Fidelity National Information Services Inc (FIS) 2010 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the FIS second quarter earnings conference call. (Operator Instructions). As a reminder, today's conference call is being recorded. And with that, I would now like to turn the conference over to Senior Vice President of Investor Relations, Mary Waggoner. Please go ahead.

Thanks to everyone joining us on the line. Today's earnings press release and supplemental slide presentation have been posted to our website at www.fisglobal.com, and a webcast replay of the audio portion of this call will also be available on the website shortly afterwards.

Joining us today on today's call are Frank Martire, President and Chief Executive Officer, Gary Norcross, Chief Operating Officer, and Mike Hayford, Chief Financial Officer. Frank will lead today's discussion with an overview of the leveraged recapitalization plan and a summary of second quarter results. Gary will follow with the operations review, and Mike will conclude with the detailed financial report.

Please refer to the Safe Harbor language on page two of the presentation. Today's discussion will contain 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 undertakes no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise, except as required by law. Today's comments will also include 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. Unless otherwise stated, references on this call to revenue and EBITDA growth rates will be on a pro forma basis to include results from Metavante in all periods.

I will now turn the call over to Frank Martire.

Thanks, Mary. Good afternoon, everyone, and thanks for joining us on today's call.

I will begin with a brief summary of our recapitalization and share repurchase plan. On May 25, FIS announced a leveraged recapitalization plan under which the Company will repurchase $2.5 billion of common stock at a price between $29 and $31 per share through a modified dutch auction. As previously disclosed, the FIS Board of Directors received a proposal regarding a potential leveraged buyout of the Company, and appointed an independent special committee to evaluate additional alternatives as part of the due diligence process. After a thorough evaluation, the Board concluded that the recapitalization plan is the best alternative to return value to shareholders today, and to also preserve future upside potential. We officially launched the offer to purchase on July 6, and expect to complete the share repurchase the week of August 9. We have completed the financing needed for the tender offer, and we are very pleased with the increased financial commitment from our existing lenders and the highly successful marketing efforts for the term loan B and senior notes, which closed last Friday. The new debt structure provides FIS with the capacity to complete the tender offer and manage the business on an ongoing basis.

Now I will continue with the business report. Overall, we are pleased with the solid second quarter results, which were in line with our expectations. Second quarter revenue increased 2.4% to $1.29 billion, compared to $1.26 billion in the prior year, and increased 1.7% in constant currency. The EBITDA margin expanded 140 basis points to 29.9%, driven primarily by synergy cost savings. Adjusted earnings came in at $0.46 per share, and pretax loss totaled $108 million for the quarter. We continue to make good progress on our integration plan, and we remain on track to achieve the synergy cost savings of $260 million.

Year-to-date sales have been solid, and the pipeline remains strong. We have been especially pleased with the number of new core processing agreements. We have signed 39 competitive core deals in the first six months of 2010, compared to a total of 50 for all of 2009. We are clearly gaining market share, and we continue to expand our presence in the mid-tier market, where our product capabilities and scale provide us with a significant competitive advantage. In addition, the demand for professional services has increased considerably as banks turn to FIS to support their IT efforts, and for assistance with acquisition and consolidation-related activity.

In May, we hosted two very successful user conferences, in Milwaukee and Orlando, with more than 2,000 existing and prospective clients in attendance. The outlook expressed by clients has improved considerably, compared to last year. And their discussions with us have shifted towards investing for growth and better competitive positioning in 2010, and away from bank failures and survival of the industry.

Before turning the call over to Gary, I would like to provide an update on our Brazilian card operation. I am pleased to report that we have agreed to terms and are working with Banco Bradesco to finalize a definitive agreement. The strength of our relationship with the bank became even more apparent to me during my recent visit to Brazil, and we look forward to future, further expanding our relationship.

Now, I will turn the call over to Gary for additional details on the joint venture, and a review of our second quarter operating highlights. Gary?

Thank you, Frank. And thanks to everyone on the call.

I am pleased to be joining you today to provide an overview of the second quarter operating highlights. I will begin with a few additional comments about our Brazil joint venture, then I will briefly discuss our competitive positioning, highlight some of our key client wins, and conclude with a few thoughts about the regulatory landscape.

