Apr 25, 2007
TRANSCRIPT SPONSOR
Executives
Jeff Yabuki - President & CEO Tom Hirsch - CFO
Analysts
Charlie Murphy - Morgan Stanley Bryan Keane - Prudential Pete Heckmann - A.G. Edwards Paul Bartolai - Credit Suisse Pat Burton - Citigroup Julio Quinteros - Goldman Sachs Dave Koning - Robert W.
Baird Greg Smith - Merrill Lynch
Operator
Welcome to the Fiserv First Quarter 2007 Earnings Call. All participants will be in listen-only until the question-and-answer session begins following the presentation.
Today's call is being recorded and is also being broadcast live over the Internet at www.fiserv.com. The call is expected to last about one hour and you may disconnect from the call at any time.
Now, I will turn the call over to Jeff Yabuki, President and CEO of Fiserv. Sir, you may begin.
Jeff Yabuki
Thanks. Good afternoon and thanks for joining us for our first quarter conference call.
With me today are Norm Balthasar, our Chief Operating Officer; and Tom Hirsch, our Chief Financial Officer. Our remarks today 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 current expectations. We will make forward-looking statements about among other matters, revenue growth, earnings per share, operating margins, cash flow targets, sales pipelines, acquisition prospects, and our strategic review process.
Forward-looking statements may differ materially from actual results and are subject to a number of risks and uncertainties. Please refer to our first quarter earnings release, which can be found on our website at www.fiserv.com for a discussion of these risk factors.
You should also refer to our earnings release for an explanation of the non-GAAP financial measures discussed in this conference call and for a reconciliation of those measures to the nearest applicable GAAP measures. These non-GAAP measures are indicators that management uses to provide additional meaningful comparisons between current results and prior reported results and as a basis for planning and forecasting for future periods.
With that formality handled, let's get to the results. Our first quarter results represent a good start to the year.
In spite of a difficult year-over-year comparison in the quarter resulting from $30 million in high margin flood claims revenue included in 2006, which did not recur in 2007, we delivered strong aggregate results. First quarter earnings per share of $0.66 was ahead of our internal estimates for the quarter and better than the $0.64 per share earned last year.
Overall revenue growth for the quarter was solid. We continued our capital allocation discipline repurchasing 2.7 million shares in the quarter, took steps to enhance our sales results, and saw early tangible results against our 2.0 initiatives.
Overall, we are on track to achieve our 2007 objectives. Our financial segment, which generated over 80% of our operating income in the quarter, had great results.
Internal adjusted revenue growth was a strong 7% exceeding the growth rates in both the comparable and sequential quarters of 2006. This is also the 10th consecutive quarter of internal revenue growth of at least 4% in the financial segment.
In addition, the sources of internal revenue growth were primarily from the higher margin payments and banking areas. That growth contributed to the 310 basis point expansion of segment adjusted operating margin compared to the same period last year.
Some highlights of the financial segment performance include our depository institution core-processing group; particularly our banking areas did a great job delivering more highly valued products and services to our large client base. As an example, our ITI division delivered over 50 integrated products in 2006, which will continue to be purchased by clients in 2007 and for several more years.
We also saw strong growth in outsourced services in the core bank processing market versus in-house software installations, which leads to higher levels of recurring revenues. Our lending group, which declined in revenues and operating income versus the prior year's quarter is showing signs of stability.
We are seeing improvements in our prime mortgage businesses some continued softness in the subprime space and growing strength in our automotive product offerings. We also recorded 55 new EFT sales with higher anticipated volumes than the prior year and signed 52 electronic bill payment clients, which puts us over the 500 mark for clients using a Fiserv electronic bill pay solution.
As good as the financial segment results were, the first quarter performance in the insurance segment was below our expectations. Results in the insurance segment were most affected by the expected fall-off in flood claim processing revenues from last year's first quarter.
In fact, flood claim processing revenue was down almost $30 million to $600,000 in the current quarter, compared with $30.3 million last year. As you know this revenue carries a very high margin.
In addition, results in our health plan administration or HPA business were negatively impacted by higher than anticipated client attrition in the large account area. As we shared with you in September, we began shifting much more of our HPA sales focus to specific client segments, where our value proposition, which is based more on service and customization as opposed to strict network discounts is far more desirable.
Mobilizing our sales force in that direction is taking longer than we anticipated. On a positive note, we are seeing results in reshaping the HPA processes and cost structure, which began last year and that work delivered positive benefit in the quarter.
