Oct 24, 2007
Executives
Jeff Yabuki - President and CEO Norm Balthasar - COO Tom Hirsch - CFO
Analysts
Pat Burton - Citigroup John Kraft - D. A.
Davidson & Co. Dave Koning – Robert W.
Baird Tien Tsin Huang - J.P. Morgan Greg Smith - Merrill Lynch Charlie Murphy - Morgan Stanley Julio Quinteros - Goldman Sachs Kartik Mehta - FTN Midwest Tim Fox - Deutsche Bank
Operator
Hello, and welcome to the Fiserv Third Quarter 2007 EarningsCall. All participants will be in a listen-only mode until thequestion-and-answer session begins, following the presentation.
Today's call isbeing recorded, and is also being broadcast live over the Internet atwww.fiserv.com. The call is expected to last about one hour, and you maydisconnect from the call at any time.
Now I would now like to turn the call over to Jeff Yabuki,President and CEO of Fiserv. Sir, you may begin.
Jeff Yabuki
Thanks, Sid. Good afternoon everyone, and thanks for joiningus for our third quarter conference call.
With me today are Norm Balthasar, ourChief Operating Officer, and Tom Hirsch, our Chief Financial Officer. Our remarks today will include forward-looking statementswithin the meaning of the Private Securities Litigation Reform Act of 1995.There are a number of factors that could cause Fiserv's results to differmaterially from our current expectations.
We will make forward-lookingstatements about, among other matters, revenue growth, earnings per share, operatingmargins, cash flow targets, sales pipelines, the disposition of the Fiserv ISSbusiness, the acquisition CheckFree and our strategic initiative, Fiserv 2.0. Forward-looking statements may differ materially from actualresults, and are subject to a number of risks and uncertainties.
Please referto our third quarter earnings release which can be found on our website atwww.Fiserv.com for a discussion of these risk factors. You should also refer toour earnings release for an explanation of the non-GAAP financial measuresdiscussed in this conference call, and for a reconciliation of those measuresto the nearest applicable GAAP measure.
These non-GAAP measures are indicators that management usesto provide additional meaningful comparisons between current results and priorreported results, and as a basis for planning and forecasting for futureperiods. With that formality handled, let's get to the results.
This was an exciting quarter for the company. First, ourbusinesses continued to execute well, delivering a 20% increase in earnings pershare from continuing operations in the quarter.
We also announced theacquisition of CheckFree, a business combination that we believe will transformthe financial services technology industry, and place Fiserv squarely in theprimary leadership position. As evidenced by our acquisitions in the quarter, we arekeenly focused on enhancing our product and services offerings, with a goal ofproviding the greatest value to our clients.
We will continue to align our businessmodel around those areas of strength in our technology leadership position inserving the financial services industry, today and in the future. At our October 2nd Investor Day, we updated you on ourFiserv 2.0 progress, and also the importance of both strategically andfinancially of the CheckFree acquisition.
Given that recent update, we won’tspend much time on those topics today. Our strong earnings results in the quarter were again led byour financial segment, which generated about 80% of our net revenue andadjusted operating income.
Adjusted operating margins also continued to expand,showcasing the underlying strength of our business model. Third quarter EPS from continuing operations, was up 20% to$0.72, from $0.60 in the prior year.
Adjusted EPS from continuing operationsthrough September 30 was $2.03. Company wide adjusted operating income for thequarter was $206 million, an increase of 14% over 2006.
Financial segment adjusted operating margin was 26.8%, up300 basis points versus the third quarter of 2006. Once again, our continuingoperations results exclude the announced sale of our Fiserv ISS business, whichis reported in discontinued operations.
We continue to expect the sale of theseassets to close in two separate transactions, during the fourth quarter of 2007and the first quarter of 2008. Revenues in the quarter were up 5% to $1.2 billion.
Adjustedinternal revenue growth was 1% overall and 3% in the financial segment. Weachieved this growth in spite of a $12 million decline in mortgage-relatedrevenues versus the prior year.
In percentage terms, the impact of this declineon the financial segment, adjusted internal revenue growth rate for the quarterwas about 2 points. Although we were pleased with our financial segment results,we are disappointed with our insurance segment performance.
The group continuesto perform below our expectations, particularly on the revenue line withadjusted internal revenue declining 5% in the quarter, although we areencouraged by the slight improvement in the adjusted operating margins of thissegment, we recognized that we must improve performance as we head into 2008. Our growth in free cash flow continues to be very strong, up16% year-to-date.
