Feb 3, 2011
Executives
Thomas Hirsch - Chief Financial Officer, Principal Accounting Officer, Executive Vice President, Assistant Secretary and Treasurer Jeffery Yabuki - Chief Executive Officer, President and Director Mark Ernst - Chief Operating Officer and Executive Vice President
Analysts
Brett Huff - Stephens Inc. Greg Smith - Duncan-Williams, Inc.
David Togut - Evercore Partners Inc. Christopher Shutler - William Blair & Company L.L.C.
Bryan Keane - Crédit Suisse AG Tien-Tsin Huang - JP Morgan Chase & Co David Parker - Lazard Capital Markets LLC David Koning - Robert W. Baird & Co.
Incorporated Darrin Peller - Barclays Capital John Williams Glenn Greene - Oppenheimer & Co. Inc.
Operator
Welcome to the Fiserv Fourth Quarter 2010 Earnings Conference Call. [Operator Instructions] Today's call is being recorded and is also being broadcast live over the Internet at www.fiserv.com.
In addition, there are supplemental materials for today's call available at the company's website. To access those materials, go to the company's website at www.fiserv.com, and click on the Access Presentation link on the home page.
The call is expected to last about an hour, and you may disconnect from the call at any time. Now I will turn the call over to Jeff Yabuki, President and CEO of Fiserv.
You may begin.
Jeffery Yabuki
Thank you. Good afternoon, and thanks for joining us for our fourth quarter and year end earnings call.
With me on the call today are Tom Hirsch, our Chief Financial Officer; and our new Chief Operating Officer, Mark Ernst. 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 internal revenue growth, adjusted earnings per share, adjusted operating margin, free cash flow, sales pipelines 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 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 our 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. On January 3, we announced the addition of Mark Ernst as Fiserv's new Chief Operating Officer.
Mark is a talented senior leader, with more than 25 years of experience in the financial services industry. As Chief Operating Officer, he will bring additional leadership to important opportunities such as integrated product delivery, service excellence and the achievement of our new operational effectiveness cost savings goal of $250 million.
I've known Mark for many years, and I'm confident that he will further accelerate our progress. We're pleased with our performance in the quarter and the full year.
In 2010, we met our commitments, including each item within our annual guidance. Importantly, we returned to positive internal revenue growth, achieving just over 1% for the year, led by full year adjusted revenue growth of 3% in the Payments segment.
Adjusted internal revenue growth in the fourth quarter was 2% versus a very strong comparable and sequential quarters. We achieved 3% growth in our Payments segment, and 2% in our Financial segment.
Revenue growth in the second half of the year was stronger as expected. Adjusted earnings per share of $1.06 was up 13% in the fourth quarter.
Full year adjusted EPS growth of 11% was at the high end of our 2010 guidance. We also generated a record level of $735 million in free cash flow, which exceeded our full year guidance.
Free cash flow per share was even better, growing 13% to $4.85 for the year, and over the last four years, per share growth has averaged 23%. As you will recall, we established three key enterprise priorities in 2010.
First, to deliver positive adjusted internal revenue growth and meet our earnings commitments. Next, to center the Fiserv culture on growth, leading to improved enterprise win rates and a higher share of our strategic products.
And third, to provide innovative solutions that increase differentiation and enhance results for our clients. Adjusted internal revenue growth improved from negative 1% in '09 to positive 1% in 2010 with growth accelerating in both segments.
Our strong base of recurring revenue has helped us navigate the challenges of the last few years and provides a solid foundation for future growth. Our 11% adjusted earnings per share growth in 2010, which as I noted, was at the top of our guidance range, also included important investments in innovation.
Adjusted operating margin, which we consider to be a key indicator of financial health, increased 70 basis points for the year and has expanded 650 basis points over the last four years. Changes in our business mix, integration benefits and the success of our operational effectiveness initiatives have combined to significantly improve the quality of our earnings.
At our Investor Day in October, we shared with you the progress we were making against our second priority, to center the Fiserv culture with growth. Quota attainment was 145% in the fourth quarter and a strong 115% for the full year.
In addition, we continue to increase the level of add-on sales to existing clients, which is evident in our strong integrated sales results. Sales of our strategic solutions were particularly strong in areas such as electronic banking, Biller solutions and account processing.
In 2010, we sold Corillian Online, our industry-leading integrated Internet banking and bill payments solution to top financial institutions such as U.S. Bank, OneWest Bank, Central Bank and Kern Schools Federal Credit Union.
Our win rate in competitive account processing transactions continued to well exceed our market share, and we recorded important wins internationally for our leading channel solutions, including Virgin Money in the U.K., Shenzhen Rural Commercial Bank in China and the online channel transformation project for The WestPac Group in Australia. We'll continue our strong focus on growth and believe that should lead to even better results in the future.
Our third priority is around innovation. Through the downturn, we’ve continued to increase our investments in those areas which we believe are important drivers of the success of our clients.
In the summer of 2010, we launched ZashPay, our P2P solution that enables a quick and easy electronic movement of money. As of December 31, more than 600 financial institutions have agreed to offer ZashPay to their customers.
As some competing P2P solutions attempt to siphon deposits away from the banking industry, ZashPay could help financial institutions build more customer loyalty, and if they so choose, generate a much-needed fee income. We continue to build momentum with Acumen, our next-generation account processing platform for large credit unions.
We had five U.S. credit unions commit to the Acumen platform in 2010.
Notably, each of our new Acumen clients purchased a broad suite of products, including high-value payments products, demonstrating our ability to expand share and deepen our account processing relationships. Based on strong interest in Acumen and the strength of our pipelines, we anticipate additional important wins in 2011.
We believe we can move the market in new and unique ways through original innovation. As a proof point of our focus, we filed 10 new patent applications in 2010.
We believe these innovative concepts provide an opportunity to increase Fiserv's differentiation and boost revenue and earnings for our clients. Additionally, we were awarded 22 new patents during the year, demonstrating the creativity and ingenuity of our associates around the world.
With that, I'll hand the discussion over to Tom to provide more detail on our financial results.
Thomas Hirsch
Thanks, Jeff, and good afternoon, everyone. Total revenue and adjusted internal revenue grew 2% in the quarter.
