into that.
Patrick Burton, Citigroup
And you’re comfortable he can do both if in fact you plan on keeping that business?
Jeffery W. Yabuki, President and CEO
I’m sorry, thanks for the clarity. At the same time we moved Jim into the corporate M&A role, we elevated the Chief Operating Office in Fiserv Health, his name is Fred Moore, who came from one of our acquisitions as well, and we’re very comfortable with the job that Fred will do.
Fred is actually both an entrepreneur but a very strong operator as well, and I think it will help us integrate some of the pieces that we have in that business in a way that will also improve performance. But again, what I want to reiterate the most is moving Jim into this role; that occurred because we felt Jim was the right person for the M&A role and is not a statement in anyway, shape or form about the health business.
Patrick Burton, Citigroup
And a followup on your commentary about acquisitions going forward, it sounds to me like maybe being accretive just isn’t enough as the reason to do an acquisition, is that a fair statement or have you maybe changed how the company is looking at acquisitions in terms of return on investor capital as opposed to just accretive to earnings per share?
Jeffery W. Yabuki, President and CEO
Sure. Given I’ve not been here for that long I would tell you that many of the acquisitions that we’ve done historically have been accretive on an EPS basis.
I don’t believe that’s the only reason why we’ve done acquisitions. We’ve tried to do acquisitions that are strategically relevant, that are accretive, we like to do acquisitions that are accretive, especially those that are in high-cash generating businesses.
But I would say is that we will try to be more deliberate about what businesses we need to enhance our value proposition to clients, and so there are some spaces out there today in which I think they represent attractive opportunities. Some of those will be accretive, some of those may in fact be dilutive.
We have done a couple of acquisitions this year, small ones that on their own that have been dilutive. So, to the extent there is a good strategic purpose for doing the acquisition, we’re going to do it.
The other thing I would say, Pat, is we will look at…I don’t know if we’ll call it ROI or if we’ll call IRR, but we’ll look at long-term value creation and using appropriate discount rates within that thinking as part of our analysis; there’s no question about that.
Patrick Burton, Citigroup
Thank you, great start.
Operator
Your next question comes from Phil Mickelson, and please state your company name.
Philip Mickelson, JP Morgan
Phil Mickelson with JP Morgan, and I’d also like to congratulate Tom as well on his new role. Real quick, when you’re looking at the competitive environment for the banking core processing, first of all as we’re in one quarter into the year, has anything fundamentally changed, are there any kind of growth initiatives within the whole core processing segment?
And then I’m going to follow up that with some competitive questions.
Jeffery W. Yabuki, President and CEO
Our take and it’s a fairly broad question. I think it would be imprudent to say nothing has changed, but to say it differently, I don’t think there have been any material changes, at least what our people would say here is we haven’t seen any material changes in the competitive landscape in terms of some of the transactions that have come together over the last six months to a year.
You see some competitors who are aggressive on pricing. We always see some competitors that are aggressive with pricing when you have the deep long-term relationships that we have, that’s largely the lever that exists out there.
So you’re seeing some of that, but I wouldn’t say we’re seeing an extraordinary amount of irrational pricing. So, the landscape is continuing to evolve, but again I’m not seeing…
Kenneth R. Jensen, CFO, Treasurer, and Assistant Secretary
I would agree with that. I think it’s pretty much as it has been in the recent history.
Philip Mickelson, JP Morgan
And you’ve had some of your significant competitors, one is Open Solutions acquiring BISYS, and also Fidelity acquiring Sedgwick, do you see those as more formidable competitors going forward or do you think that this really is not changing the competitive landscape as far as bank core processing and some ancillary businesses today?
Jeffery W. Yabuki, President and CEO
My take is that it’s anytime people get together it creates an opportunity to have an impact in the competitive market. What I would say is it’s hard for me to know or quantify that impact of those companies coming together, and we’re obviously paying very close attention and we’re looking for what are the best ways for us to differentiate ourselves, what is the right value proposition for us to deliver without regard of the competitive environment.
I think the core space is a very interesting space, notwithstanding the fact that may people say there are not…it’s obviously not a high growth area. You don’t have thousands and thousands of banks starting up and/or switching their core systems, but it’s a very unique place to be positioned within the financial institutions.
We have a leadership position there. And from my vantage point, I think we need to continue to build our leadership position in that space.
Philip Mickelson, JP Morgan
One last question is regards to mortgage processing. I think you posted a win with Bear Stearns.
