Jul 26, 2006
Executives
Jeffery W. Yabuki, President and CEO Norman Balthasar, Senior Executive Vice President and COO Thomas Hirsch, Executive Vice President, Chief Financial Officer Kenneth R.
Jensen, Chief Financial Officer
Analysts
Gregory Smith, Merrill Lynch Julio Quinteros, Goldman Sachs David Koning, Robert W. Baird & Co Patrick Burton, Citigroup Scott Kessler, Standard & Poor Charles Murphy, Morgan Stanley Christopher Penny, Friedman, Billings, and Ramsey & Co Kartik Mehta, Midwest Securities Bryan Keane, Prudential Paul Bartolai, Credit Suisse Craig Peckham, Jefferies & Co John Evans, Wells Capital
Operator
Welcome to the Fiserv Second Quarter Earnings Conference Call. All participants will be able to listen only until the question and answer session following the presentation.
Today’s conference is being recorded and also broadcast live over the Internet at www.fiserv.com. The call is expected to last approximately one hour; you may disconnect at any time.
Now I’ll turn the meeting over to Mr. Jeff Yabuki, President and CEO.
Mr. Yabuki, you may begin.
Jeffery W. Yabuki, President and CEO
Thank you and good afternoon. Joining me on the call today are Norm Balthazar, our Chief Operating Office; Tom Hirsch, our new Chief Financial Officer; and Ken Jensen, our outgoing CFO who will be retiring from the Company on July 31st.
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, revenue and cash flow targets, sales pipelines, acquisition prospects, and our strategic review process 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 second 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 of non-GAAP financial measures discussed in this conference call.
Before we discuss our second quarter results, I want to remind you that we are hosting our 2006 Investor Day at the Millennium Hotel in New York City on September 19th. We hope you will be able to join us as we will review our long-term strategies and prospects for the future.
As we announced today, Fiserv recorded solid results for the second quarter. That performance on the heels of a stellar first quarter delivered a very strong first half of results for Fiserv.
Revenues for the second quarter were up 10% to $1.1 billion and included increases across each of our business segments. Our adjusted organic revenue growth rate for the quarter, which we believe is more meaningful when calculated to exclude passthrough customer reimbursements and pharmacy costs, was in line with our internal expectations at 3%.
As expected, this quarter’s organic growth rate was lower than the first quarter, but we still achieved an overall organic revenue growth rate of 5% for the first six months of the year, consistent with our 2006 annual guidance of mid single digit revenue growth. The financial segment adjusted organic revenue growth rate for the quarter was also 3%.
You will recall that last quarter we benefited from an acceleration of flood claims revenue. That as expected did not recur in the second quarter.
The claims acceleration accounted for about 300 basis points of organic growth when comparing the growth rates between the first and second quarter. Regular contract termination fees for 2006 have remained low this year, which will positively impact future revenue growth.
Second quarter termination fees were $5.6 million versus $7.1 million in the prior year’s quarter. Through June 30th, termination fees in the financial segment were down 59% to $9.5 million versus $22 million in the prior year.
Year-to-day adjusted organic revenue growth in the financial segment is a solid 6% and in line with our full year 2006 guidance. As I mentioned, we have a challenging organic growth comparable in the financial segment this year.
Last year’s losses of a few significant clients have created a more challenging baseline for our organic growth in the current year. To achieve normal growth, we have to replace both the large termination fees and the recurring revenues from the lost clients.
We estimate that the combined negative impact of last year’s unusual large client losses on our 2006 organic growth rate to be approximately 210 basis points. While we always strive to improve performance, we are pleased with our organic revenue growth given the circumstances surrounding our year-to-year comparison.
We remain on track to achieve our stated guidance of mid single digit adjusted organic revenue growth rate for the year. We are experiencing strong sales performance through June 30th.
Sales quota attainment is up about 30% versus 2005 and up about 10% ahead of our internal plan. While these numbers can shift between quarters depending on contract signing and implementation, we are pleased with our sales results to date.
Our sales activity through June 30th combined with a very strong finish to 2005 increases our confidence in the organic revenue growth targets for the year. Sales performance in 2006 has been solid across the board with growth spanning all of our segments.
We have closed a number of transactions such as a multifaceted agreement with Blue Healthcare Bank, numerous wins in the bank and credit union core processing space, and continued growth in deepening integrated sales. We also saw in several large multi-year client agreements to provide pharmacy benefit and administration services which began in July.
Also of note, we mutually agreed currently to suspend contract discussions with JP Morgan Chase regarding a potential implementation of our mortgage servicing platform. While we are disappointed that this transaction has not come to position, JP Morgan Chase is an important client for Fiserv.