First, I will cover the Brazil joint venture. As Frank indicated, we have executed a term sheet, and we expect to negotiate and sign definitive agreements in the second half of 2010. We expect that FIS will continue to operate the joint venture in partnership with Bradesco, delivering services to Bradesco as well as other commercial clients. We are planning and working towards a fourth quarter conversion of Bradesco's Visa and MasterCard portfolio. In April, we reported that we converted over two million cards issued by Bradesco through Visa Valley. As a reminder, Visa Valley is the country's largest payment network for employee meal voucher programs. We are pleased to report that we converted the remaining three million Visa Valley cards belonging to Banco de Brazil and sent them there in May, approximately four weeks ahead of schedule.

Now I will continue with the business report. Earlier, Frank mentioned the success we are having in signing new core processing clients. In addition to providing highly reoccurring revenue streams, these relationships drive significant pull through revenue. A large portion of the total contract value associated with these new clients will be generated by the ancillary core products and payment services that were bundled as part of the sale. This illustrates the importance of having a broad product suite, and the scale and capacity to drive value to our clients.

Yesterday we announced a new core processing agreement with Sterling Savings Bank, a $10 billion institution based in Spokane, Washington. Sterling, a long-time payments client, will migrate to our core processing platform, which provides a full suite of integrated technology solutions. Including Sterling, FIS has completed eight new mid-tier processing agreements in 2010. We also continue to expand relationships with tier one institutions, and we will soon begin providing expanded bill payment services to one of the top four banks in the country. This is our second bill pay deal for a top 25 bank in 2010.

In the community banking space, Rockland Trust Company, a long-time core processing client, recently selected our item and image processing solution which we will provide on an outsource basis. This is further evidence of the success of our integration efforts, as we bring these companies together and leverage our combined product suite.

As Frank mentioned, we are also seeing an increased interest for services engagements, and we are continuing to add resources to keep pace with this demand, including the build out of our new service center in the Philippines, that we discussed last quarter. On the international front, we continue to see solid sales over last year and continued success in the installation of these systems. An example of the successful launch is VTB24, the largest retail bank in Russia, which recently went live with the Profile Four banking suite.

Now I would like to share a few thoughts about the recent passed Financial Reform Act. While it is premature to know how banks will react to the changes, I will provide our views regarding the potential impact to FIS, based on our initial analysis. The new interchange regulations, which take effect in the third quarter of 2011, are primarily debit focused and apply only to banks with more than $10 billion in assets. Since interchange is primarily a pass through for FIS, there is minimal impact to our bottom line. We expect the Durbin Amendment provisions, which include priority routing and exclusivity limitations, to be neutral to FIS overall, as any potential downside related to changes in merchant routing is expected to be offset by increased volume processed on the nice network. The new restrictions on overdraft fees will have minimal impact on FIS. While we provide the technology that enables banks to process consumer overdrafts, we do not receive any portion of the overdraft fees. Historically, changes that require banks to refresh or upgrade systems to comply with new regulations have created opportunities for FIS to provide new services to clients.

To summarize my remarks, while the market remains very competitive, we feel good about business overall. Our sales team is doing a great job identifying opportunities and closing new deals, and our people in the field are keenly focused on maintaining high client satisfaction levels. At the same time, our operations team is doing an outstanding job with the Metavante integration. And as always, we will continue to work with our clients to meet their business needs and help them remain successful.

Now, Mike will continue with the financial report.

Thanks, Gary.

I will begin slide five in the supplemental materials. Just as a reminder, my comments related to year-over-year growth will be on a pro forma basis to include Metavante results in the prior year. On slide five, as adjusted revenue increased 2.4% to $1.29 billion compared to $1.26 billion in the prior year, this increase was 1.7% in constant currency. The growth was driven by higher license sales and professional services revenue, which more than offset difficult comparisons in the second quarter of 2009. Adjusted EBITDA increased 7.2% to $386 million, and the EBITDA margin increased 140 basis points to 29.9%. This growth was driven by integration synergy savings. As Frank mentioned, we continue to execute on the integration plan for the Metavante merger. We again met our synergy savings goal, which was $40 million in the second quarter. This is our third quarter since the Metavante merger, and we continue to be pleased with the integration efforts which met the expected savings as scheduled.

If you turn to slide six, I will provide additional detail on our second quarter segment results. The financial solutions revenue increased 3% to $458 million in the second quarter of 2010, compared to $445 million in the second quarter of 2009. The growth was driven primarily by strong growth in professional services and high license revenue. Financial solutions EBITDA increased 5% to $201 million, and the EBITDA margin increased 90 basis points to 43.8.

