Oct 29, 2008
Executives
David Banks – Vice President, Investor Relations Jeffery W. Yabuki – President & Chief Executive Officer Thomas J.
Hirsch - Chief Financial Officer
Analysts
Tien Tsin Huang - JP Morgan John Kraft - D.A. Davidson & Co.
Bryan Keane - Credit Suisse David Koning - Robert W. Baird & Co.
Julio Quinteros - Goldman Sachs Kartik Mehta - FTN Midwest Research Gregory Smith - Merrill Lynch Charles Murphy - Morgan Stanley Paul Bartoli – PB Investment Research
Operator
Welcome to the Fiserv third quarter 2008 earnings conference call. (Operator Instructions) Today's call is being recorded, and it is also being broadcast live over the Internet at www.fiserv.com.
In addition, there are supplemental materials that will be referenced on today's call available at the company's website. To access those materials, go to www.fiserv.com and click on the Access Presentation Link on the home page.
This call is expected to last about an hour, and you may disconnect from the call at any time. I would like to turn today’s call over to David Banks, Vice President of Investor Relations at Fiserv.
David Banks
Good afternoon everyone, and thanks for joining us for our third quarter earnings conference call. With me today is our Jeff Yabuki, our Chief Executive 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. We will make forward-looking statements about, among other matters, adjusted revenue growth, adjusted earnings per share, adjusted operating margins, EBITDA, cash flow targets, sales pipelines, our CheckFree integration efforts, the disposition of certain Fiserv businesses, and our strategic initiative, Fiserv 2.0.
Forward-looking statements may differ materially from actual results, and are subject to a number of risks and uncertainties. Please refer to our 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.
Now I will turn the call over to Jeff.
Jeffery W. Yabuki
Before we get to the results I want to remind everyone that we are hosting our 2008 Investor Day on November 11 in Boston. We are looking forward to updating you on our progress with Fiserv 2.0, including our CheckFree integration initiatives.
In addition, we will highlight several important enterprise growth strategies which showcase our growing focus on delivering innovation to the market. I won’t go into depth on our strategies today in light of the upcoming investor day, however I will give you an update on our view of the market environment at the end of this call.
If you haven’t yet signed up for the event, please contact our investor relations team. Let me say up front that we are pleased with our results for the quarter and the year-to-date.
In January I identified three key 2008 priorities which we would use to gauges Fiserv’s progress for the year and we have updated you on our progress each quarter. Those priorities are: first, to deliver earnings results consistent with our commitments regardless of environmental conditions; second, to make significant progress integrating CheckFree and Fiserv; And finally to enhance our level of competitive differentiation through innovation and integration, leading to superior results for our clients and shareholders.
We continue to deliver against each of these commitments. Adjusted earnings per share were up solidly in the quarter and have increased 23% for the year.
We affirmed full-year adjusted EPS guidance within our original range which includes the dilution from the sale of the majority interest in our insurances businesses. For the full year we anticipate that adjusted EPS will be up 23% to 24%.
Our free cash flow conversion of those earnings has been excellent, generating $465.0 mill year-to-date, an increase of $169.0 million, or 57% versus the prior year. Our second key priority for 2008 is to make significant progress on the integration of CheckFree.
This integration is a multi-faceted initiative with a number of different projects, some such as cost synergies, revenue opportunities, and product development are tangible and easy to measure. At the same time we are using this integration effort to further our Fiserv 2.0 cultural agenda focused on attributes such as leadership, product innovation, and one-enterprise thinking.
We continue to make excellent progress on achieving our $100.0 million cost synergy target. Through September 30 we have recognized $38.0 million of pre-tax benefit in our income statement this year versus our original full-year 2008 target of $40.0 million to $50.0 million.
Given our strong performance, we anticipate that we will achieve cost synergies about the top of the range for the year. You can see some of the benefit of this initiative contributing to our strong payment segment margin, which are up more than 300 basis points for the year.
We reported strong bill payment sales again this quarter and have signed over 400 clients year-to-date. We are having good success delivering the CheckFree RXP solution into our core processing client base.
Our next generation Online Advantage product was recently named a best-in-show winner at the 2008 Finovate Conference and will be in market in December. You will have an opportunity to see a preview at our Investor Day.
We launched our Fiserv MoneyMobile solution suite in September as one of first single-solution, enterprise-wide products. This suite, which links to all wireless technologies, is well-suited for all sized institutions.
MobileMoney is a great example of how we are focused on enabling the landscape with single, best-in-class solutions when it makes sense for clients. Our third priority and most important for the future of Fiserv is extending our level of differentiation through innovation and integration.
We continue to make steady progress on this front and the early returns are excellent. As part of our innovation process we are providing products and services to clients today that uniquely meet the needs of the evolving market.
Our home retention service is one such example, which allows financial institutions to make mortgage loan modifications effectively and efficiently, helping their balance sheet and importantly, making it possible for more consumers to stay in their homes. We have also introduced a new common loan servicing platform that allows financial institutions to serve multiple loan types on a single platform, thereby reducing costs and providing better data to the institution who services that loan.
I believe the current environment is serving as a further catalyst for our Fiserv 2.0 approach to the market. We can differentiate our position across all segments of the market through our client reach and wide array of innovative market-leading products such as bill payment, Internet banking, debit, and high-value consulting.
While we will spend more time on these topics at our Investor Day, I am confident that the progress that we have made this year will pay even more dividends in the future. As I mentioned up front, we are generally pleased with our results for the quarter.
Adjusted EPS, operating margin, and cash flow were up solidly. Adjusted EPS from continuing operations of $0.81 was up 16% for the quarter and is up 23% to $2.44 for the year.
In addition, this quarter’s EPS result includes approximately $0.04 of dilution related to the sale of our 51% interest in Fiserv Insurance due to the timing of the capital deployment. The dilution will be reduced as we continue to deploy the remaining proceeds.
We shared with you last quarter that the dilutive effect of the sale would likely be much more pronounced in the third quarter than in the fourth and the results this quarter bear that out. The strength of our businesses and our focus on high quality execution translated to another quarter of strong margin performance, as adjusted margin was up 160 basis points over the prior year, excluding insurance, to 26.1%.
We aren’t satisfied with our overall internal revenue growth in the quarter. The head winds did not ease as we anticipated, leading to flat internal revenue growth for the quarter.
After adjusting for some of the large, unusual items which have occurred this year our more normalized internal revenue growth for the quarter, and year-to-date, would have been 3% and 4% respectively. While those levels are reasonable given the environment, they don’t tell the full story.
We are focused on building the company for the long term while delivering results. We have continued to resist taking on large, one-time or unprofitable revenue.