We have multiple relationships and we will continue to work together in the future. Our solid performance in the second quarter led to earnings per share from continuing operations at $0.63 per share versus adjusted earnings per share of $0.57 in the prior year quarter.
Our second quarter earnings included a one time income tax benefit of $0.02 per share primarily related to a change in a state tax law. Earnings per share from continuing operations through June 30th were up 16% to $1.26 per share as compared to adjusted earnings per share of $1.09 in the prior year.
Adjusted operating margin for the Company as defined to exclude customer reimbursements and pharmacy passthrough costs was 22.2% for the second quarter, compared to 23.4% in the prior year and 23% in the first quarter. The primary driver of the sequential quarter decrease and adjusted operating margin was the expected decline in higher margin flood claims processing revenue partially offset by increased software revenue and a reduction in share-based compensation expense.
Year-to-day adjusted operating margins were down slightly to 22.6% versus 22.9% in the prior year, of which the 2005 results included a very strong second quarter. This slight down tick for the year was driven primarily by a combination of investments and the effective termination fees discussed earlier, somewhat offset by the positive impact of higher flood claims processing.
Overall, our business mix continues to deliver solid results. In the health segment, adjusted operating margin through June 30th was down 160 basis points to 15.5%, compared to 17.1% in 2005.
This change primarily resulted from our continued incremental investments to support growth in high impact areas. While the $2.5 million we’ve invested this year negatively impacts margins in the segment by about 100 basis points, the magnitude of these incremental investments are not material for the company as a whole.
We do expect to continue these investments through the remainder of 2006. We expect improved operating results in the health segment in the second half of 2006.
Of note are the three multi-year pharmacy administration contracts I referenced earlier which should improve organic revenue and profit growth for the balance of the year and into 2007. We’ve also been implementing a series of operational enhancements in the health plan administration business, which we expect will have a positive impact on segment margins.
We believe actions in the first phase of implementation will provide a range of annualized expense savings of $6 million to $12 million. We expect the impact of these changes to begin towards the end of the third quarter of 2006 and be fully implemented by the middle of 2007.
Now, let me turn the call over to Tom Hirsch who will provide additional information on cash flow and our capital positions.
Thomas Hirsch, Executive Vice President, Chief Financial Officer
Thanks, Jeff, and good afternoon everyone. Year-to-day cash flow from operations was up 13% over the prior year to $283 million.
Free cash flow increased at a lower rate of 3% to $187 million, due primarily to the higher level of planned capital expenditures in the first half of 2006. Capital expenditures were $96 million for the first half of the year, which is an increase of $27 million over the same period in 2005.
The increases in capital spending were driven primarily by a series of investments across our businesses, including investments in our output solutions division, Check 21 infrastructure, fraud processing business, and several lending initiatives. The majority of these investments are being made to support future client growth.
Another driver of the increasing capital expenditures is the change in our financing choices. So far this year we have moved away from operating leases when compared to the 2005 levels.
This change is due primarily to the nature of assets being purchased and a lower total cost of financing associated with our due debt facility. Even with the higher level of capital expenditures through the second quarter we are still forecasting 2006 free cash flow within the range of $450 million to $480 million for the full year, which is consistent with our previous estimate.
In the last two months we have added two value enhancing businesses to join the Fiserv family. In June we acquired insurance wholesalers to build on our insurance distribution capabilities, and in early July we acquired the Jerome Group, which will bring new capabilities and incremental revenue opportunities to our output solutions division.
Overall, our acquisition activity and pipeline remain strong. We will continue to look at transactions that have both economic and strategic value.
During the quarter we also allocated $121 million of capital to share repurchase in the second quarter, acquiring 2.8 million shares of our stock. Through June 30th we have repurchased at total of 8.2 million shares returning $350 million to shareholders.
At the end of the quarter, we had 4.9 million shares remaining under the current stock purchase authorization. Now let me turn the call back to Jeff, who will give you an update on our 2006 guidance and our strategic review process.
Jeffery W. Yabuki, President and CEO
Thanks, Tom. Given our strong first half operating results and the one time tax benefit in the second quarter, we are increasing our full year operating earnings guidance which will now be from $2.48 to $2.54 per share.
Our previous full year earnings range was $2.46 to $2.53 per share. Again, we continue to expect that organic revenue growth for the full year will be mid singe digits for both the company and in the financial segment.
Now let me briefly update your on our strategic review process that will be the primary focus of our Investor Day on September 19th. I will provide a brief update on the three schemes we have shared previously along with our preliminary view on the directional impact of revenue and operating margins.
The three primary strategic themes are: first, optimizing business performance, enhancing client relationship value, and lastly the role of acquisitions. Optimizing business performance involves both performance management and cost effectiveness.
