Fidelity National Information Services Inc (FIS) 2011 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the FIS second-quarter earnings release conference call. (Operator Instructions).

As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Mary Waggoner. Please go ahead.

Thank you, Kathy, and welcome to everyone joining us this afternoon. Today's news release and supplemental slide presentation have been posted to our website at www.fisglobal.com. A replay of the audio portion of this call will be available on the website, as well as the dial-in number shortly after the call.

With us today are Frank Martire, President and Chief Executive Officer; Gary Norcross, Chief Operating Officer; and Mike Hayford, Chief Financial Officer. 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 focus on results from continuing operations and will include references to non-GAAP financial measures 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 and the supplemental slide presentation.

I will now turn the call over to Frank Martire.

Thanks, Mary. Good afternoon, everyone, and thanks you for joining us on today's call. I will begin the discussion with a brief summary of our financial results and business highlights for the second quarter. Gary will follow with the operations report, and then Mike will provide additional insight into our financial results and outlook for 2011.

We are very pleased with our continued revenue momentum and the strong growth in earnings per share. Revenue increased to $1.4 billion in the second quarter, which represents organic growth of 5.8%. These results were driven by strong performance within our Financial Solutions and international segments, including strong growth within Capco's European practice. Earnings per share increased 17% to $0.55 in the second quarter, and free cash flow rose to $195 million.

Starting with our Investor Day in 2009 and again in 2010, we shared with you our path to achieving 6% to 9% organic revenue growth. Because we serve all major market segments in the US, including community institutions, regional banks and large banks and also have a substantial international business, we believe that FIS is very well positioned to participate in a market recovery as evidenced by the progress we're making towards achieving our long-term growth plan. Organic growth has improved consistently during the last six quarters and has measured approximately 6% in each of the last three reporting periods.

As we have discussed on prior calls, 2010 was a great year for new sales. We are off to another excellent start in 2011, and our global sales pipeline is stronger than ever.

As you will hear from Gary a little later on the call, we continue to build on the success of the FIS and Metavante combination, which has enabled us to leverage our combined banking and payment solutions and industry expertise.

We expect to achieve similar success with our recent acquisition of Capco. Capco's deep domain expertise and strong relationship in the large US and global banking markets, combined with our market-leading technology, creates a very compelling value proposition for our clients. Demand for Capco's services is particularly robust in Europe as shown by the strong growth in the first half of the year. We are very excited about having Capco as part of the FIS team as we work with clients to solve their business challenges and transform their technology platforms.

Overall we are very pleased with our second-quarter results and the progress we're making to increase organic revenue growth and to drive higher earnings-per-share, and I am extremely proud of our management team and employees for staying focused on serving our clients and growing the business.

Now Gary will continue with the business report. Gary?

Thank you, Frank, and thanks to everyone on the call. I will begin today's review with an overview of the global sales climate followed by the operating highlights.

As Frank discussed, we continue to see evidence of an improved spending environment, which is driving strong growth in our sales pipeline across the globe. Industry consolidation, regulatory changes and the ongoing challenges of competition and processing scale that our clients are facing continue to drive opportunity for FIS. The combination of our product set, which we believe is the broadest in the industry, and our global distribution team have allowed us to participate in the improving spend environment.

As discussed last quarter, we have seen clients continue to favor hosted solutions over in-house implementations, which have resulted in a mix shift from license revenue to processing and professional services. These trends provide longer-term stable revenue streams and also eliminate some of the volatility in both our revenue and margins due to one-time license fees.

Next I am pleased to highlight some of our recent sales wins. Expansion of our core client base is an integral part of our growth strategy. These important relationships not only generate high recurring revenue and strong incremental margins, they also account for significant cross-sells every year. We continue to gain market share in the community and mid-tier market where the integration of our core platforms with delivery channels and payment solutions is a strong competitive differentiator for FIS.

2010 was a record year for core competitive wins, and we continue to win new business in 2011. Second-quarter signings included United Bank with approximately $9 billion in assets and a large West Coast Bank with more than $6 billion in assets. These new clients will also utilize a wide range of channel and payment solutions, including FIS eBanking, bill payment and debit solutions. The traction we are gaining with the NYCE network and our bill payment solutions are great examples of our achievement in leveraging existing client relationships to drive higher pull-through revenue.