We continued our focus on capital allocation, repurchasing$2.5 million shares of stock in the quarter and completing two smallacquisitions which will enhance market differentiation. Importantly, we madegreat progress against our Fiserv 2.0 initiatives in the quarter, positioningus well for a strong finish for the year.
With that, I will turn it over to Tom for some furtherdetail on results.
Tom Hirsch
Thanks, Jeff, and good afternoon everyone. Our financialsegment once again had another strong quarter.
Segment revenues were $753million with adjusted internal revenue growth of 3%. The sources of internalrevenue growth in the quarter were once again primarily the higher marginpayments and core processing areas, offset by an estimated 2% point decline inour mortgage processing businesses.
The growth rate also continued to benegatively impacted by the final transition of our remaining J.P. Morgan Chaseitem processing business.
Year-to-date adjusted internal revenue growth is 5%,which includes an estimated 1 percentage point negative impact from the declinein our mortgage processing businesses. Operating income in the financial segment was a $174 millionin the quarter, an increase of 17% over the prior year.
Through September 30,segments operating income is up 18% to $499 million, almost all of it organic.Termination fees in the quarter were $8 million, up about $900,000 over theprior year period and down from almost $13 million in the second quarter. Year-to-date termination fees are about $30 million comparedwith $60 million in 2006.
Adjusted operating margin in the financial segmentswas 26.8% in the quarter, up 300 basis points compared with same period lastyear. The year-to-date adjusted operating margin of 25.7% was up 260 basispoints compared with 2006.
Margin improvement was driven by a combination of costcontrol, operational efficiency and improvement in our product mix.Specifically we’re replacing some lower margin revenues in areas such as ourmortgage BPO offerings, with increases in highly valued payments in core processingrevenues, which tend to have more attractive margin characteristics. At the same time, segment margins are negatively impact byinvestments that we make across our businesses to deliver future growth such asour NetEconomy acquisition announced in the first quarter We don't expect year-over-year margin improvement of thismagnitude to continue beyond 2007.
However, we do anticipate that full yearmargins will continue to improve at least 50 to 100 basis points, annually intothe foreseeable future. Overall, we are very pleased with our financial segmentmargin performance for the year.
Our insurance segment had weak results in the quarter andcontinues to be challenged to deliver top line growth. Revenues in the quarterwas $420 million, up 5% overall.
Reported revenue growth rate flowed from whatwe have been generating in the last few quarters, because of two large pharmacycontracts, one in the third quarter of 2006 and which is now of anniversary. Asyou know this pharmacy contracts includes significant pass through prescriptioncost, which lift our revenue growth rate.
Adjusted internal revenues declined by 5% in the quarter.The drivers of the decrease, primarily customer attrition in the large accountarea of our health plan administration business. The continuing slowdown inflood claims processing, lower property and casualty life and sales and lastlythe revenue impact of shutting down some core performing businesses.
Insurance segment operating income was $32 million. Adjustedoperating margin was 17.2%, up 50 basis points from the second quarter and up40 basis points year-over-year.
The margin improvement reflect the operatingefficiency we've been driving in the segment over the last year, off set bycontinued investments in healthcare banking and payments. Overall, we are disappointed with our results in theinsurance segments.
We are focused on managing our discretionary spending andimproving the execution of our business strategies to deliver shareholdervalue. Cash flow from operations through September 30thwas $459 million, compared with $437 million in the prior year.
Year-to-datefree cash flow is up 16% to $340 million, compared with $292 million in 2006.This increase is driven primarily by solid working capital management andincreased focus on capital spending throughout the company. Year-to-datecapital expenditures were $119 million, down 18% compared with the first ninemonths of 2006.
Our effective tax rate for the quarter was 38% versus 37.7% inthe prior year’s quarter. We completed two relatively small acquisitions in the last60 days, WorkingRx and BancIntelligence.
WorkingRx is a fill-in acquisition inthe workers compensation area of the insurance segment. This business willcreate significant leverage for one of our existing businesses.
WorkingRxgenerated about $15 million in net revenue for 2006, not including asignificant amount pass through prescription product cost related to itsworkers compensation business. BancIntelligence brings a unique consultative capability forbank clients, primarily in the $500 million to $5 billion size.
The businessutilizes client data, along with market information to produce customized webbased solutions that can be used to enhance growth and better manage theirbusiness. This service is right in the sweet spot of our mission to helpclients achieve best in class results.
Now I'll turn the call back to Jeff.
Jeff Yabuki
Thanks, Tom. Each quarter, we share several performancemetrics to demonstrate progress against key Fiserv 2.0 objectives.