This performance was in line with expectations given our strong third quarter performance as well as last year's exceptionally strong fourth quarter. Both segments contributed to our solid revenue growth in the quarter.
Company adjusted operating income increased 8% in the quarter to a record level of $305 million. Overall adjusted operating margin in the quarter increased 160 basis points over last year to 29.7%.
The margin increase in the quarter was due primarily to strong sales to existing clients, growth in our higher margin businesses, particularly in the Financial segment, and a decrease in discretionary compensation costs compared to the prior-year period. Adjusted earnings per share in the quarter increased 13% to $1.06, which excludes an $0.11 charge from the early debt extinguishment in the quarter resulting from our debt refinance.
Adjusted internal revenue growth for the full year was 1%. 2010 adjusted earnings per share was $4.05, an 11% increase over 2009.
Importantly, adjusted operating margin for the year was 29.4%, up 70 basis points compared with 2009. As Jeff mentioned upfront, our performance against each of these important financial metrics was within our annual guidance ranges presented in early 2010.
Free cash flow for the year was again exceptional, increasing a more than expected 10% to a record $735 million and exceeding our guidance range of 5% to 8% for the year. Free cash flow performance in the quarter excludes an $89 million combined dividend and loan repayment from StoneRiver, an entity in which Fiserv owns a 49% interest.
As Jeff noted earlier, free cash flow per share was up an even stronger 13% to $4.85 over 2009 and continues to reflect our disciplined capital allocation and the quality of our earnings. Now onto the segment results.
Payments segment adjusted revenue was $530 million in the quarter and $2 billion for the year. Our fourth quarter and full year internal revenue growth was a solid 3%.
For the full year, each of our major businesses within the Payments segment grew, except Output Solutions, which was down over the prior year. Total income remained at historically low levels.
Bill payment transaction volume increased 6% in the quarter and 7% for the full year. Excluding our two largest bill payment clients, who experienced slower than normal growth this year, we continue to see double-digit average transaction growth on our large base of transactions.
At the same time, we have continued to expand our client base, adding more than 1,500 new bill payment clients since the acquisition of CheckFree. Interest remains strong in channel solutions as financial institutions around the world consider how to update their online and mobile banking experience to meet the demands of a digitally connected world.
Debit transaction volume increased 21% in the fourth quarter and 22% for the year. The growing utilization of debit across our financial institution base, coupled with our demonstrated ability to add new debit clients, is driving better than market growth for this very important solution.
Even in the face of regulatory change, we expect to see continuing attractive growth in our debit-related businesses. Operating income for the Payments segment was $167 million in the quarter and $625 million in the year.
Adjusted operating margin was 31.5% in the quarter and 31.2% in the year, down 60 and 50 basis points, respectively, from the prior-year periods. This is primarily due to the incremental investments we made in 2010 in areas such as mobile banking, ZashPay, online banking and Smart connections within our Biller solutions business.
The Financial segment generated revenue of $506 million in the quarter and $2 billion for the year. Internal revenue growth of 2% in the quarter was a solid finish to 2010.
Although adjusted internal revenue growth was up just slightly for the year versus 2009, we experienced good quarterly revenue progression through 2010. We continue to see strong performance in our market-leading account processing businesses, both in terms of sales to existing clients and winning more than our share of available clients in the market.
This growth was partially offset by weakness in the mortgage businesses and a continuing secular decline in item processing. Financial segment operating income was $161 million in the quarter and $591 million for the year.
Operating margin in the quarter was up sharply to 31.7%, an increase of 320 basis points over the prior-year period driven by a favorable mix shift to higher margin revenue, operational effectiveness saves and lower discretionary compensation costs. For the full year, operating margin in the segment was up 100 basis points to 30.3%.
Adjusted operating loss in our Corporate and Other segment was $23 million in the quarter, up $1 million over the prior year. For the full year, adjusted operating loss in the segment was $61 million, a $13 million decrease versus 2009.
Total debt at year end was up $3.4 billion, representing about 2.5x 2010 EBITDA. In the fourth quarter, we completed the tender offer to repurchase $250 million of our outstanding 6% senior notes due in November 2012.
We also repaid an additional $100 million of our term loan in the quarter. The $750 million refinancing completed in the third quarter extended our average maturity significantly at a historically low interest rate of roughly 4%.
Our next mandatory debt repayment is in November 2012. Our effective tax rate in the fourth quarter was 40% due to a noncash deferred tax expense originating from a tax-versus-book basis difference attributable to our equity investment in StoneRiver.
While this was partially offset by the reinstatement of the R&D tax credit, the combination of these items still resulted in a negative $0.02 per share impact both in the quarter and for the year. Our effective tax rate was 38% for all of 2010, which is slightly higher than what we expect in 2011.
We repurchased 2.9 million shares of stock in the quarter for $164 million, and for the year we bought back 8.1 million shares of stock for $418 million. Since the beginning of the downturn in 2008, we have repurchased about 14% of our outstanding shares, or nearly 23 million shares at an average cost of about $45.50 per share.
As of December 31, we had about 6 million shares remaining on our existing repurchase authorization. Now let me turn the call back over to Jeff.
Jeffery Yabuki
Thanks, Tom. As you know, at the beginning of 2010, we established a global sales organization to better focus the company on growth and improve our go-to-market execution.
We're very pleased with the early results. Quota attainment for the year was 115%, fueled by strong second half performance, even as compared to last year's very strong fourth quarter sales.
Given the 2010 sales quota level was increased over the prior year, we feel even better about the actual results. The outlook for predicted IT spending has become slightly more positive over the last quarter, which has helped fuel our pipeline even in light of our strong sales finish to the year.
However, clients and prospects remain disciplined in how they deploy their capital, and we believe that the pairing of an undefined regulatory landscape with environmental challenges will continue to impact sales cycle. Integrated sales were strong at $44 million in the quarter and $132 million for the year, achieving 126% of our 2010 target.
Sales of payment solutions continue to be strong along with channel, risk and efficiency-based products. As of December 31, total program integrated sales reached $365 million, eclipsing our original integrated sales goal of $360 million two full years early.