We now believe we will achieve between $8 million and $12 million of net cost saves in 2007, some of which will be offset by the larger than expected client attrition. Our pharmacy business, Innoviant continues to be a bright spot in the insurance segment generating meaningful operating income increases as it continues to benefit from the unique value proposition it offers to clients.
We are not satisfied with our performance in the insurance segment and are committed to delivering better results for the full year. Now, I will turn it over to Tom to provide more specific detail on segment performance and cash flow.
Tom Hirsch
Thanks Jeff, and good afternoon everyone. Revenues for the first quarter were up 11% to $1.22 billion.
Our company wide adjusted internal revenue growth rate was 1%. However excluding the flood claim impact adjusted internal revenue growth was 5% for the quarter inline with our overall expectations.
Financial segment revenues were $767 million for the quarter, an increase of 10% over 2006 with adjusted internal revenue growth of 7%. The internal revenue growth was primarily driven by our bank outsourcing units and through sales of additional products and services to existing clients.
In addition, we had excellent growth in our payments area driven by debit and electronic bill payment products and services. Insurance segment revenues were $418 million for the quarter, an increase of 15% over 2006 driven primarily by our pharmacy services businesses.
Adjusted internal revenues, which exclude pharmacy pass-through costs and customer reimbursements, declined 14% compared to the first quarter of 2006. This decline was driven by the $30 million anticipated decrease in higher margin flood claims processing revenue.
Excluding the decline in flood claims processing, adjusted internal revenues in this segment declined 1% due primarily to competitive pressure in the large national accounts client segment in our HPA business and weaker than anticipated results in our property and casualty insurance businesses, which also impacted margins. Investment segment revenues were $34 million in the quarter and essentially flat with the prior period.
Revenue was pressured by lower deposit levels resulting from strong equity markets, which negatively impacts client deposits, net investment income and corresponding revenues. Adjusted operating income and related margins were strong again in the first quarter, especially in the financial segment.
Overall company adjusted operating margin was 22.2% in the quarter, compared to 23% in the first quarter of 2006, which was the highest margin quarter in 2006 due to the significant high margin flood claims volume in the insurance segment. Financial segment operating income for the quarter was $160 million, up 23% versus the first quarter of 2006.
Almost all of the increase in operating income was internally generated without the benefit of acquisitions. Adjusted operating margin in the financial segment for the quarter was 24.8%, up 310 basis points from 21.7% in the first quarter of 2006.
Margins improved due to a combination of ongoing efficiency improvements, strong performance across much of the segment, and higher margin internal revenue growth in the payments and Banc-Corp processing spaces. Finally, termination fees increased to more normal levels over an unusually low first quarter last year, and add slightly to the margin increase in the quarter.
While we don't necessarily expect to see financial segment margins expand by 300 basis points for the full year we are pleased with the strength displayed in this quarter's results. Insurance segment operating income for the quarter was $28 million, compared with $57 million in 2006.
As we expected, adjusted operating margin for the quarter was down substantially to 14.4% from 27.6% in 2006. This decline in operating income in margins related primarily to the significant decline in higher margin flood claims processing revenue, weaker than planned performance in our health division, along with continuing investments also contributed to the margin decline.
These factors included a decrease in one time revenue from lost HPA clients of about $1 million, a $900,000 provision for a provider dispute regarding network discounts. And increased investments of $3 million in our consumer-directed health care banking and health business process outsourcing initiatives.
We continue to invest in the future growth areas of health care banking and payments, where we believe we are uniquely positioned to own an industry leading position. We expect these investments to continue throughout 2007, which is reflected in our full-year guidance.
As, Jeff, mentioned earnings per share increased to $0.66 in the quarter from $0.64 in the first quarter of 2006, our effective tax rate for the first quarter was 38.6%. This rate is up about 80 basis points from the 37.8% effective rate we recognized in the first quarter of 2006, this rate increase resulted in a negative impact of approximately $0.01 per share in the first quarter when compared to 2006.
We expect a 38.5% effective tax rate for the remainder of the year. We mentioned last quarter that we are evaluating an investment, and this review will be completed in the second quarter.
If we were to exit the business under review we estimate we would incur a 2007 pretax charge in the range of $10 million to $15 million. We will update you on our decision when we announce our second quarter earnings in July.
First quarter cash flow from operations was $170 million versus $190 million in last year's first quarter. Last year's cash flow included the earnings impact of the $30 million in high margin flood claim processing revenues, which converted to cash within the quarter.
