Fidelity National Information Services Inc (FIS) 2009 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Fidelity National Information Services second quarter earnings call. At this time, all lines are in a listen only mode. Later there will be an opportunity for questions and instructions will be given at that time. (Operator Instructions). As a reminder, this conference is being recorded.

I will turn the conference over to Mary Waggoner, Senior Vice President Investor Relations. Please go ahead.

Thank you, Kathy. Good afternoon, everyone, and thank you for joining us today. With me are President and Chief Executive Officer, Lee Kennedy, and Chief Financial Officer, George Scanlon. We will be using a slide presentation to supplement today's discussion. The slides as well as the press release are available on our website, fidelityinfoservices.com.

As a reminder, today's commentary will contain references to non-GAAP results in order to provide more meaningful comparisons between the periods presented. Reconciliations between GAAP and non-GAAP results are provided in the attachments to the press release. Today's discussion will also include forward looking statements. These statements are subject to risks and uncertainties as described in the press release and other filings with the SEC. The Company expressly disclaims any duty to update or revise the forward looking statements including guidance. In addition to being recorded, today's call is being web cast and a replay will be available on our website shortly after the call. A telephone replay will also be available and that replay number is provided in the press release.

Now, I will turn it over to our CEO, Lee Kennedy.

Thanks, Mary. Good afternoon, everyone, and thanks for joining us today. If you will turn to slide 4 we have included an agenda outlining the topics we will cover on today's call. I will begin with a few comments of our pending acquisition of Metavante followed by a review of our second quarter results. I will conclude with an update on our outlook for 2009. George will follow with the financial report and then we will open it up for your questions.

First, Metavante. Since our initial announcement in early April we have made excellent progress in preparing for the combination of FIS and Metavante. As stated in last week's press release, the S-4 has been declared effective and the shareholder vote will take place on September 4th. In addition, we continue to work closely with the DOJ to comply with the request for additional information and expect to complete the acquisition in the fourth quarter. The stacking of the integration chains is complete and the project plans for combining the two companies will be finalized and in place prior to closing. I have outlined in our April investor presentation the integration of Metavante and FIS will generate approximately $260 million in cost savings through expense reductions and efficiency gains in corporate, technology and business operations. We are confident that we will be able to achieve the cost synergy goal with minimum disruption to our customer base.

If you will continue to slide five, I will continue with the second quarter business review. We are very pleased with the second quarter results, particularly in light of the challenging market conditions which persisted throughout the second quarter. We achieved excellent double digit growth in earnings and free cash flow. In addition, the overall margin grew 250 basis points over prior year. Adjusted earnings per share increased 24% to $0.42 on a reported basis and 27% in constant currency. It was a very clean quarter with no benefit from significant software sales or termination fees. The strong growth in earnings per share was driven by strong margin expansion in all of our operating segments. Free cash flow totaled $125 million which was a 45% increase over prior year. As illustrated on slide six, second quarter constant currency revenue was comparable to prior year. Second quarter top line growth remained challenging driven by difficult market conditions which persisted throughout the quarter. However, the steps that we have taken to generate higher efficiencies in development, technology, and operations, together with quick and decisive actions to reduce costs in the second quarter enabled us to drive strong growth in EBITDA and margins.

Second quarter EBITDA grew 6.9% and the margin increased 250 basis points to 25.3%. This is the fourth consecutive quarter of 90 plus basis point improvement year-over-year margin improvement, which clearly demonstrates our ability to aggressively manage costs and drive strong operating leverage even with lower revenue growth. This is evidence that the profit improvement plans initially implemented in 2007 are generating excellent long-term results for our company. In early 2007 we outlined four strategic initiatives to improve profitability and free cash flow. Our business plan included initiatives to better leverage development, processing and support services across business unit lines and geographies. Initiatives to reduce IT infrastructure cost through the consolidation of processing centers, stronger vendor management and better utilization of our mainframe and mid range systems and operating resources. A project plan to lower capital spending by leveraging development resources across business units and geographies, eliminating redundant product development. And finally, the implementation of a plan to improve sales efficiencies and cross selling through the creation of a centralized sales organization.

The results to date are measurable and clear. Earnings per share increased more than 20% in 2008 and in the first half of 2009. Free cash flow more than doubled to $358 million in 2008 and we are on track to exceed our free cash flow guidance for 2009. After peaking at $273 million or 9% of revenue in 2007, 2009 capex is expected to be in the low 200s which is approximately 6% of total revenue. We are making progress in selling our payment products up market and increasing the number of product relationships that we have with anchor core processing customers. We have also significantly reduced debt and interest expense over the last two years which has enabled us to pursue strategic acquisitions and better opportunities that have added new product capability and scale, and improved our competitive position in the US and internationally.

At the same time, we have also focused on strengthening and expanding significant customer relationships. In the second quarter we signed multi year renewals with the Independent Community Bankers of America for debit processing, and the Illinois Credit Union League for card processing and loyalty services. We are pleased to continue our longstanding relationships with these two important organizations. We also established new core processing relationships with Post [Oaks] Bank, the Bank of Virginia and Alliance Bank. Each was a competitive takeaway. In addition, FIS was selected to provide loyalty services for Bank of the West which is the 25th largest bank in the country. Bank of the West is an example of the success we are having in cross selling payment products to our larger core processing customers.

