Nov 2, 2011
Executives
Peter Holbrook - Vice President of Investor Relations Jeffery Yabuki - Chief Executive Officer, President and Director Mark Ernst - Chief Operating Officer and Executive Vice President Thomas J. Hirsch - Chief Financial Officer, Principal Accounting Officer, Executive Vice President, Treasurer and Assistant Secretary
Analysts
Greg Smith - Sterne Agee & Leach Inc., Research Division Peter J. Heckmann - Avondale Partners, LLC, Research Division Glenn Greene - Oppenheimer & Co.
Inc., Research Division Julio C. Quinteros - Goldman Sachs Group Inc., Research Division Ashish Sabadra - Deutsche Bank AG, Research Division Brett Huff - Stephens Inc., Research Division Ashwin Shirvaikar - Citigroup Inc, Research Division Tien-Tsin T Huang - JP Morgan Chase & Co, Research Division John Kraft - D.A.
Davidson & Co., Research Division Darrin D. Peller - Barclays Capital, Research Division David Togut - Evercore Partners Inc., Research Division David J.
Koning - Robert W. Baird & Co.
Incorporated, Research Division
Operator
Welcome to the Fiserv Third Quarter 2011 Conference Call. [Operator Instructions] Today's call is also being broadcast live over the Internet at www.fiserv.com and is being recorded for future references.
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 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 Peter Holbrook, Vice President of Investor Relations at Fiserv.
Peter Holbrook
Thank you, and good afternoon, everyone. Welcome to our third quarter earnings call.
With me are President and CEO, Jeff Yabuki; Tom Hirsch, our Chief Financial Officer, and Mark Ernst, our Chief Operating Officer. Our remarks 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, acquisitions and other strategic initiatives. 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 a reconciliation of those measures to the nearest applicable GAAP measures.
These non-GAAP measures are indicators that management uses to provide additional meaningful comparisons between current results and prior-reported results and as a basis for planning and forecasting for future periods. With that, let me turn the call over to Jeff.
Jeffery Yabuki
Thanks, Peter, and good afternoon. Before I get to results, I want to thank each of you who joined us or our annual investor conference on October 11.
Building on the strategies we shared last year, we provided detailed insights into how we expect to accelerate growth in both our existing businesses and our newer innovation-based solutions. We discussed our thesis on continuing to expand operating margin and importantly, how we intend to deploy the substantial free cash flow we generate.
We believe our strategies are well aligned with the evolving market, and we are enthusiastic about our opportunity to create value for clients, associates and you, our shareholders. Let me say upfront that we're pleased with our performance, which was in line with our expectations for the quarter and the full year.
We delivered 12% growth in adjusted earnings per share to a record $1.16 in the quarter. Given our strong performance to date and visibility into the fourth quarter, we are raising our full year EPS guidance to $4.54 to $4.60.
This performance is particularly impressive considering the investments that we've made into our new solutions this year. Adjusted internal revenue increased 2% versus last year's third quarter, which was our strongest growth quarter of 2010.
We continue to make progress in growing our level of sustainable recurring revenue. On a comparative basis through September 30, we're about 2 full percentage points higher in year-over-year internal revenue growth.
Third quarter revenue was impacted by timing of some higher margin revenue, such as license fees, continued to migrate to the fourth quarter, which is a consistent trend over the last couple of years. Tom will provide further insights on our fourth quarter outlook later in the call.
Adjusted operating margin for the quarter and year-to-date was down 40 basis points versus the prior year, with the Corporate segment having a 50 basis point negative impact on our year-to-date margin performance. Additionally, we have taken opportunities to accelerate our investments and create incremental market momentum in our newer solutions given the strong adjusted EPS performance this year.
Free cash flow through September 30 decreased 5% from the prior year to $507 million, primarily due to the timing of capital expenditures and changes in working capital, which we generally expect to reverse in the fourth quarter. Excluded from the calculation of free cash flow was a $54 million cash distribution that we received from our 49% interest in StoneRiver, which continues to provide solid value.
We've been focused on 3 key priorities for 2011. 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 our strategic solutions. And third, to deliver innovation that increases differentiation and enhances the results for our clients.
Adjusted internal revenue growth was 3% in the first 9 months of 2011 versus 1% in the comparable prior-year period. The improved year-to-date growth has been driven by high-quality revenue gains in both segments and a very solid 5% growth in our Payments segment.
Given the 11% increase in adjusted EPS through September 30, we now expect full year results to be 12% to 14% higher than 2010, which is at or above the high end of our original target range and also should lead to our 26th consecutive year of double-digit EPS growth. A focus on enhancing our growth culture can be seen across multiple areas of the company including sales performance.
We expanded numerous client relationships and achieved nearly 30% of our annual integrated sales target in the quarter. Demand is high with our channel solutions, and we had over 250 payments wins in the quarter.
Importantly, these results do not yet include the leading solutions within the CashEdge acquisition, which closed late in the quarter. Preliminary market feedback on CashEdge has been very positive and provides additional confidence in our ability to distribute these market-leading solutions across our broad client base.
We plan to use a play book created for solutions such as bill payment, where we have signed over 1,800 new bill payment clients since the acquisition of CheckFree. Our third 2011 priority is critical as it focuses on creating incremental client value through innovation and differentiation, which is a key to future growth.
At Investor Day, we described the value propositions for new solutions such as Acumen, Mobiliti and P2P. We shared our view of the incremental growth we expect to generate from these investments.
These opportunities complement the leading solutions that we have in the market today such as Internet banking and bill payment. To that end, we are pleased to welcome back Zions Bancorporation, one of the small handful of direct CheckFree RXP clients to ever leave our solution.