Cash flow in both years was impacted negatively by the company's annual 401(k) retirement contributions and incentive payments, which are always paid in the first quarter. Free cash flow was $122 million, compared with $143 million in the first quarter of 2006, capital expenditures were up 3.7% to $49 million from $47 million in the first quarter of 2006.
We are focused on lowering the ratio of CapEx to net revenues within our capital allocation framework by sharing more investments across platforms than we have done historically. We also repurchased 2.7 million shares of our stock during the quarter for $142 million.
Lastly we ended the quarter with $822 million of debt up from $747 million at the end of '06. We retained significant flexibility on our balance sheet.
Now let me turn the call back to Jeff.
Jeff Yabuki
Thanks, Tom. For 2007 we modified our processes for establishing sales quotas, which had the net affect of raising our sales targets relative to what we have done historically.
Given that change we anticipate that we will see lower quota attainment early in the year, as our sales force gets traction against the new targets. In addition, I want to remind you that most of our sales quotas do not capture additional product sales to existing clients.
Sales quota attainment for the quarter was at 90% of target. The majority of our groups had solid results, with some weakness in lending and insurance.
In particular, the depository institution, and the payments and industry products groups performed very well in the quarter. Our financial segment sales pipeline remains very strong, and accordingly believe we are on track to achieve our overall 2007 sales objectives.
During the quarter, we continued to implement our Fiserv 2.0 initiatives to ensure we realize the potential that we've shared with you last September. For purposes of our discussion today, I will focus on the primary themes of client relationship value, and operational effectiveness.
As I mentioned, we increased our sales quotas to better focus the organization on current growth opportunities. We believe this will accelerate our sales activity and increase our revenues over the short to midterm.
We implemented changes to our incentive and commission plans to align our compensation programs, with delivering the $360 million of incremental revenue opportunity targeted by 2012. Although these plans will evolve over the next several years, our objective is to pay our people for delivering value to our clients, regardless of business unit affiliation, a material change from our past practices.
We have assigned goals, and are tracking the sales of 18 add-on products to enhance our existing core processing client relationships. For 2007, our incremental sales goal that amount over our normal baseline level of sales of just over $26 million of recurring annual revenue, which if attained would translate to an approximate 1% boost to our financial segment internal growth rate in 2008.
In the first quarter we achieved 14% of our annual goal, while this is behind a ratable attainment level the acceleration of the monthly results gives us confidence that we are on track for the year. For operational effectiveness we are on target to deliver the planned $15 million of net pretax benefit in 2007.
As stated previously the benefit of these saves is skewed towards the second half of the year. The company wide first quarter pretax benefit was just over $2.5 million.
Each quarter we will provide you a several metrics, which when analyzed together with the detailed quarterly results will provide insights into our progress. The metrics are, first, overall sales quota attainment.
Next, attainment of our incremental integrated product sales objective, third, quarterly results and updated jut look on operational effectiveness targets, including that amount attained in each quarter. And last, we will continue to provide you with quarterly sales results on certain high growth products.
Over time we will evolve our published metrics being mindful of not sharing any information that puts us at a competitive disadvantage. Finally, let me spend a moment on NetEconomy.
Our acquisition announced in mid-March. We believe the entire category of risk management is both critical to our client's success, and also an important driver of future growth.
NetEconomy has one of the leading financial crime management, antimoney laundering, and compliance solutions in the global financial institution marketplace today. In addition to continuing to deliver this product on a standalone basis, we will offer these capabilities integrated across each of our platforms to our more than 6,000 core depository institution clients.
Based on feedback from perspective clients we have a strong reason to believe this integrated risk capability will help us to win more new core account processing deals. Lastly by distributing a Fiserv-owned solution we will begin to disintermediate other providers within our client base capturing a larger share of the economic opportunity.
As part of the culture change under Fiserv 2.0, the business leaders came together to select a single platform, and then made a multiyear revenue commitment as a basis for us to move forward on the acquisition. We are thrilled with the cultural evolution that is allowing us to pool our strength to work together for the benefit of clients, and shareholders in a Fiserv 2.0 world.
Our 2007 earnings guidance of $2.86 to $2.94 per share remains unchanged and will include some dilution, about $0.01 to $0.02 per share from our acquisition of NetEconomy. And as we said in January, we still expect second half results to be stronger than the first half of the year, related to the acceleration of Fiserv 2.0 initiatives and market opportunities we anticipate later in the year.
