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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Welcome to the Fiserv 2018 First Quarter Earnings Conference Call. All participants will be in 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 Paul Seamon, Vice President of Investor Relations at Fiserv.
Thank you, and good afternoon. With me today are Jeff Yabuki, our Chief Executive Officer; and Bob Hau, our Chief Financial Officer. Please note that our earnings release and supplemental presentation for the quarter are available on the Investor Relations section of fiserv.com.
Our remarks today will include forward-looking statements about, among other matters, expected operating and financial results, strategic initiatives, the impact from tax reform, and the accounting changes in ASC 606.
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. Unless stated otherwise, performance references made throughout this call are assumed to be year-over-year comparisons.
All of the share and per share amounts in the press release supplemental materials and our comments are adjusted for our two-for-one stock split completed on March 19. And also the 2017 full year adjusted EPS has been revised for the impact of the completion of the sale of the majority interest of our Lending Solutions business.
With that, let me turn the call over to Jeff.
Thanks, Paul, and good afternoon, everyone.
We're pleased with our start to the year, achieving solid financial results for the quarter, slightly above our internal plan; strong adjusted EPS; and an increase in our client advocacy and experience measures. We are on track to achieve our strategic and financial commitments for the year.
Internal revenue growth was 3% in the quarter, even on lower periodic revenue. Adjusted operating margin was flat, and adjusted earnings per share was up a strong 23%. Market momentum continued, kicking off 2018 with sales up 12% versus the prior year. We also received approximately $470 million of proceeds from two business sales closing in the quarter; the 55% interest of our Lending Solutions business and retail voucher business acquired with Monitise. We expected to deploy this capital consistent with our longstanding allocation methodology.
Two weeks ago, we held our annual client conference, Fiserv Forum. With more than 4,400 in attendance this year, Forum is a place for financial executives to explore the latest technology trends, experience our leading edge solutions, and connect across hundreds of unique educational and networking sessions. We also hosted a record 270 prospect attendees during Forum, which reinforces the momentum we are experiencing across our portfolio of innovative solutions.
We continue to advance the four corners of differentiation growth strategies shared at last year's Investor Day. Each corner, account processing, digital, payments and biller solutions, has meaningful vertical and horizontal growth opportunities, which we believe will lead to deeper client relationships, increased high-quality revenue, and even stronger free cash flow.
Earlier this year, we provided our key shareholder priorities for 2018 which are: First, continue to build high-quality revenue while meeting our earnings commitments. Next, enhance client relationships with an emphasis on digital and payment solutions. And third, deliver innovation and integration, which enables differentiated value for our clients.
We provided accelerated internal growth rate guidance this year, which assumed growth would generally increase throughout the year. Consistent with that guidance, we believe the 3% internal revenue growth in the quarter will be the low watermark for the year. Internal revenue growth led by 5% growth in the Payments segment was pressured by the expected reduction in periodic revenue across both segments versus the comparable quarter.
Adjusted operating margin of 32.5% was flat in the quarter. This result included approximately 160 basis points of margin pressure from the combination of lower periodic revenue, 2017 acquisitions and the divested Lending business. Adjusted earnings per share was up 23%, which includes the benefit of a lower corporate tax rate.
Our second priority is to enhance client relationships with an emphasis on digital and payment solutions. We continue to add new clients across our market-leading processing – account processing solutions. Our DNA platform had a great start, signing seven new clients in the quarter. We also expect nearly 30 clients to go live this year, which is a significant increase in the number of implementations. And of that, more than half the institutions have assets greater than $1 billion.
We also continue to have success with our Premier platform, which has the largest client base in the market. We are pleased to renew and extend our Premier relationship with UnitedHealthcare's Optum Bank, the country's largest provider of HSA accounts. We also signed Two River Community Bank with assets over $1 billion and a competitive takeaway that, in addition to account processing, included a full digital and payment suite with solutions such as Mobiliti, CheckFree RXP and Notifi.
We continue to progress our new integrated biller strategy, which includes enabling some of the largest billers in the country with our payment solutions. During the quarter, we signed WellCare Health Plans, a provider of government sponsored managed care services with over four million members, to a bundle of omni-channel payments products headlined by our BillMatrix solution. We renewed our walk-in bill payment partnership with Walmart, which allows their customers to pay bills at thousands of Walmart locations across the country.
Digital continues to transform from technology to a mindset. Mobiliti ASP subscribers grew 25% in the quarter and 7% sequentially to more than seven million. Mobiliti business users expanded over 50% as commercial capabilities also continue to move up the digital value chain.