I was wondering if you could kind give some color around that if that was the competitive situation with Fidelity? Then secondly, I think this was while ago, you announced an RFP it sounded like from Chase Mortgage, was there any conclusion there and was there revenue recognized if you did win the business in this quarter or do yo expect that upcoming?
Jeffery W. Yabuki, President and CEO
We did make an announcement as far as on the JP Morgan Chase run in the mortgage area that we were a product of choice, but there’s been no contract signed in that regard, so we continue to work on that with them. So, at the current time, we don’t have a contract signed with them but we were chosen as product choice there.
Regarding the Bear Stearns, I’m going to have to get back. I don’t think that was a significant transaction for the company, but again the JP Morgan one is one we are continuing to work on.
Thomas Hirsch, Controller
And we do not expect any significant revenue this year from it.
Philip Mickelson, JP Morgan
Thank you very much.
Operator
Next question comes from Kartik Mehta and please state your company name.
Kartik Mehta, Midwest Research
Midwest Research. Good afternoon gentleman.
Jeff, a question on your acquisition and share buyback, I know you’ve talked about that you want to continue acquiring companies, but I’m guess I’m wondering recently because of the share buyback, is it because you don’t see the opportunity you’re looking for or is this just a better capital investment at this point in time and that’s why this share buyback?
Jeffery W. Yabuki, President and CEO
It’s a good question. To some extent I would say the opportunities are mutually exclusive.
We think about what levels should we acquiring shares. We have very significant, as Tom referenced earlier, very significant levels of free cash flow.
We would expect probably somewhere in the $450-$480 million level of cash this year. I think it is imprudent for us to sit on the sidelines while we have opportunities to deploy the capital at rates that are better than what the alternative investments are.
So, from my standpoint given the debt position that we have and basically the ability to continue to generate significant cash flow, that we should merely deploy as much capital as we can to whatever we see that will deliver very solid returns for shareholders, so that’s what we are doing. Tom…
Thomas Hirsch, Controller
I’ll just add to that, Kartik, that our debt levels with the company are fairly low. Our debt to EBITDA is probably somewhere around 0.8 or less than 1 as far as that goes.
So, we have capacity there, as Jeff indicated, we have the strong free cash flow, and we have the capacity to do both.
Kartik Mehta, Midwest Research
And just a final followup, Jeff, in your opening remarks you talked about deepening client relationships, and I’m assuming this is trying to cross-sell more products. I know it’s early on and you’ve just kind of laid this out, but is this a change you have to make in terms of sales of incentives or some type of change in sales force or is it technology or is it something else to try to garner more revenue from clients?
Jeffery W. Yabuki, President and CEO
The answer is yes, there is a variety of different levers to pull, of which you could say any or all of them may in fact be the right thing. From my standpoint, for us to be able to do this at scale, and that’s what I really care about, Kartik, how do we do this at scale, is we have to construct a very differentiated value proposition for the clients, and I have some insights into how I believe we can do that, and we are looking at the different ways for us to do that.
Some of them are on to the things that you’ve mentioned. I think some of them start to have us perhaps bundle our products in a way that creates a very compelling value proposition for the end-consumer banks.
So, there are a variety of different ways that we’re doing it, and when we get together in September I think we’ll lay out a very compelling plan for how we’re going to create that value proposition and how it’s going to get implemented, and lastly, I think, how people will be able to tell if we’re marking progress against that initiative or not.
Kartik Mehta, Midwest Research
Thank you very much.
Operator
Our next question comes form Bryan Keane and please state your company name.
Bryan Keane, Prudential
Hi, it’s Bryan from Prudential. Just looking at the FYO growth was pretty strong there at 8%, and I’m just trying to figure out how that’s going to look going forward into the second quarter and beyond.
But for the second quarter, does it look like that will drop back down towards the guidance levels, mid single digits, and then maybe you can just help us with some of the pluses and the minuses, obviously the flood claims aren’t going to be there, so that will drag it down a little bit, but you can maybe walk through some of that.
Thomas Hirsch, Controller
Hey Bryan it’s Tom. I would first comment and I’ll turn it back over to Jeff.
Our full year guidance there is mid single digits, so as we indicated in our press release we did have some process and flood claims which had some incremental benefit in the first quarter that we don’t see recurring right now as we go forward, but overall mid single digit for the year. So, I would say that we’re not giving quarterly guidance bu the second quarter would be lower and that we’d have a stronger second half as we indicated with our earnings also.