We continue to expect our full-year 2007 adjusted internal revenue growth rate to be in the mid-single digit range for both the company and in the financial segment. For the insurance segment, we expect the adjusted internal revenue growth rate to be in the lower single-digits for the remainder of the year.
We continue to expect full-year adjusted operating margin to expand over the level achieved in 2006 and that performance will be led by the financial segment. Our full-year free cash flow estimate remains in a range of $490 million to $520 million, and as Tom mentioned earlier, we have not included any potential negative impact from the pending business evaluation in our 2007 guidance.
In summary, we feel good about our first quarter results and our start to the year. Our financial segment outperformed our expectations in the quarter and again showed the strength of our value proposition through the privileged position we have with our clients.
We are focused on optimizing performance in all of our businesses and in particular the insurance segment, we are committed to achieving the returns that will make this segment attractive for our shareholders. On par, our teams delivered.
Credit goes out, as always, to our 23,000 employees and associates around the world for their hard work and commitment to clients. Thanks for everything you do.
With that, let's open up the call for your questions.
Operator
(Operator Instructions) The first question is from Charlie Murphy of Morgan Stanley.
Jeff Yabuki
Hey, Charlie.
Charlie Murphy - Morgan Stanley
Hey, how are you. Thanks very much for taking the call.
I had a question on the adjusted EBIT margin in the insurance segment, could we get a little more specificity on why that shouldn't stay at around the 14% type adjusted EBIT margin it was at this quarter?
Tom Hirsch
Sure, Charlie, this is Tom. And I'll start and turn it back over to Jeff and a couple of things, as we look out into the future.
First of all, our flood business and property and casualty insurance business had a very soft first quarter, and that should improve as we move through 2007, consistent really with the historical trends in these businesses. It was a softer quarter for our old insurance, not the health business, but the insurance business in the first quarter, which has been pretty historical.
In 2006, we had the higher flood claims, which kind of pass that quarter, but we anticipate both our flood processing and P&C insurance business to improve. Second, we're really focused on our HPA business, on both reducing the expenses through our current consolidation activities and continuing to grow our revenues through the execution of our client segment strategies, as Jeff indicated.
And third, we continue to see solid sequential growth in the revenues and profits in our pharmacy services businesses, and that should continue. And, so those are the three major factors.
Jeff, I don't know if you want to add something to that.
Jeff Yabuki
Sure, I think the only thing I would add is that we had a couple of one-time items in the health area that brought our numbers down that we don't expect to recur. And then historically our margins have been higher than this and we believe will get back up to levels that are consistent with at least 2006's performance.
We've included in our forecast for the remainder of the year very little, if any, real flood activity, so we're really focused on what I would call the nuts and bolts of the recurring revenue streams in the businesses.
Charlie Murphy - Morgan Stanley
Okay. Great, Jeff.
And then you talked about in the second half market improvement should help drive a pickup in growth. What are those?
Jeff Yabuki
It's, I would say it's more market opportunities than market improvements. And we did say, as I mentioned we're seeing some strength, a bit more strength in the lending businesses, specifically in the prime area.
Most of our, not most, but a fair amount of our business is in the home equity world. We're seeing that firming up a bit.
We're seeing a lot of strength in the auto segment of our lending businesses, and we frankly think that our subprime exposure, which is fairly limited, we believe that we're going to see some pickup. It may not be until the end of the year, but certainly that subprime space is going to have to come back, you've got too many consumers out in that world who are going to have to figure out how to get cash when they need it.
Now additionally, our pipeline has been quite strong. I believe Tom talked about or we talked about the level of products that have been developed within ITI over the last couple years as an example of the level of integrated sales and that integrated sales work needs momentum.
We've been pushing it quite hard for the last couple of years but now we think we've got our infrastructure behind our discussion, things like the commission plans and the compensation plan alignment. So, I think we're going to see those kinds of momentum catalysts kick in for us towards the end of the year.
Charlie Murphy - Morgan Stanley
Okay, great. Thanks very much.
Jeff Yabuki
Thank you.
Operator
Bryan Keane of Prudential, you may ask your question.
Bryan Keane - Prudential
Hi, good afternoon. How you doing?
Just trying to reconcile Financial Services organic growth at 7% was better than what we were expecting, but yet you only hit 90% of the quota. So just trying to make sure I make sense of the two?
Jeff Yabuki
Sure. Bryan, the sales quota, the sales quota that we achieved in the first quarter of this year will turn into revenues later in 2007 and into 2008.