Given the size of our client base and early stages of adoption, we continue to anticipate strong subscriber and transaction growth across our digital suite for the foreseeable future. We've launched a number of solutions, such as CardValet and SecureNow, which create differentiated customer value at the intersection of payments and digital experience. These solutions leverage our digital rails and enhance our long-term recurring revenue.
Our third priority is to deliver innovation and integration which enables differentiated value for our clients. We, along with the financial industry, continue to focus on Zelle, which is driving new clients and strong transaction growth. Zelle transactions increased more than 80% sequentially in the quarter. We signed two top 35 banks to our turnkey Zelle solution, Synchrony Financial with assets over $95 billion and Zions Bancorporation with assets of over $66 billion.
Including these two signings, we're contracted to provide Zelle to 10 of the top 35 banks and still have headroom to meaningfully expand the size of our network. We're pleased to announce that Navy Federal Credit Union, the largest credit union in the world with over $90 billion in assets, has also selected our turnkey Zelle solution. So far, including Navy Federal, we've signed three of the five largest credit unions in the country as full Zelle clients.
Overall, we believe Zelle is more than a solution. It is a strong statement that financial institutions will continue to own money movement. We're excited to play a key role in this fundamental enabling capability.
Our newest enterprise payment solution, Dovetail, continues to generate significant interest as financial institutions look to modernize the payments infrastructure. On the strength of Dovetail, Fiserv was recently recognized by Aite Group as having moved into a market-leading position in payments hub technology. Estimates are that about half of the top 100 U.S. institutions have selected a solution which leave significant runway for growth both in the U. S. and around the world.
Commercial Center, our sophisticated digital commercial cash management solution acquired last year anniversaried in the quarter. Since owning the business we've added 29 new clients, nearly five times the clients that were sold in the prior year. As important, the Commercial Center pipeline remains multiples above where it was when we closed the acquisition.
In Australia, the New Payments Platform, or NPP for short, was launched in February. Fiserv, Swift and Australian financial institutions collaboratively designed the addressing service, including PayID. NPP is a real transformation for Australian consumers, corporates and government agencies, providing them the ability to conveniently send and receive real-time payments 24/7 nationwide.
Finally, we were recognized as the most creative application of voice technology at the PYMNTS.com Alexa Awards in April. Our solution turns everyday banking tasks, such as balance inquiry, into a voice conversation with Alexa. Designed with advanced AI capabilities, our solution makes banking easier for consumers with features such as bill payment reminders.
With that, let me turn the call over to Bob to provide more detail on our financial results.
Thanks, Jeff, and good afternoon, everyone.
As you know, this quarter we adopted ASC 606, the new revenue recognition standard using the modified retrospective transition approach, and accordingly did not restate our prior period financial statements. In each 10-Q for 2018, we will include additional disclosure related to the impact of new standard on our financial statements.
As shared previously, we do not believe the cumulative full year impact of these changes will be material to our financial results. However, we do expect a bit more quarterly variation during this year than we've seen in the past for some of the revenue lines.
For comparative purposes, had we elected to restate the prior year periods under the new standard instead of using the retrospective approach, our internal revenue growth rate for the quarter would have been 4%. Adjusted revenue was $1.4 billion, up 4% in the quarter, and internal revenue growth was 3%. Solid execution drove our internal revenue growth for the first quarter even with periodic revenue down $9 million on an expected difficult quarterly comparison. As Jeff mentioned, we continue to expect internal revenue growth to accelerate during the year.
Adjusted earnings per share for the quarter was up 23% to $0.76. Adjusted operating margin in the quarter was flat compared to the prior year due to combined impact of 160 basis points from lower margin related to 2017 acquisitions, a decline in periodic revenue, and lower performance from our now divested Lending business.
Payments segment internal revenue growth was 5%, while adjusted revenue grew 7% to $770 million. Performance in the quarter was led by strong results from our Card Services and Biller Solutions businesses. Debit transaction growth in the quarter was in the mid single-digits and P2P transactions grew more than 20% year-over-year. We had over 80% sequential quarterly growth in Zelle transactions, and believe the rapid growth will continue as more clients and consumers adopt Zelle.
Mobile banking continues to perform very well as Mobiliti ASP subscribers grew 7% sequentially and 25% year-over-year to 7.2 million. Architect, our market-leading digital platform serving retail and small business customers, continues to grow as nearly 40 clients are slated to go live this year.
Our Payments segment adjusted operating income was up 5% to $272 million in the quarter; and adjusted operating margin was down 80 basis points to 35.4%, due primarily to the dilutive impact of acquisitions which compress the segment margin by 110 basis points.