We seek to move beyond a strict internal performance measurement system to include a combination of internal and external benchmarks. We believe this philosophical change will allow us to better optimize results against a broad range of performance dimensions.
The second element of this theme is cost effectiveness. As you know, Fiserv has come together as a product of over 130 acquisitions, which have in many cases been left to run independently.
This was done 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 structure.
We believe the largest near term opportunities lie in backend, non-client basing areas such as purchasing, supply chain management, internal technology infrastructure, and process improvements. Our goal would be to utilize these savings to increase profits and/or create additional capacity to invest for growth without negatively impacting short-term profitability.
The benefit of this theme should be slightly accretive to organic growth and positive to operating margin. Our second theme is enhancing client relationship value.
We’re doing this by examining the products and services that we deliver today, how we deliver them, and what we must do to further extend and deepen our client relationships. A key goal is to further expand the size and breadth of our client relationship network.
For example, in the banking and credit union groups we have over 5500 core system clients that in effect create a sizeable distribution system. Today, we distribute both proprietary and third-party products to our core client base.
In many cases Fiserv products compete with third-party product that we also distribute. So, we’re looking for ways to bring more integrated value to our clients through our own products or alternatively where we have third-party distribution relationships ensuring that Fiserv is receiving a fair distribution fee.
In all case, we are looking to maintain and wherever possible increase the value we bring to Fiserv clients. This second theme should accelerate internal organic revenue growth and maintain our gross margins depending upon the pace of adoption and future investment.
Our third theme to discuss today is the role of acquisitions. We want to be more deliberate in the acquiring of businesses that represent significant growth opportunities, be it unique capabilities for us to expand our businesses, products and services which provide clear industry leadership or acquisitions that leverage existing competencies and capabilities to improve margins and profitability.
We will continue to be disciplined buyers and leverage our highly developed acquisition competency as one of the ways we allocate capital. Lastly, let me comment on speculation that we may target bank and credit union core account processing systems as a way to achieve cost efficiency or streamline our competitive offerings.
At this time, we are not pursuing a consolidation of our client basing platforms and would not unless we determine it was truly in the best interest of our clients. Fiserv has historically consolidated core platforms only when our clients have decided it is best for them to migrate to another solution, and that philosophy will likely continue.
Over the past several months I have come to better appreciate the market place value of having multiple platforms. Today, retaining the value of our multiple core system client bases outweighs the potential cost savings of any platform consolidation and mitigates the attendant risk of client loss by a forced core system conversion.
So, rather than consolidation, we will instead look for efficiencies in supporting our core platforms, and as we develop new functionality look for way in which it can be rapidly integrated across our multiple core platforms. There is growing enthusiasm across the company.
Our business leaders are working together to identify ways in which we can deliver more value for clients, shareholders, and employees. We look forward to sharing our plans with you in September.
Before we open the lines for questions allow me to recognize Ken Jensen for his over 20 years of service as Fiserv’s CFO. Ken has been here from the beginning and made significant contributions across almost every imaginable area of the company.
In fact, given all the people and businesses that have been acquired by Ken over the years, it may be fair to call Fiserv the house that Ken built. Ken, on behalf of all 22,000 Fiserv associates, investors, and our clients thank you for your relentless commitment, passion, and dedication to Fiserv, you have made us all better.
Now, let’s open the lines for questions.
Operator
Thank you sir. We will now begin the question and answer session.
During the question and answer session please limit yourself to one question and one followup question. This allows time for other callers to participate.
You are welcome to dial back into the question queue for additional questions. To ask a question please press * and 1 on your touchtone phone.
To withdraw your question press * and 2. Our first question is from Greg Smith, Merrill Lynch, your line is open.
Gregory Smith, Merrill Lynch
Hi, good afternoon. First, Jeff, regarding the strategic initiatives, do you anticipate taking any restructuring charges along with that?
Jeffery W. Yabuki, President and CEO
No.
Gregory Smith, Merrill Lynch
Okay, so it’s all going to be expense then. And then you mentioned that the potential mortgage processing deal with Chase, I sort of missed what you said, can you repeat what happened there and if that’s going away, is it going to a competitor or what exactly happened there?
Jeffery W. Yabuki, President and CEO
We basically indicated that both parties for now have agreed to suspend discussions. We got to the point where we were unable to agree on all the terms and conditions and we thought it was best for both parties to step back and take a break.
Given that there was a press release issued back in November, we thought it was best to give an update to everyone on what was going on with that. I would also say that we at that point nor now included any of the possible revenue and/or income effected from that transaction in our forward guidance.
We had not counted on that and so we’re going to just sit back and see what happens for now.