And so, what you're really seeing in the first quarter of 2007 is a product of the sales quota, the sales quota performance really in the second half of 2006. But also you're seeing the benefit of the integrated selling that we're doing, which really we don't track in our quota system.
And so anytime we have the sale of a product that is developed within our core platform, if that's delivered to a client, that isn't picked up anywhere in our quotas. So that because we see a lot of that activity going, that's what gives us some comfort that we're going to continue to see good growth in the financial segment for the remainder of the year.
But again, to the essence of your question, Bryan, we don't, the quota performance that we talk about in this quarter does not link really in any material way to the revenues that we had in the quarter.
Tom Hirsch
I would also just add to that, Bryan, as Jeff indicated on his remarks that our core depository account business and our payments and industry products business performed very, very well. And the other part of that that kind of lagged behind was our insurance and lending components only.
Those other ones are on track and we did have a lower quarter in insurance and lending and that's kind of what pulled that number down.
Bryan Keane - Prudential
Okay. Jeff, you said that the new quotas are higher than kind of the salespeople are used to.
Can you talk about that?
Jeff Yabuki
Really, what we did, Bryan, is we put a little bit more science to how we are looking at quotas based on the market opportunities that are out there. So really we're looking at the higher-growth components of our businesses.
And making sure they have adequate quotas and frankly, just stretching people a little bit more, because we know what's out in the marketplace and we know where we're winning and we know where we haven't won enough and we want to make sure we get our folks focused on where we need to win a little bit more. Frankly, had we not changed our quotas and stretched them up a bit, I suspect we'd be much closer to 100% than 90%.
Bryan Keane - Prudential
Okay. Great.
And just turning to the health segment, the large national client attrition that you're seeing, does that continue to drag for the rest of the year, or do we anniversary that at a certain point this year?
Jeff Yabuki
Yeah, the majority of that attrition has occur, I mean let me say that a different way. All of the attrition that we talked about has occurred in terms of the health business.
Now, that doesn't mean we won't lose any additional clients throughout the year, so I don't want to mislead you. But the reality, Bryan, is that the majority of people switch in January, so the majority of that attrition should be gone.
I think it's more likely that we will gain new clients, and in fact, we will lose clients in that business at this stage for the remainder of 2007.
Bryan Keane - Prudential
Okay, and then just finally. Tom I don't know is there an annual revenue run rate, we can think about for NetEconomy?
Tom Hirsch
I think we didn't, it's a fairly small software company, I think we gave guidance around 10 for that on an annual basis, but one of the key things about that. And I don't, as a stand-alone basis, but one of the key things about that is how we're going to integrate that into our cores.
And that process is currently going on through all our core bank processing companies. And so we're going to be delivering that through our service bureau into our clients here in the United States.
Jeff Yabuki
Right, and just Tom to the point of NetEconomy. We indicated that had when we acquired it was about $10 million.
That was not guidance.
Tom Hirsch
No. That's correct.
Bryan Keane - Prudential
Right, I just wanted to make sure I got that right, okay. Thank you very much.
Jeff Yabuki
Thanks Bryan.
Operator
Pete Heckmann of A.G. Edwards, you may ask your question.
Pete Heckmann - A.G. Edwards
Good afternoon guys.
Jeff Yabuki
How are you Pete?
Pete Heckmann - A.G. Edwards
Real good thanks, a few questions, you had noted in the press release in the first quarter, the revenue related to acquisitions was that in the FI segment. Was that coming from the Jerome group or was there another acquisition I'm missing?
Tom Hirsch
That's just the Joe Jerome, and we had very insignificant amounts from NetEconomy.
Pete Heckmann - A.G. Edwards
Okay, and at this point. Do you have any comments on the published commentary about the potential divestiture that was showed up last week in the mutual fund news?
Tom Hirsch
No, the policy of the company is not to comment on any rumors, or market speculation as it relates to the sale or purchase of a business.
Pete Heckmann - A.G. Edwards
Okay. All right and then how about the international operations, don't hear as much about that, can you talk about European core spending, as well as, an update on the Australian check processing venture?
Tom Hirsch
Yeah, we as you know Pete. It's a fairly small component of a company; we don't break out those revenues separately, I think it approximates about 5%; there's been a lot of talk about the potential for a big European core transformation.
Frankly, we aren't seeing it; the people that I'm talking to at least this the industry are not seeing it. You have some movement going on in the larger banks.
But really in the spaces where we would be operating we aren't seeing the core shifts, we are seeing, and having some success in the delivery of some products in Europe. And we feel good about that but those would no be large core replacements as I think people were speculating on.