Financial segment adjusted revenue of $616 million was down slightly for the quarter. This was due primarily to the divestiture of the Australian item processing business last year and lower growth in our Lending business which was divested late in the quarter. Internal revenue growth in the segment was 1%, led by our account and item processing businesses, offset by a decline in periodic revenue.
Adjusted operating income in the Financial segment was up 3% to $202 million. Adjusted operating margin for the quarter was up 120 basis points to 32.8%, due to continued focus on operational effectiveness and higher quality revenue drop-through despite lower periodic revenue in the segment.
Corporate adjusted operating loss was up 11% in the quarter, and this increase was due to an unplanned litigation expense outside the U.S. We expect the full year corporate segment loss to be up slightly versus 2017.
Our adjusted effective tax rate for the quarter was 19.4%, largely due to a federal income tax rate reduction and the excess tax benefit from share-based compensation. As with last year, we anticipate the excess benefit to be frontloaded due to the timing of option exercises and the vesting of restricted stock units. We continue to expect a full year adjusted effective tax rate of 22% to 23%.
Free cash flow in the quarter was $316 million, down slightly from last year's, due to timing of working capital. Free cash flow conversion in the quarter was 98%, which we expect to improve throughout the remainder of the year. As Jeff mentioned, free cash flow does not include the nearly $470 million of proceeds received from the business divestitures in the quarter.
Total debt outstanding at the end of the quarter was $4.6 billion or 2.1 times trailing 12-month adjusted EBITDA. The decline in our debt-to-EBITDA ratio from the year-end level is due primarily to the receipt of the Lending Transaction proceeds late in the quarter. As Jeff mentioned, we intend to deploy these proceeds consistent with our longstanding capital allocation methodology.
And along those lines, we returned $398 million to shareholders in the quarter through the repurchase of 5.7 million shares. As of March 31, there were 411 million shares outstanding and 15.8 million shares remaining under our existing share repurchase authorization.
With that, let me turn the call back to Jeff.
Thanks, Bob.
Even after a strong Q4, sales were up 12% in the quarter and sales quota attainment was 92%, our strongest first quarter attainment since 2014. Sales performance was led by a number of solution areas including digital, biller and commercial services. The domestic pipeline remains very healthy, up 20% at quarter's end, and positions us for a strong sales year. Integrated sales were also excellent, increasing 19% to $61 million in the quarter.
We're off to a very good start in year three of our five-year operational effectiveness program, achieving $18 million of savings in the quarter, with strong labor optimization and procurement benefits. We expect to achieve our $50 million objective for the year, and have begun preliminary planning for the coming phase 4, which we believe will show significant opportunity.
We continue to sense optimism in the overall financial market on the strength of rising rates, benign loan losses and hopefulness around the regulatory environment. As digital is accepted as an idea that is here to stay, an increasing number of institutions are exploring ways to use the platform as a more proactive growth lever than we've seen before.
Given the current environmental backdrop, we would expect to see technology spend continue to increase as institutions look for ways to update their back office, bring enhanced capabilities to customers and, equally important, invest in risk, fraud and cyber security to further ensure safety and security in an ever complex financial system.
Lastly, around the environment. The number and depth of conversations around payments modernization continues to be significant. I'm quite bullish that this trend will lead to more opportunities, including the delivery of new solutions to address the emerging real-time payments ecosystem over the mid to long-term.
As I stated upfront, we're on track to achieve our financial goals for the year. We continue to expect a step-up of internal revenue growth to at least 4.5%, with rate acceleration throughout the year. We now expect adjusted EPS for the year to buy us above the midpoint of the split adjusted range of $3.02 to $3.15, which is growth of 22% to 27% over the $2.48 in 2017. We continue to anticipate that full year adjusted operating margin will expand between 10 basis points and 30 basis points, and that free cash flow conversion will be in the range of 106% to 111% for the full year.
In conclusion, we're pleased with our start to the year, making progress on our financial, operational and strategic objectives. We're well-positioned to achieve our financial goals while investing to drive client and shareholder value for the short, mid and long-term. Most important, I thank each of our 24,000 associates around the world who regularly go above and beyond to deliver Fiserv to our clients each day. You are the collective catalyst that makes us our very best.
With that, operator, let's open the line for questions.
Certainly, speakers. We will now begin the question-and-answer session. Our first question is from David Togut of Evercore ISI.
David?
Jeff, could you comment on just the pace of conversions of the DNA product over the balance of the year? You had some very strong signings, both last year and the year before.
Yeah. I mean, it will bias, I would think, primarily to the second half of the year. We have a number of institutions starting to go live, and then the momentum will continue through December. And given the good start to the year, seven signings in Q1, we're feeling pretty good about the momentum that will carry into 2019 as well.
