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Fiserv Inc  (NASDAQ:FISV)
Q3 2018 Earnings Conference Call
Oct. 31, 2018, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the Fiserv 2018 Third Quarter 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 Tiffany Willis, Vice President of Investor Relations at Fiserv.

Tiffany Willis -- Vice President of Investor Relations

Thank you and good afternoon. I'm pleased to be here today in my new role leading Investor Relations. I look forward to connecting with many of you in the future. With me today for the call 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 acquisition of the debit processing and related solutions of Elan Financial Services and the impact from tax reform. 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.

As a reminder, this year and per share amounts in the press release, supplemental materials and comments are adjusted for the 2-for-1 stock split completed in March of this year. Along with adjusting the comparable 2017 adjusted earnings per share amounts in each period for the sale of the majority interest of our Lending Solutions business, which closed in March.

And with that, let me turn the call over to Jeff.

Jeffery Yabuki -- President, Chief Executive Officer

Thanks, Tiffany. Nicely done on your first earnings call. Good afternoon to everyone joining us today. We delivered strong financial results including 5% internal revenue growth in both the third quarter and the first 9 months of the year. Additionally, internal revenue growth has been 5% over the rolling 12 months ending in this year's third quarter. Adjusted EPS grew 23% in the quarter and is up a very strong 26% year-to-date. We remain well on track to meet our financial commitments for the year, while continuing to invest in your company.

Free cash flow for the quarter was up 22% to $322 million and is over $800 million year-to-date, both of which include the divestiture impact of our Lending business. We continue to focus on share repurchase as our primary capital benchmark allocating $438 million in the quarter and for the year-to-date have repurchased $1.2 billion.

Before we dive into the results, let me provide perspective on the approximately $690 million acquisition of the debit-based assets of Elan Financial Services, which closed today. This acquisition with annual revenue of over $170 million, extends our leadership and payments , broadens client reach and scale and provides new solutions to enhance the value proposition for our existing 3,000 debit solution clients.

We're excited about the opportunity to extend our payments franchise and welcome more than 300 talented associates to Fiserv. Scale is becoming increasingly important in the payments network and processing businesses.

We have spent the last several years quietly migrating more than 1,200 clients to a single debit platform with our most advanced capabilities. We plan to leverage those experiences to successfully migrate the more than 1,000 acquired along clients to our platform over the next couple of years.

We see revenue synergy opportunities across three primary areas. First, we have a number of solutions in our existing card portfolio to make available to the existing clients in areas such as the Accel Network, enhanced risk, card production and digital capabilities such as CardValet. The acquisition also provides a couple of new solutions, which are additive to our portfolio and should contribute to internal revenue growth. As part of the transaction, we acquired MoneyPass, the second largest surcharge free ATM network in the US, with over 33,000 in network ATMs. In addition, we acquired a small, but strong ATM Managed Services capability, which extends our existing ATM offerings and payments differentiation.

The third opportunity is to provide other Fiserv solutions, outside of card payments as the substantial majority of the acquired clients are not currently Fiserv account processing clients. Over time, we expect to compete for new revenue opportunities by demonstrating our solution strength and integration advantage.

Overall, we believe the synergy opportunity from consolidating to a scaled market leading platform will add value to the acquired clients and deliver meaningful cost benefits over the next 24 months. We also believe the revenue synergies to be equally significant, but we'll have a longer ramp given existing client contracts and sales lead times. We generally expect to be at the revenue synergy run rate over a 4- to 5-year period. Given synergy timing, we expect this transaction to be modestly accretive to earnings in 2019 and to grow over time.

With that, let's move to our three key shareholder priorities for 2018, which are first, continue to build high quality revenue, while meeting our earnings commitments; next, to enhance client relationships with an emphasis on digital and payment solution; and third, to deliver innovation and integration, which enables differentiated value for our clients. As I mentioned, we achieved 5% internal revenue growth in the quarter and year-to-date, driven by strong results from a number of our businesses, including card, biller and bank solution. Internal revenue growth is up 170 basis points versus the comparable 9-month period and is 5% for the trailing 12 months.

As you know, we are making and we will continue to make investments to ensure your business deliver sustained competitive advantage and excellence for our clients, balanced against delivering results, that are consistent with expectations. To that end, adjusted earnings per share was up 23% for the quarter and 26% year-to-date from a combination of operating leverage, tax rate reductions and capital deployment.

These very strong adjusted EPS results were delivered in spite of a 100 basis point decline in adjusted operating margin in the quarter and down 20 basis points year-to-date.

The year-over-year decline was due primarily to the lending divestiture, margin dilutive acquisitions and the investment pool established in tax savings earlier in the year. But for these items, adjusted operating margin in the quarter and year-to-date would have been up 60 basis points and 130 basis points respectively compared to the prior year. We continue to believe, we will achieve our revenue and earnings commitments for the year consistent with our first shareholder priority.

Our second focus is to enhance client relationships with an emphasis on digital and payment solution. DNA is position as the leading charter agnostic, realtime account processing platform continued with eight signings in the quarter. We announced the addition of CFCU, Community Credit Union with over $1 billion of assets to our new Digital Edge solution suite, which is anchored by DNA. In a competitive process, CFCU selected our comprehensive digital centric platform to provide their members access to our leading digital and payment solutions integrated into DNA.