Gregory Smith, Merrill Lynch
Okay, and then just lastly, you announced the signing of a couple significant clients in the health segment, I realize a lot of that revenue is passthroughs, but it looks like you did not adjust the organic growth outlook kind of as we move into the second half, are they not that significant when you axe out the passthroughs or am I missing something there?
Jeffery W. Yabuki, President and CEO
Clearly, I think what we said in the press release is $190 million to $230 million of annual revenue. There is a ramp up period associated with that.
It’s a nice high margin, fairly attractive business when you take out the passthrough cost, we like that a lot. From an organic revenue growth perspective, we do think it will have some impact and we’ve accounted for that in terms of the fact that it’s going to offset some of the weakness that we saw in the health segment this quarter.
Thomas Hirsch, Executive Vice President, Chief Financial Officer
I will concur with that. We’re currently at 2% organic growth net of the prescription through six months and that’s how we gave our guidance of low-to-mid single digit for the year.
Gregory Smith, Merrill Lynch
Okay, thank you very much.
Operator
Julio Quinteros, Goldman Sachs, your line is open.
Julio Quinteros, Goldman Sachs
Great, good afternoon guys. One just quick question on the three strategies, I was hoping for a fourth, and Jeff we’d love to get your current view on the capital structure plans as far as you guys are concerned going forward.
Jeffery W. Yabuki, President and CEO
The three topics that we’ve been talking about Julio are not meant to be all inclusive. We will definitely talk about capital structure when we get together in September, so I’m just going to wait for September 19th on that one.
Julio Quinteros, Goldman Sachs
Okay, thanks. Tom, one quick followup regarding ESO, Employee Stock Option expenses for the calendar ’06, is there a difference in the expectations that are sort of the beginning of versus where you are now for the total ESO comp?
Thomas Hirsch, Executive Vice President, Chief Financial Officer
You mean the share-based comp?
Julio Quinteros, Goldman Sachs
That’s right.
Thomas Hirsch, Executive Vice President, Chief Financial Officer
Yeah, the same guidance has been there for the year which is $0.09 to $0.11 and that’s the guidance we’ve put out initially.
Julio Quinteros, Goldman Sachs
Perfect, thank you.
Operator
Dave Koning, Robert W. Baird, your line is open.
David Koning, Robert W. Baird & Co
Hi guys, I wanted to pursue the margin in the financial segments. Over the last few quarters it’s been down on a year-over-year basis as you’ve invested and I’m wondering if the in back half of the year we’re going to see some year-over-year improvement and if so what’s kind of driving that?
Thomas Hirsch, Executive Vice President, Chief Financial Officer
David, I’ll start with that and turn it back over to Jeff. Overall, our adjusted operating margins have been very strong in the first half of the year when you compare those to the margins we had in the first half of 2005.
Adjusted margins are in the range of 22% and we’re very strong. Our guidance for the full year has been that our adjusted margins as a company would be up over the prior year.
And when you go back into 2005, our adjusted margin when you exclude the large termination fee in the fourth quarter was 21.9%. So, our overall guidance as a company for operating margins are going to be at or above those levels for the full year while we’re making a lot of investments in the current year.
When I look at our actual operating margin again adjusted at 22.2% for the company in the second quarter, we don’t anticipate any significant changes in regards to those margins in the second half of the year, not withstanding businesses affected by a mix of acquisitions and mix of business depending on software license fees versus other sorts of our business, but we don’t anticipate any significant changes from those margin levels that we have today in the company total.
David Koning, Robert W. Baird & Co
So, similarly in the FI segment itself somewhat similar comments that sequentially you probably stated around where it’s been for the last couple of quarters?
Thomas Hirsch, Executive Vice President, Chief Financial Officer
Yeah, I’m not going to go down into the detailed segment, I would say that the first half of the year has been very strong in that segment, but as a company that’s how we’re going to give our guidance from that standpoint.
Jeffery W. Yabuki, President and CEO
Dave, let me just add a couple of other points, a little bit of additional color. One of the things is…I won’t say it’s wreaking havoc with our margins this year because that would be too strong, but I would say that the change in termination fees is actually a pretty interesting component of our margins to date.
Termination fees for the first half of the year are down almost $13 million, and regular termination fees have been at fairly stable levels for the last two years. In 2006, termination fees are down importantly and we think that’s a very good sign, so it’s a little bit schizophrenic on that, but we’re always biased to wanting the long-term benefit of having lower termination fees and higher levels of future growth and future revenue.
David Koning, Robert W. Baird & Co
Thanks, and just one final followup, are you still sticking with the long-term growth expectations 5% to 9% revs and 14% to 18% EPS growth?