On slide seven, payment solutions revenue totaled $631 million, which is comparable to the prior year. Payment solutions revenue increased 4.5%, if you exclude our paper-based check businesses. Debit and credit transaction volumes continue to trend favorably. Payment solutions EBITDA increased 4% to $232 million, and the margin improved 140 basis points to 36.8%.

Turning to slide eight, international revenue increased 8% on a reported basis, and 3.1% in constant currency. International EBITDA increased 1.1%, international margins declined 130 basis points to 18.1%, compared to the prior year, and declined 40 basis points in constant currency. International revenue growth has been lower than we anticipated coming into the year due to the delay in converting the Bradesco card portfolio. As we had previously discussed, the deconversion of Santander and the delay in the anticipated conversion of Bradesco have had a negative impact on our international segment's financial results in 2010. With the positive momentum around our JV discussions Frank and Gary both shared earlier, we are now looking at a potential conversion by the end of the year. While this is a positive outcome for the business looking forward, Brazil continues to have a negative impact on our 2010 results.

Please turn to slide nine for a reconciliation of adjusted net earnings. Second quarter adjusted net earnings totaled $176.5 million, or $0.46 per share, which was in line with our expectations. These results exclude after tax purchase amortization of $42 million, and $41 million in after tax merger, integration and recapitalization costs. The deferred revenue adjustment was $3 million after tax in the second quarter. Average shares outstanding increased $384.6 million in the second quarter.

As shown on slide ten, adjusted free cash flow totaled $108 million in the second quarter. As discussed on last quarter's call, second quarter cash flow is impacted by the timing of federal tax payments. Capital expenditures, which included $12 million of integration capital, totaled $76 million in the quarter, compared to $79 million in the second quarter of 2009.

Page 12 is a summary of our debt, after the refinancing activity. As Frank shared, we completed the refinancing on Friday of last week. This includes amending and extending our existing bank loan and revolver. We also raised more than $550 million of additional bank debt. We raised $1.5 billion in term loan B, and $1.1 billion in senior unsecured notes. With the proceeds, we paid off the Metavante term loan, and we used $2.5 billion for the share repurchase. The cost of our $5.6 billion of debt using the current LIBOR rate is approximately 5%. The number of shares we anticipate to repurchase will be between 81 million and 86 million, using the $29 to $31 range of the modified dutch auction tender.

While we will not provide 2011 guidance until the end of the year you should note, as we have indicated in the past, that our cost of debt in 2010 prior to the recapitalization was an anomaly, and that 2011 would have been a full-year rate similar to our current refinanced rate.

constant currency growth at 1% to 3%, and EBITDA margin expansion greater than 300 basis points.

As indicated on slide 14, we are now contemplating a currency benefit of $15 million for the full year, compared to a $60 million per our original guidance. This is due to the continued weakening of the euro and British pound against the dollar. This implies a second half head wind, predominantly in the fourth quarter, due to the currency exchange. We expect to generate approximately $700 million in free cash flow, which includes the impact of our higher interest costs due to the recap. The recap should be $0.01 to $0.02 accretive in 2010, predominantly in the fourth quarter, and it will have a meaningful impact in 2011. At this time, we continue to anticipate a full year tax rate of 36%. That's previously guided with the expectation that the tax legislation, including the R&E credit, will be extended retroactively prior to the end of the year. We are assuming a 37% tax rate for Q3. Average shares outstanding should approximately -- approximate $350 million for the year, compared to our previous guidance of $378 million, after recap is taken into account.

We would like to leave you with the following take-aways from today's call. First, we are pleased with the first half operating results which were in line with our expectations. Similar to prior years, the ramp will be steeper in the second half and skewed toward the fourth quarter. We are cautiously optimistic about the remainder of the year but, like all companies, continue to look for signs of a sustainable recovery. Second, execution on the integration of our merger with Metavante continues on schedule with second quarter synergy payment on plan. Third, we are pleased with the significant progress made on the Brazil joint venture and are excited about the prospect of converting Banco de Brazil -- Banco Bradesco's remaining cards prior to the end of the year. Fourth, as Gary mentioned, we are focused on helping our clients navigate the changing regulatory landscape, but at this time do not expect recent changes to have a significant direct impact on our business in 2010. We will continue to monitor any changes in bank spending due to the financial reform act. And last but not least, the recapitalization and share repurchase plan, which we expect to complete in the week of August 9, should generate $0.01 to $0.02 accretion in 2010 and meaningful accretion in 2011.

