Oct 28, 2014
Executives
Stephanie Gregor - VP, IR Jeff Yabuki - President and CEO Tom Hirsch - EVP, CFO and Treasurer Mark Ernst - EVP and COO
Analysts
Ramsey El-Assal - Jefferies David Togut - Evercore Partners Adam Dahms - Robert W. Baird Tien-tsin Huang - JP Morgan Paul Condra - BMO Capital Markets Jim Schneider - Goldman Sachs Chris Shutler - William Blair Ashwin Shirvaikar - Citigroup Kartik Mehta - Northcoast Research Bryan Keane - Deutsche Bank Ashish Sabadra - Deutsche Bank
Operator
Welcome to the Fiserv Third Quarter 2014 Earnings Conference Call. All participants will be in a listen-only mode until the question-and-answer-session begins following the presentation.
As a reminder, today's call is being recorded. At this time, I will turn the call over to Stephanie Gregor, Vice President of Investor Relations at Fiserv.
Stephanie Gregor
Thank you and good afternoon. With me today are Jeff Yabuki, our Chief Executive Officer; Tom Hirsch, our Chief Financial Officer; and Mark Ernst our Chief Operating Officer.
Please note that this afternoon's earnings release and a supplemental presentation for the quarter are available on the Investor Relations section of our web site at fiserv.com. Our remarks today will include forward-looking statements about, among other matters, expected operating and financial results and 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 for a discussion of these risk factors.
You should also refer to our materials for today's call for an explanation of the non-GAAP financial measures discussed in this conference call, along with 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.
I must state that otherwise, performance comparisons made throughout this call are year-over-year and references to the year represent current year results through the end of the third quarter. And with that, I will turn the call over to Jeff.
Jeff Yabuki
Thanks Stephanie and good afternoon everyone. Results for the third quarter were strong across the board.
We are executing on our business model, delivering value to clients, and developing products and services that we believe will contribute to increasing our internal revenue growth rate into 2015 and beyond. We achieved 5% adjusted internal revenue growth in the quarter, led by 8% adjusted internal revenue growth in our Payments segment.
For the first three quarters of the year, adjusted internal revenue growth is above 4%, well within our guidance range, and a solid increase over the 2% growth in the comparable period last year. Adjusted operating margin performance continue to be healthy, increasing 70 basis points in the quarter and year-to-date.
The 31.2% rate in the quarter is the highest performance since the launch of our Fiserv 2.0 framework in 2006. We view operating margin as an important outcome of our business model, and a key measure of the differentiated model that our solutions provide for Fiserv clients.
Adjusted earnings per share increased 10% in the quarter, and is up 13% through September 30. Free cash flow was excellent in the quarter, and is up 13% for the year to $674 million.
Free cash flow per share, one of our most important performance metrics, is up 18% to $2.65 for the year. Total sales in the quarter was up 27% over the prior year, and has increased 14% through September.
We are well positioned to close out 2014 as one of our strongest sales years ever. Now, let me provide an update on our 2014 enterprise priorities, which as a reminder are, first, to continue building high quality revenue growth, while meeting our earnings commitments.
Second, extend market momentum to deepen client relationships with a larger share of our strategic solutions; and last, to deliver innovation and integration, which enhances results for our clients. Our first priority is centered on building our internal revenue growth rate on the back of high quality sustainable recurring revenue.
We are executing well against this priority. Adjusted internal revenue growth to-date is at the top end of our 2014 full year guidance of 4% to 4.5%.
We have seen strong execution across the majority of our existing businesses, led by our Payments, account processing, and online banking businesses, and good pick-up [ph] in our innovation base solutions, such as Mobiliti. We continue to see strong adjusted operating margin performance, which is an outcome of our growth in high quality revenue, and utilization of our operational efficiency muscle.
Importantly, we are also starting to benefit, as some of the benefit -- the investments we have been making, both in products and acquisitions are beginning to scale. As our recurring revenue solutions ramp, we expect this performance to support additional margin expansion over time.
We are confident in our ability to continue expanding company adjusted operating margin by at least 50 basis points annually, consistent with our long term outlook. Given our strong results to-date, we have moved our adjusted earnings per share guidance up to $3.34 to $3.38 or a 12% to 13% increase for the full year.
We remain solidly on track across our key financial metrics. Our second priority is to extend market momentum, to deepen client relationships, with a larger share of our strategic solutions.
We added 152 new mobile clients this quarter, and now have over 2,000 clients signed for our Mobiliti services. More than 270 institutions have gone live on Mobiliti this year alone, with several hundred remaining in the queue.
Mobiliti ASP users this year have grown more than 65% to over 2.5 million subscribers. Speaking of leadership, our Mobiliti products was recently recognized by Ovum, as the market leader in their global mobile banking lender evaluation.
Our award-winning technology allows for ease and extensibility and leadership and customer experience, which is critical as the industry navigates to digital transformation. We also signed an additional 116 clients to our Mobiliti tablet product this quarter, and now have more than 20% of our mobile clients offering our tablet solution as part of their digital suite.
We were very excited to sign our 50th new DNA client since last year's Open Solutions' acquisition. This performance is even more impressive when considering that the entire market, covering all banks and credit unions, has an average of less than 300 core account processing replacements each year.
These results are indicative of a move by some larger institutions to consider platforms that have more modern technology, integration advantages with our market leading products, and the benefits of real time experiences. Through September 30, 11 of the 50 new DNA clients were live, including two of the larger credit unions in the country.
Randolph-Brooks Federal Credit Union at $6.5 billion in assets, and Navigant Credit Union, a $1.5 billion institution. Both of these clients are excited about their new technology platforms, and we look forward to serving them for many years to come.
Our market momentum goes well beyond DNA. As an example, we were pleased to extend our technology relationship in the quarter, with First Republic Bank with $46 billion in assets, for account processing and other services.
This relationship came to Fiserv as part of the Open Solutions acquisition as well, and is yet another example of the opportunities we are forging with that client base. Our third priority is to deliver innovation and integration, which enhances results for our clients.