The firstmetric is integrated sales. This measures our progress in deliveringincremental value to clients to a targeted set of Fiserv I.
products,with an ultimate goal of achieving $360 million of incremental revenues by2012. Our 2007 incremental sales goal was $26 million in recurringrevenue.
Through the first three quarters of the year, we have closed 81% ofthat 2007 sales goal, with 34% of those sales in the third quarter. Thismomentum is critical as we move into the 2008 sales year.
We are confident thatwe will reach our full year objective. We are also on target to deliver theplanned $15 million of operational efficiency benefit in 2007, and rose toachieving $125 million in operational efficiency savings by 2011.
Our third quarter progress was significant. In fact, we havenow achieved $13.7 million or 91% of our full year objective of $15 million inannualized cost savings.
Importantly, we have moved ahead of a ratableattainment phase on both of these important metrics. Overall sales quota attained was 100% for the quarter, andis now 99% through September 30.
The majority of our groups had solid results,offset by continued weakness in mortgage-related sales and to a lesser extent,insurance. In particular, the depository institution and payments inindustry products groups again had strong sales performance in the quarter.Overall, our financial segment sales pipeline remains strong, and we believe weare on track to achieve our overall 2007 sales quota objectives.
As we shared with you at our Investor Day, we expect to beat the low end of our $2.74 to $2.82 adjusted EPS from continuing operationsguidance for the year. The movement in the range is due primarily to the sharpdownturn in the U.S.mortgage markets, which we anticipate will continue in the weaker than expectedperformance in the insurance segment.
Even with the difficulties in the mortgage lendingenvironment, we expect our full year 2007 adjusted internal revenue growth rateto be in the mid single-digit range for the financial segment and the lowsingle-digits for the company. We now expect our free cash flow from continuingoperations to be between $470 million and $490 million for the full year.
Our guidance for the remainder of 2007 does not incorporateany potential impact from the CheckFree acquisition. We have received earlytermination on our HSR filing, as well as CheckFree shareholder approval.
Ourfinancing is on track, and we are working to secure the necessary state moneytransmitter license approvals. Given the anticipated closing of CheckFree later in thefourth quarter, we plan to release our 2007 year-end earnings on or about February 6, 2008.
On balance, we had a good quarter, and are on pace for thefull year. In a somewhat challenging environment, we achieved 20% earnings pershare growth from continuing operations, and delivered across the board marginexpansion.
Our financial segment has a strong foundation and isperforming very well. At the same time, we are focused on improving executionin our insurance segment and are committed to improving shareholder returns inthat business group.
We are delivering results while making progress against theFiserv 2.0 objectives, described for you nearly a year ago. We are activelymanaging our business and products, providing a more Fiserv-centric valueproposition to our clients.
We believe there is tremendous value to be unlocked in thecombination of Fiserv and CheckFree. We will be even stronger financially, havemore robust products and networks, universal client access and bring togethersome of the most talented people in the industry to serve clients.
Thiscombination is truly transformational. Lastly, we thank our employees and associates around theworld for their relentless commitment to clients and shareholders.
There isenergy and excitement across the board as we enter the next stage of thecompany's future. With that, let's open the call for questions.
Operator
Thank you, sir. (Operator Instructions) First question todaycomes from Pat Burton from Citi.
Your line is open.
Pat Burton -Citigroup
Hi, good afternoon and congratulations on the results. I'llask about the insurance segment first of.
Was the organic growth a negative, ifI had anticipated when you lowered the range at the Analyst Day, Jeff?
Jeff Yabuki
Hi Pat, how are you?
Pat Burton -Citigroup
Good, thank you.
Jeff Yabuki
We clearly had a view into the results at that time, I wouldsay that the insurance performance ended up being a little bit, even a littlebit worse than we anticipated it would be at the time, and so, while we had theview, we didn't have it all the way in. And at the time, we believed that wewould have issues and we talked about them, but again, the revenues were alittle bit lower than we anticipated.
Pat Burton -Citigroup
Okay. And moving forward whether it’s the fourth quarter orbeyond, what steps can you take to get that business back to at least some sortlets say, low single-digit positive growth given the improvement you’re makingin the rest of the company?
Thanks.
Jeff Yabuki
Yeah. From our perspective we believe that the performancein the third quarter is a bottoming out of performance.
We expect to seeperformance continue to move up in the fourth quarter and beyond. We aremanaging the business more tightly.
We are taking a good look at where we seeopportunities to sell in a more dedicated or precise fashion and we’re justmuch more focused as we move past some of the acquisitions that we beeninvolved in this year to ensuring that we are going deliver those results. In addition, we've looked at some of our management, andwe're looking at what are the right ways for us to organize to ensure that wecan capitalize on the market opportunities that exist for us, Tom do you haveanything to add?