This concludes our prepared comments. Thank you for joining us this afternoon and, Operator, you may open the call for questions.

(Operator Instructions).

Our first question is from the line of Glenn Greene with Oppenheimer. Please go ahead.

Thank you. Good afternoon and congratulations on the results.

I was wondering if you just sort of give us a little bit more color on sort of this spending background and what you are seeing from the bank market. The commentary definitely seems much more positive than six months or so ago. We don't really see it yet in the revenue results. Is that just a function of conversion cycles? The core business -- seems like you are winning a lot of take away deals. Just some more color regarding sales activity and the commentary regarding the software and professional services increasing in the quarter.

Yes, Glenn. This is Gary. We are seeing an increase in spending in the financial marketplace, both not only domestically but internationally. We have got a very full pipeline. We continue to, as you highlighted, sign a number of significant take aways. Our systems do take a number of months to come online. Once you sign the deal, you can model anywhere from typically on average 12 months, for the revenue to start really flowing through our systems as we go through conversions of these systems and implementations of these systems.

Are we close to a point where you think 2011 could be closer to a normal organic revenue growth environment, or is that too optimistic?

This is Mike. I think we will talk at the end of the year. We would certainly like to get through 2010, we'd like to see how the economy keeps recovering. We've talked about stronger transaction volumes. We continued to see that in the second quarter. We would like to see that in the third and fourth quarter. We would like to see, as Gary talked about, the sales build up and that gives us some head license to 2011. But we will hold off until the end of the year, and then we'll give you our expectations for 2011.

And then finally, on the Bradesco, is there any way to contrast at a high level what the relationship may look like going forward relative to what it was before, or your assumption before?

Well, as we mentioned, we have signed a term sheet and going through the process and negotiating definitive agreements, we will maintain 51% ownership in the joint venture. So the joint venture will stay intact, and we will be processing Bradesco's card volumes through that joint venture.

Okay. Thank you very much.

Our next question is from the line of Dave Koning with Baird. Please go ahead.

Hello, guys. Good job.

Thank you.

First of all, Q3 is a very easy comp in professional or -- I am sorry -- in both the payments and financial solutions businesses. Should we expect Q3 to be the peak of growth, just given how easy the comp is compared to last year?

David, I know it's a little bit easier comp than Q2 was. We would expect to see, you know, sequential growth quarter to quarter and then obviously we got a big ramp up in the fourth quarter. I don't know, for modeling purposes, whether you would see that as the peak. If you look at the plan, the way we built it, we're still looking at a pretty solid fourth quarter, so I don't know if third or fourth will be the peak, to tell you the truth.

Okay. And then secondly, the payments business, the growth was very good excluding the check businesses, and I am just wondering how big in terms of revenue are all of the -- all of the verification item and all of the check businesses combined?

In some of our decks that we have out there we show you the magnitude on the pie chart. But I think it is less than 10% of our overall revenue stream, if you look at it that way.

Okay. And getting smaller I would imagine, obviously.

Yes.

And then I guess just the last thing, you mentioned $0.01 to $0.02 accretive from the repurchase during Q4. Is it fair just to multiply that by four into next year, or are there some things maybe you could outline what might diverge from just doing that simple math?

I would not do that. I mean, you have to look at 2010, it's the weighted average number of shares for the full year, that's going to drive the $0.01 to $0.02. $0.01 to $0.02 is going to depend a little bit on the price range we get it back at. You've got the timing of -- we raised the financing prior to buying back the shares. So there's a lot more complexity in 2010. I think (inaudible) we are trying to have you look at -- how we look at is we look at, we would have been refinancing our debt in 2010, heading into 2011, as we have shared in the past, because our debt would have come current in 2011, matured in early 2012. So as we look at it accretive, we look at here is the cost of debt we would have had in 2011, which would have been similar to the rate that we ended up refinancing at. We look at the added $2.5 billion of debt that we put on, less the shares that we're buying back, and you can kind of do the math and come up with a number, but it is definitely higher than the $0.01 to $0.02 multiplied by four.

Okay. That sounds right. That's great. Thanks.

You're welcome.

Our next question is from Brett Huff with Stephens. Please go ahead.

Good afternoon and congrats on a nice quarter.

Thank you, Brett.

First question is, can you talk about the way the conversations are going and the drivers for banks buying, I think you said, 39 core systems. It sounds like it is across both small, medium and large. But what is the driver that folks are pulling the trigger on?