Zions, a top 35 bank in the U.S. with over $50 billion in assets, recently selected Fiserv to support its multichannel, digital payment strategy for both retail and business customers.
In addition to returning to CheckFree RXP, Zions also added ZashPay and a number of other consumer and small business payment solutions. We believe that as disparate payments and channel solutions begin to converge, we are extremely well positioned to deliver the integrated solutions that will allow clients like Zions to meet the rapidly changing expectations of their customers.
Now let me turn the discussion to Tom to provide more detail into our financial results.
Thomas J. Hirsch
Thanks, Jeff, and good afternoon, everyone. As we highlighted at Investor Day, year-on-year revenue growth in both our Payments and Financial segments has been steadily accelerating.
Adjusted internal revenue growth for the first 9 months of the year is 3% compared to 1% in the comparable prior-year period. As Jeff mentioned upfront, the third quarter of 2011 was our toughest quarterly comparison for the year due to strong 2010 growth across both segments.
The 2% adjusted revenue growth in the quarter given the strong performance in the first half of 2011 and our visibility into Q4 was within our expectations for the quarter. I will provide more detail in the context of segment results in a moment.
Adjusted earnings per share increased 12% in the quarter to $1.16 and is up 11% to $3.31 for the first 9 months of the year. We also exclude 2 positive items from adjusted EPS this quarter, an income tax benefit of $0.02 from the resolution of a purchase accounting tax reserve and a $0.02 gain from the sale of a business by our unconsolidated affiliate, StoneRiver.
Adjusted operating margin in the third quarter was down 40 basis points, primarily due to the timing of certain higher margin revenue in our Financial segment and the impact of our investments in new solutions. Year-to-date, adjusted operating margin was also down 40 basis points as increased losses in our Corporate segment earlier this year negatively impacted margin by 50 basis points, primarily due to legal costs and a building gain in the prior year.
Now onto the segment results. Adjusted revenue in the Payments segment increased 5% in the quarter, with 4% adjusted internal revenue growth.
Growth in the quarter was within our expectations given the comparison to the very strong 2010 quarter and the acceleration in the Wachovia bill pay de-conversion. Adjusted internal revenue growth through September 30 was 5% as compared to 3% in the prior year, an increase of 2 full percentage points.
Excluding the impact of the ongoing Wachovia de-conversion, which should anniversary in the middle of 2012, bill payment transaction volume increased 7% both in the quarter and year-to-date. E-bill transaction growth was 4% in the third quarter compared with 2% in the prior-year quarter.
Data-fed e-bill continues to be a competitive differentiator and catalyst for transactions on our bill payment platform. We continue to enjoy strong performance in our debit business.
Debit transaction volume grew 19% in the quarter and 20% year-to-date. Debit transactions remain an important source of our income for our clients, the great majority of which fall below the $10 billion asset threshold of the Durbin legislation.
Operating income in the Payments segment was $162 million in the quarter and up more than 5% to $482 million on a year-to-date basis. Adjusted operating margin was 30.8% in the quarter, 90 basis points lower than the third quarter of 2010 due primarily to product investments, the scaling of large Internet banking projects and the de-conversion of the Wachovia bill payment volume.
Through September 30, adjusted operating margin was down 20 basis points in the segment to 30.9%. Financial segment revenue in the quarter was $487 million, up $1 million in what was also a tougher compare in the prior-year period.
The timing of license and termination fee revenue, along with a decline in our revenue enhancement business driven by the timing of deal closures, negatively impacted segment growth. We have anticipated these impacts and have good line of sight into higher margin revenue in the fourth quarter.
As you are aware, license revenue for the entire company tends to have a fourth quarter spike, which has been on average over the last couple of years higher by more than $20 million than the first three quarters of the year. Segment internal revenue growth is 1% year-to-date, driven by our account processing businesses.
As you know, the check processing business continues to be a headwind, negatively impacting the growth rate by approximately 2 percentage points. Operating income in the Financial segment was $143 million in the quarter and $435 million in the first 9 months of the year.
Operating margin was 29.4% in the quarter and 29.7% year-to-date, each down 10 basis points from the comparable periods in 2010. Segment margin has been impacted by an $11 million decline in higher margin license and termination fee revenue year-to-date and also the aggregate impact of investments in products such as Acumen, Relationship Advance and our common loan origination platform.
These impacts were offset almost entirely by incremental cost savings and the operating leverage inherent in our model. The effective tax rate for the quarter used to calculate adjusted EPS was 35%, which excludes the $0.02 positive tax benefit I mentioned earlier.
This 35% tax rate was 1 percentage point lower than the third quarter of 2010, which resulted in an approximate $0.02 positive benefit to adjusted EPS in the current quarter. The lower rate was primarily driven by state tax law changes, increased research and development credits and favorable resolution of tax audits.
We expect our fourth quarter tax rate to be approximately 37%. Operating cash flow through September 30 was $681 million.
Free cash flow was $507 million in the period, which was negatively impacted by the timing of working capital changes and capital expenditures, which we anticipate will improve as we finish the year. And as Jeff mentioned earlier, free cash flow does not include the $54 million cash distribution from our StoneRiver investment.
We also funded the $465 million acquisition of CashEdge in September, with available cash of $345 million and $120 million from our $1 billion revolver. Through the first 9 months of the year, we had repurchased 7.8 million shares of stock for $475 million versus 8.1 million shares for all of 2010.
As of September 30, there were 5.7 million shares remaining on our existing repurchase authorization. With that, let me turn the call back over to Jeff.
Jeffery Yabuki
Thanks, Tom. In spite of the second quarter being the most successful sales quarter in the company's history, sales results were a higher than expected 99% of quota in the quarter.