We are also seeing an increasing interest for outsourced core and card processing service outside the US, particularly in the UK and Europe where banks have historically processed in house. I'm also pleased to report that all major customer implementations remain on track for 2009. In June we successfully converted over 98 million prepaid cards for American Express to our new prepaid card platform. In the second quarter we also converted more than 45,000 point-of-sale terminals at more than 15,000 US Postal Service branches across the US into our newly designed and implemented online payment switch. We will expand this service to an additional 17,000 post office locations in 2010. Both of these opportunities were initially generated through the acquisition of eFunds.

We remain on track to convert Bradesco's card portfolio by the end of the third quarter. In addition to Bradesco's legacy portfolio we will add more than 12 million cards to our platform, bringing the total number of cards processed by the JV to more than 44 million. Fidelity Brazil, which is the first processor in the country to achieve PCI certification, serves a broad customer base consisting of 14 Brazilian banks, which in total will generate approximately $250 million in annual revenue. Our BASE2000 platform supports more than 500 different types of plastic cards, including credit, private label, prepaid and store value cards. We also provide a wide range of back office and card holder support services, including fraud management, collection, dispute resolution and loyalty programs. More than 7 million consumer calls per month are handled through our 3,000 seat state of the art call center. Brazil is expected to become the third largest card market in the world by 2013. We believe our scale, experience, local market expertise, positions us very well to take advantage of the significant opportunities that this market will generate.

In summary, it was another good quarter for our Company, highlighted by excellent growth in earnings, margins and free cash flow. While our outlook for revenue growth is slightly more cautious for the balance of 2009, we are confident that the positive pipeline and market trends will continue to improve driving stronger revenue growth as the economy improves. Based on the strong results of the first half of 2009 and our positive outlook for the remainder of the year, we are raising our guidance to $1.71 to $1.75 per share from $1.60 to $1.66 per share that we previously communicated. We continue to work towards finalizing the acquisition of Metavante and expect it to close in the fourth quarter. We remain very enthusiastic about the enhanced product capability, improved scale and combined management depth of the new company. The new FIS will be stronger. It will be more competitive and it will be uniquely positioned to take advantage of the opportunities in high growth markets that we believe will grow and exist throughout the world.

I will now turn the call over to George who will continue with the second quarter financial report.

Thank you, Lee. Good afternoon, everybody. I will begin with slide eight. As Lee discussed, consolidated revenue in the quarter totaled $835 million, compared to $870 million in the prior period. The 4% decrease in reported revenue included an unfavorable currency impact of $31 million. Excluding the currency impact, revenue was comparable to Q2 2008. Termination fees were insignificant and there were no large software sales or major customer implementations that benefited the current quarter.

Consolidated EBITDA totaled $212 million, and increased 6.9% relative to prior year despite the decline in reported revenue and the impact of a $6 million unfavorable currency adjustment. As a result, the EBITDA margin expanded by 250 basis points to 25.3% as we experienced strong year-over-year and sequential margin improvement across the board in all of our operating segments. Ongoing spending discipline and proactive cost reductions continue to improve our operating leverage and mitigate the earnings impact of softer revenue. Adjusted earnings totaled $0.42 per share and were negatively impacted by $0.01 for currency affects. All in all, we demonstrated the resiliency of our operating model with very strong bottom line performance.

If you turn to slide nine, I will provide additional detail on our second quarter operating segment results. Financial Solutions revenue declined 1.4% to $277 million in Q2 2009 compared to $281 million in the prior year. Increases in account processing, outsourced technology and risk management services were offset by lower professional services revenue and a decline in software sales which tend to be more discretionary purchases. Financial Solutions EBITDA increased by $16 million, primarily due to increased productivity and improved resource utilization. As reported, the margin increased 610 basis points to 43.1% compared to 37% in the prior year quarter. Now, while there was no impact to consolidated margin, there was an anomaly related to the allocation of severance costs between the operating and corporate segments in Q2 2008 which had the effect of understating prior year margins for the Financial Solutions and International segments and overstating corporate. Normalizing for this effect, the quarterly improvement in the Financial Solutions margin was a strong 250 basis points. We have included a chart in the appendix to illustrate the normalized EBITDA and margin expansion for the respective segments.

As shown on slide 10, Payment Solutions revenue declined $3 million to $380 million in the quarter or 0.9% below prior year. Payment Solutions increased 0.4% if you exclude retail check services. A slide summarizing the results of our check business is included in the appendix for your reference.

Solid growth in debit processing in Output Solutions offset declines in prepaid, credit card and item processing activity. We saw positive developments this quarter in transaction trends relative to Q1. Debit transactions increased 7.3% year-over-year versus 4.6% growth in the first quarter, and improved 9.3% sequentially. Credit card transactions declined 2.8% year-over-year, compared to a 5.4% decline in Q1 and increased 9.6% sequentially. Payment Solutions EBITDA increased 8.2% to $105 million versus $97 million in the prior period and the margin improved 230 basis points to 27.7% compared to 25.4% in Q2 2008. Improved operating efficiency across most product lines resulting from strong expense management contributed to the enhanced performance.