Market interest in digital edge is growing and we believe it will be a longer-term differentiator for the digital first market. We had eight DNA clients go live in the quarter and a total of more than 20 since January. We expect nearly 30 DNA clients to go live in the year, which will be a record number of annual implementations. We continue to see important growth both for us and our clients across our digital banking solution. Mobiliti-ASP subscribers grew by 23% in the quarter to just under 8 million. Due to strong demand, we have expanded our architect implementation teams and expect to bring 12 clients live in Q4 alone, which will double the number of go-lives for the full year. We anticipate exiting the year with strong architect sales, a large implementation backlog and continuing market momentum.

We're seeing interest in sales activity and platform modernization with our recently acquired Dovetail Payments Platform. We were pleased to sign Union Bank with $160 billion of assets to enable their connectivity to the TCH Real-Time Payments network. We also signed BBVA Compass with nearly $90 billion of assets to help modernize their enterprise payment capabilities in the shift toward real-time settlement. We were recognized in the quarter by IDC for a Real Result Award for next generation payments for enabling instant payments in our Dovetail solution for Intesa Sanpaolo, the leading bank in Italy with a strong international footprint.

Our third priority is to deliver innovation and integration, which enables differentiated value for our clients. Zelle continues to garner significant market focus and attention, leading us to sign more than 50 new Zelle clients in the quarter. We were also pleased to bring Dollar Bank with $0.5 billion in assets, live in the quarter. We expect the continuing ramp of new Zelle clients in Q4 and meaningful acceleration in 2019.

We remain focused on ways to accelerate implementation cycle to meet the growing market demand. Zelle transactions were up more than 50% sequentially, and through September 30, are more than 10x the prior year level. Our conviction in Zelle remains high, as financial institutions accelerate their focus at the intersection of digital capabilities and real-time money movement.

Lastly, we are seeing additional interest in our Immediate Funds solution, which provides financial institutions the opportunity to provide their customers with instant access to deposited funds. A Top 10 bank selected our solution in the quarter, to address this evolving opportunity and plans to offer this service to their customers across multiple channels.

With that, let me turn the call over to Bob, for more detail on our financial results.

Robert Hau -- Chief Financial Officer and Treasurer

Thank you, Jeff and good afternoon. Adjusted revenue was up 1% to $1.3 billion in the quarter, and 2% to $4.1 billion year-to-date. Internal revenue growth was 5% in the quarter, driven by strong performance across a number of our businesses, and is also up 5% for the 9-month period. For comparison, our reported internal revenue growth through September would have been 50 basis points higher, had we restated our results under ASC 606.

Adjusted operating income, in the quarter, was down 2% to $425 million and for the year-to-date was up 2% to $1.3 billion, both of which were impacted by the Lending transaction. Adjusted operating margin for the quarter was 31.6%, a decrease of 100 basis points, and was down 20 basis points through September 30. The performance in the quarter, includes a 160 basis point headwind from a combination of the Lending divestiture, acquisitions, which closed last year and the impact of a client-focused incremental investments funded through tax savings. This headwind was partially offset by 60 basis points from a strong operational effectiveness performance and operating model leverage. We now expect 2018 adjusted operating margin to expand about 10 basis points, the low-end of the range, given a slower ramp of acquisitions including Elan, which closed today, and high opportunistic in-year investments.

Adjusted EPS was up 23% to $0.75 in the quarter, and increased 26% to $2.26 through the first 9 months of the year. Based on our strong performance to-date, we expect to achieve double-digit adjusted EPS growth for our 33rd consecutive year. Payments segment adjusted revenue was up 6% to $779 million in the quarter, and up 7% to $2.3 billion year-to-date. Strong performance in our Card Services and Biller businesses drove internal revenue growth of 5% for both the quarter, and first 9 months of the year. Increased adoption and growing transaction volumes remain important elements of driving high quality revenue growth.

In the quarter, debit transactions were up double digits and total P2P transactions, including both Popmoney and Zelle grew nearly 50%. Additionally, Mobiliti-ASP subscribers grew 23% to nearly 8 million, continuing to reinforce the importance of digital in the evolving landscape of financial experiences. Adjusted operating income in the Payments segment grew 5% to $260 million -- excuse me, $267 million in the quarter, and 7% to $809 million year-to-date. Adjusted operating margin in the quarter contracted 40 basis points to 34.2% and is expanded 20 basis points to 34.9% for the year-to-date. Segment adjusted operating margin results were negatively impacted by 140 basis points in the quarter. From a combination of the headwind from acquisitions, and the investments from tax savings, which were included in our guidance, shared at the beginning of the year.

For the Financial segment, adjusted revenue decreased 7% to $574 million for the quarter and 4% to $1.8 billion for the first 9 months of the year, due to the Lending transaction. Internal revenue growth, which considers the divestiture was up a strong 4% in both the quarter and year-to-date, driven primarily by solid performance from our account and item processing businesses. The Financial segment's adjusted operating income decreased 8% in the third quarter to $187 million, and declined 4% to $590 million for the year-to-date, again, due to the Lending transaction. Adjusted operating margin contracted 40 basis points to 32.7% for the quarter, and expanded 20 basis points to 33.2% for the nine-month period. But for the Lending transaction segment margin would have been up by 120 basis points and 160 basis points in the quarter and year-to-date periods, respectively.

The adjusted corporate operating loss was up $6 million in the quarter, due primarily to a difficult prior year compare, but fully in line with our plan and consistent with the 2018 run rate. The adjusted effective tax rate for the third quarter was slightly better than our expectations at 19.7%, due largely to a discrete tax benefit realized in the quarter. Our adjusted effective tax rate through September was 20.7%. And we continue to focus on strategies to sustainably lower our tax rate and accordingly, we now expect our full year adjusted effective tax rate to be just below 22%. We continue to deliver significant free cash flow, generating $813 million for the first 9 months of the year. Free cash flow conversion was better in the quarter at 104%, nearly double the rate from Q2, and is now 86% for the 9 months this year. The results for the year have been pressured by combined impact of working capital timing and the impact of ASC 606.