There was -- this is Frank -- there's several things that they look at, but I'll tell you the most important to them, the most important is strategically and directionally they look five years out and they say we have to be competitive. And to be competitive in the marketplace they need products that will keep them competitive and a service level that will do that for them. So first and foremost, they want to be competitive, they want to have products that will service their needs of their customers long term. And then, obviously, they do look at price. You have to be competitive on price. They look very much at the integration of the products, the fact that we bring our core products together with our payment products, and they are totally integrated, that's very, very important to them. Those are some of the drivers they look at.

Thanks. And then second question, can you tell us -- I think last quarter you told us that about 30% of sales had been cross sale related. Do you have a similar directional measure for this quarter?

Yes. Brett, this is Gary. We continue to see very strong cross sales between the two companies and revenue synergies as part of the combination coming together. As we have discussed on prior calls, 75% of our sales are generated through additional products and services to existing clients, but we continue to see strong pull through between the two companies in revenue synergies, very consistently in line with what we saw last quarter.

And then, just on the debt. In the exhibit you gave us, and thanks for that detail it's helpful, is there any swap costs included in there? And have you articulated or are the agreements articulating a certain amount of debt that needs to be swapped?

No, David. At this time we didn't include the swap cost in there. And we continue to look at how much of that debt we would fix, you know historically we have fixed going forward, to try to get certainly look forward 18 months through a budget cycle and fix our interest rates. So you can probably expect to see us do a little of that.

That's what I needed. Thanks for your time.

You're welcome.

Thank you. Our next question is from Ashwin Shirvaikar with Citi. Please go ahead.

Hey guys, congratulations on the quarter.

Thank you.

My first question was on Bradesco, and just if you could talk about the incremental impact of Banco de Brazil headed into 2011, that would be helpful.

Why don't we hold off on 2011 until we get, we will get to the end of the year, and then talk about guidance for the whole business. If you remember in 2010 we talked earlier in the year, that when Santander was going away that left approximately a $40 million revenue hole in our business down in Brazil, and we said we anticipated with Bradesco converting, that would fill that $40 million. So, Bradesco not converting, obviously, continues to create a $40 million negative impact to revenue in 2010. As Gary shared, we are working through the timing of the conversion. If we get them converted before the end of the year, we will pick up some of that $40 million, but as I mentioned, Brazil, the joint venture, has been a negative, based on where we thought we were going to be heading into the year, but even within that we have always said we can still meet our guidance goals, even with that $40 million hit.

I guess the point I wanted to clarify was that the, the Banco de Brazil piece would be incremental to that $40 million?

Great. Banco Bradesco, not -

Sorry, the incremental that you had on top, did that -- that you talked about, the agreement that Banco Bradesco now has with Banco de Brazil. That's what I want to talk about.

We talked about when we add Bradesco at the end of the year.

Yes.

You can look at that, based on what we shared, is we anticipate that -- that would have been a $40 million revenue stream in 2010, had it converted on schedule. So assuming it converts by the end of the year, that will help us with growth in 2011. But we haven't talked about Banco de Brazil in any of our Brazil discussions.

The last question, on free cash flow, I might have missed it, but what was the impact of the federal tax payment specifically? And just to clarify, is that sort of an intraquarter factor that should not affect full year free cash flow?

Definitely correct. It is a second quarter, intraquarter timing issue, that we had the two payments, which happens every year, they have come in the second quarter. You pay at your normal withholding and you pay your taxes that quarter. So, that's what we expect every year to have that double hit in the second quarter.

Okay.

On a full year basis, it does not change our full year outlook for free cash flow.

Okay. Got it. Thank you.

You're welcome.

Our next question is from David Parker with Lazard Capital Markets.

Yes, hello. Good afternoon.

Hi, David.

Just to follow up on a previous question, you had originally stated that you had anticipated the debt cost to be around 6% to 7%. What, with the blended all-in rate for 2011 given some of these swaps peeling off and also with the up-front yield costs, what are you anticipating now?

Well, again we think approximately 5%, again we haven't factored in any swaps at this point, but the refinancing all-in, the $5.6 billion, ended up right around 5%.

Okay. So it is not going to be much higher with the swap cost.

No.

Okay. And then just have you finalized the settlement with Santander yet? I believe last quarter you put $35 million into escrow, but you didn't recognize it?

No, we have not. That, when we get to, Gary talked about we have got a term sheet, that we agreed to terms with Bradesco. When we get to contracting with Bradesco, that's tied in with the Santander settlement, so we'd expect that again by the end of the year as well.