Bryan Keane, Prudential
The Australian check business, that anniversary is in mid April, is that business growing as expected and how’s the profitability going forward there?
Thomas Hirsch, Controller
That transaction will be dilutive in the current year and that is what we have indicated. We are making progress there and hope by the end of the year that will be in better position as we go into 2007.
But as we indicated earlier, in the current year, it’s going to be dilutive to our earnings.
Bryan Keane, Prudential
How about top line revenue?
Thomas Hirsch, Controller
Top line revenue, as you indicated, we’re still in the process of converting one of the final institutions there and it should pretty much at a runrate as we get into the middle of the year here, but you’re right it does annualize in the second quarter.
Bryan Keane, Prudential
Okay, and then finally I’m going to try to probe into some of Jeff’s review, but have you found any business units that are underperforming that could be divested just?
Thomas Hirsch, Controller
We’re in the process of looking of all of that. For variety of reasons, Bryan, of which I’m sure you’re aware it would be inappropriate to talk about that right now, except to say that as we sit here today we have not made any decisions that would say we should divest anything.
We’re really trying to look at this process in a very deliberate and a very intentional way setting up those criteria for which we’re going to judge or assess each of these businesses, make those assessments, and then execute whatever plans makes sense, and again we’ll discuss that in more depth in September.
Bryan Keane, Prudential
Okay great, thanks, and congratulation to Tom.
Thomas Hirsch, Controller
Thanks Bryan.
Operator
Our next question comes from Paul Bartolai and please state your company name.
Paul Bartolai, Credit Suisse
Thanks, it’s Credit Suisse. First question, just on the FYO margins, I know you guys are not breaking out the specific product lines, but I wonder maybe if you could tell us if you look at the flood claims and termination together, did that pretty much wash out the margins or was that a negative to margins in the quarter?
Thomas Hirsch, Controller
While we look at compared to the first quarter of 2005 it was a net positive there, because there was a little bit bigger impact in the flood side than in the termination fees, so there was a net positive impact there.
Paul Bartolai, Credit Suisse
On the margin side it was positive?
Thomas Hirsch, Controller
That’s correct.
Paul Bartolai, Credit Suisse
And then you mentioned on the organic growth in that business, it sound like it came in a little bit better than you expected, you mentioned the flood claims, can you talk about other areas that may grow a little bit stronger than expected or just in general driving the growth there?
Thomas Hirsch, Controller
I would fist comment and I’ll turn it over to Jeff, is that we had a very strong credit union quarter. All of our business there in the credit union operations were up over the previous year, so we’re very pleased with that.
Our loan settlement services continue to do very well. Along with that we did have some revenue from the Australian check processing contract, but very good quarter in the credit union operation.
Jeffery W. Yabuki, President and CEO
The only think I would add is this quarter was especially challenged because of both the impact on ongoing revenue of losing clients, these would be the termination fees that we collected in the prior year as well as having higher levels of termination fees in the first quarter of 2005, which again made the performance this quarter on the revenue side…I won’t go so far as to say spectacular, but very strong.
Paul Bartolai, Credit Suisse
Great, and if I could sneak one more in, switching to the health business, margins were down there a little bit year on year, can you give us a little bit more color on what’s gong on there and what you expect for the rest of the year in that business?
Thomas Hirsch, Controller
I think we look at those margins pretty much on a net basis when you pass out those prescription costs, and they were down slightly. We are making some investments there, both in the health plan administration area, the BPO business, and then through our CareGain acquisition also.
So, those investments will continue as we go through the remainder of the year. However, we do have some positive impact there on the operating margins through some things we’re doing in the health plan administration business, so we anticipate for the year that will increase to see an increase as we get into the second half.
Paul Bartolai, Credit Suisse
Great, thank you.
Operator
Next question comes from Julio Quinteros, please state your company name.
Julio Quinteros, Goldman Sachs
Goldman Sachs. Tom, it’s a long way from business school at the University of Wisconsin, so congratulations from my part as well.
Thomas Hirsch, Controller
Thanks a lot Julio.
Julio Quinteros, Goldman Sachs
My question is specific to I guess the ATM and EFT volumes, is there are a view that you guys have on how that business performed?
Jeffery W. Yabuki, President and CEO
Our EFT business, it continues to do well, the volumes are up substantially as we continue to get people over to our exchange network end and in the debit care area, those volumes continue to do well. We have had price compression, Julio, and that has offset those volume increases.