On our last call, we mentioned the July launch of Agiliti, our cloud-based retail bank technology solution in the U.K. In just a few months, we have seen strong interest from both de novo and existing institutions, which is fueling excellent pipeline growth.
We expect our first live clients towards the middle of next year. We are also establishing a beachhead with our new Mobiliti business product, to help banks deliver digital capabilities to their coveted business customers.
Interest in this solution is high, and we started adding new clients in the quarter. This solution should start contributing to revenue growth in 2015.
We have a number of new solutions pointed at the evolving ecosystem of real-time money movement through financial institutions. This area is increasingly in a spotlight, and we believe our assets, which include payment rails, applications, channel capabilities and intelligent decisioning through risk tools and analytics are positioning us well in this emerging new reality.
We were seeing early adopting financial institutions use these services to deliver value for their customers and to generate fee income. Now let me turn the call to Tom to provide addition detail on our financial results.
Tom Hirsch
Thanks Jeff and good afternoon everyone. Adjusted revenue was $1.2 billion in the quarter, and $3.5 billion for the first nine months of the year.
Our adjusted internal revenue growth rate was 5% in the quarter, and is above 4% year-to-date, showing strong acceleration over the prior year, and at the upper end of our 2014 growth rate guidance. Adjusted operating income increased 7% in both the quarter and the first nine months, to $370 million and $1.1 billion respectively.
Adjusted operating margin was up 70 basis points to 31.2% in the quarter, and expanded 60 basis points sequentially. Year-to-date, adjusted operating margin is up 70 basis points to 30.5%.
As Jeff mentioned, we have an intense focus on growing our high quality recurring revenue businesses. This effort includes scaling up our newer businesses such as Mobiliti ASP, along with executing on our operational effectiveness initiatives, which contribute meaningfully to the strong margin performance.
Adjusted earnings per share increased 10% in the quarter, and 13% year-to-date. As important, our earnings this year have converted into free cash flow for our shareholder at an even higher rate, growing free cash flow per share by 18% to $2.65.
Now on to the segment results; adjusted internal revenue growth in the Payments segment was 8% in the quarter, and at 7% for the year. The strong growth was led by client and transaction growth in card services, digital channels, bill payment, and our output solutions businesses.
We signed 40 new debit clients in the quarter and have added nearly 100 for the year. In addition to offer compelling integration advantages, we continue to provide additional value for our clients, through add-on services geared to enhance risk and fraud capabilities, EMV, tokenization and other innovation needed to stay abreast of a rapidly changing Payments landscape.
The combination of adding new institutions and extending relationships with existing clients has enabled us to produce above market debit transaction growth of 11% in both the quarter and year-to-date. We also signed 77 new bill payment clients in the quarter, and have added 247 clients through September 30.
Bill payment transaction volume grew 2% in the quarter, and is up 4% in the first nine months. Although transaction growth this year has been negatively impacted by our largest client, we recently converted a larger bill payment client, and expect to implement a similar sized client by the end of the year.
We added 85 institutions to the Popmoney network in the quarter, and have over 2,300 institutions contracted to offer these services. We continue to believe in person-to-person payments as an important growth opportunity for the financial industry.
In particular, we are seeing the emergence of instant payments as a top strategic priority at many larger financial institutions. Our pipeline for Popmoney instant payments is growing well.
Payments segment adjusted operating income grew 16% in the quarter to $201 million and year-to-date adjusted operating income increased 9% to $566 million. Adjusted operating margin in the quarter of 32.9% was exceptional, increasing 210 basis points over the prior year.
These results were primarily driven by growth in some of our newer recurring revenue solutions, and an enhanced mix of overall business in the quarter. For the year, segment adjusted operating margin was up 50 basis points to 31.6%.
Adjusted internal revenue growth in the financial segment was 1% in the quarter, and is up nicely at 2% versus flat in the comparable period last year. Adjusted internal revenue growth in both periods was primarily driven by gains in our account processing and lending businesses, which includes higher one time fees.
Segment growth was negatively impacted by difficult comparisons in our international group, and the lag associated with new implementations of account processing solutions, with an emphasis on the backlog for DNA. Adjusted operating income in the financial segment was down 2% in the quarter to $193 million, but is up 5% to $581 million through September.
Adjusted operating margin was 32.8% for the quarter, and 33% for the year. Operating margin for the quarter was impacted by several factors, including business mix and the timing of certain expenses.
Financial segment margin performance for the year has been very strong, increasing 100 basis points, primarily driven by solid execution in our account processing businesses. The impact of operational effectiveness initiatives, including open synergies, partially offset by the current year international performance.
The adjusted operating loss in the corporate segment for the quarter was $24 million, which is in line with the prior year, and down $4 million sequentially. Our adjusted tax rate increased to 34.7% in the quarter, compared to 33.5% last year.
The rate increase negatively impacted results in the quarter by $0.02 per share. The adjusted effective tax rate through September is slightly lower than last year's at 33.7%.
We expect our fourth quarter adjusted effective tax rate to be approximately 36.5%. We have received over $100 million in cash distributions from our StoneRiver joint venture this year, including $63 million in the third quarter.
These distributions are excluded from our reported free cash flow performance. StoneRiver continues to very effectively monetize the business, through dispositions and refinancings.
Gains related to dispositions are also excluded from our adjusted results. Given the reduced portfolio of businesses within StoneRiver, our adjusted equity earnings for this year are down about $0.03 compared to the prior year.
As Jeff mentioned earlier, a key benefit of increasing the level of high quality revenue growth is strong free cash flow generation. In the first nine months of the year, free cash flow grew 13% to $674 million.
Free cash flow per share in the first nine months of the year was up 18% to $2.65. Total debt at September 30th was $3.8 billion or 2.3 times our trailing 12 month adjusted EBITDA.
We remain committed to using our capital in ways that build long term shareholder value. As an example, in the quarter, we have repurchased 4.2 million shares for $270 million.