Now given our visibility into Q4, we expect to be around the low-end of our free cash flow conversion rate outlook for the full year. We repurchased 5.6 million shares in the quarter for $438 million, and have returned over $1.2 billion to shareholders through September 30. We have now exceeded for the first 9 months of the year, the total amount repurchased in all of 2017. We had 34.9 million shares remaining in our share repurchased authorization, which includes a new authorization for 30 million shares approved in the quarter. We had 401 million shares outstanding as of September 30.

Now during the quarter, we issued -- excuse me, during the quarter, we issued $2 billion of new 5- and and 10-year notes at a blended rate of 4%, and an average maturity of 7.5 years. We use those proceeds to pay off our term loan, retire our $450 million, 4.6% to 5% interest rate bonds that were due in 2020, and pay down our revolving line of credit.

Although interest expense will increase sequentially in the fourth quarter and next year, it was a great opportunity to lock in attractive rates ahead of an upward trending market. Also because we completed the 2020 note pay-off in October, our balance sheet at quarter's end did not fully reflect the results of the refinancing. Lastly, we extend the term of our revolving line of credit to 2023, and used it to finance the Elan acquisition, which closed earlier today. Our long-term debt excluding the revolver is now entirely fixed rate. Our debt-to-adjusted EBITDA ratio was 2.4x at the end of the quarter, which does not reflect the retirement of the 2020 note. Had that been completed as of September 30, our debt-to-adjusted EBITDA would have been 2.2x.

Now with that, let me call -- turn the call back over to Jeff.

Jeffery Yabuki -- President, Chief Executive Officer

Thanks, Bob. Sales performance in the quarter was off a bit more than expected, coming in at 69% a quarter, and declined 29% from the prior year. A sizable amount of the decline came from two large long tenured transactions in the prior year period. Normalizing for contract term only, sales would have been down by 13% in the period. Year-to-date book sales are down 8%, but up 1% when adjusting for the term differential. Quota attainment for the year-to-date was 80%. The domestic pipeline continues to grow, and is up 30% over the prior year. We expect very strong sales in the fourth quarter.

We continue to make excellent progress on our operational effectiveness initiatives. We achieved another $13 million of savings in the quarter and are at $45 million attainment for the first 9 months of the year. We now expect to exceed our annual goal of $50 million of savings. The Financial Services environment remains strong, with rising interest rates, positive tax momentum and a benign credit landscape. We continue to see meaningful demand in areas where we have invested such as consumer and commercial digital, risk management and Real-Time Payments. The Zelle opportunity remains robust as the industry looks to claw back the P2P space and create technology optionality for the future. M&A remains active as financial institutions continue to focus on gaining scale and increasing deposit balances, which we expect will continue for the foreseeable future.

As we said upfront, we remain on track to achieve our key financial objectives for 2018, which includes an increase in our internal revenue growth rate to at least 4.5% for the year. As a reminder for comparison, last year's fourth quarter was our strongest internal revenue growth quarter of the year. We also expect to achieve our adjusted EPS guidance for the year, given where we are in Q4, we now expect the full year to be in a range of $3.10 to $3.15, strong growth of 25% to 27% over the adjusted $2.48 last year and $0.08 higher, then the bottom of the original range of $3.02 to $3.15.

You'll recall that our full year results anticipate incremental investments funded from tax reduction savings of at least $25 million for the full year. As Bob indicated, we now expect full year adjusted operating margin to be around 10 basis points and free cash flow conversion to be about 106% for the year.

In conclusion, we're pleased with our year-to-date performance and our progress in building your company. Internal revenue growth is 5% and well ahead of last year's comparable growth rate. Adjusted EPS is up a very strong 26%, supported by operating leverage and operational effectiveness program benefits and also includes incremental investments to further sustained competitive advantage. As important, we continue to allocate capital to build value for shareholders, including a record pace for share repurchase and enhanced debt structure and the acquisition of Elan's debit assets and a move to deliver incremental value for both clients and shareholders.

We also remain committed to a continuous 360 degree view of excellence. Last month we received the results of our annual associated engagement survey and after recording a 5th straight year of improvement have now crossed into the top quartile of associate engagement of the participating employers and there are more than 3.5 million employees, and while we aren't done yet, we are grateful to the 24,000 Fiserv proud associates, who bring their best every day for the company, its clients and you, our shareholders.

With that, operator, let's open the line for questions.

Questions and Answers:

Operator

We will now open up the lines for the question-and-answer session. (Operator Instructions) The first question comes from David Togut from Evercore. Your line is now open.

David Togut -- Evercore ISI -- Analyst

Thanks, good afternoon. I'd like to start with a question about the Elan Financial Services acquisition. Thanks for giving the revenue from Elan, could you break out what expected EBITDA will be on an annual basis?

Robert Hau -- Chief Financial Officer and Treasurer

Yes, David, thanks for the question. Good afternoon. Overall, as you heard in our prepared remarks, that business will add about a $170 million of revenue to us. We're just now closing as of this morning, so it will be a nominal impact for the 2018 results in fourth quarter and when we get into 2019, we'll certainly incorporate that in overall guidance. It's a nice business for us, it's right up the alley of what we do in our debit card processing business today and as Jeff pointed out in his prepared remarks gives us some really nice opportunities for synergies over the next couple of years from a cost synergy standpoint as we bring those -- that scale into our existing debit processing platform and over the next 4 or 5 years to drive some meaningful revenue synergies. So we're looking forward to getting that business online and driving that revenue and cost synergies over the next 4, 5 years.