Understood. And then, on the operational effectiveness target, it looks like you're well ahead of plan for this year, at least if we annualize the $18 million that you showed in Q1. Is there any reason why that annualized rate of savings should be different from what we saw in Q1?
Yeah. There will be some variability in that. It's not – it doesn't start at $18 million and necessarily move up. But I would say that we feel quite good about achieving our $50 million given the $18 million this quarter. And as I mentioned, we're starting to ramp our work up a little bit around phase 4 given where we are already in this existing phase. So, we're feeling good about that.
Understood. And then, you announced a big hire recently to run your Card Services business, Kim Crawford Goodman. Does that signal a change in your ambitions for Card Services, intending to do anything bigger in that business?
So, we're very happy to have Kim onboard. She's a strong experienced payments leader. We ended up having an opening in that business, and that business is a very important business to us. We're going to continue to make that as robust and as strong as we can.
And as I mentioned in my prepared remarks, we're seeing a lot of interesting solutions emerging in the real-time – in the world of real-time money movement, and we think she's a, kind of, the right leader at the right time to help us deliver that.
Got it. Quick final question. The $9 million year-over-year decline in periodic revenue, what was the breakdown there between a decline in contract term fees versus a decline in software revenue?
The majority of the decline is actually driven by licenses in the quarter. As we said in our comments 90 days ago when we gave original guidance, we actually anticipate term fees to be down meaningfully on a full year basis. If you recall, we have very strong term fees in the fourth quarter of last year, and that's where we'll see that decline more prevalent.
Understood. Thank you very much.
Thank you.
Thank you. Our next question is from Dave Koning of Baird.
Oh, yeah. Hey, guys. Thanks for taking my question.
Hi, Dave.
Yeah. So, I guess, first of all, just sequentially, there's a couple of things in Q2 I'm wondering about. First is, in the FI segment, how much sequentially should that be down, given – I think you said it was late in the quarter that the Lending business went away, probably running at, like $50 million a quarter. I think the disclosure was somewhere around that. So, should that be down like $40 million sequentially?
Yeah. On a adjusted revenue basis, that's correct. So, that will be out of our revenue on an adjusted and a GAAP basis. Essentially, March 29, I think, was the closing date for it. So, it's in there for the full first quarter, will be out to balance the year. In order of magnitude, your number's about right.
Okay. Cool. And then, secondly, I remember last Q2 in the Payments segment you had a $15 million kind of one-off headwind. Does that create a really easy comp for margins, so Payment margins could be up at 100 basis points, 200 basis points or something, that – just this quarter?
So, you are correct. You're remembering correctly. We did have a $15 million charge in the second quarter of last year, and we certainly do not see that repeating in 2018. So, that will provide a benefit.
Dave, I would say that the only potential offset is, as we mentioned when we gave guidance last year, that we were going to be spending money, making investments. And there will be some ramping of those investments. But I would certainly agree with Bob that we wouldn't expect to have anything like that recurring in Q2.
Great. Well, thanks, guys. Good job.
Thank you.
Thanks, David.
Thank you. Our next question is from Ramsey El-Assal of Jefferies.
Hi. Thanks for taking my question, guys.
Hey, Ramsey.
Hi, Ramsey.
You mentioned that Q1 is the low watermark in terms of overall growth. Can you just speak to – and this question dovetails a little bit with some of the others that you've already answered, but can you just speak to sort of cadence we should expect for the remaining three quarters? Is it a gradual increase quarter-over-quarter? Is there a little bit of steeper acceleration later in the year? And also, Jeff, if you could just cover off on the drivers of deceleration in Financial segment revenues in Q1, which you went through, and I may have missed them?
Sure. So, I'll take the first part and I'll let Bob take the second part, and I'll let Bob correct the first part. When we gave guidance for the year, we indicated that we would have – we expected Q1 to be weak. We had a whole bunch of periodic revenue last year in Q1 and so we knew that was going to make the comparable a little bit more difficult. And then if you look at the growth rates last year in Q1, Q2 and Q3, I think that's a good way to think about how our acceleration will happen somewhat inverse to that because the Q2 was where it was and then Q3 was down lower and then Q4 was quite strong.
So, if you think about our revenue, if you look at our processing revenue, we're quite happy with how we're building our high-quality recurring revenue. We continue to believe that will step up throughout the year and then that – and that will layer in against the comparables. But then we also have significant implementations going on with Architect, DNA, Biller, Zelle, those kinds of programs on top of everything else that we have going on a regular basis, which we'll be adding in. We would expect to see some recovery in periodic revenue as well over the next couple of quarters as we get back to a more normative level from where we started in the year. Bob?