Instead, our primary focus is building our payments and processing businesses to enable larger, growing streams of recurring revenue, earnings, and cash flow. We are seeing strong, double-digit transaction growth in scale areas such as bill payment, debit processing, and EFT, which are providing both growth today and more tomorrow.
With that, let me turn the call over to Tom for a more detailed discussion of the financial results and our balance sheet.
Thomas J. Hirsch
Good afternoon everyone. I will refer to the supplemental information included in the slide presentation which, as we mentioned earlier, is available on our website.
As Jeff mentioned, on July 14 we sold a 51% majority interest in our insurance businesses. Subsequent to the sale, we no longer consolidate the revenue, expenses, or the balance sheet of Fiserv Insurance.
Instead, we report our 49% share of net income as income from investments and unconsolidated affiliate on one line, below operating income. And the net assets of this business are reflected on one line on our balance sheet.
This will be our treatment going forward. Revenue in the quarter, excluding Fiserv Insurance, was $1.0 billion, up 42% over the prior year.
As referenced on Slide 4, year-to-date revenue was up 43% to $304.0 billion, compared to 2007. Adjusted operating income, excluding Fiserv Insurance, was $265.0 million for the quarter with adjusted operating margin increasing 100 basis points to 26.6% compared to the prior-year period.
Through September 30 adjusted operating income, excluding Fiserv Insurance, was $794.0 million and operating margins increased 160 basis points over the prior year to 26.1%. The continuing improvement in margin performance comes from several factors, such as business mix, including the addition of CheckFree and related cost synergies, business model leverage, and our continued focus on operating efficiency.
Our overall adjusted operating margin, excluding Fiserv Insurance, has increased each quarter this year, from 25.8% in the first quarter to 26.6% in the third quarter. We will continue to see variation in revenue and margin on a quarterly basis in our reporting segments due primarily to the timing of certain items such as termination fees and license revenues.
However, our strong year-to-date margin results are indicative of our ability to manage the business effectively in a variety of environments. Additionally, margins will increase proportionately to our success in distributing higher growth payment products such as EFT and bill pay across our core account processing distribution platforms included in our financial segment.
This integration creates more value for our clients and increases operating leverage across our platforms. When evaluating our performance there are several items impacting the comparability of the second and third quarter results which are shown on Slide 6.
First, the sale of the majority interest in Fiserv Insurance led to dilution of about $0.04 in the quarter in adjusted EPS, primarily due to the timing of the redeployment of the proceeds from that transaction. This dilution will be reduced as we redeploy the capital from the transaction.
Next, termination fees in the third quarter were only $3.0 million, down $15.0 million from the $18.0 million included in the second quarter. Almost all of that reduction is in the financial segment and resulted in lower revenue, operating income, and margin when compared with the second quarter.
As you know, these fees fluctuate by quarter depending on acquisition activity. Third, our lending revenues continued to decline below the sequential and the prior-year quarters.
And finally, we reclassified the remaining insurance businesses that we did not sell on July 14 to discontinued operations. These small operations generate less than $20.0 million in annualized revenue.
As these operations have been slightly dilutive to operating results, the move adds about $0.02 per share to reported continuing operations results during the first half of 2008. Adjust internal revenue growth, excluding Fiserv Insurance, was flat in the quarter and is 2% for the first nine months of the year.
However, as we shared previously, there are three larger, unusual items which continue to negatively affect internal revenue growth: the home equity processing business, the Bank of America contract re-pricing earlier this year, and the declines in float income. Although we have had good success this year with our home retention product, home equity processing revenues, which include the new product revenues, still decreased by $6.0 million over the historic low levels experienced so far this year.
As seen on Slide 7, if you normalize for only these items, our adjusted internal revenue growth rate would have been 3% in the quarter and 4% for the year-to-date. At the segment level our payment and industry product segment generated revenues of $529.0 million in the quarter, or $478.0 million on an adjusted basis, net of the pass-through cost for postage, a substantial increase over the prior-year due primarily to the acquisition of CheckFree.
Adjusted internal revenue growth in the quarter improved sequential to 3%. When excluding the impact of the BofA re-pricing and float decline, revenue growth in the segment would have been 6% for the quarter and 7% for year-to-date.
We continue to see strong, double-digit transaction growth in our payment processing businesses along with good performance in our output solutions business, which is seasonally stronger in the second half and particularly in the fourth quarter. Operating income in this segment was a very strong $148.0 million in the quarter with adjusted operating margin of 31%, up 410 basis points over the prior year.
Through September 30, operating income was $422.0 million and operating margin was up 310 basis points to 29.6%. The increase in margin is due to continued improvements in operating efficiencies, network efficiencies, and as Jeff mentioned earlier, the ramp up of cost energy benefits associated with the CheckFree acquisition.
We are very pleased with these results. The financial institution segment generated revenues of $526.0 million in the quarter, an increase of 5% over the prior year.
Adjusted internal revenues contracted by 3% in the quarter. Excluding the home equity impact, internal revenue in this segment was flat for the quarter and is up 2% year-to-date.
The third quarter results were below expectations due primarily to overall weakness in our mortgage-orientated products, reduced contract termination fees, and softer license and associated professional services revenues compared with the prior-year period. Contract termination fees were $3.0 million for the quarter compared with $6.0 million in the prior year, a year-over-year decrease of $3.0 million.
Operating income in the financial segment was $128.0 million for the quarter. Adjusted operating margin was 24.2% for the quarter and 25% year-to-date.
The segment margin was down 50 basis points for the year compared to 2007 due primarily to lower license and one-time revenue along with margin pressures in our lending-related businesses. We continue to make progress variablizing our expense structure in response to lending market volatility.
As Jeff indicated, our free cash flow was exceptional. We generated $465.0 million for the first nine months of the year, an increase of 57% compared to 2007.
Through September 30 our free cash flow per share was $2.82, 16% higher than our $2.44 of adjusted earnings per share. This performance reinforces the strong cash flow characteristics of our business model along with a disciplined approach to working capital management and investment spending.
We expect our current mix of businesses will continue to produce attractive free cash flow growth. Year-to-date capital expenditures were $139.0 million, an increase of $28.0 million from last year’s level, which did not include CheckFree.
Our overall financial position is very strong. Through September we have repaid more than $1.1 billion of our debt this year.
Our next required debt payment is $250.0 million which is not due until the end of 2009. We had more than $300.0 million of available cash on hand at the end of the quarter.
We also had $650.0 million available on our credit facility, which does not mature until 2011. We have increased our free cash flow guidance, given our exceptional year-to-date results.