Turning to international which is detailed on slide 11, our international revenue increased 1.4% in constant currency which was in line with our expectations and the guidance we communicated last quarter. As previously discussed, the second quarter growth rate was impacted by significant new customer implementation revenue in Brazil, Europe and Asia Pac in Q2 2008. We anticipate international revenue growth to accelerate in the second half of 2009 driven by new customer implementations including the Bradesco portfolio conversion and organic account growth. International EBITDA increased over 29% compared to prior year and more than 57% in constant currency. The EBITDA margin expanded by 550 basis points on a reported basis and 610 basis points in constant currency. Accounting for the severance adjustment I previously mentioned, international margins expanded by 360 basis points. Our Payment Solutions products in credit, debit and item processing contributed to the margin growth while financial services was down modestly primarily due to lower software sales.

Slide 12 provides additional insight into our foreign currency exposure. Compared to the same period in the prior year the euro declined approximately 13% while the Brazilian reais and Sterling declined approximately 20%. Our exposure to each major currency is illustrated by the pie chart at the bottom of the change. The chart on the right depicts the negative currency comparisons we have experienced over the past several quarters. We expect the negative currency impact to continue through the third quarter with more normalized comparisons beginning in Q4.

Please turn to slide 13 for a reconciliation of adjusted net earnings. Second quarter adjusted net earnings totaled $80 million or $0.42 per diluted share compared to $0.34 in the 2008 quarter. As I mentioned earlier, currency negatively impacted earnings by about $0.01 in the quarter which offset a comparable non operating currency transaction adjustment. As indicated, adjusted net earnings exclude after tax purchase amortization of $19 million and about $1 million of after tax M&A costs. These costs were significantly higher last year as a result of the spinoff of LPS and other related restructurings I previously mentioned. The effective tax rate was 34.5% in Q2 2009 compared to 32% in the prior year, and our average shares outstanding were 192.7 million.

As shown on slide 14, free cash flow improved significantly to $125 million. The increase was driven by higher earnings and improved working capital management, and we achieved some one time benefits in accounts payable through more effective management of vendor payment terms. Receivables collections included $23 million related to the former Certegy Australia business. To date, we have collected $83 million since the sale of the business in October of last year and have $41 million remaining to be collected at June 30th. Capital expenditures totaled $51 million in the quarter and were comparable to Q2 2008.

The balance sheet strengthened in the quarter as we further delevered. Uses of cash included $26 million in scheduled payments on the term A debt and a $141 million reduction in the revolver balance. We also paid $10 million in shareholder dividends, and cash and cash equivalents totaled $228 million at June 30th.

Turning to slide 15, we had $2.3 billion in debt outstanding at quarter end including $1.9 billion on the term A facility and $330 million drawn against the $900 million revolver. Approximately $2.1 billion or 92% of our debt has been swapped at fixed rates with the balance floating against LIBOR. The effective interest rate including swaps and amortization of debt issuance costs was 5.5% at quarter end. We have swaps expiring in the fourth quarter and expect to enter into new swap agreements after the completion of the deal with Metavante. We are evaluating various fixed floating alternatives but do expect a $0.01 benefit in the fourth quarter which we have factored into our revised guidance which is summarized on slide 16.

On a consolidated basis, our outlook assumes revenue growth for the year to be slightly positive in constant currency and down slightly compared to prior year on a reported basis. We have several significant software and professional services deals in progress and if we are able to close these prior to the end of the year, we would expect upside to our revised guidance. However, based on the difficulty in predicting customer decision making around discretionary purchases, we think it prudent at this time to maintain a more conservative view for the balance of the year.

As a reminder regarding calendarization of our revised guidance, we face difficult third quarter comparisons in our Financial Solutions segment due to particularly strong software and professional services sales in Q3 2008. We also face difficult third quarter comparisons in Payment Solutions relating to a $6 million interchange adjustment and strong card marketing revenue recognized in Q3 2008 that is not expected to recur this year. Consequently, third quarter revenue in our domestic segments will likely decline year-over-year before picking back up in Q4.

As I mentioned earlier we expect international revenue growth to accelerate beginning in Q3 and expect full year international growth to be around 10% on a constant currency basis and flat for the year on a reported basis. Our original EBITDA margin improvement was targeted at 50 to 100 basis points. Despite the flattening of revenue we now expect revenue improvement to exceed 150 basis points this year. We will also exceed the upper end of our cash flow guidance of $430 million and expect adjusted earnings per share of $1.71 to $1.75 for the full year 2009 with the upside to prior guidance more heavily skewed to the fourth quarter due to higher operating leverage and lower interest costs. The ongoing and proactive discipline over expense and capital management that we have maintained for the past several quarters has enabled us to produce expanding margins and consistently strong profitability in a challenging environment, and positions us for even greater success when the markets normalize, as they inevitably will.

That includes our prepared remarks for FIS. Operator, we will now open the line for questions.

(Operator Instructions). Our first question comes from Dave Koning with Baird, go ahead please.