Payments momentum continued with 537 new bill payment clients and 218 new debit clients added in 2010. We've had over 600 clients commit to our a new P2P service, ZashPay, since its introduction in 2010.
In these three areas alone, over 1,300 clients made a Fiserv payments decision, which should convert to attractive streams of recurring revenue and financial institution value over the next several years. We achieved $55 million in annual cost savings in 2010, which represents 138% of our operational effectiveness target for the full year.
Since 2007, we delivered over $270 million in annual cost savings, surpassing our $250 million target more than one year early. As we shared with you at our October Investor Day, we believe there is material opportunity to gain efficiency, and we're confident that we will achieve our new operational effectiveness target of $250 million over the next five years.
Before I get to guidance, let me update you on the environment and our 2011 priorities. Regulatory actions in 2010 were up 15% to 181 institutions, impacting 157 banks and 24 credit unions, or about 1% of all financial institutions in the U.S.
Total assets impacted were down 50% versus 2009. Since the third quarter of '09, there has been a downward trend in the number of actions each quarter, both in terms of number of institutions and the impacted assets.
However, as the number of institutions on the FDIC watch list has continued to grow, we believe that will lead to continuing regulatory actions. Since 2008, our net client losses have been less than 1/2 of 1% of our total account processing client base and assuredly less than we would've experience in a normal M&A environment.
We expect the number of regulatory actions to be down year-over-year and in a range of 130 to 170 in 2011. For reference, through January 28 of this year, there had been 11 regulatory actions versus 16 in the comparable prior-year period.
We expect traditional de novo activity to remain low during the year, and we also expect the number organic acquisitions, non-FDIC-assisted to increase to a higher level than we have seen over the last couple of years as stability slowly returns to the market and scale opportunities become more attractive. Given our share, we know we will have wins and losses in the acquisition category.
However, when a client is acquired in a voluntary M&A transaction, we typically receive a termination fee, which is a normal high-margin component of our revenue. During the last two years, termination fees have been far lower than we have seen historically.
The impact of the comprehensive changes in the regulatory environment continues to be an unknown, and Washington still needs to turn thousands of pages of legislation into specific rules and regs. While at first blush it appears that the largest institutions will be affected the most, we believe that the entire industry will change as financial institutions look for new ways to replace earnings that are under pressure.
Even with the Fed's current interpretation of the Durbin amendment, we continue to believe that the risks and opportunities for Fiserv of the evolving regulatory environment are balanced. While the confusion is being sorted out, we will continue to help our clients leverage technology to take advantage of emerging digital channels, grow assets, increase revenue and drive efficiency throughout their entire organizations.
Before I get to guidance, let me share our 2011 priorities, which are, by design, very similar to that of 2010 and focused on creating value for our primary stakeholders. First, to deliver an increased level of high-quality revenue growth and meet our earnings commitments.
Next, to center the Fiserv culture on growth leading to more clients, deeper relationships and a larger share of strategic solutions. Third, to deliver innovation that increases differentiation and enhances results for our clients.
Our outlook for 2011 is based on an assumption that technology spending and the overall environment will be incrementally better than 2010 but still not at the average rate of growth we expect to see over the next three years. We also believe that client spending will again be weighted towards the second half of the year.
We expect our 2011 adjusted internal revenue growth to be in a range of 2% to 4%, and that revenue growth will be higher in the Payments segment. We also expect our growth to be stronger in the second half of the year due to the environment and the implementation effect of our strong sales year.
As a footnote to our internal revenue growth for the year, we have two items conspiring against our 2011 growth rate which are included in our guidance. First, we anticipate that the majority of the conversion of the Wachovia bill payment business from CheckFree RXP to Wells Fargo's proprietary technology, which began in the later part of 2010, will be substantially complete by the end of the year.
And second, we will experience a larger than expected decline in the Check business in 2011 due to volume declines and the impact of electronification on paper items. Together, these two items create a drag of about 150 basis points on our 2011 revenue growth rate, which we expect will moderate materially in 2012.
We anticipate 2011 adjusted earnings per share growth of 9% to 12%, or a range of $4.42 to $4.54 compared to the $4.05 earned in 2010. As with revenue growth and giving weight to seasonality, we also anticipate earnings to be stronger in the second half of the year.
We expect that overall adjusted operating margin will increase at least 50 basis points over the 29.4% achieved in 2010. We also anticipate free cash flow will increase 5% to 8% over 2010's record level of $735 million.
Our guidance for the year contemplates continued investments in strategic solutions, which enhance our competitive differentiation and strengthen the foundation for long term, sustainable revenue growth. These investments are in areas such as P2P, mobile and online banking, Acumen and business intelligence.
We'll monitor changes in the market environment and continue to balance investment levels with our earnings commitments. 2011 marks year one of our new five-year targets for both integrated sales and operational effectiveness, which are $950 million and $250 million, respectively.
Our integrated sales target for the year is $155 million, which will include the new non-account processing client focus. Our target for operational effectiveness in 2011 is $25 million, which, as we shared at Investor Day, will exclude any nonrecurring costs related to the multiyear cost saving effort.
Lastly, as we have for the last several years, we will continue to supply key business metrics along with earnings each quarter. Given the strategic focus shared at our recent Investor Day, we anticipate some additions and deletions to our current metrics to allow you to gauge our strategic progress.
We will share the new metric lineup when we report our first quarter results in April. In 2010, we saw a return to growth and delivered on our financial commitments.
We're creating value for our clients, and we'll continue to invest in strategic solutions that can deliver even more in the future. Although the last several years have been challenging, I'm optimistic about our future.
Our solutions are the strongest scenarios that matter most, and we have momentum going into 2011. Each of our associates play a key role in the company's success, and it's that talented group that will create value for clients and you, our shareholders, for years to come.
With that, let's open the line for questions.
Operator
[Operator Instructions] Glenn Greene from Oppenheimer.
Glenn Greene - Oppenheimer & Co. Inc.
I guess, the first question, just wanted to ask, talk about sort of the market, the macro sales climate and sort of the industry growth expectation. At your Analyst Day, just back in October, you sort of talked about 3% growth for the market.
It kind of sounded like maybe you were tempering that a bit. I'm not sure if I heard that right.