We now anticipate our full-year free cash flow will be between $560.0 million and $580.0 million, an increase of 27% to 31% versus the prior year. Our forecast includes $50.0 million of semi-annual interest payments that are due on our public bonds and additional tax payments associated with our insurance transaction.
As Jeff mentioned, we repurchased 3.2 million shares in the quarter for approximately $160.0 million and had about 6.8 million shares remaining in our current authorization at the end of the quarter. Our net interest expense for the first nine months was $187.0 million, with $57.0 million recorded in the third quarter.
This amount should continue to trend down as we reduce our debt and derive some interest rate benefit from the variable portion of our debt. Lastly, we anticipate that our income tax rate in the fourth quarter will be slightly lower than the year-to-date, normalized tax rate of 38.7% due to the extension of the R&D tax credit.
Now I would like to turn the call back over to Jeff.
Jeffery W. Yabuki
Even in the face of a more challenged environment we continued to see good sales activity. Integrated sales continued to build its momentum with about $21.0 million in the quarter and are now at $56.0 million year-to-date, 86% of our full-year objective.
The majority of the products are payments-related and include bill payment, debit EFT, Fiserv clearing network, Internet banking, source capture solutions, and wire exchange. Sales performance continues to be on track with year-to-date quota payment at 99% of 2008’s target.
Although sales pipelines remain fairly solid, we have continued to see delays in buying decisions for license and one-time professional services revenues. We continue to make progress on our operational efficiencies connected with Fiserv 2.0.
through September 30 we have achieved 95% of our full-year target, or $19.0 million of incremental benefit this year. As we have mentioned previously, we plan to refresh our efficiency targets at the upcoming investor day in light of the divestures over the last year.
Before I wrap up, let me talk for a moment about the market environment and how we see it affecting us. We view the markets and how we deliver products and services in two distinct groups.
First, the very large financial institutions, which include those names which you are most familiar with, and for illustration, are generally the top 50 banks in the U.S. We typically service group with best-of-breed and/or specialty products such as bill payment, Internet banking, lending solutions, item processing, risk solutions, investment services, and the like.
The majority of the almost 17,000 remaining financial institutions we generally consider as community-based institutions. This group tends to be more geographically focused in the clients they serve.
In addition, this group will tend to value technology integration in conjunction with innovation and has strong relationships with their core account processor. The substantial majority of Fiserv’s total revenue comes from serving this group of institutions, with or without a core processing relationship.
For this group of banks, thrifts, and credit unions, which count on us for a variety of non-discretionary, integrated technology solutions, things remain relatively stable. I say relatively because it’s safe to assume that no financial institution is escaping the present turmoil.
However, this group doesn’t generally have the same magnitude of issues facing them as some of the larger institutions. They are generally well-capitalized and with some regional exceptions they have not entered the more speculative areas of mortgage lending and/or investment vehicles that are negatively impacting some of the larger financial institutions.
As you know, there have been more regulatory actions in 2008 compared with the last four or five years, although less than was anticipated earlier in the year. Through mid-October there have been 29 regulatory actions requiring remediation versus around three in the prior year, and of the 29 actions eight of those are our clients.
In most cases the remediation includes the assumption of the accounts by a stronger financial institution. So far this year, in terms of numbers of institutions, the client gains and losses for Fiserv are even.
So when the dust settles, we anticipate that we will still be serving the same number of client groups. However, as we have discussed in the past, more important than the number of financial institutions are the accounts and the associated deposits those net new clients represent.
And for illustration, we anticipate about a seven-fold increase in the total assets of the banks joining Fiserv in this transition versus those that we lost. We continue to see good sales activity in this group for a primary focus on deposit gathering, efficiency products, and risk management.
This translates to demand for products such as EFT, bill payment, remote capture, and risk. While we do believe the market softness will continue, the non-discretionary nature of the services we provide across this segment should continue to allow us to deliver stable streams of revenue and new sales.
Back to the larger institutions, the story is different and a bit of a mixed bag. There is consolidation being driven by larger losses in capital needs across the spectrum.
We have seen the big get bigger and in most cases stronger. In addition, we expect the mergers and combinations within the middle tier of this group to continue, which we believe will change the market order and likely reduce the number of institutions currently in this group.
We have a variety of diversified relationships with the larger institution in areas such as online banking, bill payment, item processing, and investment services. For the most part we do not deliver core processing across this universe of clients.
Given the evolution of the market and the diversified nature of our products and therefore our revenues, our risk is more around client concentration. Aside from our [inaudible] relationship with BofA, which as you know we extended earlier this year, our large client revenue concentration is fairly low.
In addition to BofA we have only a handful of clients who have a concentration of about 1% of Fiserv revenue. In fact, there are no clients, beyond Bank of America that pay us more than 1% of total revenue for electronic bill payment or any other single product.
There have been and may continue to be, transactions across the large end of the market that will impact our revenues. From what we have seen to date, involving our larger client relationships, we don’t believe there are near-term revenue risks that will materially impact our results.
Depending on the depth of our relationships, transactions are complicated and are typically measured in multiple months, or even years. We expect that the various combinations in the market will be at worst, neutral to our revenue profile over the mid-to-long term.
As I mentioned before, our business and revenue are highly diversified across the enterprise and with a broad array of financial institution clients. Bottom line, we continue to like our position providing mission-critical technology solutions to the market.
We believe we are well balanced within the universe of financial institutions and insulated enough to ride out a challenging economy. We will share more specifics around these market trends and segments in our upcoming Investor Day in a couple of weeks.
As I indicated earlier, we are affirming our full-year adjusted earnings per share from continuing operations, which includes the dilution from the sale of the majority interest in our insurance business. Given that we are in the fourth quarter we have narrowed our expectations to be within a range of $3.28 to $3.32 per share, or for specificity, $0.84 to $0.88 per share in the fourth quarter.
As we mentioned earlier, the performance improvements in the fourth quarter are coming from continuing cost efficiencies, lower dilution from the sale of the insurances businesses, and upticks in revenue related to normal business seasonality. We expect adjusted internal revenue growth for the fourth quarter to be between 1% and 3% with much more benefit coming from the payment segment.
We expect adjusted operating margin for the full year to increase by at least 150 basis points and as Tom mentioned earlier, that free cash flow will be between $560.0 million and $580.0 million, growth of 27% to 31%, over last year. We made three commitments to our owners at the beginning of 2008: deliver on our earnings; integrate CheckFree; and enhance our level of market differentiation.
We’re on track to achieve all three. Clearly, we are in the midst of a market event.