And then your question around the Financial segments, we saw the Financial segment for the quarter up 1% internal rate of growth. We saw some good growth in our account and item processing businesses, but we did see that the periodic revenue decline that I talked about overall for the company, about $9 million. The majority of that manifests itself from the Financial segment. So, that helps – that mitigated some of the benefit for the growth we got from accounts and item processing.
Got it. Okay. And then, one more for me. On balance sheet deployment and capital deployment strategy here, it feels like the valuations in fintech are pretty stretched. Your free cash flow conversion has always been excellent, and with the lower tax rate, it's even better. Is now a better time to contemplate potentially rolling in a dividend? Is that something that could be in your long-term thinking, or are you still sort of saving your dry powder for when you may need it for some other uses of capital?
Yeah. Ramsey, I would say we're pretty disciplined about our capital allocation strategy, how we think about it in terms of biasing the share repurchase acquisitions and then debt repayment. But we also, kind of on an umbrella basis, look each year on, should we pay a dividend or how should we think about that. And so we do that, and we will do it again this year, of course. I think for now, we feel like our strategy makes the most sense. We are pretty disciplined about how we think about intrinsic value vis à vis our allocation to share repurchase and, obviously, with the recent tax law change and how to think about NPV, right. That had a very significant impact on how we would consider intrinsic value. But again, what we're focused on is delivering value to shareholders. And on a year-in and year-out basis, we'll continue to try to determine what's the right formula for optimizing or maximizing that value for them.
Great. Thanks a lot for that.
Thank you.
Thank you. Our next question is from Jeff Cantwell of Guggenheim Securities.
Hi. Good evening.
Hi, Jeff.
Hi, Jeff.
Thanks for taking my question. It's something you've touched on, but I wanted to ask about what you're seeing in Europe so far this year in terms of the regulatory environment, just in terms of how it's been evolving and whether there's any specific opportunities that you're seeing. You seem to be calling out a strong pipeline, so I'm just curious whether net-net you stand to benefit from Europe's regulatory changes around payments. And specifically, I just want to see if you could talk a little bit about the shift to faster payments and what you're seeing over there, and whether it's a trend you think you can capitalize on?
Sure. So, just – Jeff, it's a great question and it's always interesting to watch what's going on in other parts of the world and trying to extrapolate how that might impact us here. The areas that we're the most focused on in Europe right now would be the idea of open banking and what are the implications. One of the opportunities that we have is that we bought Monitise last year and acquired the FINkit technology, which is a really fabulous tool for purposes of helping financial institutions enable their APIs to be open banking-ready. And so we're making progress there. We're excited about that and the opportunities. I expect us to have some announcements over the next couple of quarters on selling that capability and for open banking purposes.
And the other area in which we're very, very focused is on payment hub technology, as we mentioned. And Dovetail, the business Dovetail as opposed to the product Dovetail, the business Dovetail had a very nice presence outside the U.S., and we're using that to leverage in Europe as well as Asia and LatAm to see how we can further extend the reach of Dovetail. So, we're certainly focused there.
On faster payments in Europe, we don't have specific payment capability, kind of front-facing payment capability, as we do here, but we are very interested in watching what's going on in the agent bank space. Basically, as I'm sure you know, in Europe, and in the UK specifically, you have to have – basically financial institutions have to use another agent to move money around, and it looks like regulatorily that might open up and I think that will create some interesting opportunities for us as we move forward.
Great. I appreciate that. And then, I appreciated the update you – in terms of what you're seeing from Zelle in the quarter. I just want to make I understand your comments. And – were you saying that – is Zelle revenue starting to layer in in a meaningful way? And can you talk about whether perhaps there is any change in terms of how you're thinking about Zelle as a revenue source for you over the course of this year?
Yeah. I mean, we're expecting Zelle to contribute to revenue. It's part of why our internal revenue growth is going to go up at least 80 basis points year-over-year. Zelle is a piece of that. Now, there are a number of pieces in there. But Zelle, we like what we're seeing in Zelle both in terms of new signings, but the sequential growth in transactions is significant. And we're a bit constrained right now in our ability to get clients live. That's the network itself is experiencing some growing pains. But we are very, very bullish on Zelle and really in terms of both the P2P opportunity, but the other payments opportunities that will be resident within the network itself. So, we'll be talking about Zelle for a while. I think it'll also be a while before we're calling it out as being as big as we'd like it to be, but we are quite enthusiastic and are seeing measurable results in 2018.
Great. Thanks very much.
Thank you.
Thank you. Our next question is from Matt O'Neill of Autonomous Research.
Hello? Matt, you there?
