Q3 2010 Earnings Call
October 26, 2010 5:00 pm ET
Thomas Hirsch - Chief Financial Officer, Principal Accounting Officer, Executive Vice President, Assistant Secretary and Treasurer
Jeffery Yabuki - Chief Executive Officer, President and Director
Brett Huff - Stephens Inc.
Christopher Shutler - William Blair & Company L.L.C.
Bryan Keane - Crédit Suisse AG
David Koning - Robert W. Baird & Co. Incorporated
Tien-Tsin Huang - JP Morgan Chase & Co
Kartik Mehta - Northcoast Research
Darrin Peller - Barclays Capital
John Kraft - D.A. Davidson & Co.
Ashwin Shirvaikar - Citigroup Inc
Richard Cheever - SunTrust Robinson Humphrey
Glenn Greene - Oppenheimer & Co. Inc.
Welcome to the Fiserv Third Quarter 2010 Earnings Conference Call. [Operator Instructions] Today's call is being recorded and is also being broadcast live at the Internet at www.fiserv.com. In addition, there are supplemental materials for today's call available at the company's website. To access those materials, go to the company's website at www.fiserv.com and click on the Access Webcast link on the homepage. The call is expected to last about an hour and you may disconnect from the call at any time. Now I will turn the call over to Jeff Yabuki, President and CEO of Fiserv.
Good afternoon, and thanks everyone for joining us for our third quarter earnings call. With me today is Tom Hirsch, our Chief Financial Officer.
Our remarks today will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We will make forward-looking statements about, among other matters, adjusted internal revenue growth, adjusted earnings per share, adjusted operating margin, free cash flow, sales pipelines and our strategic initiative, Fiserv 2.0. Forward-looking statements may differ materially from actual results and are subject to a number of risks and uncertainties. Please refer to our earnings release which can be found on our website at fiserv.com for a discussion of these risk factors. You should also refer to our earnings release for an explanation of the non-GAAP financial measures discussed in this conference call and for a reconciliation of those measures to the nearest applicable GAAP measure. 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.
Before I get to the results, thanks again to each of you who attended our annual investor conference a few weeks ago. We shared our views of how we intend to create value through a focused set of market strategies that should accelerate revenue growth and enhance our franchise over the next several years. We also shared our next wave of Fiserv 2.0 targets, including nearly $1 billion of integrated sales and an operational effectiveness objective of $250 million, both of which will be important parts of our focus over the next five years. And to provide finer clarity, we updated the long-term performance expectations for the company. We're excited about our plans and the impact we believe they will have on the market. We will talk more about this when we give our 2011 guidance in February.
With that said, let me say we are very pleased with our performance in the quarter. The organization came together and delivered strong growth results in revenue, earnings and sales. Our year-to-date financial performance has been consistent with the expectations we shared at the beginning of the year. The growth trend we are on should create solid momentum going into 2011. As you will recall, we have three key enterprise priorities, which we believe should be used to keep score in 2010, as well as measure our strategic progress. Those priorities are: First, to deliver positive adjusted internal revenue growth and meet our earnings commitments; next, to center the Fiserv culture on growth, leading to improved enterprise win rates and a higher share of our strategic products; and third, to provide innovative solutions that increase differentiation and enhance results for our clients.
Adjusted internal revenue growth has accelerated, as expected, over the course of the year from negative 1% in the first quarter to over 3% in the current quarter. This quarter's 3% internal growth is the highest since the second quarter of 2008. Importantly, we continue to build our recurring revenue across the company. Internal revenue growth for the year-to-date is 1%. Adjusted earnings per share grew 13% to a record level of $1.04 in the quarter, and are up 10% for the year-to-date. The earnings growth is even more impressive considering the increased investments we are making to further enhance our long-term growth profile. Free cash flow through September 30 has increased 5% to $532 million. The timing of working capital changes, including increased tax payments, impacted free cash flow as we expected in the quarter compared to the prior year.
Adjusted operating margin continued to expand, increasing 50 basis points in the quarter and is up 40 basis points on a year-to-date basis. We are clearly on track to achieve our full year financial goals. Our strong sales performance, both in the quarter and year to date, is evidence of the progress we are making against our second priority, to center the Fiserv culture squarely on growth. Sales results in the quarter were just shy of the record level we achieved in the fourth quarter of 2009 and quota attainment is now over 100% for the first nine months of the year.
Last quarter, we announced that the Westpac Group, the second-largest bank in Australia, selected our solutions to transform its online banking presence. This quarter, we announced an expansion of our relationship with U.S. Bank, the fifth largest commercial bank in the U.S. Already a bill payment client, U.S. Bank chose Corillian Online to enable the delivery of integrated banking, bill payment and personal financial management tools to retail banking customers through the online channel. This is another proof point supporting what we believe is the early stage of a global renewal of the online banking channel. Our industry-leading solutions position us well to benefit from this trend.