And if it is still 3%, I was just sort of curious that the midpoint of your internal growth is sort of smack in the range there.
Jeffery Yabuki
Sure. So Glenn, when we were at Investor Day, we talked about our belief that over the next few years, that IT spending for the sector would average around 3% over that period.
But that would build over the next several years, and we didn't expect that to be a flat line over the period and we see 2011 building into that average. So if you just use some simple math, you would expect it to be arguably lowest in 2011 and highest in 2013, just if you were seeing that kind of a bill.
And our guidance contemplates that kind of a bill. Arguably, we've seen more optimism in the space over the last few months than we've seen really all of last year.
That was apparent in our pipeline. It was apparent in our sales results, and frankly, there's a good level of optimism.
I think we're taking a more measured and pragmatic approach, knowing that we need to see more than a month or two or three to believe that's enough to base all of our guidance on. So we're really using data points that stretch back from what we saw during the majority of 2010, what we're seeing more recently and the sales results that we had during the year.
So all of that measures up to be, we would say, we're slightly more optimistic or I would say our clients are slightly more optimistic than they were several months ago. And we'd like to see that continue over the next quarters or two.
Glenn Greene - Oppenheimer & Co. Inc.
And then different direction, maybe a little bit of commentary related to Durbin as it relates to exclusivity, just sort of what you're hearing coming out of D.C. and sort of potential for you.
Or how are you sort of thinking about the opportunity as it relates to exclusivity, specifically on PIN side?
Jeffery Yabuki
Sure. So I mean, clearly, the first cut at the Durbin rules made that about as clear as you could be that that's going to end up being the standard.
Now perhaps that will change, but certainly the first cut looked like that. And we believe that given the success that we've had with the ACCEL/Exchange network over the last few years and the conversations that we're having right now, I would say that's one of the areas that we would say there is reasonable opportunity.
And we will continue to work with the marketplace to try to take advantage of those opportunities where it makes sense for the clients and us. Again, I think it's too soon to call that, but we feel good about the conversations that we're having today and again, believe that to extent there's benefit to be derived from the marketplace, it will be one of the beneficiaries of that opportunity.
Thomas Hirsch
And the other thing I'd add to that, Glenn, is we built up our capabilities in this area significantly over the next several years both from a sales standpoint and delivery standpoint for the Tier 1 and 2. So we're excited about that opportunity, but as Jeff indicated, it's early.
But I think clearly, we view that we're going to have some larger opportunities in that particular space as we go through 2011.
Operator
Dave Koning from Baird.
David Koning - Robert W. Baird & Co. Incorporated
First of all, I just wanted to look at the margin progression. This year, the FI margins were up about 100 basis points for the full year, and Payments were down about 40 basis points for the full year.
I'm just wondering, if you can just review that again. I remember, I know on different calls you talked about that, but now we have a full year under our belt.
Maybe you can just talk about that a little. And then, how do you look at the segments going forward?
Would you expect both to expand in 2011?
Thomas Hirsch
Yes. Absolutely, Dave.
That's a great question. I would say of the Payments side, as you highlighted, our margins were down.
I think that is the area that we have made more investments. And as you know, most of our investments continue to run through our income statement, our P&L, because a lot of that is headcount-related.
And Jeff went through some of the items, I think, in his remarks, but around ZashPay, around mobile, in our debit business, in our bill payment business, in our online channel, online banking business, which, as you know, we've had some second wins there; in our Biller solutions business, which we kind of highlighted at Investor Day. So those areas have been incremental areas of investment to really drive longer term growth.
So we have invested in there in those opportunities, and we'll continue to do so going forward because we think that's very important to drive growth in 2011, '12 and beyond. And so I would say it's really a higher level of investment in there.
Nothing's really changed from the margin characteristics of that business. But again, we just continue to invest more there because there are more opportunities to really grow our top line in that particular area.
In the Financial segment, we just continued through our operational effectiveness initiatives, et cetera. And also the check processing business, which I know we talked about before, as that kind of electronifies, we kind of pick up on the margin end.
But we also have very good scale businesses as you know, Dave, in the Financial segment in our account processing area. As we continue to sign those core clients and put them on to our platform, we really have some good scale businesses there.
So we're going to continue to see good increases going forward. Our guidance next year is 50 basis points plus depending on the level of investment.
But we're going to continue to see good margin expansion. As you know, we've done about 700, 650 basis points over the last four to five years, had a good year this year, and finished the year really at a record level from a margin standpoint in the quarter.
So we feel good about that going into next year.
David Koning - Robert W. Baird & Co. Incorporated
And then two real quick ones, just term fees in the quarter and will StoneRiver continue to generate about the same affiliate income for you even now that they paid out the $89 million? I guess just those two quick ones.
Thomas Hirsch
Yes. Dave, on the first one, yes, we had about $4 million of term fees, which is up, I think, $2 million to $3 million over the fourth quarter of last year.
Our license fees were still down slightly over last year. Though also in the quarter, they were down about $4 million to $5 million.
But we still had a good quarter sequentially in license revenue over the third quarter. And so good there, but term fees were up very small again in the current year from that standpoint.
Regarding the StoneRiver question, to highlight what you said, is we did get a dividend and loan lower repayment of about $89 million, $90 million. We did back that out of our free cash flow, but that should not impact their equity earnings going forward.
So as far as their level going into next year, it should be right around the same level or so.
Operator
[Operator Instructions] Bryan Keane from Crédit Suisse.
Bryan Keane - Crédit Suisse AG
My first question is just about the Check business. I know, Jeff, you noted that as that business volumes are declining.
I guess, can you size that business for us? And I guess going into 2012, is it just becoming so small and it's not going to be material by then?
Jeffery Yabuki
Yes. The business is in the $200 million, $250 million range in terms of overall revenues.
And the drag, or the percent size of the drag, is pretty material. That's why we called it out this year, but there's another factor.
So it's not just that you have people writing less checks, but you have many more people converting those paper checks, specifically at merchant, like converting paper checks to electronic or whatever the case maybe. And so you have not just less checks, but you have less paper overall in the system.
And that's really a function of all of the capture, the remote capture, and things like that, that have been moved in the system over the last few years. As that has gotten up to scale, that's tipping or accelerating the level of decline in that business.