I'm sorry, gentleman. I was on mute. Can you hear me now?
Yeah.
Perfect, perfect.
Sorry. Apologies. I was hoping you could just give a quick update on the competitive landscape both with respect to kind of traditional and maybe some of the newer players, whether it's a Q2 or a Temenos. Thank you.
Sure. It is – the competitive question is always interesting because we have some common competitors in certain spaces and very distinctive competitors in other spaces whether it's a Q2 or Temenos or the more traditional competitors. I would say, on balance, as opposed to talking about specific competitors, I would talk about the landscape on balance, is there is more spend available today than there was a year ago. There is more investigation going on than a year ago. And because digital has really moved from a technology to a mindset, we're seeing much more of a need for integration and modernization in technology platforms. We have been working on a series of strategies, whether it be around a middleware integration layer or just truly modern technologies ala FINkit or DNA or others. So, we are seeing more exploration. We are seeing behaviors be generally consistent with what they have been. And frankly, just given some of the results that we're seeing, we're pretty pleased with the portfolio that we have today, and are comfortable that we are well-positioned competitively.
Thank you.
Thank you.
Thank you. Our next question is from Mr. Tien-Tsin Huang of JPMorgan.
Thank you so much. Just on the lower license sales. I guess, tough comp aside, is the lower license sales also by design? I'm just trying to look ahead to next year and see if this creates an easier compare? Or is it just a good baseline to use for Q1 going forward?
Yes. Tien-Tsin, I'd say it really is just a matter of timing within the year. One of the reasons why we're focused on calling it periodic revenue, to make sure we distinguish it from our processing revenue which had good underlying growth. But we expect that to come back in future quarters and see some growth on a full year basis.
And Tien-Tsin, I would say you may remember when we gave guidance, we actually said that instead of using the term periodic revenue, we said termination fee revenue would be meaningfully down in 2018. We don't expect license revenue to be meaningfully down. At the same time, we are seeing more and more and more desire of institutions to acquire solutions that were traditionally licensed, but now sold on a cloud or on a hosted basis. And so that does have an effect, but it's not intentional. It's more what the market is demanding.
Okay. That's basically what I was getting at, that idea of looking for stuff on a hosted basis or what have you. Got it. Thanks for the clarification. Just on the phase 4 operational effectiveness that you mentioned. You teed it up a little bit. Just guessing here, is this going to leverage more maybe from the digital and AI tools that I think we've seen – Fiserv have talked about it, other firms talked about it. Is that the idea of what that next phase might look like, actually using some of these digital tools to sort of enhance your existing business offerings?
Yes. I would say, and Bob will cringe because this will absolutely have to fall into the category of forward-looking statement, but phase 4, we'll start to grab that in a fairly meaningful way; and phase 5, I think you'll see a very significant utilization of those capabilities.
Everything from automation, kind of technology automation ala the building of our technology all the way through VCA , RPA and other utilizations to create efficiency and effectiveness across the entirety of Fiserv. So, yes, I think that's going to be very important. And that will actually dovetail quite nicely with the movement to the cloud for the majority of our technologies.
Okay. That's fine. So, last one. Sorry to ask many. Just on that, is the outsourcing versus insourcing trend changing in your mind given some of this complexity because we hear mixed things in our survey work?
What do you mean, Tien-Tsin? Give a little bit more color.
More firms thinking about doing things in-house, maybe re-platforming but doing it internally; or the opposite, looking for third-party vendors, add a best of breed or full service providers like Fiserv to do it on behalf of?
Yeah. That's a great question. It depends on probably three things. It depends on the psyche of the institution. Do they – what pieces of the customer experience do they feel absolutely compelled to own and control? So that will be number one. Number two, it's – do the institutions have the economic fortitude to invest in building that because it is not cheap? And then third, I think it is actually absolutely directly related to the size of institution.
Yeah, yeah. Thank you for insight, Jeff.
Sure, of course. Thank you.
Thank you. Our next question is from Joseph Foresi of Cantor Fitzgerald.
Hi. Your competitors spoke about a pick up in demand. Are you seeing that as well? And if so, where are you seeing it?
So, yes, we – I think we mentioned in our prepared comments that we expect technology spend increase. We had said when we – in Q4 that we were seeing a little tick-up in demand, and that did manifest in some better sales in Q1 of 2018. Remember that the demand itself doesn't translate to sales for a certain period and then certainly revenue follows in some implementation period after that. But we are absolutely seeing a focus. And I would say, number one, it's in the digital. Number two, it's around payments. Number three, it's about back office modernization. And number four, it's really about products geared at safety and security, so think cyber perimeter, those kinds of capabilities. And then lastly, if I was going to put a category out there around innovation, I would say there's a lot of discussion around AI and RPA, but it's quite early in that exploration.