Through September 30th, we have deployed $789 million, repurchasing 13.3 million shares at an average cost of $59 per share. We have returned well over 100% of our reported free cash flow to shareholders in 2014.
As of quarter's end, there were 245.3 million shares outstanding and 5.2 million shares remaining under existing share repurchase authorization. With that, I will turn the call back over to Jeff.
Jeff Yabuki
Thanks Tom. As we mentioned upfront, sales for the quarter were strong at 128% of quota, and 101% in payment year-to-date.
Importantly, actual sales were at a record level, up 27% in the quarter. Total sales for the year are up 14%.
We are seeing strong demand across our product portfolio, in particular, there is growing interest in our large account processing service, digital channels, payments including real time solutions, along with early traction and our focused international strategy. Integrated sales were also strong in the quarter at $70 million and are $172 million for the year.
The leading solutions for Mobiliti ASP, bill payment, source capture, card solutions and online banking. We are well positioned to achieve our $250 million integrated sales target for the year.
We have recorded $50 million of operational effectiveness savings in the first nine months of the year, or 83% of our $60 million annual target. Even with the majority of the Open Solutions cost synergies accounted for, we continue to see a long runway of opportunity and believe we will drive economic value for a number of years through our core operational effectiveness programs.
The client environment remained stable in the quarter. There were only four regulatory actions in the period and 19 year-to-date, which is just over half as many as last year.
We expect regulatory actions will continue to approach normal levels, and we also believe M&A activities will remain quite active. Financial institutions have generally remained committed to their spending plans, and improvement over the trailing off we have seen occur over the last several years.
Technology spend continues to be weighted to areas such as digital experience, regulatory compliance, cost effectiveness, and solutions that enable financial institutions to generate additional revenue. The neediest and most significant industry discussions right now are centered on point of sale transactions, including EMV issuance, data breaches, security, tokenization and of course, Apple Pay.
Even the White House jumped into the fray in October, pushing Chip and PIN for government payments. These programs, when taken together, should create a more secure payment experience and increase consumer confidence.
We anticipate these changes to be a large opportunity and are prepared to help our clients make the transition in a rapidly evolving point-of-sale payments landscape. As I mentioned upfront, we entered the fourth quarter very well positioned to meet our 2014 financial objectives.
We continue to expect adjusted revenue to increase 4% to 5% and net adjusted internal revenue will grow 4.5% for the year, a meaningful increase over last year's 3% internal growth. We have increased our expectations for full year adjusted EPS growth, and now expect growth to be in the range of 12% to 13% or $3.34 to $3.38.
We still expect that adjusted operating margin will increase at least 50 basis points for the full year, and that the combination of increased internal revenue and operating margin expansion will translate into at least 10% free cash flow per share growth or greater than $3.65 for the year. We enter the final quarter of the year in a position of strength.
We are executing well, are on track for a step-up in our internal revenue growth rate, and fully expect to achieve our 29th consecutive year of double digit adjusted earnings per share growth. These results, combined with our forward visibility, gives us confidence that we will see another increase in our internal revenue growth rate in 2015.
We recently completed our associate engagement survey and saw a meaningful increase in the overall level of engagement. We know it is our people, and how they engage with our clients that makes the difference.
We couldn't be more proud of the work our more than 21,000 associates do each day, to make your company, one of the world's most admired. With that, let's open the line for questions.
Operator
(Operator Instructions). Our first question comes from Ramsey El-Assal from Jefferies.
Your line is open.
Ramsey El-Assal - Jefferies
Thanks guys. How should we think about the long term organic group trajectory in the Financial Solutions segment?
Where it's kind of landing now, sort of what we should be expecting in modeling going forward, or what are some potential input there that might see that accelerate a bit?
Jeff Yabuki
Thanks Ramsey, it’s a good question. We have said for several years now, that we expected that our internal revenue growth rate would be able to step-up each year for a number of years, and as we mentioned we got a -- obviously, we are stepped up nicely for this year and based on what we can see moving forward, we expect to see another step up into 2015.
And that growth, we did expect that it would have a bit of a bias for the Payments segment, given those kind of solutions and the growth characteristics of that business. However, we are actually pretty bullish about what's going on in the financial segment.
We mentioned -- we signed our 50th DNA client in the quarter, have 11 of them live, which means obviously we have 39 still in backlog, but we also are winning a number of large transactions across the landscape. So whether it's in our signature platform, Premier, or in DNA, we have got a lot of good momentum and backlog.
And we are just really start to see those clients go live, based on actually the signings that we talked about even last year at Investor Day. So we have good visibility there.
We believe we will continue to step up. And we are also actually pretty excited about what's going on in our lending businesses.
We are seeing financial institutions realize that the lending area is the place over time, where they are probably the most experienced at making money and we are seeing solutions get evaluated and looking for potential upgrades both in the origination and on the servicing side. So we see some nice macros in both of those areas, we think that will translate to some better growth for us moving forward in the financial segment.
So I would say that, we do expect that to grow. To continue to grow, I would say that that will step, but again, be slightly less than kind of growth acceleration we are seeing on the Payments side.
Tom Hirsch
And then I'd just add one more thing to that. It would probably be around international, which was included in that particular segment.
And as we mentioned on the call, we have had some very difficult comparisons and that are probably impacting the company overall by about 1% and the -- so going into the financial segment by about 1% from a growth rate standpoint. So I think as we look over the next several years, we are going to continue to grow that business, but actually help us accelerate growth in the segment overall as we look into the next couple of years.
Ramsey El-Assal - Jefferies
And none of the softness, you mentioned from the tough international comparisons. None of that you perceived to be anything related like a macro headwind from the different regions you're operating, and it really just has to do with the tough compare?
Tom Hirsch
That's correct.
Jeff Yabuki
Actually we would say that, on balance some of the technology solutions that w have introduced, such as Agiliti in the U.K. actually are riding some macro tailwinds, as opposed to the opposite.