Okay.

And you're correct, we have $35 million hung up on the balance sheet, we have not booked it into revenue, it's being held in escrow, and we do expect some additional terms fees to come, as part of the settlement.

Okay. Great. Thank you, guys.

Thank you.

Our next question is from Greg Smith with Duncan-Williams.

Yes. Hello, guys. What -- how should we think about debt pay down? Should we assume that you are going to immediately be paying down some of this debt? And if so, which component of debt would that likely be?

I think we've -- you've seen us, we did this before, we did the combination of Metavante, we had some leverage and then we went and paid that down. Our expectation, in terms of financial policy, again, is that we'll look at managing the debt. We've got mandatory paydown, and then to the extent that we would expect to pay some down, a little bit tied into whether we find some small transactions to do here and there, but our expectation over the next two years is to pay down some debt. We paid down on the term loan A, we'd probably pay off the term loan B next.

Okay. And then, the joint venture structure with Bradesco, that seems to be a bit of a surprise. I thought last quarter you were saying they wanted to end the joint venture because they were the only partner, and now it sounds like you are keeping it with the expectation of growing it under that structure. Is that the right interpretation?

Yes -- no. This is Gary. That is the right interpretation. This has been a complex negotiation. We have had -- we've got a great relationship with Bradesco, and the fact of the matter that relationship continues to get stronger. And Bradesco has continued to look at various alternatives and what made the most sense. As we have shared with you on other calls, in no situation was there ever a scenario discussed where FIS was not a part of an ongoing relationship, whether it was through a joint venture or commercial terms. And at this point in time, as we said, we have reached agreement to continue with the joint venture and us to continue with 51% ownership.

Yes. Okay. At least it is simplifies things. And then the card volumes, you have quantified that in the past. I was wondering if you could give any numbers, or at least how did they kind of progress on a monthly basis? It seems like it may have slowed in June, but did you in fact see that?

We don't get into the monthly, but what we did see is debit up continues to grow strong, debit transactions north of 15% growth year-over-year, and then credit as we saw a little bit last quarter, the second quarter, growth over 5%. So credit is actually doing well for us as well.

Okay. And then, I doubt we can get this, but is there any chance you can come up with a bookings number, just a new sales number, aggregated all together or something like that, any chance we can get something like that?

Well, I mean we have a bookings number, we do contract value and Gary and his team track that very religiously, we incent people, as you might expect, we manage to it to generate future revenue growth. But we are not going to share those kind of numbers. It gets a little hard because of all of the different businesses, and the timing of when that backlog actually gets booked into revenue, the duration of the different contracts. So we, we talk about kind of the success of sales year-over-year versus prior year, but we don't share the actual backlog number or the total contract value that we are signing each quarter.

Okay. Thank you.

You're welcome.

Our next question is from Bryan Keane with Credit Suisse.

Hello. Good afternoon. Just going back on the Bradesco deal, is there a way to think about how the deal is going to look going forward, compared to what originally you thought before the discussions came about about maybe breaking up the JV? It sounds like it is back to what the original plans were, and the only major difference here is that instead of starting this year it will just start next year, is that fair?

I think that's fair, Bryan. You know, we will be coming with a lot more details when we sign the definitive agreements, and as we have stated several times, we will get that done this year. But, all in all, I think the overall relationship will stay very consistent with where we were in the past, and Bradesco will convert their MasterCard and Visa portfolio onto the platform.

Is it fair to say then the international revenue growth in constant currency is probably going to be a little less than you guys expected originally, as a result of this. I am curious since you reiterated guidance, where is that being made up? It looks like the financial services group has been pretty strong.

That's a good way to look at it again. International in 2010 has that $40 million hole that, if we get Bradesco converted before the end of the year, we will feel a little bit of that, but that's creating a little bit of drag international. FSG's had a real strong year, year-to-date. So we're -- Gary talked about the deals and the success in the market we're having, but I think that's a good way to look at it.

Okay, and then just two clarifications. Did you guys give the amount of synergies in the quarter for Metavante?

No. We have shared, as part of the outlook for the year, that second quarter we expected to attain $40 million, and so we talked about as we met that goal. We are not going to give actual numbers each quarter as we go through it. For the full year, we expect to end up the year at $212 million, which is incrementally $150 million better than last year, so the $40 million goal this quarter, we are very pleased, we are hitting our numbers, slightly exceeding every quarter. And at the end of the year we will give a recap of where we stand.