I am very pleased to announce that we recently extended and expanded our existing partnership with Intuit to provide a highly competitive online banking and bill payment solution, which leverages Intuit's strength and user experience with FIS expertise and payment processing. As part of the enhanced relationship, more than 500 financial institutions will migrate to the FIS bill payment platform from a competing provider within the next 18 to 24 months. This will increase the total number of institutions utilizing our bill payment solution to more than 4000.

We are very excited to partner with an industry leader like Intuit as we continue to expand our presence within this market.

We also continue to make good progress expanding our core and payment relationships in the large [FI] market, including a new managed services agreement with First Niagara Bank, a $30 billion multistate institution.

We are also very pleased to announce that Fifth Third Bank recently selected FIS as their new bill payment provider, bringing the total number of top 30 wins to five in the last year. The success that we are having with this product among large financial institutions and direct banks illustrates the strength and quality of our offering. As you can see, the team continues to do an outstanding job closing new deals and driving cross-sells across the enterprise.

We are also seeing great results in our international business, including increasing demand for our debit and prepaid solutions. As we highlighted at the Investor Day last December, FIS is the only thin tech provider with combined core and payment capabilities outside of North America. The global migration towards electronic payments and prepaid cards is driving significant opportunities to leverage our global product set, and we are seeing strong demand for prepay, ATM switching and debit solutions. We added several new names to our growing list of prepaid clients during the second quarter, including the post office in the UK, [Piango] in Germany, and Woolworths, which is Australia's largest retailer, and we look forward to sharing additional successes in the future.

Last quarter we discussed our growing presence in emerging markets, including Asia and Brazil.

We continue to see strong demand for our debit solutions in Asia, which we completed new processing agreements with one of the top three banks in India and a large EFT processor in Singapore during the second quarter.

In Brazil Banco Bradesco's pilot of the new ELO branded credit card is going very well with more than 80,000 cards being issued since April. We also began processing ELO branded prepaid cards in June. We continue to feel very good about the Brazilian market and the strong opportunities we are seeing in our global business overall.

We have had a number of successes in Europe, including a newly expanded processing relationship with [Deutsche Apothekare], as well as a multiyear extension of our core and securities processing solutions with ING-DiBa both in Germany. This follows the new application management arrangement with ING direct in France that we announced last September.

As Frank mentioned, Capco is seeing substantial demand for business transformation services in Europe and has experienced very strong growth in their European practice in the first six months as an FIS company. We continue to engage our large clients and differentiated opportunities where we can leverage Capco's solution expertise and the vast delivery capabilities that FIS brings to the table. These joint transformative opportunities are a major reason that we acquired Capco.

Turning to our business operations, first, as a follow-up to last quarter's call, I'm pleased to report that we have completed our assessment of the unauthorized activities on our Sunrise prepaid platform. The additional measures that we have taken to strengthen security are working, and we have experienced no additional financial impact. Our team did a great job containing the activity, and we remain diligent in our efforts to mitigate future risks.

Next I will provide a brief update on the Durbin Amendment. As you are aware, the final rules were published on June 29. We are working very closely with existing and prospective clients and expect the changes to have a positive impact on our business overall. As an indication, more than 1000 clients have participated in recent webinars that we have hosted on this topic.

In addition, as you may have seen in yesterday's press release, we have signed a record number of new NYCE participants in the first half of 2011. We believe that the exclusivity provision, which requires all issuers to have at least two unaffiliated networks on their cards, is a favorable outcome for the NYCE network. We do not believe that the revised new limits on debit interchange will materially impact the number of debit cards being issued by large financial institutions. Furthermore, as you are also aware, the Durbin Amendment does not impact our clients with less than $10 billion in assets.

Finally, I would like to leave you with the following thoughts before turning the call over to Mike. We are optimistic that the outlook for the industry will continue to improve and that we will continue to move deals through the pipeline. We believe that the Durbin Amendment will have a favorable outcome on our business overall, and we are encouraged with the response we have received from our clients. We continue to anticipate increased consolidation in the industry, which creates both challenges and opportunities. Last, we feel very good about our client relationships, our winning track record and our global leadership position.

Now I will turn it over to Mike for the financial report.