We are pretty focused on what we do internationally, so we feel good about the growth characteristics moving forward.
Ramsey El-Assal - Jefferies
Okay. One last one for me; you mentioned you recently converted a larger bill payment client, you expect to implement another similar sized client.
Maybe you can just give us an update or some commentary on sort of -- what sizable deals that maybe you have mentioned in the past remain in the sort of backlog pipeline waiting to be implemented. Once we get these few large deals sort of through, does that sort of cap-off the implementation cycle you've kind of launched several cycles ago with a nice big win?
Jeff Yabuki
The two clients that Tom referenced in his prepared remarks, are the two remaining larger clients that we had called out, actually one of them, even a couple of years ago. So we are finally starting to go live; that will anniversary kind of late 2015 and so those named clients we would be through.
By the same token, we've had a couple of hundred bill payment clients that we have signed this year and a number of them sizable; not at the names level, but the bulk of the clients, we are still seeing a high level of attractiveness on that front; and we are also seeing good focus on expedited bill payment as one of the add-on capabilities across the entire network of several thousand bill payment install. So we think we are in pretty good shape moving forward.
Ramsey El-Assal - Jefferies
Great. That's all for me.
Thanks guys.
Jeff Yabuki
Thanks Ramsey.
Operator
Thank you. David Togut from Evercore, your line is open.
David Togut - Evercore Partners
Thank you. Good afternoon Jeff and Tom.
Jeff Yabuki
Hey David.
Tom Hirsch
Hey David.
David Togut - Evercore Partners
Given the 50 new signings you've mentioned for DNA, at what [indiscernible] will these signings actually convert over the next 12 months, and can financial organic growth get up to a mid-single digit level, let's say by the end of 2015?
Jeff Yabuki
You know David, we aren't in the business of giving guidance for 2015 and Tom would especially not want us to talk about the segment-by-segment guidance. What I would say is that the majority of the meaningful installs will start to come live -- towards the middle of next year, long install cycle, so that will take some time.
And also remember that part of our core value proposition is not just delivering the account processing piece, but also delivering many of the surround products; debit, channel, some of the payment solutions, risk, lending. So a lot of ancillary content that starts to go live, that's the good news; the bad news is it takes a little bit longer to move through those implementation cycles.
So I think you will see -- I actually don't think we will hit our peak performance in the financial segment until probably into the 2016 timeframe, just given the momentum that we have now, and I will also tell you that, as we mentioned in our prepared remarks, we are quite enthusiastic right now about the kinds of evaluations that are occurring in the market, in terms of larger institutions taking a look at the modern real-time oriented platforms, that frankly had it not been for the acquisition of Open Solutions, we probably would not be in line for some of those larger institution evaluation, those will be more dominated by the non-U.S. players.
So that is going to also give us momentum. As far as the longer range modeling goes, I think we will say we continue to expect those step-ups and we will continue to keep you informed as to how our progress is looking.
Tom Hirsch
David, I would probably just add to that, as you see our Payments segment, year-to-date growth at about seven, compared to 4% this time last year, and the Financials segment actually at 2 compared to flat. So we have seen some good growth there.
I think the other thing to Jeff's point is one of the important things around these deals in these large AT or the DNA deals, since a lot of that surround revenue, really show up in our Payments segment. So its very important to note that a lot of the bill payments and debit revenue continues to be shown in the Payments segment revenue growth, while we will get the core processing revenue that flows through financials, its really an important driver of future success, really in both segments, because that revenue shows up in both of our operating segments.
David Togut - Evercore Partners
Understood. Just ratably, it looks like you're ahead of year-to-date plan in terms of operational effectiveness, 83% of target.
You expect to significantly exceed the cost takeout target this year, as you had in the past?
Tom Hirsch
We are on track. As you well know, we are doing very well on the Open Solutions synergies, and so we are on track for a good year in regards to that particular metric, and we are very pleased.
You can see it show up. As Jeff kind of highlighted David, you have been with us for a long period of time or followed the company.
We had our highest margin -- in the third quarter since the launch of Fiserv 2.0 back in 2006. So we are pleased with that, as part of that has been our operational effectiveness initiatives, and again, we have more opportunities as we continue to look forward to continue to expand margins.
As Jeff talked about, we are very confident of that, and do a number of things around the scaling of our new solutions or operational effectiveness and a host of other things.
David Togut - Evercore Partners
Just a quick final question Tom, third quarter term fees versus year ago and then September 30th share count?
Tom Hirsch
Yes you know, as you are aware David, the level of termination fees really varies from period-to-period based upon the number and kind of the size of clients acquired. And just for a little backdrop, termination fees are usually about 1% of our total revenues and they really fluctuate year-on-year as you know.
We believe overall, these types of fees this year are up across the industry, and we are seeing the benefit this year from termination fees also. Your specific question around the quarter, term fees are up around $10 million in the quarter versus the prior year, and it was roughly around $5 million in both of the segments, and as we head into the fourth quarter, we expect a more difficult comparison, just given the -- what we had in the prior year.
David Togut - Evercore Partners
And then 9/30 share count?
Tom Hirsch
Oh, I am sorry. So I think 245.3 million.
David Togut - Evercore Partners
Perfect. Thanks so much.
Appreciate it.
Operator
Thank you. Adam Dahms from Baird, your line is open.
Adam Dahms - Robert W. Baird
Hey guys. Thanks for taking my question.
Jeff Yabuki
Sure.
Adam Dahms - Robert W. Baird
So you guys serve more banks than pretty much anyone, and we keep hearing that the banks are -- obviously willing to give up about 15 bips that they are interchanged with regard to Apple Pay. I am wondering if you guys are hearing anything on why they are going to give up this chunk of interchange?
And then on that, are there any potential economic benefits for Fiserv, do you think kind of work to integrate this initiative?
Jeff Yabuki
Sure. So Adam I would -- I mean at least in the conversations that we have typically had with institutions, there is a level of energy and excitement around the pretense that Apple Pay, and frankly other kinds of electronic transaction portals at point-of-sale will convert cash and to a lesser degree, check transactions to electronic, which will carry a level of interchange.