Tom Hirsch
Yeah. Just to add to that Pat, I think as we go back to ourinvestor day a couple of weeks ago, I think what I indicated at that was thatour full year for the financial segment would be in the mid single-digits,which we’re very comfortable with.
And also, that our insurance segment was achallenge for us in the second half of the year. The revenue growth was lower than anticipated in the thirdquarter.
We had lower flood claims, processing to implant our P&C licensesales were lower. One of the things that I want everyone to remember is that inthis business the net revenue is here about $190 million, so you are talking $7to $8 million, as far as the decline in revenue, that has been impacted allyear by the HTA business, but it can't be impacted by timing as far as licensesales in our P&C business and some of our flood claims.
So it is a muchsmaller part of our business as you know and, but we anticipate in the fourthquarter that we will be up from where we are from a growth standpoint. Ourmargins were up in this business quarter-over-quarter and has been upsequentially for the each quarter this year.
Pat Burton -Citigroup
Okay. Thanks and congratulations on the main part of the businessand the performance there in this rocky mortgage days.
Thanks.
Jeff Yabuki
Thanks Pat.
Operator
Next question come from John Kraft, D. A.
Davidson & Co.Your line is open sir.
John Kraft - D. A.Davidson & Co.
Hi Jeff, hi Tom.
Jeff Yabuki
Hey John, how are you?
John Kraft - D. A.Davidson & Co.
Doing well. Let me just start with guidance.
You just saidJeff that you will provide the official guidance in the February, on theFebruary call. But, just big picture wise, I mean excluding what you can – you don'twant to talk about it as far as CheckFree, you think there is enough of anexposure in the mortgage business, which kind of caused you to fall below yourlonger term target rates for both growth and earnings growth, revenue growth,earnings growth?
Jeff Yabuki
Yeah, I mean, that, John, just to clarify the outlook thatwe have provided in few weeks ago at our investor day, which was the same, notincluding CheckFree that we had put out in prior year. We remain verycomfortable with that.
But what we have also said is that that long-termperformance outlook and that, it's really a three year average and in that someyears will be up and some years will be down. But in any three year period, wewill be within that range.
Now that said, we don't see anything today including what isgoing on in the mortgage market, that would give us any level of discomfortthat we would be outside of our range in the financial segment, so talkingabout the financial segment. So we’re comfortable with that, but again, we will give thatactual guidance in 2008.
And for just one more piece of clarity, we weretalking about the Fiserv only numbers, not including CheckFree?
Tom Hirsch
Yeah. I think to just add to that the, our annual long-termperformance outlook is to grow organic earnings 9% to 13%, that’s from internalmeasurement and again as Jeff indicated we don’t see anything today from theone example that’s really baked into our numbers, now and end of the fourthquarter.
That would see us outside of that particular range. And the otherthing I would just comment on is that our financial segment year-to-date isgenerated about 18% organic earnings growth on year-over-year basis.
That’sbeen off-set somewhat by our insurance segment, but nonetheless a very strongperformance.
John Kraft - D. A.Davidson & Co.
Okay, thanks, that’s helpful. And then speaking of theinsurance segment, do you anticipated, what sort of impact or exposure, youhave relating to the claims processing essentially from the fires in Southern California?
Jeff Yabuki
Yeah. We aren’t in that business, so we don’t have any – wewouldn’t have any impact there.
John Kraft - D. A.Davidson & Co.
Okay. And then, lastly here, on your legacy, the paper itemprocessing, what’s the latest percent of your overall revenue did thatrepresent?
Tom Hirsch
You know what John, I think it’s been around that, I thinkwe've put that in that our investor day updates. So I think it was in the rangeof 10% somewhere in there, as far as percent of our financial segment revenue.And I think you can see that kind of on the pie in the analyst daypresentation.
John Kraft - D. A.Davidson & Co.
Okay, thanks guys.
Tom Hirsch
Thank you.
Operator
Our next question comes from Dave Koning from Robert W.Baird.Your line is open Sir.
Dave Koning – RobertW. Baird
Hi, guys
Jeff Yabuki
Hi Dave
Dave Koning - RobertW. Baird
First of all, we had FI growth this quarter around 3%, andthat was obviously impacted by mortgage and on the Chase business. If themortgage business continues kind of at the current level, and it takes a lot ofthe anniversary that the Chase item loss.
What gives confidence that then thenext couple quarters we get better than 3% internal growth, and maybe you couldgive us a few items that kind of gets us back on track?