Great job again. First of all, on the Financial Solutions versus Payments you did a great job laying out the headwinds in Q3 and then how they get a little better in Q4. I'm wondering this year and even as we look in the future do you expect both of those segments to look about the same from a growth profile, or maybe you can talk a little bit about the puts and takes.

Dave, I would say that as we look forward we would anticipate that the Payments part of our business would have faster growth characteristics and the Financial Solutions segment would have a little bit more lumpier story. The software sales this year have been a challenge, as you can imagine. We are down about 30% year-over-year. And yet we have been able to expand margins despite the loss of that most profitable part of our business. We know from the pipeline that there are deals in the future. It is just the delays in getting the customers to the finish line have compressed revenue growth. But we know over time that part of our business will come back along with the professional services. So we think we can resume a normalized level of growth. The Payment side, though, I would expect to grow faster on average than the (multiple speakers)

I think Payment will be aided by a strong growth in debit. We had really good growth for the quarter. We expect that to continue on. Also the conversion of some of the accounts in Brazil which will add to that, on the international side anyway. So I think those factors will push Payment at a faster rate than what you see on the Financial Services side.

Just one other question. If that was a challenge how to adjust numbers after guidance gets rated so meaningfully to the out year, and I know you don't want to comment much on 2010 by any means yet, but my one question around that is this year is seems like license was obviously very weak, so it seems like the comp gets easier into 2010 and FX gets easier too. Are those the two main comps that do get a lot easier in 2010? Is there anything else happening this year that you would expect to get a lot easier into 2010?

I think the product lines that are more discretionary get easier going forward. If you look at our software sales, year to date, they have been very weak. We don't expect that to continue into 2010. So we're going to get some natural lift just from institutions that have delayed decisions really jumping into the fray and implementing new capabilities. So I would say discretionary nature you will see the improvement there.

Thank you.

Our next question comes from Glenn Greene with Oppenheimer.

Good afternoon and congratulations on the quarter. I want to get more clarity and color on the order of magnitude on the margin ramp. That seems to be the story of the quarter, especially in light of the software sales being as weak as you talked about, I think George said down 30% year-over-year. Did you take extraordinary cost efforts, were there more layoffs? I'm trying to get some understanding of how you achieved the margin ramp that you did in the quarter because it was certainly beyond anyone's expectations I think.

In preparation for what we thought would be a weak year, remainder of the year, we took actions early in the year to take out expense. So yes, there were cost reductions and head count reductions. But a lot of it is also being driven by the efficiencies that are being generated through the consolidation of various operating organizations. Our development organization is now operating on a combined basis. So we have eliminated a lot of the duplicate development efforts we have had in the past. We have much more capacity and flow through and efficiency in our call centers, as we brought additional volumes from other parts of the company into those call centers. We are seeing a significant lift on the technology side of the business. Ram Chary, who heads up our technology, has done a phenomenal job in taking out expense in that piece of the organization. Not only by better utilization of mainframes and our server environment and also a mid range platform but by more cost effective negotiation of the various maintenance agreements and licenses we operate under. So it has really been a series of initiatives that started really last year that are producing really good strong results this year aided by some very aggressive cost management starting really at the end of the first quarter throughout the second quarter to make sure that we actually achieved the financial results that we communicated to the market or better.

If you look at it, we were pre-emptive really about a year ago in taking costs out in anticipation of what we thought would be a softer revenue environment which materialized. Coming into the year, we really felt the same way. So I would say it is really an ongoing effort by everybody to really tighten up spending, whether it's on the expense side or whether it's on the capital side. We're seeing the benefits in our cash flow and trying to lower our run rate going forward so when revenue does come become, we will get an even better margin pop.

Lee, if you can broadly talk about the spending environment by the bank customers, what pipeline activity looks like, any loosening of the purse strings or a real uncertain environment still?

I think it is still somewhat uncertain. We are cautious about the environment at least for the remainder of the year. The areas of spending that are being held back all center around software sales and the more discretionary products they might buy from our Company including hardware sales or hardware refits that we provide to institutions. So I think that will continue on at least through the end of the year.

As far as the sales pipeline, it is as strong and robust as we have ever seen it. Without question leading into next year, we are confident that a number of the deals we currently have underway or we're in the process of negotiating will close and produce some really strong benefit next year. There are at least five direct banks that are being organized or launched by financial service companies that we are right in the middle of. We hope to expect to close some of those later on in the year and others as we approach next year. So I think it is still the same story that we communicated in the first quarter. Cautious. They are not spending a lot right now. They are waiting until the financial strength of the bank improves. Once that does, I think we're going to be in really good shape going forward.

Thank you.

We'll go to Brett Huff with Stephens, Inc.

Good afternoon, Lee and George and Mary, and congrats on a good quarter again. Quick detail follow-up on the last call, can you characterize this big versus small, or however you want to categorize different size banks in the way the sales conversations are going? I'm not sure who best to answer that.

The hold back has more been on the end of the larger banks, that is looking at acquiring or purchasing professional service work from us or new software licenses. The smaller bank, actually the spending is pretty robust. It is pretty decent. It is not at great levels but it certainly isn't at the level of the larger banks. So more caution I would say at the upper end of the market than the lower end of the market. We are still cross selling a lot of our payment products into our core customer base. That hasn't dropped off significantly. It has been a little bit of a down tick but not significant. So I would say more skewed towards the upper end and the higher end of the mid market range that we service.