So there has been a belief that that would in effect, wipe out the amount of -- or at least an optimism that will wipe out the incremental interchange or a basis point [indiscernible] and share it with Apple. There is also some more technical stuff and quotes around card present and card not present rates, in which there is an agreement that, typically some transactions that would have been treated as card not present will now be treated as card present, given the security and that changes the interchange rates as well.
So I think there is a kind of a net-net around that, that's going to have, that has banks be willing to do this.
Adam Dahms - Robert W. Baird
Great. Thank you.
And any benefit -- is there any way you guys seem kind of getting on that --
Jeff Yabuki
Yeah I am sorry, I missed that element of it. I mean obviously, as a processor, any of the transactions that are converted to a card-based transaction, we have got -- if they are debt, we have got debit processing fees, we have network fees, we have -- and we just -- one of the things that I like is just training consumers to be more -- have a higher propensity to use a digital payment mechanism, and so using your mobile phone at point-of-sale is going to make you just that much more interested in using your mobile phone for non-point-of-sale transactions, which as you know, is a very important part of our business model, whether its around bill payment or person-to-person transaction.
So we like that training element as well.
Adam Dahms - Robert W. Baird
Makes sense. Thanks a lot.
Jeff Yabuki
Thank you.
Operator
Thank you. Tien-tsin Huang from JP Morgan Securities.
Your line is open.
Tien-tsin Huang - JP Morgan
Great, thanks. Good results here.
I guess on the totals page -- I just wanted to ask on the total sales, 27%, quite strong, sounds like its going to help fuel acceleration to next year if that makes sense. Just curious, has this continued into October and have client priorities just changed, just wanted to get a little bit more color on what's driving this?
Jeff Yabuki
Yeah, thanks Tien-tsin. Couple of things going on in the quarter.
We mentioned, you may remember that after Q2, we were -- we had a little bit of light Q2, we saw some transactions slip into Q3, and so we obviously picked those up. But we are seeing the institutions continue to spend, and as I think you know, you are one of the folks who had been monitoring spending and seeing it trail off in the second half of the year for the last several years, and we are not seeing that kind of trailing occur.
So we are seeing the interest at the FI level continue to be there. We are seeing strong interest in activity on the lending side, both from core financial institutions, as well as some of the non-traditional banks, some of the non-bank lenders who are out there, making -- investigating and making purchases in that space and of course in the online digital channel space as well as payments.
So it's really a combination of all of those things coming together. As far as October, I hate to say this, but most sales forces take a little bit of a breather after they close a quarter.
We are encouraged by how our pipeline looks moving forward, and we are frankly counting on a strong finish to the year.
Tien-tsin Huang - JP Morgan
Got it. Good to know.
I guess, as my follow-up, I heard the instant payment demand and what not. I am curious, given a lot of talk about ACH again, and the clearinghouse sort of clearing this real time payment system, I guess in parallel with some other things that are out there.
What does that mean Jeff for Fiserv? Is it good, bad and different?
Love to hear your feedback, thanks.
Jeff Yabuki
I think its great news actually. And the fact that there is -- almost unanimous support across the industry for a methodology that allows consumers and businesses to move money at the speed of their choice is quite positive.
By the same token, believing that the right answer in the near term at least is a construction of a new rail, I think is unlikely to -- I have a hard time seeing how that solution allows consumers and businesses to transact in the near term. So I think you're going to see some kind of set of hybrid solutions.
I think we are all looking at what are the best ways to get to the end, which is allowing that choice in transactional speed. In the near to mid term, I am highly confident that our solutions will play a role in how institutions will transact, and I think it will allow us to bring the kind of choice that we have talked about to our applications, such as bill payment and Popmoney that will fit very well into this new consumer experience at value speed, potentially above all else.
So we're pretty bullish about it and pretty excited about it.
Tien-tsin Huang - JP Morgan
Makes sense. Appreciate the comments.
Jeff Yabuki
Thank you.
Operator
Thank you. Paul Condra from BMO Capital Markets, your line is open.
Paul Condra - BMO Capital Markets
Great. Thanks for taking my call.
I wondered maybe you could talk a little bit more about, what you're seeing for EMV? I know you have talked about potential opportunities there, but any deals that you're winning and any trends that you're noticing, that you can get more detail on?
Jeff Yabuki
Sure Paul. Thanks.
Clearly, lots and lots of conversations around EMV. Those conversations got a little bit more complicated around the Apply Pay announcement, just in terms of having mindshare moving around.
But there is no question that, it's not a matter of it, it's just a matter of when. We see all the same data that you all see around a number of cards, both credit and debit, that are anticipated to move.
Most of our card processing is centered around debit. Most of our card production is centered around debit.
We were very happy to see that, for example, Bank of America announced they are going to reissue their debit cards this year. With Chip, I think we have seen some of the other large institutions do that, we think that's very good news, both in terms of -- for the industry and for consumers around how they transact, but as well as for our business.
To the second part of your question really around deals that we are winning, we have a very good position. We really aren't in a place where we can talk about it.
But I would say that we are doing, at least as well as we though we would do, if not better. Now again, very few cards have actually been reissued.
We think those reissue cycles have run over the next several years. I would guess that 2015 would be the lowest of all of the years, but there is going to be a lot of activity in that space, over the next several years.
Paul Condra - BMO Capital Markets
Thanks. That's helpful.
And then just trying to understand, are your bank clients Apple Pay enabled, and then if they want to be, do you have some kind of role to play in that?
Jeff Yabuki
Sure. So a number of our institutions are currently Apple Pay enabled, and we work with our clients to make sure that they are enabled to do the things that are necessary to have become enrolled in Apple Pay.
There is a lot of noise in the market right now around deadlines and dates, and I think much of that is settling out. I think that yesterday, there was announcement coming out of Apple about a million cards are currently enrolled in Apple Pay.