Now again, that will level out at some point, but it's going to continue to drag on us for a while.
Thomas Hirsch
Yes, and I think to Jeff's point there, Bryan, I think a lot of that electronification though, we should be -- by the end of '11, we believe we will be significantly along that ramp as far as electronification goes. So that compression as we look into 2012 should become much better because we just won't have as much as what we're going to experience here in '11.
And going into '12, we're going to be in much better position because that electronification is not going to be fully 100%, but it's clearly ramping to that particular level.
Bryan Keane - Crédit Suisse AG
And then I just want to ask about the operational effectiveness of $25 million. I guess that's kind of below last year's objective of $40 million, and I know the goal is, over five years, $250 million.
So can you just help us understand, is that number get greater as we go forward?
Thomas Hirsch
Yes, it will continue to build, Bryan. And that really is the same number that we presented on Investor Day, so that $25 million, because the next area of savings in the $250 million comprises of data center transformation and a number of other areas.
But that $25 million ramps up significantly to year two to over $50 million. We're not giving guidance on that right now.
But clearly, it's going to ramp up, and we have our plans. We're executing alone those plans and continue to refine those to accelerate as much of that as we can into 2011, keeping in mind the quality of our delivery and pacing that correctly over the next few years.
So we are continue to refine those plans. Mark is going to be helping a lot in that regard to execute that over the next five years, and we remain very confident in our ability to be able to obtain that $250 million.
Jeffery Yabuki
And Bryan, the other consideration on that is, if you go back and look at how we paced in the $270 million or so that we have adjusted our structure for, including the CheckFree synergies, you saw that build. I think it actually started around $15 million or so, then that built up to a crescendo and then it begins to tail off.
And that's really what's been going on that $44 million -- right, is actually I think less than it was last year. And that number will -- maybe something.
But remember, that whole $270 million is now built into our cost structure, and then this new $250 million is additive to that. So by the end of this five-year period, we'll have actually adjusted our cost structure by over $500,000,000 assuming that we get this right.
So they're just different streams that, that $25 million, to Tom's point, will grow to be in much larger level. And then that two will tail off.
It doesn't mean they're going away. It just means there is no incremental saves.
These are all incremental saves each year.
Operator
Chris Shutler, William Blair & Company.
Christopher Shutler - William Blair & Company L.L.C.
Jeff, looking at the 2% to 4% internal revenue growth guidance, what are kind of the one or two biggest swing factors, particularly get to the high end of that range?
Jeffery Yabuki
Yes, I would say it's the biggest opportunity that exists today. And earlier in 2010, early in the year in '10 -- sorry, I was getting my year straight -- we had talked about the fact that there were some larger transactions that we were in pursuit of.
Some of them we could announce publicly, and some of them we could not announce publicly. And one of those happen to be WestPac, and we announced that it was a large transaction.
Well, during the year, we ended up winning the transactions we thought we would be able to win. We didn't announce them because they were not announceable, but these are transactions that will be implemented over time.
And the constraints that we have are really around having to contend with resource constraints within these very large financial institutions. We have to effectively get into their development queues.
And some of the projects that we are working on, to the extent they can be moved in earlier, would have upside into our numbers for 2011. So that's the upside.
I think on the downside, to the extent that the economy itself begins to deteriorate down to levels below what we saw last year in 2010, I think that would create some downside in our numbers. Beyond that, I would say that on balance, we would say there's probably more opportunity in our numbers if the economy stays as strong as people are talking about it staying right now.
But we just don't see any reason, Chris, to get ahead of ourselves. We feel like we've got a reputation of doing what you say you're going to do, and that's what we're focused on right now.
Christopher Shutler - William Blair & Company L.L.C.
And then second question is actually on e-bills, grew about 2% to 3% this year. How confident are you guys that, that growth rate can materially accelerate at some point either in '11 or '12 off of that base?
And then with Wells taking their bill pay in-house, how do you think about the risk of other large FIs doing the same thing?
Jeffery Yabuki
Sure. Those are great questions.
I'm going to take the latter one first, then we'll come back. Wells Fargo did not take their bill pay business in-house.
Wells Fargo, a number of years ago, spent significant money and built their own bill payment system. What they did is they bought Wachovia back in '08, I guess it was, or '09 now, early '09.
And they planned all along to convert that. They began converting the Wachovia business over to their own proprietary system, and they plan to complete that in 2010.
So that's what happened in that case. And as it relates to others, I mean, we're very close to -- not surprising, we're very close to what's going on in the market.
Beyond Bank of America, which is a well known large client of ours, Wachovia was about a 1% client of ours, we have a handful of other clients, bill payment clients, that are, I'll call it, 0.5%. And then beyond that, there's little concentration, and even 0.5% is not material concentration.
The great news is we have renewed, most of it, not all of those agreements, over the last 18 months and we feel quite comfortable with that base of clients. So from that standpoint, we don't see any current risks.
So that's the good news.
Christopher Shutler - William Blair & Company L.L.C.
And then just final question, on ZashPay. Looks like you're charging, just on looking at the website, about $0.75 per transaction on your own website.
But I'd just be curious to hear how you're seeing most of the FIs at this point price the product or, if most, are giving it away?
Jeffery Yabuki
Chris, I will get to that e-bill question that I forgot to answer to. I got slapped by Tom for that.
But on ZashPay, yes, on the consumer side, we are charging $0.75. But most of financial institutions right now are looking at this.
They see it to be a very high-value solution. They think it's going to move into the kind of the daily habits of their consumers, and they see it as a way to build fee revenue.
So most of the clients that we're talking to right now are looking at ways to either charge for it. Many of them have already implemented and are charging for the send element.
And I've heard some clients talk about, well, if you use a debit card x number of times, they'll let you have Zash transactions. So there are a variety of ways that you can bundle these solutions to try to create more value for clients.
So my guess is it's going to become a fee generating item, and I think it will actually be quite helpful over the next several years for financial institutions as they look for that fee revenue. Just a quick comment on the e-bill.
We continue to think e-bill is critical, not just for the fact that it unlocks growth, but it's ordinarily differentiating us as it relates to bill payment experience. Tom, I think, mentioned that we are investing in our Biller area and through our SmartConnect product.