Julio Quinteros, Goldman Sachs
Okay, great. Then, if you guys were to sort of step back and kind of take a look at the banking environment with rates continuing to sort of move up and the sort of attitude or kind of the approach your banking clients are taking, how do they look at the interest rates and the demand environment, what’s the tradeoff there and how should we possibly looking at what impact higher rates could have on your business from a demand perspective?
Jeffery W. Yabuki, President and CEO
And Julio, when you say demand, you mean demand for our services?
Julio Quinteros, Goldman Sachs
Correct.
Jeffery W. Yabuki, President and CEO
I mean, as you well know, I’m sure you know better than I that the spread market right now is very odd. I have heard from several bankers that it’s extraordinarily difficult to make money and even had one individual say to me that he wasn’t sure if made sense to even issue loans anymore.
So, there are some odd things going on. Frankly, and we’ve not seen any real demand challenges for our services in a negative way.
I actually think that the macroenvironment while substantially imperfect for banking profitability actually is an interesting catalyst for us as we think about how do we go to market in a way that is differentiated from others; because we have a full suite of banking products and services and because we have deep relationships and because we have associates and employees who our clients generally trust. The macroenvironment is creating an opportunity that will allow us, I believe, to go in and offer a better economic value proposition for the bundle of services that banks need and that will allow us to be able to deliver more product, more service, and hopefully capture more of the manufacturing profitability that today is going out to third-party providers who are riding off the value of our distribution system; so that’s number one.
I think the other thing that’s interesting is in a difficult macroenvironment you have people looking for different ways to reduce cost, and one of the ways to reduce cost is to either number one outsource, or number two, increased levels of automation, all of that is valuable to us, all of that are demand catalysts that we could use to help or we will use to help build our business.
Julio Quinteros, Goldman Sachs
And just kind of digging down on that, if one of you guys maybe has the answer, what percentage of your revenue would actually be sensitive to sort of the rate environment that we’re kind of involved in, is there are a kind of general benchmark on that number?
Kenneth R. Jensen, CFO, Treasurer, and Assistant Secretary
Fundamentally, just our ISS business, investment support.
Julio Quinteros, Goldman Sachs
Okay. That was Ken?
Thomas Hirsch, Controller
Yeah, that was Ken.
Julio Quinteros, Goldman Sachs
Hey Ken, congratulations on your retirement as well.
Kenneth R. Jensen, CFO, Treasurer, and Assistant Secretary
Thank you.
Operator
And our last question comes from Charles Murphy and please state your company name.
Charles Murphy, Morgan Stanley
It’s Morgan Stanley, quick question on the FYO business, what percent of revenue in FYO is not able to be moved up every CPI-based type?
Thomas Hirsch, Controller
Charlie, this is Tom Hirsch. It’s fairly difficult to look at because of all the components that we have in there, but as you’re aware, we have a number of different product lines and then we have our lending group which is about 15% of revenue, but the majority of that group segment, 50-60%, is in our bank and credit union area, and I think those primarily CPI increases occur in that particular segment of the business, and that’s where we generate GAAP sales in the service level outsourcing frame.
We also have our insurance business in there which really doesn’t get those CPI increases, but I would say that’s a rough guess, but that’s probably where I’d put it.
Charles Murphy, Morgan Stanley
And lending does not as well, right?
Thomas Hirsch, Controller
That’s correct.
Charles Murphy, Morgan Stanley
And then last year at this time, you were getting a lot of questions about big check processing, IRD outsourcing deals, has the domain environment for those dried up a bit, do you expect any of those to close in 2006?
Norman Balthasar, Senior Executive Vice President and COO
This is Norm. We still have a lot of activity going on in that area.
We haven’t had anything that’s close to closure at this point, but there’s still a lot of interest; as cheque volumes continue to dwindle, the value organizations look at their per-unit cost and the amount of technology they need to invest in for the image side, and I think that’s getting more and more compelling, a lot of conversations, but nothing that has come with definition yet.
Charles Murphy, Morgan Stanley
Okay Norm, did you have any large higher deals built into the mid single digit guidance in internal growth in FYO for 2006?
Norman Balthasar, Senior Executive Vice President and COO
No, not really, we certainly have some higher deals that we anticipate to close and will close, but nothing of major consequence by itself.
Charles Murphy, Morgan Stanley
Okay, thanks very much.
Jeffery W. Yabuki, President and CEO
Thanks everyone for joining us this afternoon. If you have further questions, please don’t hesitate to contact our investor relations team.
Have a good afternoon.