Jeffery W. Yabuki, President and CEO
Yeah, we haven’t changed that at all, Dave, and we won’t do anything to that until we get the other in September and then we’ll talk about changes that we may make to the guidance at that point. Again, we believe that the business is actually performing fairly well right now, given the trough that we’re recovering versus 2005 with both the termination fees and the loss of the recurring revenues related to the large clients that left in 2005.
David Koning, Robert W. Baird & Co
Thank you.
Operator
Pat Burton, Citigroup Investments, your line is open.
Patrick Burton, Citigroup
Hi, thanks for taking the call. Just to be clear, the second half ’06 organic growth rate then takes into account the large termination fee received in fourth quarter ’05, is that correct?
Thomas Hirsch, Executive Vice President, Chief Financial Officer
No, it does not. We’re giving guidance on the organic growth basis.
We have that very large termination fee pad in the fourth quarter and you will recall that when we adjusted our earnings for that, when we looked at earnings growth on a year-over-year basis and revenue growth on a year-over-year basis. So, being consistent with how we treated this item in the fourth of last year, we will treat it that way in our comparison also.
So, our mid single digit guidance does exclude that one large termination fee that we had in the fourth quarter.
Patrick Burton, Citigroup
But you said that from the beginning?
Thomas Hirsch, Executive Vice President, Chief Financial Officer
That is correct.
Patrick Burton, Citigroup
And then the other fact is that you mentioned in the quarter of the anniversary of the Australian deal and the flood claims revenue shifting loud, all those issues are taking into account as you move into the back half of the year as well?
Thomas Hirsch, Executive Vice President, Chief Financial Officer
That is correct.
Patrick Burton, Citigroup
Okay, thank you.
Operator
Scott Kessler, Standard & Poor, your line is open.
Scott Kessler, Standard & Poor
Hi, thanks a lot. Related to the strategic initiative, a few questions; first, a benefit associated with related efforts already incorporated into the guidance that you’ve provided.
The second question is, are you planning on potentially reducing the number of operating businesses that you currently have through consolidation and divestiture? My last question, what timetable do you foresee for the implementation of efforts related to the strategic initiative?
Thanks.
Jeffery W. Yabuki, President and CEO
Can you repeat the second question?
Scott Kessler, Standard & Poor
Basically, are you going to reduce the number of operating businesses that you currently have through consolidation or divestiture?
Jeffery W. Yabuki, President and CEO
To the first question which are the benefits included in our guidance, we would say that’s one of the main reasons why we would look to update our guidance in September to the extent that there are impacts from the strategies that we’re going to choose moving forward. We will clearly update our guidance, so I would say they are not specifically included in there yet, we will do that on September the 19th.
To the second question, will we reduce the number of operating businesses or reduce the operating businesses that we have, I think it is possible that we will look at where there are like businesses that we can put together to gain efficiencies, whether that be in management efficiencies or cost efficiencies, but more importantly can you get some marketing client efficiencies that will have an improved level of performance that you would clearly see us do that, and I think the timetable for that would basically follow whatever it would take for us to put these businesses together where it makes sense if it makes sense in a way that has us not have any risk or increase our risk of execution in any way.
Scott Kessler, Standard & Poor
Thanks a lot.
Operator
Charlie Murphy, Morgan Stanley, your line is open.
Charles Murphy, Morgan Stanley
Thank you. Could you refresh us how large the payments segment was in the quarter in terms of revenue, revenue growth, operating income, and operating margin?
Then, Chase took away some volume from NICE this quarter in the debit business, have you seen any of your banks do that as well?
Thomas Hirsch, Executive Vice President, Chief Financial Officer
Regarding the first one, Charlie, we just don’t disclose those assets. We don’t have that amount of detail as far as a breakdown as far as our payment group goes.
We disclose by segment and we just don’t have that information available.
Jeffery W. Yabuki, President and CEO
To the second question, at least I’m not aware, we have not heard that people have been moving volume around any of the switching systems.
Charles Murphy, Morgan Stanley
Okay, a quick followup on the health business, what type of operating margin do you think you can put up there in the second half of this year?
Thomas Hirsch, Executive Vice President, Chief Financial Officer
Again, we’re not going to be commenting separately on segment margins into the future, but we would say we do have a number of initiatives there that we talked about that we’re getting started on as far as some of the operational efficiencies we’re having in the health segment and we do have some new client wins, but we’ve given company margin guidance as I spoke to earlier and that’s where we’re at, but we do have some of those things that should begin to have a positive impact.