Okay. Then just lastly, there was a $23 million term fee I think in a year-ago period. What segment does that show up in, in the results, for comparison purposes?

[inaudible] that was a large outsourcing deal of a bank that got acquired, and so we got a large term fee. And the term fee falls where the business was that we lost. So it hit both segments.

Okay. Both of those segments. And the other term fees you are expecting to get from Santander and Bradesco, will that just go in the guidance for the fourth quarter? Or will that be a one-time charge? How do you guys think about that?

We'll share that with you. We don't actually know how it is going to look yet. When we get the final deal signed, what happens with the equity that was in the JV, what goes FIS, how this all works out. That cash is going to come to us. So we will get the cash. How we actually end up structuring the balance sheet, our team will work on that. But we will call that out for you and tell you what it is.

Okay. Perfect. Congratulations.

Thank you.

Thank you.

Our next question is from the line of Kartik Mehta with Northcoast Research.

Good afternoon. Frank, you talked about professional services doing better and I am wondering, is this the first time you think that market spending is getting better, or is the professional services at FIS just doing better because you are taking market share?

I mean it is some of all of that involved. Let me just qualify a little bit. It is getting better, the qualified optimism that we have there because there is improvement in the marketplace. We are just hoping and cautiously optimistic that it continues. So clearly getting better and it helps you when you take in core deals, because they're usually associated with some amount of professional services.

Yes. When you look at the -- it also displays to the overall breadth of our overall product set. And at this point in time, as we have all mentioned, we are starting to see banks, financial institutions spend, starting to spend more in recent months, and as part of that they're looking for us to add services to our various products that they're taking through these sales.

And all the integrations associated with it.

So have you seen any attitude change from your customers, or prospective customers, on out-sources versus in-house, or are they still more focused on outsourcing right now?

We talk about this a lot, how it goes back and forth, but the reality is there is much more of a movement towards outsourcing clearly, a feeling that they want to be more outsourced, at least either all of the core system or a particular product.

And then, just on the international business, would you expect a margin of that business sequentially to continue at least in the third quarter and fourth quarter of this year, continue to ramp up?

It's probably a little lumpier than the rest of our business timing. The timing of some large transactions, some large software deals, when they move quarter to quarter, they have a bigger impact. But certainly third and fourth quarter, we expect higher than the first half of the year.

Great. Thank you very much.

Thank you.

Our next question is from the line of Jim Kissane with Bank of America.

Thanks. I will add my congratulations, especially on the Bradesco deal. Following up on Ashwin's question, will you be processing the new Elo card for Bradesco, or is that something separate?

That would definitely be something separate. Obviously, we will compete for that business and we hope we get an opportunity to win that, but that would be separate.

Gary, just a clarification, because I think you said that interchange is a pass through and has no impact on your profitability, but is in fact -- I didn't think interchange was in your revenue at all, it was really just your customers' revenue.

Most of that, most of the interchange is absolutely going to our clients. We have a very, very small amount that interchange does pass through our revenue line, but it is a very small amount.

Okay. I guess a question for Frank. Given the recap and the additional debt, does it change your appetite for growth acquisitions?

No, we look at it and we look at what makes sense for the Company and what makes sense for our clients and for the shareholders and the best way to grow our Company to add value. So we will clearly continue to do that. No change.

What is your sense of the environment for M&A in the core processing and payment space?

I don't know. We look at it, there's obviously, as more consolidation takes place in the marketplace, there's less and less available, but there's still some opportunities out there, clearly still some opportunities.

Okay. Just to be clear, it sounds like demand or the pipeline of demand for software and professional services is still strong and you have pretty good visibility there.

Absolutely. We are seeing strength in our pipeline across most of our products. We're obviously -- I think we highlighted in the last quarter call that we were a little bit surprised by how quickly FSG has rebounded. We are seeing a lot of demand on our core processing business, but also seeing strong demand on outsourcing throughout the US and even in certain international markets, and then seeing nice demand on our payments businesses as well.

Great. Thank you very much.

Thank you.

Thank you. Our next question is from the line of John Williams with Goldman Sachs.

Good evening, guys. I'm in for Julio. Quickly just wanted to get a sense, you had spoken a little bit earlier about the impact of Durbin and the financial reform generally on the business, but some people in looking at the exclusively for debit have thought that it might present an opportunity to maybe steal some share. What's your take on that? Do you think Nice can capture a little bit incrementally, in terms of actual processing on debit?