Tom Hirsch
Yeah, I would say, Dave, when you look back historically andif you even look at in the second quarter, we reported adjusted revenue growthof 5% which was a positive impact by a percent from termination fees, and anegative percent from lending. So that was at about 5% which was our core midsingle-digit growth rate.
In the third quarter, we did report adjusted internalrevenue growth of 3%, but that really hit us kind of hard with the lendingpiece, which is 2% points. So, when I look at our core payments, coreprocessing business, that's been at 5% to 6% over the last six to seven toeight quarters, and we continue to see that going forward.
We do believe, as a baseline going into next year. Weobviously have our integrated sales initiatives which are going extremely well,and we don't believe that the J.P.
Morgan thing, that will anniversary by theend of the year. We don't anticipate having as we look into 2008, that large ofan impact in our lending business.
And again, we have those other growth vehicles that we'redriving through those integrated sales initiatives that will lift that corerate. But we've been very consistent at the 5% or 6% quarter-over-quarter, asyou look over the last six or seven quarters, and we anticipate that goingforward, not withstanding the lending impact that we had, which is fairlyunusual in this quarter.
Jeff Yabuki
Yeah, and Dave, I would just add that we also continue tohave a very strong pipeline where we are continuing to engage in lots and lotsof great conversations of prospects, and so we feel good about that. We feelgood about the underlying transaction growth that we’re seeing in our paymentsassets, and when you combine that with the fact that we’ve been seeing a lot oflending decline over the last four quarters.
We believe that by the time weturn into 2008, the grow-over on what we had really seen in 2005 will be farsimpler than we've had to deal with this year.
Tom Hirsch
And just to add one thing to it. Jeff indicated, the margincharacteristics of, we drop off on the lending business, that’s a much lowermargin business than our core depository institution payments business, and youcan see in the current quarter, what we've basically done, is replace some ofthat revenue with much higher margin revenue from payments and other coreprocessing assets which we continue to push in our integrated salesinitiatives, both EFT, wire exchange bill payment, those products and services.
Dave Koning - Robert W.Baird
Okay. That’s great.
And I guess a follow-up, Jeff, in Q4 wemaybe shouldn’t be surprised to see another quarter, a little bit impacted bythe mortgage-related business, but then a pick up really in '08?
Jeff Yabuki
Yes. We are planning at least for forecast purposes that themortgage business will get no better for the remainder of the year than it'sbeen for the last month or two, yeah.
Tom Hirsch
We've indicated at the Analyst Day, it was mid single-digitfor the full year, is the rate and that’s what we reaffirm today.
Dave Koning - RobertW. Baird
Great. Thanks.
Tom Hirsch
Thank you.
Operator
Next question will come from Tien Tsin Huang from J.P.Morgan. Your line is open, sir.
Tien Tsin Huang - J.P. Morgan
Hi. Thanks for the mortgage detail, a couple of questionsthere.
The $12 million decline in the mortgage revenues, how much of thatshould we consider to be as loss due to decline in bankruptcy?
Jeff Yabuki
Yeah. The majority of that, Tien, is coming from declines involume as opposed to lost clients.
I mean, clearly, everyone who is serving themortgage industry to some extent has had some falloff from that perspective.But these clients are largely the BPO-oriented closing services, where we areseeing volume declines, really driving our drop off as opposed to lost clients.In fact interestingly, we've had actually a pretty good year in signing up newclients and bringing them in. Unfortunately, that's getting subsumed by thedrop off in overall volume.
Tien Tsin Huang - J.P. Morgan
Got it. How was the lending business performing quarter-to-date?And also, can you give us some sense on how you are adjusting your coststructure to offset from this weakness?
Jeff Yabuki
Yeah, again, as we said a couple of times, for what we cansee right now, we expect volumes to be certainly no better than they were inthird quarter, and recognizing that the third quarter started out better thanit ended. So, we really believe that the quarter is going to look really likeit has for the last month or two.
So, basically flattish to even a little bitdown to where it's been in the last month and there is no signs in the economythat that is getting any better. About the same token, we are very aggressively looking at onour business, looking at our process fees, and looking at ways to realign ourcost structure as we shared with everyone.
Previously, this business is a lowermargin business and we have been caught in a little bit of a timing issue, andas the volume has fallen so rapidly, kind of catching up, realigning our coststructure to match the new level of volume that we are assuming for theremainder of this year, and frankly for most of 2008.
Tien Tsin Huang - J.P. Morgan
Okay. Thanks a lot.
Jeff, maybe if you can just comment onthe overall demand environment for bank spending, any change there? Looks likeyour sales increased?