We're at 102% of quota entering the fourth quarter, which is typically the strongest of the year. Although sales cycles remain long, categories driven by large secular trends such as mobile and Internet banking, along with solutions that help financial institutions drive revenue or improve efficiency are getting significant attention.
Durbin-related PIN debit activity is high as leading debit issuers evaluate their options related to selecting an alternative network. Integrated sales were strong in the quarter, totaling $45 million or 29% of our annual target, led by solutions across payments, channels and risk.
Through the first 9 months of the year, integrated sales were $113 million, 73% of our full goal and 28% ahead of last year. We're on track to achieve our full year target of $155 million.
Our operational effectiveness results were $11 million in the quarter. We're now at $27 million through September, which exceeds our $25 million full year 2011 target.
Our view of the market environment is consistent with what we shared with you at our recent Investor Day. Regulatory actions have continued to slow as anticipated in 2011.
There have been 103 actions through October 28 compared with 161 in the prior year, and total assets of impacted institutions are down 67% in 2011 when compared with 2010. We believe that increased technology spend will be required as business models evolve to reflect today's market reality.
Institutions are reworking their internal processes, looking for new ways to increase revenue and enhance efficiency, all while reacting to the needs of an empowered consumer. We believe that technology will be the key enabler, and therefore, expect healthy IT spending across these areas.
However, as we shared on Investor Day, we still remain somewhat cautious on the level of near-term general IT spend. We will provide additional insights in the context of our 2012 outlook early next year.
For 2011 guidance, we remain on track for the full year. We continue to anticipate adjusted internal revenue growth of 2% to 4%.
We now expect full year adjusted earnings per share of $4.54 to $4.60, which is at or above the top of our original guidance range and reflects growth of 12% to 14% over 2010. We anticipate free cash flow to bias towards the lower end of the 5% to 8% growth range for the year, and as we shared at Investor Day, expect operating margin to be at the low end of the 10 to 50 basis point improvement range for the full year.
We are progressing well into 2011, delivering strong results, reenergizing revenue growth and bringing new solutions online that will further boost our competitive position. Our progress is due to the relentless effort of our nearly 19,000 associates around the world who remain singularly focused on driving success for our clients.
With that, let's open the lines for questions.
Operator
[Operator Instructions] Our first question is from Dave Koning, Baird.
David J. Koning - Robert W. Baird & Co. Incorporated, Research Division
Yes, I was wondering mainly about Q4 this year. It seems like you're projecting a pretty big EBIT ramp.
It looks like in the ballpark of $40 million, and I know you don't guide anywhere to any exact number. But in that ballpark given kind of the margin parameters, the last few years you've only grown EBIT about $10 million to $17 million sequentially.
So it seems like a lot of good things are happening. I know CashEdge is part of that, but it seems like a lot more than just that.
Maybe you can just describe a little bit maybe what the pipeline. You talked a little bit about it, but what gives you confidence for such a big EBIT ramp sequentially?
Thomas J. Hirsch
Yes, Dave, this is Tom, and I'll turn it over to Jeff. A couple of things I highlighted that we've been at a minimum over the last 2 years, from a license revenue standpoint, roughly $20 million and clearly, in our current plans in this year, anticipating even a little bit higher than those particular levels just given the way our plan laid out in the current year.
And so we're going to have the higher margin license revenue. We do have a couple of termination fees that are falling in the fourth quarter versus the third quarter.
And just really strength in the other businesses, including our revenue enhancement business line that we kind of talked about, along with some strength in our output solutions business. So it's just really how the plan kind of fell into the current year.
And again, we feel real good about that. And also, a little bit around the timing of some of our investment spending and those are really the factors that are driving that.
But we have good visibility. We're very comfortable with that and that's -- clearly, Dave, we've been saying that all year, as you know, going back to the second quarter and very consistent with our comments on investor day.
David J. Koning - Robert W. Baird & Co. Incorporated, Research Division
And just, I guess, the one other thing, just on CashEdge just so we have kind of parameters for this quarter. How are you expecting revenue to come on, I guess, in Q4 from CashEdge?
And then do you expect it to be margin accretive or dilutive?
Thomas J. Hirsch
I think we're going to continue to spend in the P2P area. So again, I don't expect it to be margin accretive from that standpoint, and you can probably just take a quarter of revenue from what we prepared on Investor Day as far as the annual revenues there as a rough estimate.
Operator
Ashwin Shirvaikar, Citi.
Ashwin Shirvaikar - Citigroup Inc, Research Division
Good move at the higher EPS guidance there. My first question is on the license revenues in 4Q with regards to your comment.
Is achieving that more a function of sales deal closures, or is it more about attaining implementation milestones?
Jeffery Yabuki
There's a couple of things. It's a combination of certainly the -- when December 31 comes around, right, the year is over and we've seen the last couple of years really beginning in 2008 and ramping up after that, we've seen more and more sales get compressed into the fourth quarter.
And so we do expect to see more license revenue. And it's a function of the fact that we have, in my opinion, much better sales coverage, much better account management coverage and we just have more and more deals that are coming together, and again, back to the earlier point of they tend to come to fruition or they have tended to come to fruition over the last couple of years in the fourth quarter.
Thomas J. Hirsch
And Ashwin, just so you know, right, in our core account processing base, we have a large distributed account processing base that's in-house clients. And so again, they typically buy more as we kind of hit the fourth quarter.
So it's pretty much across the credit union, our banking environment and a number of our other license businesses that just seasonally have a good strong fourth quarter.