The second question is, it sounded like you feel good about international revenue in the second half of the year even on a constant currency basis. It is a little bit lower than where you guys were before. But even looking out into 2010, do you still have the same amount of confidence, saying that is really going to be the market that's going to grow a lot, more quickly, even beyond the Brazil deal, maybe core in Europe? Can you talk about anything like that as you look at your pipeline.

I think we remain optimistic about international. When you think about it we're covering several continents and multiple countries so there's lots of opportunities to sell. We are seeing an increasing propensity to outsource. So we are engaged in more conversations particularly in Europe. The pipeline for international remains strong. Obviously getting Bradesco fully converted will start to normalize the operations for that joint venture and we should see margin expansion along with that. The European markets seem to be less adversely impacted to date than what we have seen domestically. So we are encouraged by our outlook longer term for international and we think it will remain the fastest growing part of our business.

Without question, we think that.

One last quick question. It sounds like the expenses we are seeing now are a combination of things started in 2007 that you outlined, and then even 2008 and then even 2009. Do you see the same kind of layering over the next couple of years, or are most of the expense saves we are seeing going to taper off or is this continual cost improvement we should see over the next couple years, as well?

I think you're going to continuous improvement. It's just not going to drop off. There is still a lot of efficiency to be gained even if the companies were to operate long term individually. There is a lot of money we believe we can take out of the core operations. But the target and the real effort will be directed towards achieving the $260 million in cost synergies once we combine with Metavante. We are very comfortable and confident that we will be able to achieve that number collectively.

That's what I needed, thanks for your time.

We have a question from Tien-tsin Huang with JPMorgan.

Thanks, terrific jobs on the expenses. I wanted to ask about that. In Financial Solutions, George, I heard you mention the change in some of the allocation on the severance. Can we look at it sequentially because it was a pretty big $11 million sequential step-down in expenses within that segment. I just wanted to make sure that that is a good base that we can use going forward.

Yes. I think that is the base going forward, Tien-tsin.

So nothing else unusual beyond that?

No.

Just a compare from the prior year.

That's exactly right.

So the cost reduction, it sounds like it is pretty consistent with your plans. A question I have, I'm not sure how you'll answer it, but does the reduction in the cost here change at all -- I guess is the word -- the degree of difficulty in your ability to capture the cost synergies related to the Metavante deal? Because it does seem like a pretty large nominal improvement?

Some of the cost takeout that we've achieved will be directly related to the combination of the two companies that we had an opportunity to take out in advance of the combination, but there also is quite a bit of expense that is directly related to the core operating part of our business also and on a standalone basis. We will give you a complete reconciliation of it once we get the two companies together and hold our investor day which hopefully will be some time in November. So we'll give you that accounting. But the number you should really focus on is 260 and we will achieve that.

Maybe I'll just ask one more for you, Lee, just the impact of the new credit card legislation, in particular for your -- obviously for your card processing business, what kind of implications could that have in the near term and the long-term? I suppose there could be some systems updates that have to be done to meet those deadlines?

We do have some system work which we have started to work through. It's not going to be material in nature and I think we have our arms around that. And some of the system work we had to put in place will be shared with other customers that operate our software. So the net expense to FIS will be a little bit lower than what we initially thought. The good news with the base that we service in the US is they are primarily community institutions. They are not exotic in the way they administer their card programs. So in some cases there is not as much risk associated with the changes because they really don't go overboard. They're pretty banal in nature. So we will keep you updated on it. But it shouldn't be something our investor base should be concerned with. We will be able to complete that development work and it will not have a material impact on the growth of the business or the expense base of the business in general.

Thank you. Well done.

Our next question is from John Kraft with D.A. Davidson.

Good afternoon, nice work on the cost discipline certainly. I wanted to touch base on the change in your revenue portion of the guidance, that change in sentiment there. Is that simply those deals, George, that you talked about that were in the pipeline still but you didn't expect them to sign? Is that the difference there?

I think that's the principal difference, John. We have got deals and the markets remain volatile and to get them finished and signed is just taking longer. So as I said, we see some potential upside really more in the fourth quarter if we can get these deals closed. We did see improving trends on the card side this quarter, really both in debit and credit. I think the credit side remains negative but less so. One quarter is not an indication necessarily of a trend but it is encouraging to see the negative trends reverse. So there is some possible upside there, as well. But I would say it is principally related to our ability to get additional software sales and professional services deals done.

Fair enough. On that last point, the credit Q1 was down 5.4% and I thought you said Q2 was up 2.8?

No, it was actually down less, I think it was down 2.8% down. But up 9.6% sequentially. So we saw the negative year-over-year comparisons get less negative and the sequential comparison get much more favorable.

How did those trends change month to month in Q2 for both debit and credit?

We saw increasing improvement. June was the strongest month of the quarter, and again three months doesn't make a trend but I think we are more positive about the trend today than we were 90 days ago and hopefully we will feel that way 90 days from now.