The market today is far different than it was a year or 18 months ago and our internal revenue growth is being impacted in 2008. However, as you have seen each quarter, the strength, diversity, and resilience of our business model provides a solid foundation for us to grow.
We expect to emerge strong for the experiences and far better positioned for the future. As always, I would like to recognize the hard work and commitment of our associates around the world who are responsible for the results we deliver each and every day on behalf of our thousands of clients, which is especially evident now.
Truly, our people make the difference. With that, let’s open the line for questions.
Operator
(Operator Instructions) Your first question comes from Tien Tsin Huang - JP Morgan.
Tien Tsin Huang - JP Morgan
On the internal revenue growth target for 2008, it now looks like it’s about 2%, if I’m calculating that correctly, down from your previous target of 4%. Can you rehash what’s driving the change there?
Thomas J. Hirsch
The biggest thing of that change at the second quarter is primarily I would say in three areas. One, in our home equity business.
As we talked about, we planned on having more revenue from the base business there. That business is down $6.0 million from the second quarter and we have sold a lot of new product as far as our home retention product in addition to that.
So that had a fairly big negative impact on our growth rate, roughly about 3%, 2% overall for the company and 3% in the financial segment. So that was a major driver, from that standpoint.
And that was the biggest thing we had. The other thing I would say is that as far as the large licenses and discretionary spending has tailed off a little bit in the third quarter, a little lower than what we planned.
But I would say the biggest item is the home equity business. That has been offset by good growth in our payments business.
We are up sequentially in that group and we continue to see good growth there but the financial segment was definitely impacted by the large home equity downturn. And also the discretionary spend on licenses, which does impact businesses such as our credit union business and some of the professional services.
Jeffery W. Yabuki
And I would say that you will recall that a fair amount of the boost that we were anticipating seeing in Q3 and in Q3, but really in Q3, was kind of the comparative benefit of the sharp decline that we saw in the home equity market, as Tom referenced earlier, in the prior year. And frankly, we did not anticipate this steep decline that it has continued to be on.
That coupled with specifically in the area of discretionary and upgrade types of licenses, we don’t see giant holes but we see a fair amount of softness across that horizon. So there aren’t big holes but these small items aggregate up to make a difference.
Those are the two primary areas.
Tien Tsin Huang - JP Morgan
And most of that is contemplated in the fourth quarter guidance of 1% to 3%.
Jeffery W. Yabuki
We are still at this stage assuming that the home equity markets continue to decline and we don’t see much pick up there, if any, and we are actually not believing that we are going to see much benefit in license sales this year either. At this stage, even though we are hearing things from clients that say they are not going to keep putting these off, we just think that things will continue to elongate and we have taken that into account in our guidance.
Tien Tsin Huang - JP Morgan
And moving to CheckFree synergies, it looks like you are tracking above your targeted savings there for the year. Does this excess savings accelerate your 2009 target or have you identified some incremental savings beyond what you originally anticipated?
Jeffery W. Yabuki
It’s really a matter of us executing better than we maybe thought we would execute. We’ve been very good on the execution side.
So I would say it’s coming in a little bit faster. I don’t know that I would be able to say that we are seeing new save.
So that would give us increased confidence in being able to book the entire amount of the synergies within the time frame that we originally anticipated.
Thomas J. Hirsch
I would just add to that that the third quarter in our payment segment, the overall operating margins there were 31%, which sequentially were up about 250 basis points from the second quarter. So those cost synergies and the scalability of our payments business model, especially in the EFT and bill pay, continue to generate good growth, good operating and income growth, and as I indicated previously, on the top line standpoint, just the float in the BofA re-price, that payment segment is running at about 7% internal revenue growth on a year-to-date basis.
Tien Tsin Huang - JP Morgan
The sale of the last piece of the Fiserv five, it looks like it’s been pushed out again. What’s the visibility on getting that done in Q1 and does that change your buyback appetite for the rest of the year and going into Q1?
Jeffery W. Yabuki
No it does not. It just is with the regulatory agencies today we have to get approval through the FDIC, etc., and they have just been busy on a lot of different matters.
And so that is just going through the normal regulatory course but it will not change anything in regards to our share repurchase purchases.
Thomas J. Hirsch
The share repurchase was really contemplated not based on the ISF transaction but on the insurance transaction, which was closed.
Operator
Your next question comes from John Kraft - D.A. Davidson & Co.
John Kraft - D.A. Davidson & Co.
I just wanted to clarify on the Q4 guidance. It sounds like you expect the license sales to continue to be weak.
You expect the home equity business to continue to be down. Obviously there is a little bit left to the dilution but that doesn’t quite get you enough to the ramp that you are expecting.
I guess I’m trying to get an idea of your confidence and if there are some deals that might have slipped or deals in the pipeline that you’ve got nailed down.
Jeffery W. Yabuki
What I was trying to get across was that we think, as we’ve talked about in our market discussion, there are certain clients who are buying. Those clients tend to be the more output clients who are more outsourced with us.
On the in-house side we are seeing clients buying but the cycles are elongating and we believe that they will close and whether they close in Q4 or Q1 of next year, it’s hard for us to know. What we have not assumed is that the cycles look any different between now and the end of the year.
So some will obviously close, some won’t. The acceleration that you are seeing is due to some seasonality that we have in our businesses where we have stronger fourth quarters, like in our output solutions businesses, as well as in our payments businesses where we are continuing to get good, solid, double-digit transaction growth that is fueling underlying growth.
So when you add that all together and you put a dose of conservatism on there, we get comfortable that the numbers that we’re talking about are quite achievable.
John Kraft - D.A. Davidson & Co.
And you just mentioned the strong payments business. Specific to walk-in or walk-up bill pay, how has that been doing?
You’ve got one competitor that sort of suggested that given the environment there’s customers out there that aren’t able to pay their bills and that business has slowed.
Jeffery W. Yabuki
In the walk-in business, one of the things that we had done last year was to set up a relationship with Walmart, and that relationship is growing nicely. We are in something like around 800 Walmart locations at this point in addition to the walk-in network that we already had established.
And we’re seeing reasonable levels of activity there. We have a little bit of an established position so I don’t think we have the same kind of potential battling that’s going on.
That said, I think on the fringe the transactions are less. But it’s important to know that those transactions, in the aggregate, aren’t enough to move the needle.
And so the kinds of growth that we are seeing is all positive and adding to some of the network economic benefits that Tom was talking about earlier. We don’t expect to see material increases in the walk-in business probably for another year.
John Kraft - D.A. Davidson & Co.
I know you are going to talk about this in detail next month, but I was wondering if you would care to just share some high-level thoughts on organic growth next year.