Thanks, Gary, and good afternoon. I will begin with slide four of the supplemental materials. Adjusted revenue growth was 13% for the quarter. Organic revenue growth, which is normalized for acquisitions and currency, was 5.8% driven by strong results in Financial Solutions and our international business. Second-quarter EBITDA increased 5.9% to $415 million compared to $392 million in the second quarter of 2010. EBITDA margin was 28.8% compared to 30.7% in the prior year quarter.

On slide five, we have provided a bridge that illustrates the impact of acquisitions and one-time items on our margins. Starting with the reported margin of 28.8% in the second quarter of 2011, we have adjusted the margin impact of the Capco acquisition, and as you recall, the lower margin consulting business has a negative impact on our overall margin. Additionally approximately $5 million of one-time costs related to integration, severance and M&A activity were included in the current year quarterly results. These costs were excluded from our adjusted operating results in 2010. This bridges to an EBITDA margin that is comparable to the prior year quarter.

On page six, Financial Solutions revenue increased 12.7% to $516 million and grew 5.2% organically. The increase was due primarily to strong growth in services revenue. Financial Solutions EBITDA increased 3.5% to $208 million. The EBITDA margin was 40.3% compared to 43.9% in the prior year quarter, reflecting the higher mix of consulting and services revenue and lower license revenue.

As shown on slide seven, Payment Solutions revenue totaled $632 million in the second quarter of 2011, which is a slight improvement over the second quarter of 2010. Payment Solutions revenue increased 4.1% compared to the second quarter of 2010 excluding the check business and the impact to the merchant platform consolidation. As you recall, merchant revenues recorded at gross in 2010 and now is being booked at net now that the platforms are integrated.

Year-over-year comparisons should ease in the second half of the year now that we have cycled past that platform consolidation. Although we continue to face headwinds due to declining check volumes and ongoing competitive pressures, we believe having more clarity around the Durbin Amendment and the exclusivity provision in particular will have a positive impact on our payment business going forward.

As a reminder, there is a seasonal component within PSG due to the peak tax processing revenues in the second quarter. Therefore, consistent with prior years, you should expect payments revenue to decline sequentially from second quarter to the third quarter.

Payment Solutions EBITDA increased 2.9% to $239 million compared to $232 million in the second quarter of 2010. Second-quarter EBITDA margin improved to 37.8% compared to 36.8% in 2010.

Turning to slide eight, international revenue increased 57.8% to $293 million compared to $186 million in the second quarter of 2010. Revenue grew 25.2% on an organic basis. The strong performance was due to higher card processing volumes in Brazil, increased license sales and services revenue, including Capco's international operations.

International EBITDA increased 44.3% to $61 million compared to $42 million in the second quarter of 2010. The margin was 20.9% compared to 22.8% in the prior year, reflecting the addition of the Capco revenues.

Corporate expense was $92 million in the second quarter of 2011 compared to $84 million in the prior year quarter. This increase is primarily due to an increased stock-based compensation, increase in employee benefit costs, increase in sales and marketing, and the acquisition of Capco.

As you will recall, corporate expenses for the third-quarter 2010 included a $10 million one-time benefit related to the reimbursement of legal fees, which will not recur in 2011. As we shared on last quarter's call, we would expect corporate costs to continue in the $90 million per quarter range plus or minus 5%.

Please turn to slide nine for a reconciliation of net earnings. Second-quarter net earnings from continuing operations totaled $172 million compared to $181 million in the second quarter of 2010. The decline in net earnings compared to the prior year quarter is due to higher interest expense associated with the leverage recapitalization that we completed in August of 2010. The resulting share count declined to 311 million shares in the second quarter of 2011 compared to 385 million shares in the second quarter of 2010. Average diluted shares increased on a sequential basis due to option dilution from the higher average share price.

Earnings per share from continuing operations increased 17% to $0.55 a share compared to $0.47 a share in the second quarter of 2010. The only adjustment to our reported GAAP numbers in the current quarter is the after-tax impact of purchase price amortization of $42 million or $0.14 per share. Approximately $5 million of one-time costs including integration, severance and other M&A expenses are included in our 2011 results for the second quarter of 2011, and we reduced these earnings per share by approximately $0.01.

The effective tax rate was 32% in the second quarter of 2011 compared to 37% in the second quarter of 2010 and 35% in the first quarter of 2011. The decline was largely due to a one-time tax settlement related to our international business. We hope to keep our full-year effective tax rate at the lower end of our guidance range of 35% to 36%.