Jeffery Yabuki
And they tend -- to your point around implementation, I mean, they tend not to be -- these are not large, very large licenses. I mean, those are -- if we sold a very large license that required implementation, obviously that wouldn't benefit the fourth quarter in any material way.
Ashwin Shirvaikar - Citigroup Inc, Research Division
Right. Okay.
So one other question I had was as banks, in particular large ones, sort of struggle with their debit strategy here especially with some fee reversals, how does that affect Fiserv? I mean, does that affect Fiserv in any way?
Jeffery Yabuki
Yes, so Ashwin, we have been fairly consistent in our view that we believe that debit was a trend that was not going to be able going to be stopped by the virtue of fees being assessed. And then we have seen obviously some reversals of those kinds of actions coming.
And we believe that, that -- either consumers would decide to switch institutions or they would look at other ways to continue to use their debit cards. So we've been pretty positive on that all along.
That was not necessarily a popular position, but we do think that we're going to continue to see strength in debit. One of the things that we are actually very encouraged by is on Investor Day, we talked about one of the key market trends being that of consumerism and really having consumers have power to influence organizations to deliver the kinds of products and services that they want.
And whether it's debit or a fully functional mobile application or a new wave of Internet banking or P2P payments or whatever it may be, we do believe that what you're seeing in the market right now is a direct relationship or a direct result of consumerism, which we think is actually creating a tailwind on those secular trends that we talked about both today and at Investor Day.
Operator
Julio Quinteros, Goldman Sachs.
Julio C. Quinteros - Goldman Sachs Group Inc., Research Division
Just one quick question on the check processing drags, because this is something that seems like its endemic in both your model and the FIS model as well. And I guess just in terms of thinking about when that actually comes to an end from a revenue perspective, I think if I recall from your Analyst Day, it sounded like we were getting pretty close to that but the offset for you guys as you think about the forward look was that the margin contribution should be higher as you get more of the sort of the electronic check capture, et cetera.
Can you just walk back through what the benefits are expected as you get the better margin accretion there?
Thomas J. Hirsch
Yes, I think we -- we're not going to give exact numbers. We're not going to talk about guidance for 2012.
But clearly, I think, Julio, you remember the chart I put up on Investor Day for the check processing business. And what we said this year is we've accelerated the, from an operational standpoint, a lot of the center closures because on the intake of the check, those are electronified instead of having the process of paper checked through the sorters.
And we've primarily completed that as we get to the end of this year. Our revenue per trend of paper item is higher, but we make more money clearly when it's electronic.
So that whole activity is coming close to an end as we get to the end of this year. So going into next year, we're not going to see the precipitous decline as we have this year in regards to revenue.
It is still going to continue to decline as checks have declined on a secular basis, as you know, 8% to 10%. But it's just -- they're not going to accelerate as quickly as it is, and we should get some lift from a margin standpoint going forward also.
We kind of put out there, I think you saw on the chart that this business should go maybe from a 10% margin to a 15% margin in '12. But again, that's kind of our anticipation with not as big of a headwind from a revenue growth standpoint.
Jeffery Yabuki
And Julio, just to quote a little bit finer point on that. So I mean, we did lay out in the chart what's been going on, on a revenue basis.
We've said earlier in the year that the combination of check decline and Wachovia would be 150 basis points drag on our revenue this year. And I think we showed -- we tried to show pictorially that, that would diminish some in 2012, and we still believe that.
Julio C. Quinteros - Goldman Sachs Group Inc., Research Division
And then just lastly, when you talk about IT budgets, Jeff, you made a point about expecting some budgets for 2012 to be either flat or soft or whatever cautious, I think you said, on the general IT spending numbers there. How do you differentiate that from the investments that you are seeing in payments, things that are kind of driving your mobile strategy, et cetera?
Because I guess in general, I would think that those dollars are coming out of general IT spending budgets, but obviously the growth rates in the investments and the focus in the channels still seems to be running its course. So how do you distinguish between a cautious general IT spending environment but then still a requirement to invest in mobile and cost efficiencies and all those things?
So how did the dollars get allocated relative to a more cautious general IT spending comment I guess?
Jeffery Yabuki
Yes, thanks for asking that question. We have tried -- what we tried to say is we think that financial institutions will in fact spend money, and we're seeing a lot of that going on in these areas of secular interest, so mobile and payments.
I mean, those areas are getting money put to them. We're also seeing money being allocated to places where institutions have an opportunity to raise revenues.
So for us, we're seeing a lot of interest in our revenue enhancement solutions area, specifically in our Relationship Advance product. I mean, just a ton of interest because of the revenue opportunity that creates, and then of course around efficiency.
And so the nuance point that I was trying to make at Investor Day and again today is quite simply this: that institutions will in fact, as what we're seeing today, we believe that they will spend money in those areas. However, given that overall IT budgets are not going to be increasing, we don't believe across the board, we think that given the volatility in the markets that, that will probably be off a year, that those dollars will in fact come out of the IT budgets or other places within the institutions to fund that.
So to the extent that your growth is coming from areas that fit into those, basically, those 4 areas as the majority of our growth is, we actually think we have a secular tailwind. But on balance, right, if you look at the entire industry, it would not surprise us if you did not see growth in overall IT spend when we look back on 2012 that will be fairly consistent with what we saw in 2011.
And in some cases, it could actually be down given the volatility. But again, we believe that in the areas where we are focused, that people -- because of what we're seeing in both the pipeline and in closed deals, that people will in fact continue to spend money in those areas well beyond 2012.
Operator
Glenn Greene, Oppenheimer.
Glenn Greene - Oppenheimer & Co. Inc., Research Division
I guess I'll just segue on the last question. But maybe -- and I know Analyst Day was only a few weeks ago.