Jeffery W. Yabuki
You know, obviously we had some belief that someone would ask some questions about what we were seeing into 2009. And I think for right now, like I think everyone else, I think we’re all kind of heads down thinking about getting our plans done, what do we need to do to manage the business going forward.
When I think about 2009 I think about the things that we’ve had to deal with this year, things like the Bank of America re-pricing and some of the issues in lending and declines in float. Those kinds of things.
We know that when we announced the acquisition of CheckFree we had a lot of people attacking the client base. And just a lot to things going on that we think were net-negative.
We are hoping that those things will be a little bit more positive going into 2009. We do expect the environment will continue to be at least as soft as it is now and we’re going to manage the business as if it’s going to be that way so we can make sure we can meet our commitments.
But we think that we will have maybe a little bit less of a head wind but I think it will be hard work for everyone in 2009. And in 2010.
Thomas J. Hirsch
And at least from my perspective, just to level-set that discussion a little, is that as you are aware, we have really dramatically increased our payments business. And that business has grown, year-to-date, internally, roughly about 4% on a year-to-date basis and that has been impacted negatively by about 3% in that segment.
For the float and also for the BofA re-price. And the float is pretty well down and it continues to decline a little bit but that number is fairly small right now and the BofA re-price will not be a recurring item into 2009.
So overall when we look at the payments business we are year-to-date organic about 7%. Our financial segment is fairly flat.
We have had a difficult time in the home equity processing business. That business has negatively impacted that segment by 2%.
So to the extent it’s leveled out and we can keep that business solid, year-to-date the financial segment is at 2 and on average that comes to around 4% or 5% through the first nine months of the year, as far as our actual results. But as Jeff indicated, we are in depth in our planning process and will continue to get that to you and give you more update in two weeks and our guidance in February when we release our year-end results.
John Kraft - D.A. Davidson & Co.
4% to 5%. That’s helpful.
Operator
Your next question comes from Bryan Keane - Credit Suisse.
Bryan Keane - Credit Suisse
I’m a little surprised to see the financial operating margin down 220 basis points year-over-year. I guess considering you’re getting a lot of cost saves from Fiserv 2.0, anything unusual in there?
Were you a little surprised to see the margins where they came out?
Thomas J. Hirsch
First of all, any quarter can have some fluctuations depending on some of the license fees, their termination fees. When I look at that segment overall, year-to-date we’re down about 50 basis points in the operating segment.
I would think the biggest things that we’ve had primarily in there are related to the lending business. The large decrease in revenues, we continue to variablize the expense base there.
But that has continued to be a drag overall. And if you are comparing more in the second quarter to the third quarter the largest item was really the decrease in the termination fees.
Those went from roughly $18.0 million to $3.0 million and those have a fairly dramatic drop-through. So when we look at the overall margin profile there, at 25% on a year-to-date basis, while it’s down over the prior year, the lending business has had a major impact as far as the margins go in that particular business.
Bryan Keane - Credit Suisse
And Jeff, when you were talking about some of the regulatory actions, I just want to sum up your comments. So, so far net-net the gains and losses has come out to be about zero.
Jeffery W. Yabuki
Yes. If you think about there were eight clients, of the 29 eight were Fiserv core processing clients and then if you take into account the 21 that were not, our clients acquired some of those and just kind of the ins and outs of that, the net-net number of institutions is the same.
Bryan Keane - Credit Suisse
And the seven-fold increase was what again?
Jeffery W. Yabuki
Basically the size of the institutions that were acquired by our clients were seven times larger in assets than those that we lost. So net-net we end up with probably a larger account base with a much larger asset base.
And as you know, the way our pricing models work, they work on accounts and transactions and those kinds of metrics, which we think are economically positive and favorable for us going forward.
Bryan Keane - Credit Suisse
So the larger the institution the better it is for Fiserv.
Jeffery W. Yabuki
In terms of how we charge, yes.
Bryan Keane - Credit Suisse
On the flip side of that, the bank consolidation we’ve seen, we’ve heard about quite a few of them, but net-net you think that’s going to come out and there’s going to be some positive and some negative so a net-net neutral?
Jeffery W. Yabuki
When you say bank consolidation what do you mean?
Bryan Keane - Credit Suisse
I’m just talking about the acquisitions we’re hearing about. Wamu, Wachovia, Net City.
Jeffery W. Yabuki
Exactly, I assumed that was what you were saying. We have lots and lots of different relationships with the different institutions, whether they be bill pay or investment services or item processing or remote capture, whatever it is, and some of those relationships we know will continue and some of those relationships will probably not continue.
But we also have a good idea when institution A acquires institution B, not surprisingly because there are not that many providers, everyone knows what everyone else is doing. And I think as we can see the landscape unfolding, we believe we will win some and we will lose some, but net-net that they will be neutral.
And in fact could be positive but I would rather just for right now assume they’ll be neutral and our revenues will stay net-stable. But the other thing that is important there is that even when an acquisition of one of the larger institutions occurs, it takes a long time for some of the, even if we’re going to lose a bill payment customer, it’s going to take a fairly long period of time for that transition to actually occur.
So from our standpoint we don’t see it being a near-term issue, we see these things being mitigated over the mid-term and we think this turmoil that’s going on, especially in the middle tier of that larger group, will actually allow us to deliver some more of our products because people will be looking for that differentiation. And I don’t think anyone is going to be looking, for example, to go to a downgraded bill payment solution.
So from our prospective we look at those as some pretty interesting opportunities in that middle tier of the space.
Bryan Keane - Credit Suisse
And Tom, the tax credit will take the tax rate to what level? And then any comments on appetite to buy back stock at this level.
Thomas J. Hirsch
Yes, it will be lower by at least 100 basis points from where we’re at on a year-to-date basis. So I think 37.5% in that particular range.
Bryan Keane - Credit Suisse
And just appetite to buy back stock here?
Thomas J. Hirsch
Yes. We bought back 3.2 million shares in the quarter for about $160.0 million.
We thought the stock was valued well there and at today’s price it’s cheaper than it was then. So we will obviously be looking at the opportunities that we might have to acquire stock.
We said before that we intended to repurchase shares on the basis of offsetting the dilution from insurance. This actually could create an opportunity to do that a little bit more effectively.
Operator
Your next question comes from David Koning - Robert W. Baird & Co.
David Koning - Robert W. Baird & Co.
You mentioned how strong the operating margin in the payment segment has been in Q3 and that’s certainly encouraging. I’m wondering if this is a new sort of base line now, that 31% is the new base line and can you even ramp from here or if there is risk and it could go down for any reasons over the next few quarters.