As shown on slide 10, free cash flow totaled $195 million compared to $107 million in the second quarter of 2010. The increase was due to lower tax payments and the timing of working capital. Capital expenditures totaled $68 million compared to $75 million in the prior year quarter. Debt outstanding declined to $4.9 billion as of June 30, 2011, and the weighted average interest rate was approximately 5% at quarter-end. Additional detail on our debt is provided in the appendix.

Now I will provide a few comments before we open the line for Q&A. First, we continue to be bullish on our revenue growth given the strong first-half results in our financial and international segments. In the first half, as Gary described, the mix of revenue has shifted slightly towards processing professional services, which is generally lower margin than our license fees. We believe that clarity around the Durbin Amendment will be positive for our business overall.

And while our payment business continues to face headwinds from competitive pricing and declining check usage, we are encouraged by the success we are having signing new clients for our EFT business and our bill payment solutions. Overall we are pleased with the progress we are making to driving higher organic revenue growth and are well positioned to drive increased earnings and strong cash flow.

As we are focused on growing the business organically, we will also continue to look for opportunities to augment growth with mergers and acquisitions.

That concludes our prepared comments. Thank you for your time this afternoon, and operator, you may open the lines for questions.

(Operator Instructions). Dave Koning, Robert Baird.

Great job on the continued revenue growth. My first question, just on the margin bridge on page four, it seems to imply that Capco was something like 150, 160 basis points margin drag, which would imply that EBITDA is about zero -- is about breakeven right now. And I'm wondering, is that a seasonal factor, and I would imagine you would expect that to get nicely better, but maybe you could just comment a little bit on that and kind of how that improves.

David, I would say first of all the margin for Capco as we described in the past, we expect to be lower than the rest of our operating numbers, operating business units. And, as you can see, the start of the year we are probably running a little behind what we had anticipated. So I would view it as flagging a little bit maybe where we had anticipated, although we would have expected the second half of the year to build and drive a little bit more profit than the first half of the year for Capco.

So we are actually pleased with the start we had. I think there is probably a little -- I think Europe is off to a very, very strong start in the first half of the year. Our Canadian business is doing extremely well in North America. We had a couple of challenges with some clients in the US, really not related to what Capco is doing, but more related to the nature of the business and some kind of global financial industry changes that impacted a couple of the customers there. So I would say we are off maybe a little bit behind on the earnings, very strong revenue growth, and we anticipate earnings to pick up in the second half.

Great. And I guess one other thing from the supplement, this quarter the interest rate weighted average was 5%. Last quarter it was 5.2%. I know I think you had 1.5 billion of hedges -- interest rate hedges rolling off this quarter. I mean is it fair to say that you might have redone them at a little better rates now and extended those nicely or something because it does look like the interest rate is nicely down?

I think it is -- you know, the hedges, as we have paid down -- some of the debt we have paid down at the higher rate, and then, as you said, the fixed to floating kind of ratio has improved a little bit the overall cost.

And then lastly just quickly, the payment segment, it seems like much less of a headwind from check trends now. I know they will likely continue to be negative, but between that and then the anniversary of that interchange headwind, when it seems like there is much less of a headwind going forward and even probably maybe a tailwind as you anniversary some of this stuff the next several quarters. Maybe you can just comment on that, too.

David, I am assuming you are referring to the check business and the check verification business that we have, the paper-based businesses. I think it is a fairly consistent headwind. It is about 400 basis points, 4% of growth on the top line, which is kind of what we have been seeing, you know, 3.5%, 4.5%, in that range. So I think 4% is kind of consistent with that.

The headwind I think we are battling through them so that the team did a nice job in the other parts of the business. We have, again, a slight revenue growth. And if you adjust out again the impact of the accounting change and the impact of the paper businesses, a pretty respectable 4% growth year over year in the quarter. But I think those headwinds will be fairly consistent as the business gets to be a smaller and smaller piece of the business we do to manage over time.

Great. Well, thanks. Good job.

Julio Quinteros, Goldman Sachs.

So good to be back over here on the coverage side. A couple of quick questions from my side. When you look at the comment that you made about the shift from traditional license sales to the hosted model, how should we think about that in terms of any drag or even lift to the current revenue model? And just theoretically how would this be different from the old service bureau model that I'm more familiar with when you think about what you refer to as hosted today?