In Australia our operations we feel like we are making progress, the Australian operations were planned to have pickups in performance really in the second half of the year. So we're really been moving right now, as we have been over the last couple of quarters.
Reengineering our operations and getting it inline, but we have a fair degree of confidence, that we will see improvement in those results this year. Another reason why we expect to have kind of continued acceleration in results in the second half of the year, but I would also say that those results will continue to be dilutive throughout 2007.
Pete Heckmann - A.G. Edwards
Okay, okay; and last question. Do you anticipate at this time any significant termination fees in the second quarter?
Tom Hirsch
There's nothing that we're aware of in terms of abnormally large termination fees.
Pete Heckmann - A.G. Edwards
Okay, I appreciate it.
Jeff Yabuki
Thank you.
Operator
Paul Bartolai, Credit Suisse, you may ask your question.
Jeff Yabuki
Hey Paul.
Paul Bartolai - Credit Suisse
Hey good afternoon, first question, just. Jeff I think you made some comments about the core systems market, and seeing more on the outsourcing side versus license.
Was that more a shift in preference or are you seeing some pickup in general demand trends as well?
Jeff Yabuki
Yeah, we're really seeing a movement of shift, I guess to your vernacular. Really a shifting of existing client demand, we're seeing both for new clients, as well as, some of our own clients deciding that perhaps operating the systems is not the best use of their own internal energies in this spread environment, and we're having clients convert from in-house to outsource.
We also had a fair amount of success this quarter in signing up new clients. And specifically, in the de novo market where we had a number of clients sign up for outsourced services; which is primarily good news.
Although in the short-term, you give up a license fee for a much greater stream of recurring revenue, which is actually our preference.
Paul Bartolai - Credit Suisse
Okay. But not a major shift in the core demand.
Jeff Yabuki
When you say core demand...
Paul Bartolai - Credit Suisse
Demand for core systems. Just what you're seeing in the market in general.
Jeff Yabuki
Right. No there's no change in demand for core systems in the aggregate.
Paul Bartolai - Credit Suisse
Okay, and then switching to the margin side. Obviously, you guys are making some good progress there.
And I think Tom made some comments not to expect similar margin growth. But sequentially is this kind of a new baseline that you guys are comfortable with.
Or was there anything in there that was more one time in the quarter or seasonal?
Tom Hirsch
I would say our margin performance continues to be very strong. I think particularly, in the financial segment, and our guidance has been is that our overall company margins will be higher on a year-over-year basis.
Notwithstanding the difficult comparison we had with the flood stuff. Our financial segment margins they continue to expand as our results in the first quarter demonstrate, we believe we can continue to improve margins as we go through the year as performance in our lending group and our Australia operation improve.
In addition our Fiserv 2.0 initiatives are continuing to take hold, which focus on reducing our expenses, and driving increasing profit or organic growth. That was I think one of the brightest spots in the first quarter was the incremental profit that's delivered through our payments, and bank processing businesses.
So, our business continues to produce good incremental leverage. Especially, in the financial end, on the insurance end I think we've discussed that, we do believe that's going to improve as we go through the year, we had a lot of one-time items in the first quarter.
But again our overall guidance is that our overall company margin should be up on a year-over-year basis.
Paul Bartolai - Credit Suisse
Okay great, then just last question. It sounds like you guys expect a little bit of a pickup in growth in the insurance business from the first quarter, just curious if you could comment a little bit on what gives you confidence that we'll see that pickup into the low single digits.
Tom Hirsch
I think when you look at the first quarter at least. We had a couple of things there and again I would say it was in two or three areas, it was both in our insurance segment, which was the non-health business.
Which had one of the lowest quarters they had historically that's been a very low quarter in our flood business, and our property and casualty insurance businesses. So, we anticipate some subsequent improvement there, as Jeff indicated.
We had the attrition already in our TPA-type businesses, we have growth in our pharmacy services businesses. Both the workers' comp and our PBM business, which continue to grow nicely.
So I think not going to comment on quarter-over-quarter. But what I am going to say is that, we have some things there that I think is going to help that growth rate as we go through 2007.
Paul Bartolai - Credit Suisse
Great. Thank you.
Operator
Pat Burton from Citigroup. You may ask your question.
Pat Burton - Citigroup
Hi, thanks for taking it, my question. Jeff just relates to any changes in your strategic thinking about the insurance business, or any of the components in insurance.
If they really fit with the long-term vision you have for Fiserv, thanks.