And also just normal seasonality is that Q4 margins in the segment usually go up from Q3. Maybe you could just comment a little bit about those factors.
Thomas J. Hirsch
I guess the things I would say is I comment on the financial segment the same way I look at quarters. You know, quarters can move around from a standpoint of a margin standpoint.
But to take a step back, our margins and that on a year-to-date basis and that payment segment are up roughly 310 basis points as we continue to leverage and grow that particular model, so over time we continue to believe that we can continue to generate operating efficiencies along with additional cost synergies associated with the CheckFree integration with Fiserv. So over time we don’t really have anything there from an unusual nature that would say that those should not be able to continue to expand, as we have done historically.
And so that model is a good scalable model. But we’re not going to give some type of quarterly guidance because there are sometimes license fees that can fall from one quarter to another and our output solutions business can also have revenue that goes into one place of another.
But overall we have had exceptional margin improvement and we continue to believe the model is very scalable and we will continue to drive efficiencies through that business.
Jeffery W. Yabuki
We clearly see continuing opportunities to be more efficient on our own cost structure and whether it be from our own internal technology and the platforms that we use as well as some of the cost synergies that we talked about earlier in the call, on a year-in and year-out basis, I believe that those margins will have continuing room to grow. And at the same time, as you know, there were some things going on in our numbers this year on the revenue line in that segment that were pretty detrimental.
So when you add those together, there’s no reason to believe that we won’t be able to continue to grow those margins. Now, there’s an offset to that and the offset to that is in transaction businesses that are rapidly growing, you’re always going to have compression and so we factor compression in.
And our clients are important clients and we want to make sure that we can serve them well so we factor that in. But we feel very good about the progress that’s been made on how we’re operating the business and I think you’re going to see improvements in those areas.
David Koning - Robert W. Baird & Co.
Free cash flow was certainly one of the biggest highlights. I’m wondering about the sustainability of free cash flow above the non-GAAP earnings.
What are the drivers that kind of keep it above cash earnings?
Thomas J. Hirsch
We continue to believe it will be at or above our adjusted earnings per share. I think we do have some deferred tax-type expense, etc.
that will continue to kind of be here for a little bit that will provide some benefit in excess of our adjusted earnings per share. I also believe our capex, in relation to our depreciation, we’ve been very good as far as having a lower amount of capex in our normalized depreciation and amortization and we continue to have a business model now around working capital with the dispositions that we’ve had over the last year, year and a half, regarding the house business, the trust business, the insurance business that is very focused on growing and delivering good cash flow through good working capital management.
But for now I would say we would expect it to be at our above. It’s 15% higher year-to-date through September but I think we will have a small percentage that will be above our adjusted earnings per share over the long term in our free cash flow.
Operator
Your next question comes from Julio Quinteros - Goldman Sachs.
Julio Quinteros - Goldman Sachs
I wanted to go back a little bit and think back on the last time we saw a real material deceleration in organic growth was the 2003 time frame when we were running at around 0% or so. It seemed to stay there for a little while and during that period the level of acquisition activity was really sort of taken up.
At that point in time the flexibility on the balance sheet was much different given the much lower debt level. If we look forward, with the $4.2 billion of debt that you have now on the balance sheet, how comfortable are you that you’re going to have the flexibility to manage the business as you have always had, with a little bit of organic growth and a little bit of acquisition growth contributing to the top line, given a very different debt and balance sheet structure in your model today?
Jeffery W. Yabuki
It’s a good question and at least I wasn’t here in 2003 but I am familiar with that time in retrospectively examining the past performance. You know, as Tom talked about, we have a lot of strength in our balance sheet right now.
We have got about $1.0 billion of liquidity, if we needed it. But in fact I don’t think we do need it.
The business is run much differently today than it was back in 2003, which was really running as a holding company where you’re exactly right, there was a lot of movement on the acquisition front and then I think that slowed down and all of a sudden I think people realized, wait a minute, what happened to organic growth, so we better start acquiring. We actually have quite a good handle on what’s going on with organic growth right now.
And frankly, if the environment were a little bit different I think the conversations that we would be having would sound a little bit different. That notwithstanding, as Tom has articulated several times, there are a few big items that are really hurting us this year.
And you know, frankly, when we anniversary those items I think the numbers will look a lot different. I think the company is quite strong in terms of its operating margins and its clients and you know, we have gone from basically having almost no payments assets to over $2.0 billion of payments assets today generating on an adjusted basis about 7% growth.
So, I’m feeling quite good about that. The only thing that gives me pause is I don’t have a crystal ball to know exactly what the environment is going to do and that’s why you’re going to hear conservatism.
There’s just no need for us to get out in front of the market. We’re just going to keep our heads down and do what we need to do to deliver earnings and cash flow.
Julio Quinteros - Goldman Sachs
Maybe if you could just help us distinguish between the volume commentary that you made earlier where you talked about double-digit transaction growth on the debit EFT side. Does that also include the check volumes and can you just sort of strip it apart a little bit to get a sense of what’s happening on the debit versus EBT and check sides.
Jeffery W. Yabuki
Sure. That did not include check.
That was really talking specifically about debit, EFT, and our bill payment businesses, electronic bill payment businesses. We continue to see deceleration in check.
The check business continues to be down. On an organic and a same institution basis check is down, a lot of move towards remote capture.
Those kinds of solutions, we’ve got a lot of activity in our FCN network which is also growing very rapidly. But the double-digit transaction growth is really in the debit and the EFT and the bill payment business.
We have other areas that are growing as well but those are the big drivers in the segment.
Thomas J. Hirsch
And just for clarity, the check business is actually in the financial segment, not in the payments business.
Julio Quinteros - Goldman Sachs
And the drags within payments other than the Bank of America stuff that we’ve been talking about for the last couple of quarters now, where would there have been weakness in the payment segment separate from the Bank of America situation?
Jeffery W. Yabuki
The big driver would be the decline in float revenue, which is 300 or so basis points this year reduction, plus we are anticipating another good size cut coming soon. So, that’s probably the biggest single driver.
Thomas J. Hirsch
When we look at the growth rate in the payment segment we reported 3% in the third quarter, up from 2% reported in the second quarter. And there is about a 3% negative regarding the BofA re-price and also the float.
And hopefully we have about $750.0 million of variable debt where we get the benefit on the bottom line in the interest, but this float does go through the top line, from the CheckFree business and that’s been a drag combined with the BofA piece of about 3%, as that has come down over the 2007-type levels. But our payments business, excluding those two items, and the float that is impacting many companies, I’m sure payroll processors, etc., we fortunately have a variable debt that we’re able to have those same servings so it doesn’t really hit our earnings from that standpoint.