We absolutely do think there's some upside with our Nice network, and frankly until some of this unfolds a little further, it is hard to gauge all of that. But we think there's some opportunities for upside.

Okay. A while back you had mentioned the core replacement for Citi. You haven't really said much about that since, is there any update that you can provide, or maybe some thoughts on what's going on with that particular deal?

Again, we shared a win with Citi for a core software product. It was a software sale. And we were excited about it for two reasons. One is whenever you get a large name, a large organization as prestigious as Citi that you are selling, winning the business to, I think that's important, and so we shared that. And secondly, I think it's an indication, as we've talked about over the years, that some of the larger institutions are starting to look at what they need to do to their core systems to renew them for the future. So, that's why we shared that deal. It is a software deal, a little bit of special services. So while we think it is a fairly substantial capital project for Citi, it is a small piece for us, it is not a material number. So it is, there's not much more to it than we got some software sales in professional services, and it is a great win for us.

One other question, sort of a housekeeping thing. You had talked a while back about the refinancing of the term loan B, it was about $800 million or so, is that number, are you going to do that, or is that included in the updated number that you provided in the slide deck on page 12 today, that $1.5 billion for the term loan B. Is that replacing the original?

Well, the Metavante term loan B that we got through the merger, and we paid that off as part of this refinancing. So the original term loan B which we have seen which from Metavante -- that's gone, we now have the bank debt. We've got the new term loan B, which is $1.5 billion, and then we've got the bonds at $1.1 billion.

Same name, different loan.

Correct.

Okay. Thanks, guys. Appreciate it.

You're welcome.

Our next question is from the line of Karl Keirstead with Kaufman Brothers.

Hello. Good afternoon. I may have misheard, but could you confirm that you trimmed your free cash flow guidance for the full year from $750 million to $700 million?

Originally $750 million, we now say approximately $700 million, 100% related to the recap. So the recap, the incremental interest cost that we'll bear between now and the end of year is the difference.

Okay. 100% of the $50 million difference.

Right.

Okay. Secondly, if we could return to the EBITDA margin expansion story, it looks like in the first half of 2010 year-over-year your adjusted EBITDA margin is up a little over 200 basis points. So for the full year to be up 300, your margin expansion story is going to have to improve in the second half. Can you just run through the two or three main levers that you will use to get that kind of accelerated margin expansion? Thanks.

I have year-over-year second quarter 140. In the second quarter, we talked about this, we had a very difficult comp in the second quarter of last year, you know, in the term fee that we had - one-time term fee that Metavante booked and also there was a legal settlement that Metavante booked. So if you take those two out, we are actually pretty close to 300 basis points. So the operating business is close to 300, and so second half of the year we won't have the difficult comps, we do think that the margins are going to pop back up and we still think we will get that 300 mark by the end of the year.

Okay. Thanks very much.

You're welcome.

Thank you. Our final question for today will come from the line of Tien-Tsin Huang with JPMorgan.

Thanks so much. Just a couple questions. First I want to ask about the expanded bill pay services, I think you said with a top four bank, I'm curious, can you elaborate? Is that a competitive take away or an expansion of an existing deal?

Yes. It is an expansion of an existing deal, by taking new volumes off of a competitor and it is also an expansion of new products wrapped around that as well. Wrapped around those bill payment services.

Okay, got it. So handling more of the routing side of it. Understood. And then, a higher level question I suppose, just given all of the financial reform and the negative ROE impact for the banks, I'm curious, if we look beyond 2010, do you see pricing pressure becoming more problematic here, given that the banks are going to look to offset some of that pressure?

I think we shared, we obviously are going to keep watching that, the fact that some of these regulations obviously have an impact to the banks' pocketbooks and that's who's writing the checks for us, and while we don't have a direct connection, obviously, we don't get to participate in those fees that are being reduced, we are going to have to watch whether banks decide to spend less or to spend differently. The pricing pressure, I think of how to answer that we are always fighting pricing. I think it is hard to say that the banks in the future, that you would expect that they are leveraging all the competitors today to get the best price they can, they'll do that in the future. And whether they ask us to participate and take some of that out of our pockets, I certainly think they'll ask. I am not sure we will actually see much difference in discounting based on that, but again it is so new. We will have to see how it shakes out. We'll have to see what happens when the reg's get written and the banks actually start finding different ways to generate revenue.

We'll all be watching. I appreciate that. Thank you.

Thank you

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