Jeffery Yabuki -- President, Chief Executive Officer

So, David to the exact question of, will we provide EBITDA? The answer is we don't give that kind of a breakdown, as I know, you know. But I would say that we would expect that business to maintain margins consistent with our debit processing business, especially as we migrate, as Bob mentioned, we migrated over to our platform over the next couple of years. We're moving from having -- they run on their own platform, their US bank, we're going to obviously migrate them to our platform. So we think that there are meaningful cost synergy benefits that will come in. One of the reasons why we're saying it's moderately accretive next year is obviously we'll be be moving that forward as we migrate clients over to our platform.

David Togut -- Evercore ISI -- Analyst

Understood. And then on the third quarter earnings call last year, you gave a preliminary 2019 earnings outlook of $3.50 a share, on a split-adjusted basis based on what you see in terms of the underlying margin expansion of the business, bookings, revenue trends, is that $3.50 outlook still intact for 2019?

Jeffery Yabuki -- President, Chief Executive Officer

Yes. So I would say, Bob is making sure that he gives me the normal look, I think what we told you is specifically, we were not giving guidance, but based on what we could see at the time that we expected to be in that range. I would say that nothing has changed since we talked about that previously to where we are today, I would say, with one exception and that is, as Bob mentioned, we did a fairly meaningful refinance in the quarter. And that's going to add some additional interest expense, which we expect to cover the same way we cover every everything else from an operating perspective, I am not saying we won't be there and I'm not saying we will be there, but I am saying that, that's the one thing that I can think that's a little bit different than it was when we talked last time conversely, we've acquired Elan. We expect that to be accretive. So I think when we give guidance, we'll be giving guidance such consistent with what we have been saying all along.

David Togut -- Evercore ISI -- Analyst

Got it. And then just a quick final question for me at Money 20/20, MasterCard debit do a BillPay exchange offering. And I'm just curious if you compare that on a feature functionality basis to kind of CheckFree's core BillPay offering, how does it stack up, is this sort of a significant competitive threat or not so much?

Jeffery Yabuki -- President, Chief Executive Officer

Not so much.

David Togut -- Evercore ISI -- Analyst

And why would that be?

Jeffery Yabuki -- President, Chief Executive Officer

It's not so much. We, as you know that, that technology has been a market-leading technology for a long time, and the beauty in our technology is that the data, not only can we move money at any speed consistent with what a consumer wants. But we know how to perfect the payment and we know how to manage risk on those payments. And so we are able to take money out of accounts when the consumer wants it because we have a risk model -- a patented risk model that allows us to make smart intelligent decisions on that basis. But the most important part is, is we know how to make sure the money goes where it supposed to go even if the consumer who will occasionally tell us the wrong thing. So we just think it's a more advanced technology, by the same token we all see a very significant opportunity to electronify the nearly half of the bill payments each year, that still are not moving on an electronic rail. So we're glad others are talking about it, but we believe right now, we maintain a meaningful and important strategic and competitive advantage.

David Togut -- Evercore ISI -- Analyst

Thank you very much.

Operator

Thank you. The next question comes from Dave Koning of Baird. Your line is now open.

Dave Koning -- Baird -- Analyst

Hey, guys. How is it going?

Jeffery Yabuki -- President, Chief Executive Officer

Hey, Dave. How are you?

Robert Hau -- Chief Financial Officer and Treasurer

Good afternoon.

Dave Koning -- Baird -- Analyst

Good. Thank you. So I guess first of all, I'm just wondering -- so Q3 revenue is a little lighter than we thought, was there some periodic revenue maybe that's moving into Q4, because Q4 seems almost a little better than we thought and margins in Q3 a little weak, and you see that periodic revenue carries pretty high margins, is that kind of what's happening here?

Jeffery Yabuki -- President, Chief Executive Officer

Yes. And we -- you know well that periodic revenue comes in when to a large degree it decides it wants to come in. In Q2, remember we said, we had a little bit of a pull from Q3 to Q2. In Q3, we actually have a shifting from Q3 to Q4. And so because of the margins that also follows. So we do expect -- I think we tried to give a little clarity last quarter, when we indicated, we expected the first half and the second half to be substantially similar and we're absolutely on track for that. So nothing other than the shift in revenue -- sorry, the periodic revenue, as you know. And then the other piece on margin, just to add a little bit more clarity, if you look at the last 3 years. Q3 has been our weakest margin quarter and most of that to your question comes from movement of periodic revenue between quarters. And it just so happens that Q3 tends to be an unusually weak periodic revenue quarter for some reason.

Dave Koning -- Baird -- Analyst

Okay. And I guess how much down was the year-over-year in Q3?

Jeffery Yabuki -- President, Chief Executive Officer

It was not, it was not down meaningfully in the quarter, to the prior it was down relative to our expectations for how the periodic revenue would flow through the year.

Robert Hau -- Chief Financial Officer and Treasurer

Dave, if you think about it, we had a good first quarter, we had a very strong second quarter to Jeff's point, some of that was timing of periodic revenue actually shifting out of third quarter, we ended up in the first half of the year at 5%, we expected the second half to be similar in growth rate, in total versus first half and expect Q3 to be the strong quarter within the half with Q4 being a little bit lighter, given the tougher comp in the fourth quarter. That's still the case, but will be more normalized, because Q3 came in a little bit lighter and Q4 will be a little bit stronger, but it's a shift within quarters, it is not a year-over-year thing per se.