Got it. And then, so just sticking with that thought process, what puts you over the top on the 4.5% growth target? I know you said that Zelle was sort of a key contributor there. But what other large opportunities could you break out for us given where – given your comments on demand?
Yeah. Sure. I would say it's probably fair to remember that most of the increase in demand that we see won't really convert to revenue. You'll have little bits and pieces towards the end of the year. But really – and I think about that this may be a bit of a tailwind, but the majority of what's going to drive revenue for us in 2018 has already been sold and is in implementation or it's very late in the sales process and will get implemented this year. And that's really around some of the larger implementations in biller, the DNA implementations, Architect implementations, Zelle as we talked about, continuing strong growth of Mobiliti. I think we had around 25% subscriber growth in Mobiliti. We have – we're seeing good volume in card. We talked about some interesting network innovation earlier on, flow, ease of compare.
And then the last thing that's important is we've done some acquisition over the last several years and those are starting to move from being not part of the organic growth calculation to being part of the organic growth calculation. So, when you throw that all into the basket and stir it up, it's all of those pieces that are contributing to us moving to the, not just the 4.5% in 2018, but also looking – or obviously not giving guidance, but we would certainly be looking to see a step-up in growth in 2019 as well.
Helpful. Thank you.
Thank you.
Thank you. Our next question is from Bret Huff of Stephens, Incorporated.
Hey, Brett.
There's a lot of payments change going on, and you guys have your fingers in a lot of those pies. Can you talk a little bit about what you see in terms of consumer interest and adoption versus what banks are investing behind? And as I try and kind of guess as to where the puck's going to be, it seems confusing. I think things like faster payments versus traditional bill pay or peer-to-peer versus faster payments. How is that evolving from both a consumer and a bank investment point of view?
So, that's a great question. Brett, I would say, from the consumer's perspective, they don't think about things like faster payments. They think about the fact that it's their expectation, if Amazon can deliver a package in Milwaukee on a same day basis, money should be able to be delivered in Milwaukee on a same day basis. And so, we're seeing both the modernization or the expediting of the rails to allow what we traditionally thought about as ACH to start to move in a faster payments way; not the network, but the idea.
And so whether we're using card rails or TCH or same day ACH or whatever the different capabilities are, it's about creating that enabling capability within the financial institutions, having them connected, creating a broader network that connects to – in our world, we like to think about connecting to billers or requesters of money. So, creating that ubiquity which will happen over a long period of time, and then allowing that ubiquity to be tapped by different consumer-facing or business-to-business facing application, so Zelle as the example and P2P.
We're also quite excited about our digital disbursements capability, which enable billers to – as an example, instead of an insurance company having to kind of check, let's just allow money to move seamlessly at the speed of the consumer or the biller's choice. So, creating different kinds of use cases that have this electronified network, and then I won't even go to things like check.
But all of that is going on. And Brett, the other thing that's really important is, how does the digital experience, how does the wallet – how do I manage my digitally-oriented initiated movement of money via my "bank" experience? So, our – we get to be in the, I think, the unique place of playing both on the modernization of the backend side as well as on the frontend facing.
Bill payment, for example, we are quite excited about real-time money movement. We are working on how do you take advantage of that in bill pay in a completely different way to change the bill payment experience, to have a team much more like Biller Direct, but instead of having to go to 25 websites, I can go to one place and pay what I want, to whom I want, at the speed I want. So, I think it's going to enable consumers to do things in a very different way, and our goal is to make sure that we're playing across that emerging ecosystem.
That's helpful. And a little bit related, the economic model of Dovetail, is that sort of network economics or is it sort of infrastructure economics or an arms dealer kind of software license? How do you guys see that evolving?
It is dependent upon the size of the institution that's acquiring it. I would say, it is a combination of hosted economics, license economics, and AS – kind of the old world ASP or cloud economics, depending on the size, institutions taking advantage of that and what they want to do. I wouldn't be so bold as to call it network economics. But I would call it – I would be comfortable calling it the same kinds of economics that you would see out of "the high quality revenue" that we talk about.
Great. Thanks for the answers.
Thank you.
Thank you. Our next question is from Jim Schneider of Goldman Sachs.
Good afternoon. Thanks for taking my question. Jeff, I was wondering if you could maybe give us an update on what you see relative to the M&A landscape at your bank clients. Certainly, valuations are higher across the industry but your term fees are lower. So, do you think that we're unlikely to see a significant uptick in consolidation despite the increase in (48:49) limits? Or how do you think this plays out?
