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Wednesday, October 25, 2006

Analyzing Fiserv's (FISV) Earnings & Management Guidace

By Yaser Anwar, CSC of Equity Investment Ideas

Fiserv reported 3rd Q earnings per share of $0.63, exceeding The Street consensus estimate. Total revenues grew 14.3%.

FISV performed better than expected, with internal growth accelerating strongly to 6% from 3% in the second quarter and margins increasing 90 basis points to 23.9%.

Performance of Health Plan Management and Investment Support Services, however, was somewhat disappointing, suggesting that these businesses continue to face significant headwinds.

Financial Institution Outsourcing (FIO) internal growth increased sequentially as expected but rose more than The Street expected at 6%, adjusted for customer reimbursements. Margins in FIO improved to 23.9%. Since margin declines in this business unit have been a source of concern to investors, we believe this is a positive result.

FIO results were essentially in line with expectations, with internal growth of 6%. Operating margins in FIO expanded 90 basis points to 23.9%, excluding customer reimbursements. This is result of increased revenues from payments business, strong results in core bank processing, and operational efficiencies.

Management updated its full year 06 guidance for earnings on continuing operations. FISV has increased the lower end of the range from $2.48 to $2.51. They are maintaining the upper end of the range at $2.54, so the updated estimate anticipates earnings from continuing operations to be within the range of $2.51 to $2.54.

FISV also mentioned that it expects adjusted internal revenue growth rates to be in the mid-single digits for the FIO and ISS segments and in the low single digits in the HPM segment for 06.

Management also mentioned on the conference call that it expects to complete its current repurchase authorization of 3.2 million shares as of September 30, 2006, in the near future.

I believe the company can achieve better-than-15% earnings per share growth and that despite recent strong performance valuation remains attractive in view of the level and visibility of this growth.

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