Dave Koning -- Baird -- Analyst

Okay, thank you. And just one quick follow-up, the $3.10 to $3.15 this year includes a little bit, I think a couple of months of the Lending business in the first quarter. So you lose that next year. Is Elan, the benefit from Elan the accretion from that bigger than the lending EPS that you kind of lose next year.

Robert Hau -- Chief Financial Officer and Treasurer

No, the lending income -- operating income in the first quarter of 2018 will be a little bit stronger than the first quarter from Elan in 2019, little bit bigger business.

Dave Koning -- Baird -- Analyst

Okay. Thanks guys. appreciate it.

Jeffery Yabuki -- President, Chief Executive Officer

Thank you.

Operator

Thank you. The next question comes from Andrew Jeffrey of SunTrust. Your line is now open.

Andrew Jeffrey -- Suntrust -- Analyst

Hi guys. Thanks for taking the question here this afternoon. I actually have a couple if I may. Jeff and maybe both for you guys could actually good way in. You call out sort of investments and you do so consistently and maybe a little bit more so this quarter than others. Could you just talk a little bit about IRR thresholds or philosophy in terms of how you deploy and when you deploy capital to reinvest in the business?

Jeffery Yabuki -- President, Chief Executive Officer

Sure. So philosophically, the investments that we make, we think more about the capital trade-offs as opposed to maybe a traditional IRR. So if we're going to make incremental investments, we think about how does that compare to share repurchase, just like we would with an acquisition. And how does that end up impacting our competitive position in the market. I -- the problem with IRR is as you can do lots of things with terminal value to make the IRR be what whatever you want it to be. And so we tend to stay away from that, as a metric, unless, we're doing very large incremental allocations of capital, which we are not. The reason why we referenced it in this quarter and maybe a little bit more to your perspective is because the margin was a little bit lighter in the quarter, than I think people expected. We were trying to call out this idea that $25 million pool that at least $25 million, the third quarter was the first quarter in which that really started to hit, will have an even bigger hit coming in next quarter. And so pointing that out and also looking for other opportunities to invest in a year where frankly, we're going to deliver 25% to 27% EPS looking for ways to expedite investments in technology or feature function. We think is the right way to think about capital overall.

Andrew Jeffrey -- Suntrust -- Analyst

Okay. So in the context of sustaining the kind of earnings growth and organic revenue growth I guess.

Jeffery Yabuki -- President, Chief Executive Officer

That's right. And well, sustaining and hopefully increasing, right. Our strategy is to increase this year out 4.5% is roughly an 80 basis point increase in internal revenue growth, where we are based on what we can see right now, we would expect to see some lift in that. Moving into 2019, of course, that's not formal guidance, but we would expect to see that as we continue to move forward.

Andrew Jeffrey -- Suntrust -- Analyst

Okay. And then if I may, recognizing that Elan there's a lot about debit processing. You also, as you mentioned acquired MoneyPass in a Managed Services business. Can you talk a little bit about how you're thinking about ATMs and generally, how they fit into sort of banks priorities and whether there is an opportunity for a third-party like Fiserv that outsources just about everything else, like community banks do to provide more outsourced services around ATMs?

Jeffery Yabuki -- President, Chief Executive Officer

Sure. I mean, from our perspective, when we hear clients talk about how the digital world, right, will intersect with physical world. ATMs continue to be front and center in that device centric key type strategy. And so we're still seeing that and we're actually hearing more people want to add sophistication to those ATMs. For us -- and so given the scale that we have over 3,000 clients, who we -- most of them we drive ATMs for as part of our EFT and debit proposition, we see this to be actually a pretty attractive incremental service, outsourced service that we can provide. We have stayed away from services like that historically for two reasons; number one, we didn't have the expertise; and number two, it takes a little bit more capital than that we tend to use, right, for going out and acquiring the ATMs. But just given how the world is morphing right now, we think it could make some sense. And we'll spend the next couple of years, looking to see what can we add in terms of service offerings to those 3,000 clients.

Andrew Jeffrey -- Suntrust -- Analyst

Okay. Thank you. Appreciate it.

Jeffery Yabuki -- President, Chief Executive Officer

Thank you.

Operator

Thank you. The next question comes from Jeff Cantwell of Guggenheim Securities. Your line is now open.

Jeff Cantwell -- Guggenheim Securities -- Analyst

Hi. Good evening.

Jeffery Yabuki -- President, Chief Executive Officer

Hi, Jeff.

Robert Hau -- Chief Financial Officer and Treasurer

Hey, Jeff.

Jeff Cantwell -- Guggenheim Securities -- Analyst

Thanks for taking my questions. Jeff, you led this Company for many years, you've seen how it performs through various business cycles. Now, clearly there's a lot more focus right now on macro risk versus even 3 months ago, when you last spoke with us. So I wanted to ask you what you're thinking as at this point in time, as far as, how you expect this Company to perform if the US economy moderates to some degree in the future? And then what operational leverage might you be able to port or to manage through the cycle?