I mean I think it is very similar to the old service bureau model. So the service bureau, ASP, hosted in the cloud I think are all very common. It is the shared leverage model that is connected to a platform that we are operating in some central location.

And so we like that business a lot. It does have an impact upfront versus getting a licensed professional services upfront. When we sign those deals, those revenues are spread over a seven-year contract typically. But it creates more recurring revenue and more predictability, and again, to the extent we get on a leverage platform, we will make those profits over time.

Any sense on what percentage of your business today is spread across the hosted model versus the licensed model?

Well, we have talked about in the past is what we would term as our recurring revenue, and recurring revenue for us is revenue streams that we do not have to go out and sign a new contract. And we are in the mid-80s, so 83%, 84%, 85% in that range. It has come down slightly. I think we are up as high as 87% at one point, but with Capco most of that is not occurring. So in that mid-80s is kind of the level of recurring revenue that we have as a company.

Got it. And then on the comments, we saw the release yesterday about the NYCE additions kind of post-Durbin. Maybe just help us characterize a little bit about what are the clients actually looking for when they come to you guys now post-Durbin world? What is the specific demand driver or the issue that these clients that are coming and signing up for NYCE now beyond kind of the obvious? Is there something additional they are looking for from you guys?

I think there is a couple of things they are looking for, and NYCE helps do that. A couple of things. With the Durbin decision and final rulings in June, you now have to have multiple at least two networks for your debit processing, and NYCE is benefiting our clients because it's the most issuer-focused network in the industry. So we guarantee to maximize the interchange to the financial institution, and our clients and our new customers see value in that.

So there's really two things driving it. One is Durbin and the need to have multiple networks, but two, the fact that we are so issuer-centric instead of being merchant-centric with our NYCE network, our financial institutions are seeing a lot of value in that.

Do these clients need to actually be core clients as well?

No, not at all.

Got it. Great and then just one last question on Capco. Do guys have any metrics on Capco headcount utilization levels and then any plans for headcount additions going forward?

No, we have not really shared the headcount of Capco. I think the comments that you heard us talk about today, Gary covered the strong results in Europe. The Company is growing, growing very well. We think they are doing very well in their markets. And we also think they are doing extremely well competing for talent in the consulting business. So our plans are to continue to grow headcount. They focus on utilization each and every day to drive profit.

Ashwin Shirvaikar, Citigroup.

I had -- I wanted to start with Capco. As Capco grows, should we expect at least some level of operating leverage in that model, or should it be -- should we consider it like a typical consulting business which has limited operating leverage? I'm trying to figure out what the longer-term impact of Capco growing faster than the rest of the business is on margins.

Well, I would say it is going to act like a typical consulting company. They are very people-based, so it is not the same kind of leverage model that you would get out of a hosted solutions (inaudible) kind of discussed a leverage model that -- (technical difficulty) processing contract.

Having said that, we knew when we brought them on board at the size and the scale they were even a little over a year ago to where we expect them to be at the end of 2011, they are going to continue to get some operating leverage out of the fact that they are larger, driving more revenues to cover their business unit level costs or corporate costs at the capital level.

So we have our target long-term is to get into the midteens for EBITDA margin, and we have also shared that for 2011 we expect it to be lower than that. We expect it to be around 10% for the year in 2011.

Okay. And when I look at the payments business, obviously the overhang from Durbin and other regulatory issues has sort of hurt growth in that business. But now that some of that stuff is behind us, should we expect some pent-up demand to emerge?

Well, as I mentioned in the call, we did see some pent-up demand on particularly stuff like the network decisioning in and around Durbin. As part of the overall rulings, the network portion of Durbin does not have to be implemented until April of 2012. So we should see a number of signings in the second half of 2011 and then revenue starting to be generated due to that in 2012.

As I also indicated, to give you some insight into the size of the opportunity, we have been running a number of webinars around Durbin and around NYCE particularly, and we have had over 1000 financial institutions dial into those webinars and participate and learn how the NYCE network can drive value to them and satisfy the needs of this regulatory change.

And, as I look at, say, maybe the small bank exemption, what percentage of your client base is relatively unaffected? Is there a way to quantify that maybe?