But maybe, Jeff, you could comment on the sales activity, the pipeline activity. Obviously, there's a lot of regulatory uncertainty and the macro uncertainty, and volatility has kind of made a lot of people uptight.
But what is the behavior you're seeing from your bank customers in terms of their willingness to spend? Has it changed at all on, and is that any cause for caution heading into 2012?
Jeffery Yabuki
Beyond the comments that we made at Investor Day and what I just said a few moments ago, I would say no. And in fact, I would -- we have this argument sometimes within the company.
Based on our sales results, which have been stellar, based on our pipeline, which is in fact up across all measures that are meaningful, we feel like we are in very good shape. However, right, the caution comes in because we don't believe you can ignore the volatility that is in the markets and what is going on in the core foundation of the economy.
And so I would say that we are more cautious than some of the metrics that we are seeing inside. So we're having great conversations.
The pipelines are good. We're closing deals.
We expect to have -- as you heard Tom discuss today, we expect to have quite a strong fourth quarter, right. So all of those metrics are quite positive.
But we still believe it is prudent and pragmatic to maintain a cautious tone at this juncture. And when we give guidance at the end of January for 2012, we'll obviously have a much better, much well-informed opinion on what the market will be like.
But on balance, the market is, in the areas that we talked about, pretty positive.
Glenn Greene - Oppenheimer & Co. Inc., Research Division
And at least on the last quarter, you had given a sales growth figure at least year-to-date. I don't know if you gave a comparable statistic on this call at least year-to-date.
Or was that just sort of the sales being integrated, the sales effectiveness statistics you gave of 28%?
Jeffery Yabuki
Yes, new sales are up somewhere in the area, I don't have the exact number, but somewhere in the area of 15% to 18% over last year.
Glenn Greene - Oppenheimer & Co. Inc., Research Division
And then just a quick one for Tom, and I know this probably explains part of the reason you're thinking in the license revenue will ramp more than $20 million Q-to-Q. But any way to quantify the amount of the big deals that might have been deferred that you are hoping would have landed in the third quarter at least directionally?
Thomas J. Hirsch
No, I mean, I think that's factored into kind of some of the license revenue, et cetera. So we -- it's just the way that this year kind of fell off, and it's kind of where we anticipated.
But like I said, we're projecting a good solid Q4, and that's been really, Glenn, our consistent message since the end of the second quarter and it's just a reconfirmation today of that.
Operator
Brett Huff, Stephens.
Brett Huff - Stephens Inc., Research Division
One quick question on the math in the press release. Where did the gain on sale hit in the P&L?
Thomas J. Hirsch
Yes, Brent, that is the -- if you look at our equity income line from equity investment, you can see that's up a little bit on the regular P&L, so like $8 million for the quarter. Income from investment and unconsolidated affiliate and about $3 million of that $8 million is that gain on sale of that particular piece of business.
So it's really in our actual EPS results, we just claim credit for $5 million of that $8 million.
Brett Huff - Stephens Inc., Research Division
Okay. That's helpful.
And then another question to both of you on just the ramp from 3Q to 4Q. I want to make sure that I get what you're saying.
It sounds like you had a few deals pushed from 3Q to 4Q. Is that the right understanding?
Jeffery Yabuki
Yes, we had a few deals that we thought could close in either Q3 or Q4. And not surprisingly, they closed -- they did not close in Q3, which is consistent with what we've seen over the last few years.
Brett Huff - Stephens Inc., Research Division
Okay. And have those deals closed yet, or are we still in the process?
Jeffery Yabuki
Yes and no. Well, there's a lot -- again, one of the challenges are is that we aren't dealing with gigantic license fee deals.
So there are a lot of deals that get done. So they're doing what we expect them to do.
Brett Huff - Stephens Inc., Research Division
Okay. And then last question, just want to make sure I reconcile the raise in guidance, which was substantial to me on the EPS line versus the remaining 2% to 4% from the organic growth.
Is there a sense of top, near the higher end of that organic growth range? Just the raise in one without the other, can you just sort of help me reconcile that other than just saying it's mix?
Jeffery Yabuki
Sure. And I'll take it and then Tom can add onto it.
I mean, the things that you're seeing in there are, you may remember, Brett, in the last quarter, we said hey, we're going to bias to the upper end of the range, right. We ended up having a third quarter that was right in line with expectations.
We also have good visibility. So the conversation we're just having, we have good visibility into the revenue that we're going to see in Q4.
And as you know, license revenue, termination fee revenue, those kinds of things are very high margin revenue. And we expect to see that -- we expect to see a higher proportion of that caliber of revenue come in, in the fourth quarter, which is why without necessarily moving outside of the range of revenue just because of the very nature of the scale that we have as a company, the way that we invest on a quarter-to-quarter basis and the higher margin revenue, we've got some movement and we just want to make sure we were being as open with you as we could be.
Thomas J. Hirsch
Yes, I would say the other thing is when Jeff indicated that we have a bias towards the upper end, clearly, that was on our EPS side. And so Brett, given where we were and given what our results in Q3 and keeping lockstep and barrel with our Q4 plan, that just have us move up that particular range because of where we're at.
Brett Huff - Stephens Inc., Research Division
Okay. And then can you -- at some point, can you comment just on the term fees and kind of the size of those?
Or would you call those out when Q4 happens?
Thomas J. Hirsch
Yes, we always do. There aren't anything unusual.
We just have -- as you know, we have like $8 million in the second quarter, maybe $4 million in the third quarter. And so this can bounce around between $4 million to $10 million and as you know, per quarter.
Jeffery Yabuki
And I think term fees are actually down, right, so far for the year.