Jeffery Yabuki -- President, Chief Executive Officer

Sure. So, Jeff, I mean, we are in a period where we are investing significantly in technologies that are linked up with digital kind of the digitization our Financial Services along with the need and soon to be mandate to move to a real-time monetary ecosystem. It's hard for me to see how either of those trends will moderate, even if the economy itself begins to slow a bit. So I think that based on where we are strategically that will continue to be a fairly strong defensive play as we have been and frankly in all of the other cycles. That said, if, in fact, we see a slowdown that starts to negatively impact financial services, I would expect us to be able to take steps such as slowing down the investments. And one of the things, if you go back and look at our data, you'll see that we've meaningfully increased our level of spend as a percentage of revenue over the last 3, 5, 7 years and most all of that drives future internal revenue growth. We think one of the beauties of our model is, we can pull that back as needed without impacting the current level of internal revenue growth and create incremental flow through of free cash. So I think, we're pretty positioned, we think about that all the time as you might imagine and we like the fact that we have that lever as well as -- I think we've demonstrated for the last 10 plus years, a strong ability to reduce weighing in and restructure our costs, our costs overall. We talk about it is operational effectiveness and I'd expect us to be able to, to do more of that as well as needed.

Jeff Cantwell -- Guggenheim Securities -- Analyst

Okay, great. Thanks very much.

Jeffery Yabuki -- President, Chief Executive Officer

Thank you.

Operator

Thank you. The next question comes from Brett Huff of Stephens. Your line is now open.

Brett Huff -- Stephens -- Analyst

Good evening, guys.

Jeffery Yabuki -- President, Chief Executive Officer

How are you?

Brett Huff -- Stephens -- Analyst

One question on Dovetail, that was an interesting acquisition to us and it sounds like you guys got a couple of pretty big contracts. And I know that you serve a lot of very large banks, especially in BillPay, any thoughts on in moving up market, maybe in specific verticals or maybe even in the core account processing. But is there a strategy about moving up market? Or is this more about digital and immediate payments and you're just going maybe where the demand is right now?

Jeffery Yabuki -- President, Chief Executive Officer

It's really a combination of both, I mean, we, Brett, as you know, have a number of large clients who work with us on BillPay. We also have a number of large clients who work with us on digital, and we see that interesting interaction to just open the door to allow us to come in and talk about how the rails are evolving. And that was the back strategy. The other thing that you probably know is PEP+, which is the majority of the ACH and the US goes over PEP+ today is owned by us. And we see a nice fit between Dovetail and PEP+. So being able to help clients who we've served for years on payments modernized with Dovetail is also part of the strategy. So it's coming together in the market, the market will move if the patient moves. But we were pleased with the results in the quarter and the pipeline looks good and hopefully we'll continue to make that progress.

Brett Huff -- Stephens -- Analyst

Great, thanks. And then also, there's been a lot more focus I think on helping banks or banks looking to do more alternative deposit gathering not necessarily having to own the deposit gathering function itself using partners, things like that, some of those are featured at Money 20/20. I know you guys do some of that. Can you just remind us of the various things you do, whether it's alternative lending, things like that? What kind of products given your digital focus have you been developing?

Jeffery Yabuki -- President, Chief Executive Officer

Yes. The majority of the things that we're doing are on certainly focused on lending, we're doing work. As I mentioned, this is a little bit of an offshoot, but we're seeing more and more banks look to set up separate internet brands to be able to go out and gather deposits, we do some work with some third parties who are -- who basically are brokering deposits across the -- but more of on a partnering and integration basis, who are moving deposits around the ecosystem. And then as we mentioned things around Immediate Funds which is about attracting non-customers into branches, things like that.

Brett Huff -- Stephens -- Analyst

Great. That's what I needed. Thanks guys. I appreciate it.

Jeffery Yabuki -- President, Chief Executive Officer

Thank you.

Robert Hau -- Chief Financial Officer and Treasurer

Thanks.

Operator

Thank you. The next question comes from Tien-Tsin Huang of JP Morgan. Your line is now open.

Tien-Tsin Huang -- JPMorgan -- Analyst

Hi. Thanks so much. Happy Halloween to you guys. I want to ask on your comment on the strong sales expectation for the fourth quarter is -- what type of -- what do you see in the pipeline and being able to replenish the backlog and when that is there. I feel like I ask you this every year, Jeff, but is there a concept of budget flush maybe that might be beneficial?

Jeffery Yabuki -- President, Chief Executive Officer

Yes, we do talk about it as we should. We -- you have kind of the year-end budget that's always the case, fourth quarters are always strong. We had some larger sales slip from Q3 to Q4, that's part of the revenue movement from Q3 to Q4 is also due to some of those sales. So we have that and we have, whether it is around the payment rail transformation, you've got a lot going on there. Zelle, DNA a lot on the digital front, whether it will be architect or others. So this, the same kinds of trends, I think by the -- also connected to the urgency of -- we've got to get it done this year, so we can spend the project up and get going for next year.

Tien-Tsin Huang -- JPMorgan -- Analyst

Got it. Okay. That's good. So just my follow-up on the marginal front, you covered a lot of it, I know, but just to be clear on my side, is the incremental change in the margin outlook, is it Elan, because that the tax reinvestment side, I know you contemplated maybe the timing wasn't contemplated. Just trying to better understand what changed?

Jeffery Yabuki -- President, Chief Executive Officer

Sure. Are you talking about from being 10 to 30 to going to saying it's going to be about 10?

Tien-Tsin Huang -- JPMorgan -- Analyst

Right. What's incremental to get to the 10?