And so we are investing there. You'll hear more about that over the next year, and we are maniacally focused on unlocking some of the value that exists there.
You may remember, we've got, call it, $100 million of embedded latent revenue that's sitting there. And it's a fixed cost business, so there's a lot of opportunity there.
So we are focused on that as well.
Operator
Greg Smith, Duncan-Williams.
Greg Smith - Duncan-Williams, Inc.
Tom, the tax rate in 2011 is 37.5% about where we should look at?
Thomas Hirsch
I think that's in the range. It's going to be slightly better than 2010, which I'd say which is around 38%.
Greg Smith - Duncan-Williams, Inc.
And then the high tax rate in the quarter that clipped you for $0.02, when did you sort of know that, I guess, is the question? I mean, is it fair to say that, that was unexpected by you guys?
It certainly was by me?
Thomas Hirsch
Yes, it's fairly -- I mean, we had an item there that was associated with our equity investment, which was fairly unusual. It's a noncash item, Greg.
So again, it has nothing to do with what we're ultimately going to pay in taxes. And it just was a FASB 109 requirement, so recorded that.
It was offset a little bit by the R&D tax credit, but it's about $0.02 negative impact in the quarter for those two items.
Jeffery Yabuki
Greg, I think it's one of the challenges of having an equity investment, to some extent you take what you get.
Greg Smith - Duncan-Williams, Inc.
I know it's de minimis, the float income. I guess the question is, what's it going to take to actually move that?
Is it going to take the Fed actually raising rates because you invest at all such short term? Is that the case?
Jeffery Yabuki
That's correct, yes. So it's going to take exactly what you said.
Thomas Hirsch
You are right though, Greg. I mean, de minimis may actually be an understatement.
Greg Smith - Duncan-Williams, Inc.
And is there a rule of thumb what's the latest 1% move in the fed funds rate what that would do to EPS?
Thomas Hirsch
I think if we give 1% or so, it's $0.02 for every 1% that we kind of have.
Operator
David Togut from Evercore.
David Togut - Evercore Partners Inc.
First, Tom, could you comment on unit pricing that you've seen in the last six months both in the Financial segment and the Payments segment and then what you see going forward in 2011?
Thomas Hirsch
Yes, I think, David, we appreciate that question. And I think from a compression standpoint, which I think is what you're referring to, is the market continues to be competitive.
We have not seen a great change over the last six months as far as pricing goes. There hasn't been any improvements or really any detriment from that standpoint.
So that continues on about the pace it was. We clearly run the situations, as we always do, where competitors want to get into a certain client and/or a certain area, and that does happen on occasion where it can get aggressive.
But overall, there really hasn't been a significant change in the environment over the last six months. Jeff, I don't know if you have anything to add to that.
Jeffery Yabuki
The only thing I would say, David, is to some extent, as we see growing percentage over time, the notion of unit pricing is changing as we see bundles being a more predominant way to think about the pricing of the different solutions that are out there. But I would agree with Tom beyond that.
David Togut - Evercore Partners Inc.
And then the second question relates to capital allocation. And specifically, Tom, what is your appetite to buy back stock at current prices?
And perhaps, if you could compare that to your appetite to acquire at current valuations.
Thomas Hirsch
Well, as you know, David, and as you followed the company over the last several years, from a capital allocation standpoint, share repurchase is our capital allocation benchmark. We continue to be buyers of our stock.
We run an intrinsic value model inside the company clearly from that standpoint, and we'll continue to be buyers of our stock because that is really the benchmark that we use. And we continue to look clearly at acquisitions in the marketplace as we always do, but we do compare that.
That's our capital allocation benchmark, and I think our history speaks for itself as far as what we've done in that particular area.
Jeffery Yabuki
I would say, I think this year, we generated just south of $5 a share in free cash flow. I think, Tom, I think we're talking about being able to grow free cash flow and you can see our history in reacquiring our shares.
I think Tom talked about around 14% of our outstanding over the last three years alone. So if you just put those metrics together and you think about what's the right multiple against cash flow per share, just applying the bottom of our free cash flow rate, would be get to a healthy number above five.
I think you can make some assumptions on what the intrinsic value model might look like.
Operator
Brett Huff from Stephens.
Brett Huff - Stephens Inc.
Two quick questions. One is, can you tell us just more specifically about the very nice margin expansion that you saw in the Financial segment?
You detailed a little bit, but I wanted to make sure that I understood exactly all the moving parts on that. And going forward, you called out a few things that will help continue with that cost savings and things like that.
But will the thing that happened in the fourth quarter repeat itself?
Thomas Hirsch
Well, I think we don't -- the fourth quarter, let me just talk about the quarter for a moment. We did have a lot of good growth there from a top line.
If you compare it to the third quarter right, revenues were up in that particular segment, about $20 million. Most of that dropped to the bottom line.
Typically, in the fourth quarter, Brett, we do have some good purchasing from clients as far as license revenue goes compared to the third quarter. So when you compare the Q4 to Q3, we just had a lot of good incremental drop through in that particular quarter because, really, our license revenue in that particular segment was up on a sequential basis.
And we had a really solid quarter from that standpoint as far as that drop through goes. And in comparison to the quarter four of last year, again, good mix of revenue.
But also, we have some discretionary compensation expenses last year, which did not recur in the current year, which helped that year-over-year comparison. But I think going forward, we look at margins, sometimes these licensees will fall into the fourth quarter, sometimes into the third, sometimes into the second.
But overall, we're going to continue to grow our margins in both of our segments. We continue to have a number of opportunities, and we continue to have more outsourcing revenue in this segment.
And we have, again, good scale businesses. We have our new $250 million target for operational effectiveness.
We have a lot of things going on in our check business with electronification, and so we continue to have some solid opportunities there.
Jeffery Yabuki
The other thing I would add in there, Brett, is for the last couple of years, at least we've been trying to -- especially as revenue growth was hit so hard by the economy, we've been trying to point people to the fact that in places where we've been losing revenues, so take item processing for an example, we are replacing that revenue with much higher quality, much more attractive margin characteristic carrying revenue. And so we talked about some of the drag that we're going to have this year on our organic growth rate.