Jeffery W. Yabuki, President and CEO
Charlie, just to amplify that a little bit, the two big changes that we see on the horizon for the second half of the year and into 2007 are, the first one is these three pharmacy benefit administration contracts that we entered into this year which will be large and I would guess have some net of the passthrough cost will have a positive impact on margin. And then secondly, we indicated that we are doing some operational efficiencies, some enhancements to how we are managing our processes and in the first phase of implementation we have a pretty wide range, but we see anywhere from $6 million to $12 million of basically middle line improvement that will flow through margins not fully in until 2007, but again that should begin to be positive in this current year.
So, I think you have more upward opportunity in that segment for the remainder of the year and certainly into 2007.
Charles Murphy, Morgan Stanley
Okay, thanks very much.
Operator
Chris Penny, FBR, your line is open.
Christopher Penny, Friedman, Billings, and Ramsey & Co
Thank you. Two quick questions, first of all, on the debt loan the interest expense line, what’s the kind of the forecast for the remainder of the year and just the use of cash flow for the remainder of this year?
Thomas Hirsch, Executive Vice President, Chief Financial Officer
I would say the interest expense is higher in the second quarter when you go back compared to last year, because our debt level is up around $800 million, and last year we did sell our securities operations where we were generating some investment income. As far as on a go-forward basis, the first use of our capital, we’ll be looking at acquisitions and we’ll also look at share repurchase as we go through the year.
We take into a lot of factors when we consider where we’re going to be spending our capital. Right now, our current interest forecast, we don’t anticipate that that’s going to change dramatically from the levels we are at currently, but that can be impact by the level of share repurchase that we have and also by acquisitions.
Christopher Penny, Friedman, Billings, and Ramsey & Co
Okay, Jeff, a quick question on the recent acquisition of the Jerome Group. If you’ll look at their client list in some of the industries they talk about, financial services really isn’t a big industry for them, at least it seems like that, and in your stated comments you talked about output solutions, the extra investment there, and I think this is one of the first times we’re really heard you guys talking about output solutions, and there is a lot of activity in there when you couple in what BillMatrix could be.
I was wondering if you can give us a little bit of insight as to what you’re thinking about customer care, and does BillMatrix and the likes do they kind of work into that environment, and are you looking to go a little bit more horizontal in different verticals, especially when you talk about the Jerome Group?
Jeffery W. Yabuki, President and CEO
Hey Chris let me just get a little bit of clarity and I’m going to ask Norm to answer the question. You were talking about the Jerome Group and then output solutions and then BillMatrix?
Christopher Penny, Friedman, Billings, and Ramsey & Co
Well, I was wondering if that kind of fits into that at all in terms of working with some of those customers that Jerome Group has and what they do. I know it’s not apples to apples right now, but it seems like there is a lot of cross-selling opportunities in that space.
Jeffery W. Yabuki, President and CEO
At a high level, one of the opportunities that we saw in the Jerome Group, they brought some unique capabilities, some special services that we don’t provide today within our Personix business, which is the match up for the Jerome Group. So we thought that to be a positive.
We also know that some of the clients that the Jerome Group have were attractive for Personix, so there were some products that were being delivered in Personix that the Jerome Group didn’t have. So, from that perspective we saw synergy.
Whether there is synergy or maybe synergy across other businesses like BillMatrix, it’s just too early for us to tell, but…Norm, do you have something to add to that?
Norman Balthasar, Senior Executive Vice President and COO
There are a couple of things that I’d add regarding Personix, some of the investments that were talked about earlier, the additional new business outside the Jerome acquisition. Also, Jerome brings some assets and capabilities that will augment our healthcare portion and also what they call kind of smart direct marketing where they can target down almost at the individual level and it will be very effective.
Direct marketing seems to be on the upswing especially since the low cost, and the situation has been out…and we find that as will probably grow in the future.
Christopher Penny, Friedman, Billings, and Ramsey & Co
Okay, thank you very much.
Operator
Kartik Mehta, your line is open.
Kartik Mehta, Midwest Securities
Good afternoon, Jeff. One of the statements you made said that sales were up 30% compared to last year, is that a reflection of the market getting better or is that a reflection of changes you might have made in intensive plans or anything else that’s been done from a company standpoint?
Jeffery W. Yabuki, President and CEO
The 30% really was, we have what we call a sales quota attainment, which is a measurement system that the company has been using for a number of years, and that’s where we said we were up 30% over the prior year and up about 10% to our internal expectations. That system measures sales across all of our different businesses and we have not made any material significant changes to our incentive systems.
Really a couple of things that are going on there is we have a fair amount of business that we’re seeing people taking more Fiserv products and services which is delivering more revenue on a per sale basis than we have at least over the last year, so that’s a big driver. As we noted on our press release, we’re seeing some additional integrated selling efforts where for example in our EFT business we had 111 new clients signed up in the first half of the year of which almost 80% of those clients were existing Fiserv clients.