Good to hear. And then the last one (multiple speakers)

I would say, the consumer remains under pressure and unemployment continues to rise. So we think realistically we have got a ways to work through the consumer spending part of the cycle and it'll probably lag the decision making that the banks do on the software and professional services side.

Sure. And just to clarify, the other income line, the $5.5 million, what was that related to?

That relates to dollar denominated notes we have got in Brazil and the FX effect in converting them. So what I said was basically that pickup was offset by the loss of about $0.01 on the conversion of our international operations EBITDA. So net-net, it kind of washes.

Thanks.

We will go next to Greg Smith with Duncan Williams.

I was just wondering if you can at all talk about any insight you may have into why the Department of Justice did the second request and what they are looking at and where they are maybe getting hung up?

I don't think they are getting hung up. I think, Greg, it has become more of a standard process that they have implemented with the change of the Administration. They want to be very careful and prudent with what they do. We don't expect any issues with it. We are complying with it. We are on schedule. We still expect to close the transaction in the fourth quarter. But I think it has become pretty much a standard, or will be a standard, into the future especially with companies that center around banking in general. So there is nothing we've seen that gives us any concern. We still feel confident about it and hopefully in the fourth quarter we will be a combined company.

Excellent. In the past you guys have given specific revenues around the potential impact from bank failures that have been announced. We certainly got some more since the last time you guys gave us any numbers. Has anything changed significantly on that front?

No Greg, it hasn't. We still have less than 1% of our revenue base at risk. I think most of the accounts with banks that have failed are still processing with us, they are still paying their bills. So it is insignificant so far. So we will keep our fingers crossed. But no material change.

George, you mentioned that it sounds like the swaps rolling off. Are you guys doing something with those swaps? In the fourth quarter this year it's going to add $0.01, but that begs the question about 2010, you getting potentially quite a large benefit, depending on what you do there. Any clarity you can provide, because I don't think that $0.01 implies an annual run rate of $0.04 as far as how that could benefit you?

That's exactly right, Greg. We will see more significant benefit in 2010. Essentially we have got $1 billion dollars of swaps expiring in October and $250 million expiring in December. As I said, we are looking at the combined companies' debt position and the fixed variable mix we want to maintain. Obviously there is a bias toward going more variable today because of the yield curve. We are weighing different swap lengths and we will see benefit in 2010. Obviously as part of the guidance we provide you with on the combined company, we will give clarity into our capital structure and the benefit we see next year. But I would say, it is $1.25 billion that is being repriced this year and then I think there is another $850,000 that comes due in April. So effectively all that debt gets repriced and we will be picking up, as you know, additional debt in the Metavante transaction. They are 100% swapped right now on a fixed basis. It is a bit of trying to manage through our outlook and the advisors we are talking with.

When do their swaps expire?

They actually go out, I think, until 2014. They are longer term. They have some that come due next year. So we are trying to not preemptively make decisions until we get more certainty on the timing of the deal closing. But when you add it all together, Greg, your point is on that we will benefit 2010 by having a lower average interest cost as we have talked about the objective of the combined companies is to pay down debt. So that should become a lower part of our cost structure.

We will get you the number Greg, once we get the negotiations done. But it is well north of the $0.04 that you were asking.

One last one, if I can sneak it in. I think George, you may have already mentioned this, but what was the sequential percentage increase in your credit card and debit card volume?

It was 9.6 in credit card and 9.3 in debit.

Thanks.

Next, we have James Kissane with Banc of America.

Lee and George, congratulations on a great quarter. If you look at the international business, if the revenue growth reaccelerates in the back half of the year, will you continue to drive margins higher there? As also, related, will there be a step-up in margins post the Bradesco conversion?

Jim, we achieved good margin growth this quarter. I would expect margin expansion to continue in Q3 and Q4. Clearly we have got to get the Bradesco conversion completed. It will realistically take 90 to 120 days post conversion to stabilize the platform. The MIPS utilization which has a cost to it. So as we look into next year, I would expect margins to continue expand in 2010 in international and exceed what we did in 2009. We targeted, I think, coming into the year getting into the high teens in international. That remains our target and I think that's achievable.

We should hit that target for sure in the fourth quarter. There is some seasonality involved and that gives you more leverage, so we will hit that goal, Jim.

On the 260 target with Metavante, have you eaten into some of that or will that all be incremental?

Some of the expense that we took out this quarter, you should attribute to synergy expense takeout that we took out in preparation for the combination of the two companies. Again, we will give you a complete reconciliation of that but by no means was it a substantial portion or the majority portion of the leverage in the expense takeout that we had in the business in the second quarter.

You may recall, Jim, we announced the deal on April 1st and we had made an assumption of a July 1st close, and obviously with the second request it extended it probably a quarter or so. So I think both companies have been working together on organizational design and trying to get as much ahead of this as we can and obviously that is the story we will tell post combination.

Just one last question, I've got a detail question. Bill payment growth, George, in the quarter, did you do that? Did we miss that?

We have got to dig that out.