Jeff Yabuki
No, not, really not at all. And we have been actually verypleased at our sales pipeline.
Most of our business unit leaders and our salesleaders are saying that this is a pipeline is as strong as its ever been, interms of the businesses that really contributes the most margins for us. Andwe’re optimistic that we are going have some attractive clients wins betweennow and the end of the year.
And we are pushing hard on that in that way.
Tien Tsin Huang - J.P. Morgan
Very good thanks.
Jeff Yabuki
Thank you.
Operator
Next question comes from Greg Smith from Merrill Lynch. Yourline is open Sir.
Greg Smith - MerrillLynch
Yeah, hi. It seems to me that something been missed here,its just that mix shift in your revenues.
Just looking at the, in the financialservices segment, 3% organic growth, that you had 17% operating profit growth.So I guess my question is, if you can break this out of that 17% operatingprofit growth, how much is coming from the positive mix shift in revenue versushow much is coming from more expense initiative?
Jeff Yabuki
It would be difficult to do it any other than, kind of on anestimated basis, but we have identified for our purpose of allowing people togauge our progress, our expense management initiatives, where we have gotaccomplished about 90% of our expense goal on the Fiserv 2.0 site for 2007, soabout $13 million. And that’s for the entire company.
So that’s the biggestexpense initiative or expense management focused point that we have. As Tom mentioned in his remarks, Greg, the real differencehere is, we have taken revenues that are historically low margined whether itbe in the lending BPO or some of the IT other areas that are much slower growthor declining in this case and replace those with much more attractive marketingcharacteristic as we showed, at our Investors Conference the revenues that arearound the depository institution side and on the payments in industry'sproduct side, carry margin characteristics that are in excess of the 23% marginthat we had last year.
And so, you are exactly right, if you do the math and youare bringing in those higher margin products on the increment, or on theaverage, in both cases, those are going to add a lot to our operating earningsand that's why you are seeing the leverage that we've been seeing. And as you know, we've been seeing that each quarter, wewere 300 basis points up in the first quarter, almost 200 basis points up inthe second quarter, 300 basis points up in the third quarter and that's reallybeen happening as these lower margin revenues have been replaced by what wethink are more attractive recurring streams of revenue.
Greg Smith - MerrillLynch
Yeah okay. That's exactly what I was trying to hit at.
Then,just is that possible to give us annualized runway revenues on the two recentacquisitions?
Tom Hirsch
I think we did have that Greg, for one on the Working compRX, which was $50 million. And the other acquisition, I think, is under $10million, as far as just an estimate for that on annual basis.
Greg Smith - MerrillLynch
Okay, perfect. And then, you called out Tom, the $12 millionof sort of negative impact on the mortgage side.
Any ballpark what we can thinkabout, incremental margin on that. Obviously they have to be relatively low,just given the high margins you are putting up here?
Tom Hirsch
Yeah that's correct
Tom Hirsch
No, I’m not going to do that on the increment basis, butthat being said, if they are lower than our overall operating margin as acompany and much lower than those other areas that Jeff highlighted in thepayments and core depository institution area.
Greg Smith - MerrillLynch
Okay, perfect. Thanks a lot guys, appreciate it.
Jeff Yabuki
Thanks Greg.
Operator
Next question will come from Charlie Murphy from MorganStanley. You’re line is open sir.
Charlie Murphy -Morgan Stanley
Thanks very much for the detail on sub-segment margins. Ijust wanted to check in on payments and see if you are in disclosing whatapproximately, how much more profitable that sub-segment is than the financialsegment as a whole?
Jeff Yabuki
What we said Charlie is that; in our in Investor Day, webasically said that, that group payments and industry products, which are ourpayments assets and a variety of other products. The margin characteristics ofthose revenues tend to be higher than our 2006 average margin, which is 23%, sothat’s really all the insights that will be providing at this time.
Charlie Murphy -Morgan Stanley
Okay.
Tom Hirsch
The only I thing, I clarify that, just to add Charlie isthat the incremental components of when we add incremental transactions to ourEFT data card platform, those are obviously much higher margins on theincrements than what we would experience in lending or other ones, there isjust a lot of higher direct cost associated with those businesses than lendingIP’s. So, incrementally this is very positive when we get that incrementalrevenue on there.
Charlie Murphy -Morgan Stanley
Okay great. And I just wanted to ask the same question onlending, is this anyway excites how much below the 23 that is?
Jeff Yabuki
No, I think the way to think about it is that they tend tobe BPO services, so they are little more expensive to deliver, given you haveboth technology and people in those businesses. And we have also talked aboutthe fact that as those revenues have declined as rapidly as they have, that we havehad a mismatch or a misalignment, and we have not been able to reduce cost inthat sub segment, as quickly as the revenue has come off.