So, we’re starting to see the cultural bubbling up of the benefit of delivering more Fiserv products and deepening that relationship, and that’s without again changing any of the system. So, I’d like to say that we’ve done things that have really accelerated this, but I really think this is the benefit of the last several years of the company’s management and focus paying off for us.
Kartik Mehta, Midwest Securities
When these sales happen, how long before you realize revenue, Jeff, is it right away or is the average, but in the next six months you’ll see revenues, so I guess what I’m trying to get to is will you see the benefit of these sales in 2007 or are you seeing the benefit now?
Jeffery W. Yabuki, President and CEO
Really like many questions, Kartik, it depends. For example, the pharmacy benefit contracts of which there is a number in there for those contracts, those are already online and creating revenue.
In some cases, it could be a quarter, two quarters, three quarters, it depends on when contracts finally get signed, when implementation begins. Generally, though, one of the reasons why we indicated we have confidence in our 2006 organic revenue growth guidance for the year is we had a very strong 2005 fourth quarter and we believe that that will have the requisite impact on our results during the calendar year of 2006.
So, we’re really thinking about it in no less than one to two quarters before we kind of start to see the run rate of all these sales start to hit the ledger.
Kartik Mehta, Midwest Securities
Thank you very much.
Operator
Bryan Keane, Prudential, your line is open.
Bryan Keane, Prudential
Hi good afternoon. Tom, you said the CapEx if I look at for the six months is up 38% and you mentioned Check 21 and flood and lending as some of the areas, are those higher investments in CapEx, is that a one time year event and then it goes back down or should we expect that elevated event go forward as well into ’07?
Thomas Hirsch, Executive Vice President, Chief Financial Officer
You know, I think it’s a little early to say but I would say we are making a number of investments as we said during the year, particularly in the output solutions in one or two areas such as Australia that are of a nature of a one time, but we will be getting more detail out to you on the ’07 when we get there. So, I do think there is some of that that is one time in nature, but we are making these investments for future growth, and for the full year we anticipate that our full year capital expenditures will be in the range of roughly 15% up from where we were last, and we’re very comfortable with our free cash flow estimate for the year, which is $450 million to $480 million.
Bryan Keane, Prudential
Okay, and then in the financial segment, the adjusted operating margin for the second quarter ’06 was 23.4%, I didn’t get what it was a year ago period in the second quarter ’05?
Thomas Hirsch, Executive Vice President, Chief Financial Officer
The second quarter ’05 was a very good quarter, it was up around 24.7%, so we are down a little bit from that adjusted margin in a previous year period, the second quarter, but Bryan that was our best quarter of the year in 2005 and it was substantially higher than what we had in some of the other quarters. So, now it’s a good quarter for us.
In the current year we have talked about it. We have had some investments in our lending business, also investments in our Australia contract as it’s ramping up, and that’s why we’re down really a little bit on a quarter-over-quarter basis there, but that was a very high point in ’05.
Bryan Keane, Prudential
Okay, so it’s down about 100 basis points year over year, but it’s explained by the lending investments and some extra investments in Australia?
Thomas Hirsch, Executive Vice President, Chief Financial Officer
Yeah, the Australia startup expenses of that contract are the primary factors there.
Bryan Keane, Prudential
Okay great, thanks guys.
Operator
Paul Bartolai, Credit Suisse, your line is open.
Paul Bartolai, Credit Suisse
Thanks, good afternoon. Just a question on guidance; I mean you guys raised guidance by $0.02 on the low end depending on the high end, but just given the first quarter performance and the tax benefit in the second quarter, I’m surprised it wasn’t raised a little bit more, so I guess if you can give us any comments on expectations for the second half and what you’re thinking on the macro or spending environment that might be impacting that?
Jeffery W. Yabuki, President and CEO
We had a very strong first quarter as everyone knows. The second quarter was stronger than we expected it to be.
You will recall that during the first quarter and actually fourth quarter of 2005 we indicated that we expected the results in the second half of the year to be than those in the first half of the year. Now, as we move through the first half of the year and we saw the second quarter be stronger really than we were thinking it would be, we think it’s prudent to just hold back and see what happens really with some of the software license sales and some of those things that can just move around quarter to quarter, and for right now we are very comfortable with our guidance both on the earnings side and on the organic revenue growth side, and I don’t see any need to modify it.
Paul Bartolai, Credit Suisse
Okay, and then just on the FIO organic growth, it sounds like you expected to pick up a little bit from the second quarter, is that mostly from sales that have already been closed and are just starting to ramp up or is that just from the activity that you’re seeing?
Jeffery W. Yabuki, President and CEO
It’s really a combination of both. We have some good activity going on as we noted with the increase over the prior year and just the general momentum that we have in the market place; market momentum is looking pretty good.