While you are doing that, it sounds like some of the revenue compression in the back half is related to software, timing. So it sounds like the impact on the bottom line could be disproportional if they do come through. Is that (multiple speakers)

No. We've looked at that and we are comfortable with what we are going to have in terms of additional expense takeout and leverage for the remaining quarter. So you shouldn't view that as material or significantly impacting the profitability of the business. We missed software sales this quarter also that we had in prior quarters, so it is not something that just ramps up and starts.

Jim, bill payment growth was about 7% in the quarter.

Thank you very much.

We will go to Julio Quinteros with Goldman Sachs.

Just to go back to one point of clarification, the 9.6 and 9.3 for credit and debit, were those quarter to quarter or year over year numbers?

That was sequential.

What are the annual comparisons on that?

The year-over-year you mean?

Yes.

Credit was negative 2.8 and debit was positive 7.3.

Then just to go back to the commentary on the revenues, and I apologize because I had to switch back to your call here. I caught the tail end on what you were talking about on large banks versus small banks. Can you rehash that? I think I heard you say that the big banks are holding back but the small banks are doing okay, and I'm trying to understand what okay means for the small banks in terms of spend.

Most of the software purchases we have with our customer base are driven through the large banks. The smaller banks generally don't buy software from us. They outsource their processing to us. It's a requirement really to operate the banks. So you don't see a lot of variability in the revenue stream that we generate from that segment. So really the vulnerability, or the weakness, is at the upper end of the market traditionally with larger institutions that would purchase software or programming services from us that are discretionary that they can push back and not materially affect the operation of the bank. So that's really the difference. Most of your products and services that a community bank offers, as you know, are outsourced to a third party. There is not a lot of variability with that group in how they buy their services or whether they can just push services or delay them. They just can't.

So then you are tied more to the annual volume trends depending on what they are. Right?

That's correct.

Looking ahead, one of the bigger topics here, especially in the small and medium size banks, has been this rollover from the consumer to the commercial side as we look at the exposure on commercial real estate, commercial credit, et cetera. Are you seeing any signs that that could add another level of constraint potentially with some of your small to medium sized banks that they decide that this is something they can't afford to really deal with and therefore there's not as much spending? Is that a part of what's imbedded in the costs in the back half of the year here?

No, it is not. We don't expect a material change from the first half to the second half with community banks, so, no, that is not factored in. We don't think that will be a significant problem. Yes, there will be some banks that will be affected, community banks but all-in-all, by and large, community banks are still doing relatively well and they're still spending at a reasonably strong clip.

Next, we have Roger Smith with Fox -- FPK.

Hi, thanks very much. I want to go back to the operating efficiency here again and make sure I understand this, and I think you touched on this a little bit, Lee. But when you talk about the software and professional sales, when they come back in, is there any difference in the operating or EBITDA margins there compared to what we have on a recurring revenue basis or will that really just continue to improve?

When the software purchases are made and come back in, they come on at very high margins. So there's going to be improvement in profitability and margins as they start, as those sales start to strengthen. So yes, you will get more leverage once they do come back onboard.

So when they come back, we should even have more increase in the margin expansion?

I think depending on the period you look at. Keep in mind that software sales are traditionally lumpy. You might not see it on a consistent basis but when you do sign major accounts, they're going to come on strong. Last year we had a phenomenal year in terms of software sales. We sold close to 11 banks that had assets over $50 billion worldwide. And we didn't get that benefit this year. But by no means are we saying that the demand isn't there. It is there. They are just pushing back and that will come back as the market improves.

Great, and that is the second point I want to try to understand it. When we talk about the market improving and how long that might be. By the banks not doing this, really I'm assuming that they end up being in a less competitive position because their product or what they are doing just isn't as good. Who ends up seeing that and how would we as consumers of a bank notice that? How do we know that the banks can't just push this off for a longer period of time and try and make it work with what they have now?

If their goal and objective is to cut costs and get rid of expense and become more efficient so they are more profitable, there are very few ways they can accomplish that short of, number one, raising prices to the consumer, which obviously doesn't work, or putting in better technology so they can operate more efficiently. So, yes, they can push it off for a period of time, but many of the things they're pushing off directly impact the consumer if they are not put in place. The ability to not offer new product capabilities and compete with the bank across the street. The ability of not being able to offer a competitive price on their products because their cost structure is too high. There is just a whole [myramid] of things that will eventually catch up to the bank.

You can look at it this way, the banks just have cut their spending and they're not going to be able to do that and survive on an ongoing basis. They have to improve their risk management systems to get profitability increases, they've got to improve their technology capabilities and they've got to be able to serve their customer. If they don't do any of those three, they're going to deteriorate and they're not going to grow going forward.

Everything we have seen in our conversations with our top tier banks is that sometime toward the end of the year, as we roll into next year, we will see an improvement. That's for the traditional larger tier bank. There is a segment of banks that are going to purchase regardless of the economy and those are the new direct banks that are being formed by financial service companies, and there is a number of those that we have underway that we will start to see drop towards the end of the year and into next year. So we still feel pretty good about it. They're not going to be able to push this off forever without directly affecting the quality and health of the bank.

The last question is on the international. When I look at the margins there on a constant currency basis, they looked like they were 17.1% in the quarter versus the 16.5%. What I want to know is you talked about the guidance and the constant currency numbers being less impactful in 2010. Would we then necessarily see an increase in that operating margin by 50 to 70 basis points, somewhere in that range, from just a smoothing of the currency?