Jeff Yabuki
Sure. And thanks for the question Pat, one of the things that, notwithstanding our performance in the quarter.
These are businesses that have delivered good solid results, we believe that these businesses are good businesses. We have strong client relationships we have a good, strong array of products, what we need to do is, we need to make sure we're executing our plans better than we did this quarter.
We're very focused on that right now. And I would also say that just like we talked about in September and a lot of last year.
We will consistently evaluate this business and all of our businesses to make sure that we're delivering the most value for shareholders. Whether it'd be operating the business, acquiring a new business or occasionally divesting a business.
We're always looking for what's the right formula to deliver shareholder value. So, nothing has changed as of right now for insurance, and we'll continue to evaluate that as we evaluate all of our businesses on an ongoing basis.
Pat Burton - Citigroup
If I could just follow-up on the comment you made about stripped network discounts, and moving the HPA business. It looks like downstream, how are you going to compete in that business.
I guess is the question I'm asking against the bigger managed care companies?
Jeff Yabuki
Well. Specifically the point that, I was trying to get across, and I may not have done a very good job of it.
As we actually think that we are much better suited to work around the large, and what's the right way to say this. The large, small market to the mid-market, but for clients who need more customization they're not boilerplate clients, and so they really need the expertise.
The administration takes precedence; kind of that customization takes precedence over that of a strict network discount dollar versus dollar kind of decision. Obviously the costs of the network what the end client is paying for the medical care is always going to matter and we believe we have a generally competitive program.
But we don't have for the most part we don't have the bandwidth to compete with all the nationals all the time. There are some cases where we do it depends on our network arrangements.
But in most cases we believe that we are better suited focused on those areas where customization and plan administration is the most important reason for the employer to select the administrator. And frankly we had not been focused enough on that historically we moved over to that segmentation model in the fourth quarter of the year and it just didn't catch momentum the way we thought it would.
So we're focused on that we're moving some of our sales resources around and we'll continue the give updates on where we are each quarter.
Pat Burton - Citigroup
Thank you.
Jeff Yabuki
Thank you.
Operator
Julio Quinteros of Goldman Sachs. You may ask your question.
Julio Quinteros - Goldman Sachs
Actually I just wanted to go back on my question. Jeff, if you can go back to the comments where you referenced the incremental revenue through 2012 with $360 million, and just make sure I have all the data in terms of what, where we were according to those numbers as of the first quarter and what your expectations were for the year?
You rattled off a couple numbers and I wanted to make sure exactly where we were relative to those plans?
Jeff Yabuki
Sure Julio. What I had mentioned is that for 2007 our plan was to deliver, I'm sorry, our plan is to deliver about $26 million of integrated sales.
And those integrated sales are beyond the normal integrated sales that we would typically be doing. I think it was Bryan Keane, who asked an earlier question about sales.
And I mentioned the fact that we don't -- we have not historically tracked the sales that are occurring within each of our core processing businesses. So, where a core processor sells a product that they develop in-house that gets excluded from the typical -- typical quota tracking.
So, this $360 million that we talked about last September that was really all incremental and all geared at selling products that don't live within any of the core platforms. So it could be EFT, it could be wire transfer it could be cash management, or any one of, literally hundreds of different products.
What we did is we picked 18 of them, kind of the 18. We think that are going to deliver the most potential, kind of the 18 to get 80%.
And in the first year that 18 totaled out to be $26 million of integrated sales, which would largely hit next year. That 26 is the first ramp not surprisingly, we start that slowly and it ramps up as you get the kind of geometric affect of that year-on-year-on-year of new quotas adding to new revenues.
Does that make sense?
Julio Quinteros - Goldman Sachs
Yes, and that's -- and then I think the final point that you made was something along lines of that you were, as of the first quarter you were at 14% of that goal?
Jeff Yabuki
14% of the $26. And frankly it didn't roll out until February.
Julio Quinteros - Goldman Sachs
Got it, okay, perfect. Thank you.
Jeff Yabuki
Thank you.
Operator
Dave Koning of Baird. You may ask your question.
Dave Koning - Robert W. Baird
Yeah, hi guys.
Jeff Yabuki
Hi Dave.
Dave Koning - Robert W. Baird
Looking at Q1 internal growth within the FI division it looks like, if we exclude termination fees it would have been around 6%. In time just wondering as we look into Q2 and if, if we can take 6% as a baseline is there anything either in the year-ago period or in the current period that would have a large impact on that type of thinking?