So obviously, we are quite early. I think that's going to involve.
But as the processor to the clients, we do work in partnership, to make sure that they have the capabilities that they need to participate in that program.
Paul Condra - BMO Capital Markets
All right. Thank you.
Nice quarter.
Jeff Yabuki
Thank you so much.
Operator
Thank you. Jim Schneider from Goldman Sachs, your line is open.
Jim Schneider - Goldman Sachs
Good afternoon. Thanks for taking my question.
One question on bill pay, you talked about the new large client win that you have coming out at the end of the year, and the other client wins, do you think the bill payment transactions can get sustainably north of 5% for the foreseeable future as we go into 2015 and beyond?
Jeff Yabuki
I do think the natural rate of bill payment is actually in excess of 5%. Just given how transactions are electronifying.
Today, something or in round numbers, the number of paper payments related to bill are still around 50%, so there is a heck of a lot of growth that is still available in the market. I think in order for that to happen, you've got a couple of things that have to occur.
You have to continue to see this convergence between payment enabling and digital, I think that's one of the big catalysts that you see out there. You got to have more opportunities for consumers to choose speed of their choice or to select the speed of their choice when making a payment, that's a critical element of it, and that's one of the things that we were talking about earlier around the creation of some of these rail, we are actually very enthusiastic in that area.
And then third, we have to continue to win some number of transactions. The majority of institutions, which we do very well.
The majority of our growth in payments over the last several years has really come from winning new clients. We have got a lot of focus now on how do we make those clients more capable in terms of the experience in driving more payment volumes.
The last thing I want to talk about, because I think its really important Jim is, in that business, there are two ways that we grow revenue. We grow revenue on the basis of new transactions or additional transactions and we grow revenue by increasing the average value of every transaction, and one of the areas in which we are very focused is on driving expedited payments, because we see that as an opportunity to take some of the 1.3 billion transactions that are in existence today, have them go a little bit faster and create more revenue per transaction.
We have risk capabilities, we have customization and other services that we are delivering in that space, and frankly, that's an area where we have not done anywhere near all we can do, and I see that to be a nice opportunity to drive revenue growth in parallel to driving just core transaction growth.
Jim Schneider - Goldman Sachs
That's helpful, thank you. And then as a follow-up, with respect to your -- as we look into 2015 and looking at your 50 basis points or better operating margin targets over the long term, can you talk to how much of that is going to be driven by normal leverage in the business, versus how much do you think you can wring out in terms of additional cost synergies above and beyond the open cost synergies that you've realized in 2014?
Any kind of color on the additional synergies to be realized on the cost side would be helpful?
Jeff Yabuki
Yeah, so let -- Tom why don't you?
Tom Hirsch
Jim is your question around Open or the general? We are going to continue down the pathway of our operational effectiveness initiatives, and so that's going to be clearly a component of what we are going to have over the next three years.
But it is going to be combined with a scaling of our newer solutions, things like Mobiliti, where we have made a number of investments and we are getting to a nice scale position as we move forward over the next several years. So again, its early for 2015 from a guidance standpoint, but it is going to be a combination of activities.
Jeff Yabuki
And Jim I would say, I don't have the data in front of me, I will have Stephanie follow-up with you; but we still have a fairly large pool of operational effectiveness saves in which we have identified and then we basically look to optimize our effort across the company, putting some of it to growing internal revenue, putting some of it to continuing to take out and restructure our expenses and our processes to deliver more value. So we still have a good sized pool there.
But I think to your question, we are going to see a fair amount of leverage over the next few years, in scaling some of these solutions, like the Mobiliti ASP solution that we talk a lot about, were up to -- I think the number was 65% growth in subscribers to 2.5 million. If you look at our Payments margin over the last couple of years, you will see that those margins have been under pressure, because most of our investments have been in the Payments segment over the last couple of years.
Those are now starting to convert, and we will see that leverage come through in our results.
Jim Schneider - Goldman Sachs
That's helpful. Thank you.
Jeff Yabuki
Thank you.
Operator
Thank you. Chris Shutler from William Blair and company, your line is open.
Chris Shutler - William Blair
Hey guys, good afternoon.
Jeff Yabuki
Hey Chris.
Chris Shutler - William Blair
So first on Mobiliti, I know that you're seeing pretty strong uptake there. Maybe just Jeff, could you remind us the revenue model, can you give us rough sense of where revenue stands today for Mobiliti and then if you look at usage within your FI client base, what percentage of end clients that actually have access to the platform are using it today?
Jeff Yabuki
Good questions Chris. The model, there are three core variations of the Mobiliti model.
There is a license and services straight model, so the larger institutions, the U.S. banks of the world, we sell them the license, we work with them on a services basis, and then we continue to work with them to modify as they deem appropriate, and then they would pay us on kind of a seat basis.
The second variation of the model is, taking the first piece and then adding hosting, so we would actually host it in our data centers and we do that for several larger clients. And then the third one is really the ASP model.
So we build it, we run it in our data centers, and the model for that is the institutions pay us for each of the users, we refer to them as subscribers on a monthly basis, and they would be paying us on the basis of, are they using kind of the core phone piece alone, do they have tablet on top of that, and then we also have been talking about Mobiliti for business, which is the next iteration of ASP or cloud-based offering. So those are the three different revenue models that we have today.
As far as the overall revenue, we don't break that out. Historically at Investor Day, we have talked about where we sit in that business.
[Indiscernible] will do the same thing, when we do our Investor Day in June. Probably, what I can tell you is, I think we are still in the fairly early innings of what that mobile opportunity looks like, as compared to where our online banking business is, if you think about the users.
One of the benefits -- one of the embedded benefits that we have is that, historically, especially for the smaller institutions, Mobiliti integration occurs through the online banking platform, and because we have tens of millions of users using that platform, it’s a simpler and easier way to go and we believe over time, those institutions will end up selecting us. There are still a very large number of institutions, who have not yet selected Mobiliti, and we believe that that will continue to grow for us over time.