I think what you will see, Roger, next year is maybe more of a normalization of the international margins as it gains more maturity, particularly in Brazil. So I think the margins should sequentially grow from the 17.1% that you referenced in your comment for the balance of the year. I think as we get into next year, while there is some seasonality quarter to quarter, I think we will see stronger margins in 2010 than we saw in 2009. So we will see overall margin expansion overall.

Great, thanks very much.

Our next question is from Bryan Keane with Credit Suisse.

I got on the call a little bit late so just a couple of clarifications. How much, George, of the $260 million of cost savings or synergies were realized this quarter?

We are not in a position to quantify that at this point, Bryan. What we said earlier was that both companies have been working together in anticipation of the deal closing. The deal got delayed because of the Justice Department second request. We are continuing to work on integration planning together and our anticipation at this point, assuming we close reasonably early in the fourth quarter, will be to host an analyst meeting in November and obviously give all of you a lot better insight into our path to get the 260 accomplished.

Okay, but some of that 260 will also be in the third quarter, this quarter upcoming?

Some of it will be, and we will give you a complete bridge to what we took out that is synergy related to the 260 target.

Just on the revenues, the international constant currency revenue was flat. That has been averaging double digit. I just wasn't sure why it fell back to flat.

We had talked about this on the last quarter. We had several software deals and implementations in Asia Pac and Europe and then we had the ABN conversion that occurred down in Brazil. So we had a disproportionately strong quarter last year that we said coming into this quarter would be a tough grow over. I also said that I anticipated that double digit growth to resume in the third quarter.

Software sales were down 30%. Did you say what professional services were down? And then maybe a total percent of revenue for software and professional services now?

Professional services were down about 20%. That has been consistent, really, both for the quarter and year to date. So if you think about those two parts of our business, historically software has been about 4% of revenue. So round number is $120 million to $130 million and professional services have been about 8%. So you just double that. Those are the two parts of our business that are more discretionary, and the parts where, while the pipelines are there, our conversion ability just hasn't been there because of customers' delays in making decisions. I said that's where there may be some potential upside in the fourth quarter if we are able to get those deals across the finish line.

I think what is notable is we achieved this margin expansion in the face of losing an amount of software revenue that contributes almost 100% incremental margin for each dollar of revenue. So as we look forward and we get back to a more typical market, we think there is a lot of margin opportunity when we start to get those deals done and still have the cost structure in place that we have.

And I'll just ask Lee, any idea when that more typical market might be? Fourth quarter? First quarter? Or is it just too early to call?

We keep on seeming to move it back every six months, but hopefully as we approach midyear next year, get into the second quarter of next year, I think we are going to see some more material improvement. However, we will sign some of the larger deals, we think, again, in the fourth quarter, and as we approach the first quarter of next year. So they haven't dried up completely. We just haven't gotten back to the normal rate of growth that we've experienced and enjoyed for the previous three years, but we will get there.

Congratulations on the very solid operating results.

Our final question will come from Andrew Jeffrey with SunTrust.

Thanks for taking my question. When you look at Metavante and some of the expense success you have had, can you talk about cost integration expenses? You have referenced having taken out potentially some costs. Has there been any incremental spend, either expense or capitalized, aimed at putting the two companies together? And how would that trend over the next few quarters? Is it a net decline or are you going to be able to parse that for us?

Andrew, I would say there has not been any meaningful incremental integration spending by FIS, certainly. I can't speak for Metavante, I don't believe they've got it. We've both incurred transaction related fees which have been principally professional services based. We have incurred some severance in the quarter. We picked up north of $4 million in severance that we absorbed as part of the cost actions we took, which is about $0.01 a share and then they may have some of that, as well, but you better ask them about it. But I think you will see more of that as the companies come together and we can more formally complete the integration we have been talking about for some time now.

Would you envision having explicit integration expenses or does it all get absorbed by --?

There will be integration expense that we'll separate from the core business and identify so you can get your arms around it. We will be able to provide that sometime hopefully in October. But there will definitely be integration expense, and that points to severance and a number of different things -- relocation, some work on systems -- and we will have a lot of things we will do on branding and things like that. So we will get that bucketed. It will hopefully be short in duration and will not stretch out over a significant number of years. In most cases with major acquisitions we get through that within the first six to 12 months and we don't expect anything different here. So we will get that identified for you, Andrew.

As far as the long-term growth trajectory of the business, when we see a normalized spending environment, do you still think about the combined companies as being a 6% to 9% organic revenue growth business with operating leverage?

Yes. I think we haven't backed off of the 6% to 9%. Up until a significant downturn in the economy, we were exceeding that. In fact, if you look at the last four years, and look at the first three or so, we'd beat it every year. We expect our competitive position to strengthen once we put the two companies together. That's why we are doing this. So yes, we think that is achievable once we get back to a normalized environment because, quite frankly, Metavante and FIS have done that year in, year out, so we don't think anything will be different there.

Thank you.

Thanks everyone for joining us today. We'll look forward to talking with you soon.

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