Well, we really have not broken down our client base across the various sizes. The nice thing about our payments business we mentioned in the announcement some scale items around our bill payment solutions and some of our other solutions. And also, as you see in the release yesterday, the first half this year we had record signings on our NYCE network. Really our payment capabilities spread pretty much the gamut of institutions both size and throughout the US. So we really have not disclosed the breakdown of how our payments revenue is between large financial institutions and community institutions.

And my last question on Misys, at what point might you be ready with the due diligence done and so on and so forth to speak? I mean are we getting close to that point, or should we be looking for an announcement? What is the decision process here if you don't mind sharing that?

Well, you know that we obviously had a press release that said we had made an approach to the company and are evaluating and having discussions with the company. I think suffice it to say when we get to the point where we have something to announce, we will announce it. And until we get there, we really have nothing to discuss on the topic.

Fair enough. Okay. Thanks.

Glenn Greene, Oppenheimer.

The first question, I guess, is for Gary. I know you sort of talked about 2010 being a very strong contract signing year, and this year you are continuing at a fast pace. Is there any way to frame what contract signings look like maybe year-to-date this year relative to a year ago and maybe a little bit of color across the industry as what it is really -- which segments are driving the strong contract signings?

Yes. No, it is a great question, and we have traditionally not disclosed the size of our pipeline. But, as I stated, we did have a record 2010, and I will tell you the first half of the year we are ahead of where we were at this point last year. We know we have got -- obviously we have got the second half of the year, so we have got to continue to perform. Our pipeline, though, has continued to grow very significantly as well. So all of those are positive signs for us as a company.

As far as the markets that we are seeing this growth in, frankly, as I shared in some of the examples, we are seeing great success in community markets, in large institutions and in our international markets as well. So there really is just no one specific area that we are seeing the growth. It is really coming from all the segments.

Yes, I think that is what is key there. We are getting them from the small community banks, the mid-tier, the large and the international segments, so it is right across the board for us, which is very positive obviously.

So would it be fair to say that the banks are spec and sort of getting back to normalcy in making decisions? I guess it is a little surprising to me that we are seeing the decisions happening as you are suggesting so quickly.

I think as we have shared this is three quarters in a row with almost 6% organic growth. So I would say it has not just come back quickly. Right? We have worked through it each and every quarter. And, as we have shared on each quarterly call, we continue to see banks who have weathered the financial storm to now starting to free up their capital dollars to start making investments so they can compete in this cycle and gain marketshare. And given the breadth of our solutions, that plays very well for us.

I'm not here to say that there are still aren't institutions out there that are hunkered down and not making any buying decisions because there are. The fortunate thing for us is we are just seeing more and more of those get through their process and now starting to focus on buying. And as we shared in the examples, we are seeing in the US and frankly globally as well strong demand for our core banking solutions. That typically drives our payments solutions as well through that. But as the example of Intuit and several others, the Fifth Third example, we are also seeing strong demand just for our Payment Solutions as well.

Right. And then on the international business, which three quarters in a row keeps blowing away my estimates at least, can you just help -- are there a couple of things to call out other than the Banco Bradesco conversion that is really driving the very strong organic growth?

Well, I think two things. One, certainly getting Banco Bradesco converted and getting the joint venture from being a startup to an ongoing entity where we are focused on the market and able to grow relationships in Brazil is certainly key.

But we also when we shared with this in multiple of our investor updates, several years ago we made a conscious decision to start transitioning our revenue away from a license model to more of an outsourcing and processing and professional services model. And while the percentage of our reoccurring revenue in that business is still less than our overall company, that change both market-driven and driven by us is that we are seeing benefits in our revenue streams and starting to see more predictability and more growth due to that higher reoccurring revenue.

All right and then just one quick one. The Intuit bill pay win, was it the Digital Insight piece within Intuit?

Correct.

Okay. So it is the smaller -- obviously the smaller FIs?

Yes, it is the smaller credit unions and smaller community banks. But we do all of Intuit's -- you know, the number of aspects of bill pay that we provide processing for.

Brett Huff, Stephens, Inc.

Congrats on a nice internal revenue number. A question on corporate. I know you told us last quarter that you thought $90 million would be the run-rate, but I'm confused about the swing from what I think my math is right, would have been $82 million last quarter ex the one time Sunrise platform charge to $94 million this quarter. A), is my math right based on how you guys think about it? And B), if so can you just give us a sense of what has changed in the last quarter to this quarter that was adding cost there?