And so, not only do we have the impact of that being a lowermargin on average, but as Tom was talking about that the increment, it actuallygoes the other way. It is little bit worse.
Charlie Murphy -Morgan Stanley
Okay, thanks very much.
Jeff Yabuki
Thank you.
Operator
Next question will come from Julio Quinteros from GoldmanSachs. Your line is open, sir.
Julio Quinteros - GoldmanSachs
Great. Thanks guys.
Real quickly, just on the environment,your client environment specifically, I'm just trying to get any sense from youguys as your sales people are out there on sort of the front lines. Have they notedany sort of change in tone or sort of environment or appetite for IT, especiallythe kind of work that you guys are selling to them?
Is there any sense thatthere is an increased nervousness or anything along those lines? I am justtrying to get, just kind of general color for what the demand sort of situationmight be like, relative to all the terminal that we're seeing in the financialservices vertical today?
Tom Hirsch
Yeah. It's good question, Julio.
We again have a pretty broadspectrum of clients that we are serving. But for our core processing clients,we are seeing kind of a continued demand.
People looking for ways to createadvantages in the market by the same token, they recognize that it's becomingmore competitive, that the big banks at time will move down into their space.But as we have talked about the last couple of quarters, we have actually seenmovement from bank core processing that had typically been in-house, startingto move over to the outsourcing side. And we also showed a little bit of slideon that at the Investor Day.
But we believe in times like this, outsourcing is a prettyviable opportunity, and we are seeing it on the core processing, we are seeingit in some of our other businesses. And then lastly, our sales pipeline and oursales quota attainment, both are pretty strong.
So, on a metric basis, that’s all very positive. I would saythat there is consternation in the markets in terms of lending-oriented, peopleare not making big mortgage processing platform decisions.
They are not makingbig lending origination decisions. And so, in those areas we have seen aslowdown, and when you talk to clients, you do hear your consternation fromthem on, when are things going to change.
Today we saw that existing home saleswere down 8%. So, I think we are going to continue to see issues in thatarea.
Thankfully, that remains to be a very small piece of our business. And asconsumers continue to use their debit cards or pay their bills online, or writecheques, again because of our recurring revenue transaction-based model, thosewho are pretty positive for us.
Julio Quinteros - GoldmanSachs
Okay, thanks. And then, on the termination fees, I think ona nine month basis, you are up somewhere in the neighborhood of about two timeswhere you were last year.
Is there anything different about the profile theclients are contributing to the increase in the termination fees this yearversus last year?
Tom Hirsch
No, there really isn’t, Julio. We had a couple of ones thatI noted that were bought a little bit earlier in the contract term.
So, whenthey get bought out a little bit earlier, are acquired in the contract term,it’s a little higher fee, just because of that acquisition earlier in the term.The other thing I'd say is as you saw in third quarter there, really rightabout the same as where they were, the third quarter of 2006. And, we are rightin line really where we were in '05 and '04 as far as the dollar value.
So,that being said, that's kind of where we at on that.
Julio Quinteros - GoldmanSachs
Okay. And just finally, when do you guys expect CheckFree toreport their results?
Jeff Yabuki
I believe it's this week. So, I'm not sure if it's tomorrowor on Friday.
Julio Quinteros - GoldmanSachs
Okay. Thanks guys.
Jeff Yabuki
Yes.
Operator
Next question will come from Kartik Mehta from FTN Midwest.Your line is opened.
Kartik Mehta - FTN Midwest
Thanks. Good afternoon, Jeff.
Jeff Yabuki
Hi.
Kartik Mehta - FTN Midwest
I wanted to ask you a question on the insurance segment,Jeff. If you look at that segment, do you think the reason maybe you haven'tperformed up to your expectation is a product issue or is it just an executionissue that's more easier to fix versus the product?
Jeff Yakubi
Yes. Kartik, one of the challenges in answering thatquestion is, I would guess if there are probably well over 50 products in thatsegment, my take is, it is a combination of both, but the lion share where Ithink we have upside, is execution-based, not withstanding the challenges inHPA that we've talked about where we are, to some extent disadvantaged on thenetwork discount side.
All of that said, I do think we can perform better, bybetter execution. We have had some management changes this year, and I believethat we will be in better shape and deliver better results in this segment.It's not going to happen magically overnight, and we are going far deeper intowhat's going on in there to make sure that we don't have any product issues orother issue lurking out there.