Well, again, Jim, I would say it depends a bit on the size of the institution. I would say, the majority of activity, obviously, in the numbers happens at the low end of the asset tier because, of course, that's where the majority of the banks sit.
I do expect there to continue to be transactions. I expect them to be – I expect there to be a lower number of transactions this year over last, which is why we're predicting a meaningful reduction in termination fee revenue. And at least the conversations that we're having, we just – we had the opportunity to spend time with 4,400 client representatives and associates and partners. And everything we're seeing would say that the level of acquisition activity is precisely inverse to valuations. And so people are mostly feeling like valuations are high, and that with rates going up, it's a good time to build out their organic capability, which is one of the reasons why we're feeling bullish on technology spend and certainly the different exploration we would see that supports that. So, I see that.
We are seeing a SLIGHT tick-up in de novo activity, and so – that's typically a good sign. And I think you'll see some of the larger institutions look for ways to expand more broadly as, kind of, the war on deposits continues to accelerate.
That's helpful context, thanks. And then, maybe a capital structure question. You kind of touched on the dividend question earlier, but can you maybe talk about at leverage ratio of just 2 times, I think it's lower than many, many of your peers. Is that something you feel comfortable with permanently? Or do you think that you would feel comfortable kind of taking up leverage even if it's to fund increase buybacks, even if you can't find attractive M&A candidates?
So, there's two pieces to the answer to that question. One is, as we mentioned earlier, the drop in our debt-to-EBITDA ratio in the first quarter of 2.1 times relative to where we were in December. And in fact, where we typically run is really due to the timing of the receipt of the cash from the divestiture of our Lending business, the joint venture there. We certainly would expect that to go back up. We're very comfortable seeing leverage go up. If there's an opportunity to do a large acquisition, we certainly have the strength of the balance sheet and the strength of our cash flow to be able to run a much higher leverage for some extended period of time and then draw that back down if we needed to. Certainly, to be up more towards 2.5 times would be more typical for us.
Yeah. I think it's kind of an odd deal, Jim. We got a large check on – what day?
The 29th.
The 29th of March, which really took our leverage down below the 2 times, 3 times or so we had been at the end of last year. But I think we're fairly on the record that we prefer to have our leverage much up towards 2.5 times. And I think the answer is, we'll continue to deploy capital in the way that we have and in a way that maximizes shareholder value.
Very clear. Thank you.
Thank you.
Thank you. Our last question in queue is from Ashwin Shirvaikar of Citigroup.
Ashwin?
Hey, Ashwin.
Ashwin, are you on mute or did we lose you?
Hey, can you hear me?
Yes.
Yeah. There you go.
So, a lot of discussion on this call about digital, and everyone has a digital mandate. I guess my question is, how does that change your contract going forward? Are the terms different? Is the pricing lower due to more cloud hosted delivery and the shorter contracts? Can you talk about that?
I'm only – I'm pausing for a moment. I'm trying to get an idea. I would say that the contract terms are typically would be consistent with the normal contracting process that we have. And it – Ashwin, it depends a little bit on the type of client. So, is this a digital-only client? Is it a client who buys something via 30 other services? Is it a professional services engagement? So, I think the right way to answer it is – depends on the solution itself. But I would say that we believe that solutions that are consumer-facing tend to be the ones that institutions are least likely to convert because in fact they are facing their customer base. And so the contract terms themselves are less important than making sure that we're delivering a high-quality service to our clients so they can best serve their customers.
Understood, understood. And I should probably have explained the context to which I was asking the question, but you got that right. Can you speak about contactless cards? Is that an opportunity you're focused on, particularly dual use cards as we go forward?
Sure. I mean, we're quite focused and ready for contactless. The market continues to move – the U.S. market continues to move slowly. We were quite encouraged. And one of the larger brands spent a fair amount of their prepared commentary talking about the move of contactless and how quickly it starts to adoption, starts to burn through the base once it started. It's really a matter of, in the U.S., getting it started. I suspect it's still at least a year or two years away, but it would surprise me if by the end of 2019 we weren't seeing a lot more movement on that front.
I think we're – the whole way digital intersects with card-based payments, it just screams to have contactless be much more front and center. So, I think we'll see it, but it's really a matter of when does the market make the move.
Got it. Thank you, guys.
Thank you.
Thanks, Ashwin.
And thanks to everyone for joining us this afternoon. We always appreciate the opportunity to have dialogue and your support. If you have any further questions, please don't hesitate to contact our Investor Relations team. And have a great night.
Thank you very much, speakers. And that concludes today's call. Everyone, thank you very much for your participation. You may now disconnect.