Chris Shutler - William Blair
Great, thanks. And then just a couple of real quick follow-ups.
One is on the buyback, and you guys have been quite aggressive this year, I think 789 repurchased, relative to kind of 460 to 580 the last couple of years this time a year. Just any kind of thoughts, why maybe you have been more aggressive and then secondly, the depreciation and amortization line looked like it fell off a decent bit sequentially, just want to make sure, as we model that going forward that it should be fairly consistent with Q3 levels?
Thanks.
Jeff Yabuki
So I will take the share repurchase question, and I will let Tom deal with the more technical one, then he can comment as well. But on the share repurchase question, remember last year we also acquired Open Solutions, so that was a fairly hefty allocation of capital.
And we have said over time, is we are going to allocate our capital, in a way that we think makes the most sense for shareholders, and that we use share repurchase as our capital allocation benchmark. We have not completed any acquisitions this year, and we believe that the combination of increasing internal revenue growth, market momentum, and the margin runway that we see, that we believe that we have got an attractive business over time, and therefore the repurchase has made sense, and we will continue to look at that on a period-by-period basis.
Tom Hirsch
And Chris, regarding the -- I will take this offline with you, but just to me, when I look at the cash flow statement, its relatively consistent for the nine months with where we were in the last nine months and even on a quarter basis. Let me take that offline and give me a shout, and then we can go through that.
Chris Shutler - William Blair
Sounds good. Thanks a lot.
Jeff Yabuki
Thanks so much Chris.
Operator
Thank you. Ashwin Shirvaikar from Citigroup, your line is open.
Ashwin Shirvaikar - Citigroup
Thanks. So good performance especially on the margin front.
The question I have is, of the margin improvement that you had in total, what was the -- is it possible to separate out the contribution of operating effectiveness versus synergies related to Open, to the extent you still have them? It has a impact on a go forward expectations I guess with regards to how long it has been continued [ph] improving margins at this pace?
Jeff Yabuki
Ashwin, let me start with it, and then Tom and Mark can add in, as it makes sense. Its difficult to look at all the contributors to margin on a pure vertical or siloed basis.
I mean, we have a number of different contributors, operational effectiveness, which includes kind of the core muscle that we have built over the years, reengineer our cost structures and our processes to be more effective. You have got the synergies from Open, you have got the scaling from some of our solutions.
But on saying that, you have investments in new technologies and other areas in which we know we have to build, so that we can continue to grow our level of high quality sustainable revenue growth. And so in any year, we are making trade-offs that allow us to invest the amount of money that we need to invest at an enterprise level.
One of the things that we talk about a lot is, we could have higher margins, if we didn't see opportunities to invest. Thankfully, we are in a situation where we do have that.
And so we use those levers simultaneously to make sure that we are in a place where we can grow the business over a long period of time, and also expand margins. So -- and when certainly, when certain streams of revenues come in, in a different way, we are always looking what are the kinds of things that we can do, to continue to make sure that we are making the right investments so that shareholders benefit and clients benefit over a long period of time.
Mark Ernst
One thing I'd add to that is, to your point about, so how sustainable is that 50 basis point, or a greater margin expansion, and how many years is that good for. Sitting here today, we can clearly see plenty of reengineering opportunities across the company and the portfolio of things that we do, that give us high confidence that that long term objective is in fact a long term attainable objective.
Ashwin Shirvaikar - Citigroup
That's good to know. One follow-up question on a separate topic which is bill pay.
Obviously, you guys have had a lot of good, I guess, market share driven growth. But as you sort of look at what's left, right?
I mean, you have already signed a lot of large clients. Do you see sort of a large diminishing returns with regards to -- you have to now go sign a lot more mid-sized clients, in order to achieve the same things that you did with the signing of TD or Wells or so on.
Jeff Yabuki
I am sorry Ashwin, I didn't mean to cut you off. So I would say that, we are in the fortunate position to have a nice market share across the largest institutions in the U.S., and where we have to go moving forward, is in the kind of the middle of the market, where we actually have a surprisingly low level of penetration.
So we have a very attractive penetration rate across the top 20 institutions. But if you look at the top 20 -- I am sorry, the number 21, they call it the number 50.
We are surprisingly low penetrated in those markets; and so, we have real opportunities. And if you go back and look at press releases over the last couple of years, you will see that we are just beginning to win in those phases.
So we won't have the one big win probably, but we will have two or three wins that actually look bigger than those one win. So we are still pretty optimistic and pretty bullish about that end of the market.
But I do want to also reinforce that today, we are still seeing a tiny percentage of the payments for household that are actually being executed, even by our most loyal users. So I do think there is a big opportunity there for us in that space, and some of the convergence that we talked about earlier should also help that.
And then lastly, we obviously have the revenue per transaction commentary that we talked about earlier. So still a lot of opportunity in that space overall.
Ashwin Shirvaikar - Citigroup
Absolutely. If I can squeeze one more in, is there any benefit or detriment either way I am just kind of -- opening it up for you with regards to, what happens with the bill payment business as your real time payment business kind of grows?
Is it a cost benefit that you can get from that, or I mean, is it not related then, just that --?
Jeff Yabuki
So actually, we shared a little bit of this at our last Investor Day. I mean, we are actually quite bullish, that the bill payment business will benefit in two ways by real time.
First is that some percentage of the 1.3 billion or so transactions a year will get converted to a real-time transaction, and that will drive value for the financial institution, and then drive some incremental revenue for us on a per transaction basis. But I actually think the biggest opportunity is not the conversion of the existing clients.
But I think there is an educational element that's missing in the market. When someone wants to pay a bill right now, they aren't thinking about going to their banks.
So they aren't even bothering to go to the bank aggregator side to do that. They are going to bill or direct, they are going to a walking counter, they are doing whatever they are doing, but they are not going to the aggregation site, and that should bring in my opinion, many, many, many more transactions than we are seeing today, that will not only add to the transaction count, but actually come in at a higher level.