But year-to-date through the third quarter, that payments business is 4%. Without those two items it’s 7%, which is at a good level.
We think we can do better but still, it’s strong from that standpoint.
Julio Quinteros - Goldman Sachs
And I think the other metric that you do provide is the transaction growth and if I’m reading this correctly it looks like it’s about 12% for the quarter and still 13% or so, year-to-date, on the electronic payment side?
Jeffery W. Yabuki
That’s correct.
Julio Quinteros - Goldman Sachs
One quick thing on the balance sheet. The decline in deferred revenues and if you could just give what the pieces are in the other long-term assets line.
Thomas J. Hirsch
The biggest change we’ve had on the balance sheet is, remember, as I indicated, we sold our majority interest in our insurance business. So what happens from a balance sheet perspective is many of those assets and liabilities are now netted in one line item called Investment in Unconsolidated Subsidiary.
So when you look at our balance sheet you’re going to have changes from the end of the year related to the assets and liabilities that have come off in that. So the other long term assets is really the net investment in our insurance business.
Regarding deferred revenues, overall they’re down as you look at our cash flow on page 9 of our press release, right about the same levels as they were last year. So we haven’t really had any significant change.
It’s typically timing. The fourth quarter is typically a build-up of deferred revenue associated with maintenance billings for the next year.
So when you look at year-over-year, the balance sheet is a little odd because the insurance deferred revenue is no longer in there compared to December 31. But when you look at the cash flow, they’re fairly on the same level compared to last year.
Operator
Your next question comes from Kartik Mehta - FTN Midwest Research.
Kartik Mehta - FTN Midwest Research
Jeff, I wanted to ask you about what you believe might be the biggest challenge in 2009. Is it just the fact that you could have more consolidation and in essence net losses that you might not foresee?
Or do you think there are other challenges that might occur?
Jeffery W. Yabuki
As it specifically relates to 2009, I don’t see consolidation, in and of itself, to have a material impact on our actual revenue line, which you know, you assume that’s the bigger of the issues. I think, frankly, the state of the economy, and that impact on our clients and how our clients spend is the biggest issue.
And again, because the majority of our revenues, the substantial majority of our revenues, come from the community-based institution group that generally we are their core processors, we think that’s a very stable group of revenues. But on the fringes, you are going to have issues around if the economy continues to look the way it looks now, you’re going to continue to have slowing in some professional services and one-time license sales and those types of revenues.
And frankly, the home equity business could get worse. It could be worse in 2009 than it is now.
At some point that will kind of hit a natural floor but it could get worse. When I think about what are the things that could go wrong, I think those are far more impactful than the impact of consolidation on our 2009 results.
Kartik Mehta - FTN Midwest Research
Are you able to quantify at all what the drag has been so far from the professional services and the license revenue?
Jeffery W. Yabuki
It is difficult to share it because we would have to start breaking the businesses well outside of the way we typically talk about them. But what I can tell you is that in our credit union businesses for example, those businesses tend to be businesses that are more in-house so they’re not outsourced.
The things like processing system upgrades are not things that are required. People have discretion to do them.
And that business, as we’ve said all year, has been weaker this year than it has in the last. And I think you’ve seen some of our peers make similar comments.
So that’s a sizeable business for us. There is no big hole but there are little pockets all over that in the aggregate end up to be more than rounding errors.
Kartik Mehta - FTN Midwest Research
Considering what we’ve seen in the past 6 to 12 months, the activity and what’s happened to banks, would you have made any changes in that CheckFree acquisition at all or do you think the opportunities are almost the same as what you saw or nearly the same as when you acquired it?
Jeffery W. Yabuki
I actually think the opportunities that we have with CheckFree today, what we see as the opportunities, are far greater than we were at that time when we originally acquired, or thought about acquiring, CheckFree. We will certainly talk about that next month when we get together for Investor Day.
But we have executed far better on the cost side. We thought there was some risk that we would not be as competent as we are, or have been, to executing on the cost side.
Frankly, even though we’re not saying that the cost synergy opportunities we have are larger than we originally committed to, we see more opportunity there than we have. How we execute against that, we still have time to figure out.
The businesses and the opportunities that we have, given the client base, we didn’t understand how impactful it would be to go to market with the Legacy Character folks and the Carillion folks and the CheckFree folks and combining them with Fiserv. That’s become a very powerful combination.
The relationships that we have and our ability to distribute products across the market is far greater than we thought. And then right in the heat of the moment is the CheckFree, kind of legacy CheckFree, the bill payment business, is a jewel.
It is an incredible technology. The importance of ACH-based payments, we believe is unbelievable for the future.
And the new Online Advantage is going to move so far ahead of the rest of the industry. And the next generation behind that, that’s in development now, is light years ahead.
So, we’re excited. Whether they be on the risk side or the traditional bill payment side, it’s way better than we thought it was going to be, and it’s hard work along the way.
But the organization is coming together, the catalyst in the environment has been good for us and we’re excited.
Kartik Mehta - FTN Midwest Research
I just want to make sure I got a clarification. Earlier you had stated that all the large bank M&A activity that happened would be neutral.
And I’m assuming you meant both neutral from a revenue and earnings standpoint, or margins standpoint. Would that be accurate?
Jeffery W. Yabuki
Yes, I was really talking more from a revenue and an earnings standpoint. I haven’t done the math at this stage to say it’s margin, but generally we think it will be neutral and I think you could say that within a standard deviation all three of those would fit.
Operator
Your next question comes from Gregory Smith - Merrill Lynch.
Gregory Smith - Merrill Lynch
Jeff, you mentioned potentially passing some one-time work or revenues that you can get in favor of focusing on higher quality, recurring and margin profile. What are some examples of that one-time work?
Jeffery W. Yabuki
We have had several opportunities during the year to engage in large check-oriented transactions where you would invest capital, get very large streams of revenue. You drop those in so you basically lose a little bit of money, maybe break even, not unlike what you say Fiserv do a couple of years ago when it did its Australia transaction.
And that would have the effect of juicing the organic growth rate. But we just think it’s low quality and we’re not willing to do those kinds of things.
Conversely, we have other deals out there that we’ve put together that have been actually quite attractive. Looking at our IP footprint and remote capture and those are just starting to come on line.
They’re not moving the needle enough yet. And unfortunately there were a couple of others out there that may have gone away, in some of the consolidation that’s occurred.
But it’s those kind of more innovative transactions that we’re looking at and all we were saying is we’re just not willing to take on the risk of applying capital just to bring in revenues that add to the top line but they just don’t do anything other than make it more difficult to execute. And they tend to be a little bit more one-time because once you anniversary that it’s hard to continue to grow off of it.