Jeff Yabuki
Not that. As what we see right now no, I mean there's nothing unusual that we see out there from a termination fee standpoint or large one-times or anything in those areas.
Tom Hirsch
Yeah. I mean the only thing I would reinforce is that some level of termination fees are just normal course of business and you're always going to have some of them.
Dave Koning - Robert W. Baird
Okay, great and then just secondly. You mentioned how financial margins should continue to ramp and I think you meant on a year-over-year basis.
And I'm just wondering sequentially, if we should expect the margins to kind of stay somewhere around the current level I think around 25% or so, kind of throughout the course of the year, is that kind of fair to think about it that way?
Jeff Yabuki
Yeah, we're not going to be getting into quarter-over-quarter margin type guidance. But we had a very good quarter from a margin standpoint.
Over the long-term we're going to continue to improve upon those margins through a lot of the initiatives we have I believe in the lending I think Australia those types of area should improve as we go through 2007. And so I think we'll have something there along with the incremental profit that we're getting in our recurring revenue businesses.
But, as a strong quarter, but I think over a time, we're going to continue to try to work to improve those through the initiatives under Fiserv 2.0, our operational effectiveness initiatives and some of the integrated sales stuff so, that's kind where we're at with that.
Dave Koning - Robert W. Baird
Great. Thanks nice job.
Jeff Yabuki
Thanks Dave.
Operator
Greg Smith of Merrill Lynch. You may ask your question.
Greg Smith - Merrill Lynch
Yeah, hi guys. Just sort of a higher-level question I guess Jeff given the Digital Insights acquisition by Intuit and Check Free's acquisition to Character and Carillon.
Do you see this as at all choking off any of your opportunities or frankly creating new ones or energizing you to develop more product in-house, just some thoughts on that, please?
Jeff Yabuki
Sure, and my perspective and we've been talking about this for probably a good nine months now is that. We have this really valuable asset within our client base.
We have a privileged position with the core clients and it's really our opportunity to make sure that we are delivering as many high quality products as we can deliver to clients, and not allow others to really get into our distribution system. That was one of the big reasons why we thought NetEconomy made sense, I mean we see a lot of growth coming out of the risk management space.
It's a big, big focus point for regulators it's a big, big focus point for bank officers. And what was going on, is there were other providers starting to kind of ease their way into our system, and into our core platforms and when that's going on.
If the product provider needs to make a profit and we'd like to make money as well. You're getting some doubling up, so it was our prospective that going out and acquiring NetEconomy made a lot of sense.
And I believe you will see us do more. Certainly I've talked about acquisitions, in terms of going out and acquiring products that we think we can distribute high-quality products through our client base.
And we will continue to do that as well as looking for opportunities to expand the system. So, we think all of that is actually goes a long way in validating that what we're trying to do around distributing additional product.
Greg Smith - Merrill Lynch
Okay. Great, helpful.
And then just on BillMatrix that looks like you had pretty good transaction growth there. But are you getting any synergies out of that deal and are you pleased with it overall?
Jeff Yabuki
One of the things that I would say is. We're quite pleased with the growth, they've really come on over the last year we feel really great about the work that they are doing.
We have a lot of different opportunities we think to synergize with them and frankly we haven't done anything yet in that area. And I think it's on the drawing board for us to do in 2007, we think we can bring some unique opportunities with those assets.
And so, we're looking to do that later on in the year.
Greg Smith - Merrill Lynch
Okay. And than just one final one, the acquisition environment as far as properties, you're going after with all the private equity money.
Is that are prices continuing to rise and is it making it more challenging for you this environment?
Jeff Yabuki
Well, yeah. I mean, I would clearly say that prices are at a minimum stable and kind of going up from there.
Prices are high for good assets, or attractive assets they're high and even for assets that aren't necessarily that attractive is seem to be higher than you might think. So, it causes us to take a really hard look at what, what we're willing to do with our capital.
By the same token where there's an opportunity to really create a great match between our client base and products or to enlarge our client base I think we have to look at that. And obviously the legacy of the company is 150 acquisitions over the last 20 years that's something we know how to do well, and we'll continue to look to utilize that competency.
Greg Smith - Merrill Lynch
Yeah, okay. Thanks.
Jeff Yabuki
Thanks Greg.
Operator
(Operator Instructions)
Jeff Yabuki
All right, well. Thanks, everyone for joining us this afternoon.
If you have any further questions please don't hesitate to contact our Investor Relations team. Thanks for your support and have a great day.