It doesn’t suggest any shift in the environment during the year, but we’re just feeling good with what we’ve seen to date. We thought all along that the second quarter would be our weakest quarter of the year and we continue to believe that.
Paul Bartolai, Credit Suisse
Great, and then just one last one if I could, do you have the spending diluted share count at the end of the quarter?
Thomas Hirsch, Executive Vice President, Chief Financial Officer
The diluted shares at the end of the quarter, it should be on our press release, but the quarter ended I believe at the $177,551,000…I don’t have that handy right now, we’ll publish that in our 10-Q.
Paul Bartolai, Credit Suisse
Thanks.
Operator
Craig Peckham, Jefferies & Co, your line is open.
Craig Peckham, Jefferies & Co
Good evening; first of all, congratulations to Ken Jensen, I don’t know if he is in the room anymore?
Jeffery W. Yabuki, President and CEO
He is right here.
Craig Peckham, Jefferies & Co
Back to business here; on the EST segment which you said had particularly strong sales activity, can you just give us a sense for what kind of pricing dynamics you’re seeing within that market? I recall that in the past that’s been a pretty competitive business pricing wise, and as a corollary, is there any impact here on the go-forward margins as a result of some of the strong sales activity?
Jeffery W. Yabuki, President and CEO
Craig, I’m going to ask Norm to answer that and then we’ll add in if there is anything.
Norman Balthasar, Senior Executive Vice President and COO
The current EST, I think that’s still a very competitive area continues to be so, I don’t think it’s unusual but is still very competitive especially at the upper end of the market.
Jeffery W. Yabuki, President and CEO
Craig, to the question on margins, we’re seeing obviously some price pressure as Norm notes, but we’re picking up good healthy levels of volume and so on a per client basis we have some pressure, but not surprisingly that’s a business that is a high fixed cost leverage kind of business. So, incremental revenues flow through at a very attractive margin, therefore we’re seeing stability in margins in the aggregate.
Craig Peckham, Jefferies & Co
And maybe if you could give us an update on what’s happening on item processing on the U.S. side, also paint some picture here of pricing and margin implications here.
Norman Balthasar, Senior Executive Vice President and COO
This is Norm again. The pricing I don’t think is anything unusual.
We had seen a lot of activity in the IRD, Image Replacement Document that has ramped up quite nicely. We are also having quite a bit of success with our FCN, the Fiserv Network, which has got about 350 clients signed up on that, so some of the newer products and services are ramped up very nicely.
Jeffery W. Yabuki, President and CEO
I would add to that, Craig, the Check business, the cross item processing business tends to be a lower margin business, so when we talk about ways to gain efficiency that’s an area where we’re really looking to manage our costs sufficiently as we can.
Craig Peckham, Jefferies & Co
Okay, thanks a lot.
Operator
Our next question is from John Evans, Wells Capital, your line is open.
John Evans, Wells Capital
Can you just talk a little bit about the share repurchase? You bought 2.8 million roughly in the quarter and that’s the least that you bought since the first quarter of ’05 and can you help us understand maybe the strategy or what you’re trying to achieve there?
Thomas Hirsch, Executive Vice President, Chief Financial Officer
Yeah I think we announced earlier in the year we have bought back I think over the last 18 months or so roughly $1 billion of stock, part of that was due last year to the sales of our securities operations, and in the current year we set aside roughly $10 million share repurchase authorization, which is about four years of free cash flow. So, we’ll continue to buy back our stock as we go through the year and as we see other needs for capital.
So, it’s going to fluctuate on a quarter-to-quarter basis depending on what else we have going on in the company. So, we will continue to buy back our stock under that authorization to the remainder of the year and that’s really where we’re at.
John Evans, Wells Capital
Is the 2.8 million kind of a run rate with the free cash flow and then the extra that you had in the last several quarters has been because of the sale of the business?
Thomas Hirsch, Executive Vice President, Chief Financial Officer
When you go back to the last year, when we were purchasing more stock, it was primarily due to that, but on a go-forward basis we have right now about 5 million shares remaining, so we’d be looking to purchase that on a go-forward basis as we look at other needs in our business, but we don’t have a run rate that does move around a little bit, but we plan on repurchasing stock as we go through the remainder of the year and into 2007.
John Evans, Wells Capital
Okay, thank you.
Operator
Thank you, now I’d like to turn the call back over to Mr. Yabuki for closing statements.
Jeffery W. Yabuki, President and CEO
I just wanted to say thanks to everyone for joining us this afternoon on the East Coast in the evening. If you have further questions, don’t hesitate to call our Investor Relations team.
Thanks again and we’ll look forward to seeing you in September.