Gregory Smith - Merrill Lynch
And you had talked previously about with the change in CheckFree’s fiscal year end that maybe there was some license sales that typically would have been done in the June quarter getting pushed into the December quarter, given the incentive structure with salesmen. Is that kind of swamped by everything else going on at this point?
Jeffery W. Yabuki
Yes, we clearly saw a push in Q2 as the old sales year closed. We think we will get a little bit more of a push in Q4.
We have considered that. But I think the noise in the environment is going to trump the push that people will make to try to get some quota credit in before the end of the year.
Gregory Smith - Merrill Lynch
Just looking at your stock price, the stock price of some of your close competitors, you are all doing the same thing. The obvious conclusion would be that we could see some consolidation within the industry at some point.
I guess the question is at what point do you and maybe some of your competitors sort of feel pressured to pursue that strategy as a way to potentially increase earnings growth? Would it take another couple of years of this environment or do you think something could happen potentially sooner?
Jeffery W. Yabuki
That’s a little bit of a crystal ball question. I think the precipitous decline in the stock price of a sector is much more geared towards kind of a fear of what does a consolidation mean to the industry.
That notwithstanding, I think I am on record, as are several of my other colleagues who run our peer firms, saying that there are probably too many competitors in this space. So I think it’s more at some point, is there more value to be created for shareholders by putting some of these firms together?
Can you attack the market differently? Much like we did when we did the transaction with CheckFree last year.
I think there will be some movement in our space over the next year or two. But I thought that before the decline in the stock market.
And this could change the patience quotient for some shareholders. But I think that most people that understand this sector as you do know that the noise that’s going on right now isn’t really going to have a long-term effect on the revenues that are being generated here.
And I think things will settle out and we’ll have to see what happens as we move into next year.
Operator
Your next question comes from Charles Murphy - Morgan Stanley.
Charles Murphy - Morgan Stanley
Given some of that consolidation among large banks out there, I know that Bank of America is CheckFree’s largest customer. But are there any other major negotiations you may be working on over the next year that could cause some pricing surprises?
Jeffery W. Yabuki
Certainly no client has the scale that Bank of America has. We have, across the legacy CheckFree business, as it is across all of our businesses, because we have long-term contracts.
Anywhere between 10% and 20% of our contracts, 30% in some businesses, come up for renewal each year. We have compression on many of them.
I can tell you that we had compression this year that we’ve covered that was sizeable and we’ll continue to have that each year and it’s been going on for a while. So I would say I can be confident right now that there’s nothing out there that I can see, based on the world as I know it, that would cause us to come out and say that we have had to take a compression hit that is going to change our numbers at all.
So we are very comfortable with that. Our renewal cycles are fine.
We have good visibility into them and we are comfortable that we won’t have any issues there.
Operator
Your next question comes from Paul Bartoli – PB Investment Research.
Paul Bartoli – PB Investment Research
On the financial margins, I understand what you are talking about with the license fees and what not, but if you look year-on-year, margin is still down in financial 150 basis points or so, excluding the term fees. Is there anything else affecting that?
Have you seen pricing getting tougher or are clients coming back to renegotiate? Is there anything else impacting that?
Thomas J. Hirsch
I just think the largest thing has been in our lending businesses. As those continue to contract I think our revenue in our home equity business is down $50.0 million to $60.0 million in that particular segment.
And that does have an impact on our overall margins for that particular group. The other thing I would say, as Jeff has highlighted, is that some of our license-related revenue, which again is a small part of the company but to the extent that’s deferred slightly and those purchases are down, that is higher margin type revenue that actually hits the bottom line.
But outside of those particular areas there is really nothing significant in that segment from that standpoint.
Jeffery W. Yabuki
We’re actually pretty pleased, to be honest, that we have been able to actually take the actions that we have been able to take in that segment given the large reduction that we’ve have in revenues and even have margins at that level. So we feel pretty good about that.
And again, we think we will have a reversal of fortune moving forward.
Thomas J. Hirsch
And I would again comment that the overall margins of the company last year were 24.5%. This year year-to-date they are 26.1%, they’re up 160 basis points, which is very strong performance from that standpoint.
Paul Bartoli – PB Investment Research
And on the financial revenues, even if you exclude home equity you’re looking flat in the third quarter. Given what we heard from some of your competitors, I’m a little bit surprised, given the recurring nature of the business, that it’s not up at least a little.
Are you seeing anything that is getting tougher as far as maybe attrition, is cross-sales not going as planned?
Jeffery W. Yabuki
The couple of things that see are we have very little international business and so for us we have not been able to get any benefit from the growth that has been occurring outside the U.S. in 2008.
And in fact, much of the international business that we have was actually mortgage-related and so when the mortgage market started going the wrong way at the end of 2007 and into 2008 that actually had a pretty negative impact on us. Again, we don’t talk about that all the time because we don’t think there is any value in doing it.
But the second thing is that we don’t have big, big software license sales and big, big installations of professional services. So we can’t go out and sell, if we have a hole that gets created, we can’t really go out and sell or change that through the delivery of a license or a professional service contract.
So from our standpoint the good news is we have a lot of visibility into what our revenues are going to look like. The bad news is if something starts going the wrong way it is very difficult for us to turn on a dime.
And then lastly, just to say it one more time, the home equity business, which is probably down $100.0 million or $120.0 million since its peak four or five quarters ago, that business was unusual. Most of our competitors didn’t have them and today they don’t have them at all.
I think even the closest competitor has now spun that off. So we retain that drag in our numbers.
And unfortunately there is nothing we can do about it. But I think those are the primary differences when you look at a high level contrasting what we’re doing versus the competition and why our growth rates haven’t stacked up at least in this quarter.
Paul Bartoli – PB Investment Research
On the payment margins, just to clarify, the results were real strong there and the margins, but is there seasonality in that business in the margins in the third quarter?
Thomas J. Hirsch
Again, I don’t like to comment on a quarterly margin but I would say that we do have some permanent things there with the cost synergies that we talked about so I don’t think we had anything too unusual as far as the third quarter goes. But again, we’re focused on driving year-over-year margin improvement; do not look at individual quarters.
We do from a progress standpoint but we don’t know of anything in there that’s unusual from the standpoint that would say one way or the other in a significant trend. Besides the year-to-date is up, as we indicated, about 300 basis points.
Jeffery W. Yabuki
Thank to those of you left for joining us this afternoon. I know the call went a little bit long.
If you have further questions please give David a call. Other than that, we look forward to seeing everyone on November 11.
Operator
This concludes today’s conference call.