We're still going to grow in a range of 2% to 4%, but we're going to replace all that revenue. And the IP side of that revenue is very low margin revenue.
We'll replace that with much higher margin revenue. We've been doing that for a number of years, and that will continue.
As that low margin revenue bleeds off, we will replace that and are replacing with typically recurring revenue that has pretty attractive incremental margins. And that's a big driver.
Probably the single largest driver of the 650 basis point gain that we've had over the last four years is the swapping out of lower margin revenue for higher margin revenue, and we will continue to do that. Whether it came via the CheckFree acquisition or whether it's come from just internal revenue growth or swapping of revenue, you will continue to see that for a long period of time.
Brett Huff - Stephens Inc.
And then last question, on the two large clients that are having a little bit slower growth on bill pay, what's the game plan to address that? I mean, how much help can you provide them?
What are the others solutions or things around the edges that you can help maybe restart some of that growth? Or is that just an economy or even just a saturation thing?
Jeffery Yabuki
Well, it's a little bit of a different story for each one. I would say on balance, we try really hard to help point out areas of potential growth.
But in the case of our largest client, they're at a penetration rate that is probably 1 to 2x larger, right. They're penetration rate is 1 to 2x that of everyone else.
So there's a lot of opportunity for everyone else to get up to their rate. For them to really grow significantly, they would have to do some things that would be fairly different.
And unfortunately, right now, given everything that's going on in the economy, I don't think people -- the institutions aren't spending a disproportionately large amount of their time focused on how to do move that forward. So I don't think there's a lot we can do there beyond changing and modifying our own experience to make it even more differentiating than it is today and easier to transact.
And that's part of how we think about our own technology in terms of doing that.
Thomas Hirsch
But the untapped opportunity here in these other clients that we have and the other signs that we have is tremendous, and we are investing more in that also. I talked about investment in this particular business of bill payment.
We're spending a lot in the consumer side, a lot on the consumer adoption side, making sure how we can help our FIs continue to grow consumers that are on bill pay because it helps them a lot also from a retention standpoint and a profitability standpoint. So that continues to be an area of investment for us because it's critical to continuing to increase our long-term growth profile.
Operator
Darrin Peller from Barclays.
Darrin Peller - Barclays Capital
Just a quick question. First on, can you just help us understand how much payments margins are being impacted collectively by the investments in some of the newer initiatives?
Thomas Hirsch
Darrin, I'm not going to go specifically into that. All I'll say is that our core businesses, both in bill payment, debit, et cetera, continue to have nice pull-through.
But from a standpoint of incremental margins, those businesses and how they operate and the incremental drop through margin continues to be very positive. But we are making these critical investments in a number of different areas, and we talked about them already: mobile, Zash, analytics, a number of different things.
So it is quite a piece of the expense growth that we've had in this particular segment because we view it as very critical to the future growth profile.
Jeffery Yabuki
The other thing that we have going on is in that segment, you tend to have longer implementation cycles, bigger institutions, bigger projects, which also tends to get your expenses a little bit ahead of revenue because of how -- as Tom mentioned, we tend to have things run through the P&L.
Darrin Peller - Barclays Capital
I mean, I may have missed it, but is that driving the margin drop down and the payments year-over-year, payments margin?
Thomas Hirsch
Yes, that's correct. That's been going on all year end, and that's really where a lot of our investment as a company is focused.
And Darrin, I think earlier I addressed this question, but the issue around most of our growth comes through headcount, which is expensed. And if you look back, we were investing in seven or eight or nine different things here that are very critical to us and will help our growth rate as we get into '11 and '12 and '13.
So they're critical things, and we're very excited about.
Darrin Peller - Barclays Capital
I guess on the topic of margins, I mean, you put up a nice margin expansion, 70 basis points over last year. And I think that was on revenue growth of about 1.5%.
When we consider your guidance of 3% to 4%, and we also note that about 60% of your revenues are transaction processing-driven, like you said, scalable. I mean, I would have expected to see more than 50 basis points margin upside just given the revenue pick up.
So that's I guess why I'm trying to figure out, understanding why it wouldn't be more than 50 basis points. Is it just because of the payments growth initiatives?
Jeffery Yabuki
Darrin, I would say first of all, and this maybe how we talk about this, I would accentuate the 'at least' part of that. You said at least 50 basis points.
We're not saying nor are we saying it will be 50. Try to have me say that again.
It's just kind of our normal guidance, we've now just adopted it. So it's at least 50 basis points.
So I would not necessarily use 50 basis points as the right answer.
Thomas Hirsch
And if you look at our history as where we performed over that mark, I mean, we are going to meet our commitments, our earnings commitments and we gate our investments appropriately.
Darrin Peller - Barclays Capital
Jeff, last question for you. When do you see the client base seemingly getting through some of their inhibitions around spending over regulatory reasons?
Jeffery Yabuki
When do we see the spending loosening up?
Darrin Peller - Barclays Capital
Yes, when do you see the concern by some of your clients abating, I guess, is really where I'm getting at. Where I'm going, I mean.
Jeffery Yabuki
Yes, I mean, really, it's a rules question. Once there are rules, I think people will know what they can do and what they can't do.
And when the Durbin rule, first cut of the rules, were introduced, I mean, there's been a lot of noise in the system obviously because of that. I think we have to get the proposed regulatory changes quantified and have people on -- and as soon as they understand them, I think people will move past.
I think really the issue is understanding what is going to happen. If they were final, things would be a lot better, no matter what they are.
They just need to be final, and people will move on.
Operator
John Williams from Goldman Sachs.
John Williams
I was just curious, we haven't really heard a lot in the way of commentary on the larger bank core upgrade cycle. I know a lot of us have sort of hitched our views to the smaller and the midsized banks coming back.
But what color can you give us on the bigger banks and those bigger projects? Are you seeing anything different now versus a few months back?
Jeffery Yabuki
Well, John, I would say that if the question was directed at the size of projects, there are some magnificently large projects out there. They just tend not to be in the U.S.
They tend not to be core-centric. I mean, there are some core changes going on outside the U.S.