Thomas J. Hirsch
So far for the year, they're down a couple of million dollars and primarily, also, pretty significantly in the Financial segment.
Operator
Tien-Tsin Huang, JPMorgan.
Tien-Tsin T Huang - JP Morgan Chase & Co, Research Division
I guess I'll just ask you directly because I probably missed it or misunderstood. So the raise in the EPS guide explicitly, what are the components that's driving that?
Thomas J. Hirsch
Yes, I think we just kind of tried to go through this, is that at the end of the second quarter, as you know and even at Investor Day, we said we had a bias to the upper end of the range. We clearly continue to feel really good about Q4 from that standpoint.
We have a little shifting between Q3 and Q4 in a couple of things, and we've had some good outperformance as far as where we are in our performance year-to-date. So we have a bias to the upper end.
We continue to have good visibility into our Q4 results, and that's why we raised the range. But this is just a continuation of kind of where we were at the end of last quarter.
And so that's kind of where we're at.
Jeffery Yabuki
Yes, Tien-Tsin, I think the other thing I would say is at the end of the second quarter, we said we were having a pretty good year. We're actually ahead of our model internally, things were looking good.
But we felt it was premature, right, to say anything other than we're going to bias to the upper end of the range. We needed to see how Q3 would look.
And just given that performance, given the visibility into the type of revenue we're going to see in the fourth quarter, given some tax benefit in this quarter, I mean, it just all kind of had to say we think we're going to be at the top or above the range, which is why we're now at $4.54 to $4.60.
Tien-Tsin T Huang - JP Morgan Chase & Co, Research Division
Okay. No, I just want to make sure because there wasn't -- I didn't really see a lot of surprises.
Everything was pretty much in line with quarter end really towards that. I just wanted to make sure.
Jeffery Yabuki
And that's fair, Tien-Tsin. I would say the real answer is with a couple of months left in the year, we have pretty good line of sight into what's going to happen over the next 60 days.
Tien-Tsin T Huang - JP Morgan Chase & Co, Research Division
Yes, I don't doubt that at all. Just one last one for me, just the Zions coming back.
I know that you talked about that in the past, but are they coming back at the end of the contract? Or this is early change or conversion?
And I take it they're just not shopping for best price here. Did they experience, how should I say it, less optimal service at the rival?
Or is it the bundle that's causing the difference and allowing you to win that business back?
Jeffery Yabuki
Yes, I mean, this is my opinion. I mean, I don't -- I think it's very difficult for institutions to switch off of CheckFree RXP.
It's one of the reasons why -- I don't remember the exact number. I think we've had -- it's only 6 or 7 people actually kind of direct contracts de-convert over the last 4 or 5 years.
And in a couple of those cases, they were acquisitions. But for institutions that are focused on delivering a really high-quality experience, CheckFree RXP is the market leader.
There is no question, right, whether it's data-fed e-bill or whether it is the risk model that we use, the way we settle, any of those measures. It just -- it creates a really great experience for consumers.
And when people switch off that, it doesn't usually go very well. I mean, there are videos out on YouTube that where clients of certain institutions have complained about the change in their bill pay experience.
So I mean, that is, in our opinion, the reason why they made the switch. And the reason why the left originally, when they left, that was before our time, but we have a very good relationship with them.
And as you saw, right, they didn't just add CheckFree. They added lots of different technologies around their payments and this converging suite.
So we're excited about that, and we think that is consistent with -- well, not we think, we know that's consistent with what we've been seeing in the market. And when you've only lost a few customers in the history and one of them comes back, it feels pretty good.
Operator
David Togut, Evercore Partners.
David Togut - Evercore Partners Inc., Research Division
Earlier today, FIS highlighted a slight increase in pricing pressure in their Financial segment. Are you seeing any change in pricing in your own business in the last quarter or so?
Jeffery Yabuki
No. No, I mean, we have been saying for a while that it's a highly competitive market and it's been a highly competitive market for a long time.
And I -- we compete and I think FIS did a nice job of indicating that there are lots of competitors out there, and I think everyone is doing the best job that they can. But we have not seen any kind of measurable change in pricing activity.
Tom or Mark, I don't know...
Thomas J. Hirsch
No. I mean, it's really as we kind of commented on David, it's been about the same when we look on a year-over-year basis.
And that's why we continue to focus on differentiation as a key part of our strategy to be able to more competitively differentiate our solution set, but we've really seen no change out there.
Mark Ernst
The other thing to make sure people are paying attention to is that so many of these transactions anymore have so many different products involved, that pricing is quite often bundled and it's hard to see precisely what the price is on any one particular element of that -- of the transaction. But certainly in the last quarter, nothing has changed.
David Togut - Evercore Partners Inc., Research Division
A quick follow-up on that then, Mark. Can you update us on the timing of large Acumen conversions on the calendar?
Mark Ernst
Yes. So we -- as we talked about in Investor Day, we've got a number of things that are in motion.
I would say that it continues to be the case. We've seen 1 or 2 deals slow down just a little bit in terms of whether they're going to come through in the fourth quarter.
But for the most part, they continue to progress as we talked.
Jeffery Yabuki
And David, we have I think the majority of our slots are called for in 2012. And so we have a lot of implementation work that will be happening, and we have a lot of implementation work going on now.
So we expect to have...
Mark Ernst
Just clearly, for the most part, we're now filling 2013 slots.
David Togut - Evercore Partners Inc., Research Division
Got it. Just a final question on the cost savings.
You've already exceeded your $25 million target for the year, and the rate of savings appeared to have moved up from about $9 million in Q2 to $11 million in Q3, if my math is correct. So can you comment on your target for 2012, the $65 million, and where you are relative to kind of the big actions needed to achieve that?