And that's really not my opinion, that's the opinion of the market participants that we are really supporting, as we build our technology out.
Ashwin Shirvaikar - Citigroup
Understood. Thank you, Jeff.
Jeff Yabuki
Thank you.
Operator
Thank you. Kartik Mehta from Northcoast Research, your line is open.
Kartik Mehta - Northcoast Research
Hey good afternoon, Jeff, Tom and Mark. Jeff, a question for you.
Well you talked a lot about Mobiliti, you talked a little bit about Popmoney and bill payment; and maybe you already do this, but if you don't, is there an opportunity for you to create a payment gateway sword [ph] to sell to the banks? And by payment gateway, something that where a bank tends to have bill payment, Mobiliti or Popmoney all on one screen to be able to tell to its consumers, if that makes sense?
Jeff Yabuki
Yeah; I mean, we do see that, and that's a bit of how we operate today. Its one of the reasons why we said that, the online banking and the mobile experiences are so important.
And so to the extent that we can provide that, we think we have a very significant advantage in delivering our non or beyond point-of-sale payments capability. So bill pay, Popmoney, TransferNow, those kinds of things.
And then when you wrap it with speed, kind of the speed of choice, and then the intelligence that underlies that, we think there is a definite advantage to us. And frankly, we have seen this playing out in the market for the last three or four years.
The reason why we have done so well in areas such as account processing, is we are delivering this very full bundle of not just any technologies, but award winning innovative technologies that our clients get, and when the account processing selection processes occur, we always hear, hey, we are selecting Fiserv on the benefit of the integration advantages that we can deliver.
Kartik Mehta - Northcoast Research
Then Jeff, there is not a lot of talk, and you talked about EMV and just the change in the payment landscape that's happening. Are there any holes you need to fill as a result of these new changes, and the need to acquire any technology or services that would position you better to when it deals?
Jeff Yabuki
No. I mean we are actually quite well positioned right now.
We build our own -- again, one of the investments that we have been making, is building out our capability, to make sure that when the EMV cycle starts, that we are absolutely ready to go and that's across our cards solutions businesses, as well as our output solutions businesses. So we are in very good shape in that area.
Kartik Mehta - Northcoast Research
And Tom, just a clarification, I want to make sure I understood you right. Tom, did you say that your termination fees in 3Q 2014 were $10 million greater than 3Q 2013?
Tom Hirsch
That's correct. About $5 million in each segment.
Kartik Mehta - Northcoast Research
Perfect. Thank you very much.
Tom Hirsch
Thank you.
Operator
Thank you. Our last question comes from Bryan Keane from Deutsche Bank.
Ashish Sabadra - Deutsche Bank
Hi, this is Ashish Sabadra, calling on behalf of Bryan Keane. Thanks for taking my question.
Quick question on the Payments segment; Tom, you provided some highlights --
Jeff Yabuki
Excuse me. We are having a really hard time understanding you.
Ashish Sabadra - Deutsche Bank
Sorry about that. Can you hear me okay now?
Jeff Yabuki
We can try.
Ashish Sabadra - Deutsche Bank
Sorry. So my question was more around the Payments segment.
So Tom you highlighted strength, broad-based strength in the payment, but I was just wondering if you could just parse out, was there anything of particular strength, and then particular things which were strong in that segment in this quarter? And just the sustainability of the growth in the fourth quarter and going forward, do you get hit into some tough comps going forward?
Tom Hirsch
I think overall, well you just look at our year-to-date metrics and our Payments segment is at about 7%, up from 4% in the prior year. And as I put my comments, we just really had in the quarter, at least good growth amongst all of our areas, so whether that'd be card services, our digital channels business which is in our Payments segment, our output solutions business, our bill payment business from a revenue growth standpoint.
So we just saw really good growth, and its also on a year-to-date business by a number of the businesses that are included in that segment. And as Jeff kind of highlighted around areas like bill payment etcetera, we have some good opportunity in the future to continue to do better than what we are doing today, from an opportunity to continue to grow transaction volume and revenue in areas like our bill payment business.
So we are pleased with our progress, but we continue to believe we have very good opportunities in each of those different areas, which comprise online banking, Mobiliti, our output business, our bill payment business, and continuing really superb performance in our card services business with trunk [ph] growth of about 11% on a year-to-date basis. So again, we expect over the next several years, that segment is going to continue to grow well, and we have some good opportunities for further growth.
Ashish Sabadra - Deutsche Bank
That's great. Just a quick one; on the financial segment side, the operating margin there.
You highlighted that there was some impact from business mix and timing of certain expenses, but it has been trending very well for the full year. So as we think about the margins and specifically in the FI segment for the rest of the year and going forward, there are some synergy opportunities, the open synergies opportunity.
So how should we just think about the margins, just for the fourth quarter and then going forward?
Tom Hirsch
Yeah, we are not going to get into fourth quarter quarterly guidance. We are comfortable with our guidance for the full year, and I think as Jeff and Mark have kind of highlighted, we have very good visibility and are continuing to grow margins in both of our operating segments through a combination of scaling of our newer solutions, continued growth in our operational effectiveness and really our business model, which we believe is really a differentiator, as far as both the differentiator of our solutions, and continuing to focus on high quality revenue in both segments; i.e., scaling of revenue inside our businesses, both in the core account processing segment and also on our payment segment on our larger businesses.
So that's a key to drive that growth, and we ensure that our revenue goals is coming from those high quality sources, which allows for margin expansion and kind of free cash flow growth, and those are really the drivers of what we see going forward, and that should continue.
Ashish Sabadra - Deutsche Bank
That's good. Thanks for taking the question.
Tom Hirsch
Thank you.
Jeff Yabuki
Thank you. And thanks everyone for joining us this afternoon.
If you have any further questions, please feel free to contact our Investor Relations team. Have a nice day.
Operator
Thank you. That does conclude today's conference.
Thank you for your participation. You may now disconnect from the audio portion.