And frankly, there is one or two large core changes going on here. But in the U.S., we're just not hearing a lot of energy on core.
Most of the energy that we're hearing tends to focus around channel, right. So around Internet banking, that's a big topic around the world right now, lots and lots of renewal and these are very, very large projects that are going on.
So that we are hearing. But domestically, there is not a lot discussion, real discussion, around core renewal because that's just not differentiating from the consumer perspective.
And I think until people are able to move on with the business of banking, I just don't see them putting the energy, and that it would take to do. If you can imagine, one of the top three or four banks doing a core change, I just don't see it.
John Williams
Just to go back to one of the earlier questions on PIN debit specifically. I know historically, you guys really haven't been all that active at the point-of-sale.
It seems like most of the cards are ATM network-oriented cards. I guess, what specifically can you do if indeed Durbin does disaggregate some of the volumes away from the bigger networks on PIN debit?
What can you do specifically to try and capture some more point-of-sale volumes? Because that seems like the biggest way that you guys could actually and maybe make a dent in the industry if you can grab some more of those volumes.
Jeffery Yabuki
I would say, John, over the last several years -- and when you were making that comment, it made me think we probably hadn't done a good job talking about this. We've actually spent a lot of energy and effort over the last few years in expanding our presence at point-of-sale.
I think we're about a 98% or 99% acceptance at this point through the U.S. through our direct efforts and some partnerships that we formed.
So we're out there. It's one of the reasons why the ACCEL/Exchange network has been growing rapidly, and it's one of the reasons why we're involved in a lot of the conversations that are occurring around industry right now in kind of what I would call the second network conversation.
So I agree with you. There's a lot of opportunity there, and we hope that we will be a benefactor of that as the rules become final and as people make choices, if in fact the rules require that.
Operator
Our last question for today comes from David Parker from Lazard Capital.
David Parker - Lazard Capital Markets LLC
Just wondering if we could actually get Mark to comment on his decision to join the team, and just how he views his role going forward and what he will be focused on initially?
Mark Ernst
Sure, David. Probably the thing that I was most attracted to in looking at Fiserv is the management team.
I've known a number of folks, not just Jeff, but a number of people who are part of the management team for a while. And so the opportunity to work with people who I respect, who I think have a lot of passion for the business and serving their clients in a way that this management team seems to want to serve clients, was very attractive to me.
I also believe that there is a lot of opportunity to think hard and look long and hard about how to be innovative and create new sources of revenue growth for this company. And I find that to be an interesting challenge that I'm excited about.
And clearly, Fiserv as I think you know probably as well as I do, is in the midst of a transformation from what it was in the earliest kind of incarnation of the company to Fiserv 2.0. And while a lot of progress seems to have been made, there's still a lot of opportunities.
So things like this $250 million expense challenge, this next stage is fundamental restructuring in the way in which the business gets done as opposed to just simply costs take outs. That's fascinating.
For a business guy like me, that's fascinating work to figure out how to do that and not just take out costs but enhance quality for clients at the same time. So it's just an interesting opportunity to work with some really good people and do really interesting work.
Operator
Tien-Tsin Huang from JPMorgan.
Tien-Tsin Huang - JP Morgan Chase & Co
I just have a couple of quick ones so you guys can go. Just the capital question I wanted to ask, I think 2.5 turns of leverage, is that still the leverage target you guys expect just to stay true to you through this year or do we see that change?
I asked because it could imply heavy repurchase activity again this year absent any deals.
Thomas Hirsch
No, our target is 2, 2.5x and we're within that range of that target. We're going to continue to allocate capital, some to debt repayment.
But again, we're going to be focused on share repurchase as we have been in the past as our capital allocation benchmark.
Jeffery Yabuki
Really, nothing has changed from what we've talked about for the last couple of years.
Tien-Tsin Huang - JP Morgan Chase & Co
I just want to make sure because your guidance does assume some level of repurchase then, right?
Thomas Hirsch
Yes, absolutely. As far as allocating our capital.
Tien-Tsin Huang - JP Morgan Chase & Co
Just the bill pay outlook. Jeff, I know you and I talked about this before and I figured to ask it again, see if things have changed.
Just wanted your thoughts on what lower debit interchange means for your bill pay outlook. Again, I think I could certainly argue it's positive and negative, but just wanted your thoughts on that.
Jeffery Yabuki
And Tien-Tsin, are you talking about our classic CheckFree bill pay?
Tien-Tsin Huang - JP Morgan Chase & Co
Yes, classic CheckFree bill pay, not the walk in or the other stuff, just bill pay and I guess on the tail of that, the e-bill as well. Just with the cost of taking debit being cheaper, could we see more Biller Direct?
Or because you have more optionality now with debit, could you see it open up more billers to take it and it all being aggregated under the banks. I'm just trying to get a feel for how that shakes out because I'm still kind of confused by it.
Jeffery Yabuki
No, I understand, and I think we're all working our way through the complexity of what will happen. At least from my standpoint, I'm still a firm believer in the aggregator model.
And so whether debit creates another quasi form of payment, and especially if you can put a rewards umbrella around that and does that begin to help bill pay, I think you might begin to see some different economics. As different economic models emerge, I think you could see rewards end up centering around, not just transactions, but around bill pay and other kinds of services that aren't currently covered by that.
So I think the Biller Direct is certainly going to be an option for people who like Biller Direct. But at the end of the day, I think the aggregator model wins.
And I especially believe that mobile, as a way to allow people easier access kind of when they want that access, will actually accelerate trends towards aggregators. And as we talked about before, we do believe that bill payment follows bills, and the propagation of e-bill is getting that right.
I actually think it begins to diminish the Biller Direct value proposition because you have the amounts and the other relevant information right at your fingertips. So kind of a long-winded way of saying we still believe in the aggregation model.
We think Biller Direct is there to stay. We do a lot of that work, but we think that the aggregating model will win even in a period or a time of lower interchange.
Depending on if that continues in that form, I guess, will also play a role in the ultimate decision. Well, thank you, everyone for joining.
And if you have any further questions, please don't hesitate to follow up with our Investor Relations group. Have a good night.
Operator
Thank you. That concludes today's conference.
Thank you for your participation. You may now disconnect from the audio portion.