Thomas J. Hirsch
David, as far as the -- we're very pleased with the activity we've had this year. And clearly, from our standpoint, we're not going to give guidance that we have.
But the incremental piece in 2012, as you know as I shared on Investor Day, was $40 million. And cumulatively, that's $65 million.
And we're clearly, from that standpoint, comfortable in that general direction that we'll firm that up as we give guidance here at the end of January in '12 and February. But we continue to make good progress there.
Mark Ernst
I mean, we got visibility to some of that but not all of that, and we got visibility in all of that. And we know that some of the procurement things are saved going into next year, but there's still a lot of work to be done.
Operator
Darrin Peller, Barclays Capital.
Darrin D. Peller - Barclays Capital, Research Division
At your Investor Day, I believe you mentioned that your investment initiatives have been distributing to about a $40 million pretax operating loss. Just wonder, can you comment on how much your third quarter margin may have been impacted by these investments now?
And then maybe perhaps just one on when we should expect on a quarterly basis to see those turning more breakeven or positively impacting quarterly margins?
Thomas J. Hirsch
Yes, I mean, I think you can see it in the -- if you look at that -- I'm not going to be exact to that. But clearly, it's somewhat ratable but more -- we invested a little bit more in the third quarter.
You can kind of see the expense ramp in the Payments segment. So when you look at the total expenses in there in the second quarter, they're about $353 million.
In the third quarter, they were $364 million. So we did pull a little bit more in there.
But as we talk about some of those, clearly, what we talked about is as we go on to '12, certain of those investments like Acumen, like Mobile, are going to begin to scale, but that recurring revenue takes time to build. And we're interested in driving that long-term revenue.
So it's going to be slowly but surely, that is going to continue to improve as we kind of look forward into '12 and then into '13.
Darrin D. Peller - Barclays Capital, Research Division
On a sequential basis though, this quarter was better than last quarter in the sense of the adverse impact from that and should be continue to do so?
Thomas J. Hirsch
The other way around. We have more expenses in the third quarter.
Darrin D. Peller - Barclays Capital, Research Division
Okay. For these initiatives?
Thomas J. Hirsch
Exactly.
Darrin D. Peller - Barclays Capital, Research Division
Will that decrease in Q4 though?
Thomas J. Hirsch
I'm not going to go into every single one. All I'll say is clearly, you can kind of look at our overall margin guidance.
We feel that the margins clearly in Q4 are going to be much stronger than what we had in Q3, and we're going to continue to spend money as we are. But over time, as we head into '12 and '13, it's going to slowly dissipate in certain of these areas.
Darrin D. Peller - Barclays Capital, Research Division
That's helpful. Just one last quick one on the tax rate.
I think you said 37% should be expected for the quarter -- for next quarter. Just want to make sure, I mean, that's a normalized tax rate.
Should we expect any onetime items that you see, or is that just...
Thomas J. Hirsch
Not right now, no. Pretty normalized for the fourth quarter.
Like I said, our adjusted tax rate, as you know, in the quarter was about 35% in the third quarter. And so for the fourth quarter, it's going to be right around that 37% tax rate.
Operator
John Kraft, D. A.
Davidson.
John Kraft - D.A. Davidson & Co., Research Division
I just have one question left and that is going back to the discussion of the fallout related to Durbin and the debit changes there. This morning, we learned from FIS that they're seeing a large number of account openings happening at the Community Bank segment.
And so I guess my question is, are you seeing this? And if so, remind us how the CashEdge instant funding product, how that revenue works?
Is it a volume-based fee? And I'm assuming their volumes would have spiked.
Jeffery Yabuki
Yes. So I'll take the latter part.
I mean, the CashEdge OpenNow FundNow product is based on transactions. I can't actually -- I'd like to be able to say that there will be a bunch of volume coming from that, but I don't -- my guess is no.
I mean, that product, as you know, is primarily targeted at the larger institutions. So to the extent that this would have happened a few years from now, we suspect we would see a bunch more benefit.
Just on the account point itself, I mean, I think we have been saying for a while that it was our belief that the kind of actions that were being taken will be difficult for consumers to swallow. But there are a lot of other reasons why people might be switching between institutions.
So I don't think we have a hypothesis that it is something that is being driven by Durbin. Our community banks -- so speaking for our clients, that they would say that this kind of noise in the market was a good thing and is a good thing for them, and they did expect to see clients migrating to them and saw this as an opportunity to grow.
But we don't have a specific comment.
Mark Ernst
We've heard the same anecdotes from our client base, community bank client base, so the credit union client base. But it's a little early to call that a trend.
It could be just because there's a lot of noise. The noise could well go away at this point.
So I think certainly, we're in a good position to have a broad range and types of clients and the non-affected Durbin, non-affected institutions will have a slight advantage in this world going forward. So that's a good thing for us.
But I think it's too early to call this a real trend.
Thomas J. Hirsch
Yes, it's just too early.
Operator
Greg Smith, Sterne Agee.
Greg Smith - Sterne Agee & Leach Inc., Research Division
I don't think this has come up. I just wanted to get your thoughts on the interest expense.
Is this a pretty good clean number now? I think it was $45 million in the quarter.
Is that a good run rate from here?
Thomas J. Hirsch
Yes, I think that's a pretty fair thing to say. It's pretty good in context to that just given the fact we do have CashEdge coming on a little bit with the incremental debt there, but it's going to be in the range of that area.
Operator
Peter Heckmann, Avondale.
Peter J. Heckmann - Avondale Partners, LLC, Research Division
As regard P2P volumes, I know you said you're going to, in the first quarter, start to provide some growth rates or commentary in terms of actual payment volumes. But can you talk about just early uptake?