Jeffery Yabuki -- President, Chief Executive Officer

Yes, there are a couple of things. I would say the biggest one is the acquisitions that we brought in last year, as well as as the impact of Elan, they're ramping a little bit slower. They've been there say -- the sales cycles, took a little longer, so they -- instead of us signing X deals, we signed Y deals. So things like that around the acquisitions, I would say that's one Elan will be moderately dilutive as well. And then you've got the incremental investments that was due to tax reform, we've been looking for given how the year is progressing. Are there some incremental investments we can make that none of them are material by themselves, but just a few million here and a few million there, not to diminish a few million, but it adds up and it has a basis point impact. So it's really those kinds of things.

Tien-Tsin Huang -- JPMorgan -- Analyst

Okay, thanks for that clarification. Appreciate it.

Jeffery Yabuki -- President, Chief Executive Officer

Thank you.

Operator

Thank you. The next question comes from James Schneider of Goldman Sachs. Your line is now open.

James Schneider -- Goldman Sachs -- Analyst

Good afternoon, thanks for taking my question. Maybe just returning to the question of sales for a moment, I think you talked about some of the slippage from Q3 to Q4 , but I think that on a full year basis or year-to-date, the Quota attainment still feels a little bit light. Is that just the size of the deals? And maybe can you -- maybe address the whole topic of competitiveness of new deals because some of the sales commentary from some of your peers seems quite robust over the past couple of quarters. So I just wanted to square those two issues?

Jeffery Yabuki -- President, Chief Executive Officer

Sure. So the answer to the first part of the question was really around larger deals that were the ones that were slipping, so they have an impact. We mentioned the fact that we had the term adjustment, which had an issue on our comparative sales I think as it kind of squaring it, we are seeing a very robust sales environment, pipeline is up 30% year-over-year, and it's both a strong at the late stage as well as in the early stage, I think we probably give a bit more information than others in terms of exact percentages and things like that. So it's a little bit easier to see how our quantitative data -- how our quantitative data ends up playing out. I would also agree that the AT is a little bit light. But again, we're expecting a very strong fourth quarter and I think we'll be quite well positioned for next year.

James Schneider -- Goldman Sachs -- Analyst

That's good to hear. And then maybe just on the financial side. Free cash flow was actually down slightly year-to-date. And you talked about some of the factors that drives me out and some of the investments I assume that are playing into that. Can you maybe talk about as we head into 2019, what levers you're able to pull to kind of get that free cash flow back up to where it normally would be in the -- if that -- is that an issue of conversion percentage or is an issue of lower CapEx, as a percentage of revenue or maybe some of the factors there, please?

Robert Hau -- Chief Financial Officer and Treasurer

Yes, Jim, it's Bob. We are nominally down, just a couple of million dollars, few million dollars on $800 million year-to-date number, the largest driver of the year-over-year performance is the Lending divestiture and that's a business that generated good cash that we don't have any more. So it's in their last year numbers. We didn't adjust or make any modifications to last year's actuals. So that's probably the biggest driver. You saw in our third quarter numbers, the conversion rate jumped up very nicely to a 104%. We've been a bit behind the overall year-to-date conversion rate is now what we would typically expect and that's really driven by timing of working capital as well as CapEx spending some of those investments that we've talked about with that reinvestment of the tax savings is also bringing capital spending. So that will moderate into next year, we expect to have a very strong fourth quarter and hit the bottom end of guidance range of the 106% for this year and be in good shape into 2019, and beyond.

Jeffery Yabuki -- President, Chief Executive Officer

But just to clarify, as it relates to the cash flow itself, it's really a matter of the lending business a little bit more CapEx things that should come back to a more normalized route.

James Schneider -- Goldman Sachs -- Analyst

Great, thank you.

Jeffery Yabuki -- President, Chief Executive Officer

Thank you.

Operator

Thank you. The next question comes from Kartik Mehta of Northcoast Research. Your line is now is open.

Kartik Mehta -- Northcoast Research -- Analyst

Hey, good evening, Jeff and Bob.

Jeffery Yabuki -- President, Chief Executive Officer

Hey, Kartik.

Kartik Mehta -- Northcoast Research -- Analyst

Jeff, as you look at kind of the backlog of the business, the sales you are anticipating in the fourth quarter. What percentage of revenue do you -- is already kind of, I hate those word, but in the back for 2019 and what do you still have to kind of backfill?

Jeffery Yabuki -- President, Chief Executive Officer

So on balance, our recurring revenue is in the 80% to 85% range depending on what year, year-end. So I think that's a reasonable proxy to say, certainly that's using the notion of in the bag, I think that's a fair way to think about it. But we also have line of sight into a whole bunch of additional revenue below that, I'm sorry, above that recurring revenue number. So it's a fairly small number, ultimately, that is kind of in the go get category. But if it's -- even if it's 5%, it's $300 million and change. So -- and because $10 million is a point in a quarter roughly, Bob is going to tell me, it's really $12 million. But it's in that range, you can have those shifts just because of the $25 million to $30 million a month, that is in that 5% range.

Kartik Mehta -- Northcoast Research -- Analyst

And then Bob, just the tax rate for 2019, do you anticipate it to be similar to 2018 or are there things that might change for 2019?

Robert Hau -- Chief Financial Officer and Treasurer

No. We came out with original guidance of 22% to 23% and I would think that is kind of a more normalized rate this year, will dip just below that, given some of the discrete tax items we had. But, of course, there we're always looking for that, in fact there are some of the things we pointed out in the prepared remarks, that's an expense line that we look to manage, but 22% to 23% is kind of a long-term normalized rate for us.

Kartik Mehta -- Northcoast Research -- Analyst

Thank you very much. Appreciate it.