So, I'm comfortable that we are going to improveperformance. I’m disappointed that its taken as long as it has, but we willturn that corner.
Kartik Mehta - FTN Midwest
Great, and a last question Jeff. Have you noticed any changein behavior for your customers for the bill payment product?
I noticed that inyour press release, I think you said you had 82 new clients for your bill payproducts, but this is what I was wondering is, as clients look for you tofinalize the CheckFree acquisition and has that product on your umbrella, are younoticing any client saying we’ll wait till you acquire the company or anychange in behavior for even the internet banking product, because its clearlya?
Jeff Yabuki
The short answer is no. We have developed the Paytraxxproduct is a good product, and we got a nice job of distributing it across ourbase as you will recall, there was a large segment of our population who hadnot yet signed up or, I think about 50% of our core clients had not signed upyet for bill pay solutions or making nice inroads there.
What’s been mostexciting is that in the last quarter we started to have some very nicecompetitive wins. And so we’re starting to take clients from our competitors,and I believe that upon the closing of CheckFree, that we will be able to puttogether a far more robust and richer offering, that will hopefully be an evenstronger best in class offering that exits today.
But, no we have not seen slowdown on the bill pay side noron the internet banking side. We continue to hear from our clients, they wantto know what we’re going to do that is going to be innovative, and how are wegoing to deliver more products to them faster, which kind of continues to giveus confidence about the success that we’re going to have in the future withthat acquisition.
Kartik Mehta - FTN Midwest
Great, thank you very much.
Jeff Yabuki
Thanks Kartik.
Operator
Our last question will come from Tim Fox from Deutsche Bank.Your line is open sir.
Tim Fox - DeutscheBank
Thank you, good afternoon.
Jeff Yabuki
Hi Tim.
Tim Fox - DeutscheBank
Just one follow-on on the margin question, given theperformance you had this year and then certainly in this quarter in improvingmargins and mix shift that we should see going forward. I am wondering why didthat you anticipate only sort of 50 to 10 basis points over the longer termfrom margin improvement perspectives.
Jeff Yabuki
Good question Tim. Let me just give you my quick insights thenI will have Tom give the more detailed answer.
We have seen really, obviouslyhealthy gains in margin this year and as we have talked about that those gainsin margin is really coming from a combination of primarily product mix, as wellas a bit on the cost efficiency side. What we have said is that we expect tosee at least 50 to 100 basis points of grow annually so each year sequentially,and over the foreseeable future.
So, we don't expect to see only 50 or only a100, but we believe that its reasonable for people to build into their economicanalysis, some level of continuing gains in market. Now, we'd all like to see those gains be larger, but by thesame token, we can't always estimate what is going to be happening in themarket.
We didn't anticipate, its the beginning of the year that we would seeprecipitator's follow-up that we have seen in the mortgage lending side. But webelieve that 50 to 100 basis points is a very comfortable level that we will beable to achieve on a regular basis, Tom.
Tom Hirsch
Yeah. I think that covers that, I think the comments that Imade was that will be at least in that 50 to 100 leap.
The comment that we wantto make is that our financial year-to-date, they are up about 260 basis pointsand that type of margin improvement on year-over-year basis. So it will be verydifficult to us, obviously attain.
So we just want to make the point that wecontinue to anticipate at least 50 to 100 basis points. Its something thatwe've demonstrated our ability to execute on it, its something we are veryfocused on, is getting those higher value products to our clients that resultin higher margin status also.
Tim Fox - DeutscheBank
Okay good that's helpful. And in one just other sort of highlevel question Jeff, about, you mentioned, budget was pretty good, pipelineremains fairly strong, I was just wondering, given some of the success you'vehad with de novo wins over the past year or so, what do you think on that frontnow, is there any effect on new de novo formations and possibly on win ratethere, if we see some continued softening in this market?
Norm Balthasar
Yeah, hi, this is Norm. That it still continues to be a veryvibrating area for us.
We've got probably the same level of more activity, forde novo is not only opening, but the month we would be signing on it, markshare that we would gain. So we still feel very good about the de novo market.We don’t see any appreciable difference and what we do see is probably a littlebit of traction as far as the de novo that are coming up.
Tim Fox - DeutscheBank
Thank you all
Norm Balthasar
Thank Tim.
Jeff Yabuki
Thank you Tim
Operator
This time I show no further questions.
Jeff Yabuki
Great, well thanks everyone for joining us this afternoon.We as always appreciated your sport. If you have any further questions, pleasedon't hesitate to call our Investors Relation group.
Thanks, thanks again.
Operator
At this time now we conclude today's conference. You maydisconnect and thank you for your attendance.