Are banks starting -- I'm seeing banks start to advertise this. Are you seeing your banks start to advertise this?
And generally, what type of model they're looking at? Is it proving to be something where a bank can charge the user a fee, or are banks subsidizing it like bill pay and giving it away at a subsidized rate or free?
Jeffery Yabuki
So that's a big question, which I assume we won't be able to fully answer. But the simple answer, Pete, is different banks are doing different things.
And we are big fans of the FedEx pricing model and believe that as same day/realtime payment capabilities come online, which should be over the next several months that, that will allow almost all institutions to charge for expedited payments. Today, virtually all institutions charge for expedited payments within the bill pay application, and we don't see why this would be any different than that.
So from that standpoint, we do believe it's going to be a revenue-generating opportunity. Even so in certain institutions, they are in fact charging for this, but there are some that are giving it away.
It really does depend on the strategy of each of the individual financial institutions. We are seeing institutions advertise.
They're doing it on their own. They're excited about it.
They're using it as a way to differentiate their own services, and that is from smaller community-based institutions to some of the largest institutions in the U.S. So I think its early days, but I do -- the energy around this is great.
As we said in our prepared remarks, we've signed nearly 1,000 clients onto ZashPay. That does not include the fantastic job that's going on within CashEdge and the Popmoney solution.
And we see a lot of opportunity here just like we laid out at Investor Day, and we'll start putting the transactions out next year. But they'll obviously start small, which they should, but they'll grow, we think, at a pretty rapid pace.
One of the things that's interesting is that the usage models are looking good. So once you get people using the solution, the number of transactions, but very importantly, the types of transactions that people are engaging the solution to transfer funds on is really interesting; in fact, broader than we anticipated originally.
Peter J. Heckmann - Avondale Partners, LLC, Research Division
Okay. And do you think -- I guess I'm trying to think about it longer term, but does P2P maybe take some volumes from bill pay in maybe in 2 or 3 years?
Do we not even think about them as being separate products?
Jeffery Yabuki
So one of the -- that's a great question. And one of the points that we talked about at Investor Day and I tried to include a little bit of a reference in the remarks today in the context of Zions, and that is that we do believe that these solutions, which are arguably disparate today, will come together.
And that consumers will want and then demand a common way to transfer money in either as in response to a bill or a request for money in any way or whatever the case may be. It will be difficult, we think, for consumers to make the differentiation, do I go into bill pay?
Do I go into P2P? So we do see those solutions converging.
We think it's one of the powerful reasons why having the solutions together, right, under one company will create a significant and proprietary advantage. And not just in terms of the consumer initiating the payment, but in terms of the risk model, the fraud capabilities, the settlement, bringing all of that infrastructure and management together to create a ubiquitous way for consumers to execute transactions we absolutely believe in.
And that will also, we believe, transfer over to the small business side. The small business side is a very significant opportunity as well.
And then when you combine that with the fact that we have, arguably, the leading mobile solution, which you saw in our press release, and the leading Internet banking solutions, those together we think are a powerful combination and will help to also spur growth in the early days.
Peter J. Heckmann - Avondale Partners, LLC, Research Division
Yes. That will be very interesting.
One last little maintenance question. What were diluted shares outstanding at the end of the quarter?
Jeffery Yabuki
I think our outstanding shares were roughly around 140.8 million from that standpoint.
Thomas J. Hirsch
142.6 million.
Jeffery Yabuki
Yes, and the diluted was -- well, I think 1.5 million, 2 million higher. You'll see that in the 10-Q that we're filing tomorrow.
Operator
Bryan Keane, Deutsche Bank.
Ashish Sabadra - Deutsche Bank AG, Research Division
This is Ashish calling on behalf of Bryan Keane. I guess most of my questions are answered.
Just some -- Visa announced on their earnings call that they want to incentivize merchants to route over their network, and they may also incentivize merchants to -- let's say, Interlink is not present on the back of the card, they could even route it on the signature -- route PIN transaction on signature network as long as it's a Visa-branded card. Do you expect any of these changes?
If the merchants do start using -- start routing PIN over signature, do you expect any impact to your ACCEL network transaction volume? And also, any positive impact to your debit processing because these transactions, I don't know, if will get processed as signature or PIN-debit transaction?
Jeffery Yabuki
Yes. So I think I commented a little bit on this at Investor Day.
I mean, we think Visa is doing a good job in how they are managing their franchise, and from our perspective, we still see significant and interesting opportunities on the opportunities around the alternate network given that we don't serve that market today for the most part. So we continue to be enthusiastic and optimistic about the opportunities there, both in terms of the network because just share growth in the network will be a good things for us.
And then secondarily, we continue to grow the debit business. I guess, the other thing I would say is remember that the significant majority of our revenue in that business today is in the below $10 billion space.
And our network business is relatively small, which is why we think this is such a good opportunity on balance. So we remain enthusiastic.
Ashish Sabadra - Deutsche Bank AG, Research Division
And one quick question on the boost license revenue. I was wondering how much of that is going to come from cross-selling opportunities from all the acquisition, like the CashEdge, M-Com And Maverick acquisition?
How much would that contribute to the boost to the license revenue that you're expecting in the fourth quarter?
Thomas J. Hirsch
Zero. I mean, very close to 0 if anything.
I mean, we expect the majority of our license revenue in the fourth quarter to come from existing clients just by the very nature of the size of our client base. But we have not accounted for those areas in the numbers that we've been discussing with you today.
Operator
Thank you. That was our last question.
Thank you for joining today's conference, and have a good evening.