Robert Hau -- Chief Financial Officer and Treasurer

Yes.

Operator

Thank you. The next question comes from Ashwin Shirvaikar from Citibank. Your line is now open.

Ashwin Shirvaikar -- Citibank -- Analyst

Thanks. Hey, Jeff, hey, Bob.

Jeffery Yabuki -- President, Chief Executive Officer

Hi, Ashwin.

Ashwin Shirvaikar -- Citibank -- Analyst

Happy Halloween. You guys gave a lot of good color on sales. Appreciate that. I guess larger deal slippage, I mean that happens that larger deals also tend to be competitive in many ways. So I guess the question is, if the deals and ramps push out more or if you suppose don't win, can that affect your internal growth rate? Or do you believe this year's internal growth rate is sort of a good assumption thinking ahead into future quarters?

Jeffery Yabuki -- President, Chief Executive Officer

Well, that I'm pausing because sure these larger deals and smaller deals tend to have a competitive element, the pipeline that we're talking about that is up 30%, is actually weighted on the basis of our belief that we will prevail or not. Now things happen and sometimes you lose transactions that you don't think you're going to lose. And certainly if we lost a bunch of things that we were expecting to win, it could have an impact on revenue this year and frankly, next year, I think that's always the case. We feel pretty good about where we are right now and that will achieve the at least 4.5% internal revenue growth. But to sustain that overtime, obviously, we have to continue to win and we'll make sure that we're doing what we need to do from a product and a go-to-market perspective to ensure we were winning.

Ashwin Shirvaikar -- Citibank -- Analyst

Got it. And then on the debt, I mean paying up to ensure a fixed rate, would -- to me is sort of a -- in some ways a bullish sign because it kind of probably implies if you kind of think fee rate can continue to improve and that would imply things for the spending environment, things like that. I guess -- is that a fair hypothesis in terms of kind of as you speak with bank executives with regards to what you're hearing about spending intentions for technology and so on so forth? And then a quick question at the end of that, what is the new cost of debt?

Jeffery Yabuki -- President, Chief Executive Officer

So let me take the -- even though I know the answer to the last one, I'm going to let Bob take that Ashwin.

Ashwin Shirvaikar -- Citibank -- Analyst

Okay.

Jeffery Yabuki -- President, Chief Executive Officer

The spending environment is quite bullish. I mean right now everyone in financial services knows that technology investments have to continue to be made to keep up with what's going on the digital transformation front. So there's lots going on there, there's still a ton going on around cyber, other kinds of risk, and then in this whole -- the whole notion of this payments revitalization. So there is a lot of that going on. Most of those quote decisions have been made to do things. Now it's a matter of finding the right partner, making the decision, making sure they have the right resources in their own shops to get this done, that is one of the constraints is, do the financial institutions have resources on their own side, not just us, but the pair up to be able to get things done. But there's a lot of energy and focus and, in fact, I would say that there is a higher level of motivation now to get things done because people can see what's on the other side of the wave. And what's on the other side of the wave is, this intersection of digital, and payments, money movement, new financial experiences all of that. And though we haven't even begun to talk about cognitive technologies, RPA and where that's all going to go. And in order to do that, you have to get some of the other legacy systems cleaned up. So it's pretty good from that perspective. Pretty bullish overall.

Robert Hau -- Chief Financial Officer and Treasurer

And then let me answer your question on the cost of debt after this refinancing, we're just under 3%, about 2.9% after tax.

Ashwin Shirvaikar -- Citibank -- Analyst

Got it. Pretty good. Can I squeeze one last one in just to get the next full explanation on -- you mentioned the acquisitions have had a slower ramp. Is that -- I mean was that a product issue? Or what led to the slower ramp?

Jeffery Yabuki -- President, Chief Executive Officer

I'm sorry, Ashwin, on which act -- which product are you talking about?

Ashwin Shirvaikar -- Citibank -- Analyst

No, no. When you said the acquisitions that have had a slow ramp?

Jeffery Yabuki -- President, Chief Executive Officer

On acquisitions, I'm sorry, I thought you said something activation, it's all about sales cycle. So it's about how long -- so we announced a couple of Dovetail payments platform transactions. It's about how the sales cycles have gone in terms of how long it took for people to get comfortable that we were going to continue to invest in win. And then just the cycles on the client side took a little bit longer. So that idea is the main slowdown that we've seen relative to what we expected to happen. Does that make sense?

Ashwin Shirvaikar -- Citibank -- Analyst

That makes sense. Yes, got it. Thank you.

Jeffery Yabuki -- President, Chief Executive Officer

Thank you. And thanks everyone for joining us this afternoon. If you have any further questions, please don't hesitate to contact our Investor Relations team and have a great evening.

Operator

And that concludes today's conference. Thank you for your participation, You may now disconnect.

Duration: 59 minutes

Call participants:

Tiffany Willis -- Vice President of Investor Relations

Jeffery Yabuki -- President, Chief Executive Officer

Robert Hau -- Chief Financial Officer and Treasurer

David Togut -- Evercore ISI -- Analyst

Dave Koning -- Baird -- Analyst

Andrew Jeffrey -- Suntrust -- Analyst

Jeff Cantwell -- Guggenheim Securities -- Analyst

Brett Huff -- Stephens -- Analyst

Tien-Tsin Huang -- JPMorgan -- Analyst

James Schneider -- Goldman Sachs -- Analyst

Kartik Mehta -- Northcoast Research -- Analyst

Ashwin Shirvaikar -- Citibank -- Analyst

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