Yes, I think we had a few miscellaneous things. We had some type of integration-related costs at the corporate line. We had some M&A-related costs at the corporate line. I don't think there was any -- I'm trying to think if there was any other big item that would have hit at that level. So I think that maybe $4 million above the guidance was probably some of those one-time things that we described, innovation-related costs, some severance and M&A-related costs.

Okay. And then I think, Gary, you talked about one of the goals of Capco, besides adding a lot of great professional services expertise and domain expertise, was ultimately to try and get into one of these transformational deals that you talked about that it is core but broader at a big bank. And Gary, I think you mentioned that, and you are happy with the progress. Can you give us a little more color on that? You know, how many of those prospects are out there, or is there any way to sort of give us how big that opportunity is?

Well, I think there is -- suffice it to say, at this point in our ownership, we are very pleased with the conversations we are having. How many transformative deals are there out in the market? We really don't know, but we are having a number of key conversations both in Europe and in North America. These conversations, perhaps as you would expect, take a long time to work through. Certainly not only are we bringing the consulting power and domain expertise of Capco, but bringing our wealth of solutions and IP to the conversations. But at this point we have got a number of key opportunities that we are pursuing, and we feel very good that we are going to sign some of these transformative opportunities.

Okay. And then, Mike, I think this is a question for you. In terms of international, how do you see that organic growth or even the total topline growth trending over the rest of the year? I agree with first news on last that you guys have continued to outpace my expectation, so I'm trying to just get a better sense of where I'm wrong. Any guidance from you guys on that international number?

Well, I think I would see in the fourth quarter the year-over-year comps are (inaudible) for Brazil because we did -- we converted that in October of last year. The other big driver of this is Capco, and we shared their year-over-year growth is much greater than we anticipated in Europe, which is growing into that international segment. So I think those are the two big drivers that are probably outpacing what we had expected and, therefore, I think what people have expected in terms of our growth internationally.

As Gary said, the rest of that business is just doing very well. The team has done a great job of penetrating some of the higher growth markets in Asia, in India, China, other parts of Latin America. And then our European practice is doing well.

So I think they are executing real solid, and then you have got a little extra push obviously from Brazil, which is showing very good growth, and then the Capco services is growing very strong as well.

That is helpful. And then just one last question, and I want to make sure I heard you right. I think in the discussion of Capco you said that you were a little behind on that. And I think you then said that might have been driving a little bit behind on the first-half earnings versus where you all expected. First of all, did I hear that right? And second of all, what gives you confidence that you will pick up some of that slack in the second half specifically?

Well, as I shared, we had a very specific situation in the US. We had some clients who just through the changes in the environment no longer had the funding to spend on a series of projects that were fairly large for Capco.

Now they are not a significant portion of the overall FIS, but for Capco they were a decent chunk of their revenue opportunity. So what they have done is they have for the most part been able to keep their people together and go out and sign other clients. I think it has challenged them for three or four-month period of time where they had to go out and find new clients where they expected to start some very large projects, to kick off at the beginning of the year. Those did not materialize. This is within the individual client. And so they have gone on to other business.

So, as we enter the second half and we sat down and walked through where they stand, particularly what the utilization rate is and what their pipeline is for getting new client projects going, we feel pretty good about the second half.

John Kraft, D.A. Davidson.

I wanted to go back to Durbin, and specific to prepaid, I guess my question is, how would you characterize the interest level at your banks in offering a prepaid or some sort of debit prepaid card now this quarter versus last quarter given that we have heard some commentary from the Fed suggesting they are going to discourage the banks from flipping the switch, if you will, from a debit to a prepaid? Is that something that is affecting their interest levels?

I think, John, that is a good point. We have got a lot of clarity in the June 29 finalization, and one of those -- is they clarified certain things around prepaid where earlier we thought we were going to see some opportunities where our clients might look to launch some type of re-loadable prepaid card to generate -- to not have to deal with the Durbin regulation. But, as I said, we got a lot of those issues clarified.

We still are, though, with that as a backdrop. So those kind of conversations to deal with Durbin have lessened, but we do continue to see strong demand for our prepaid offerings in our financial institutions, not only in the US but as I pointed out especially in our international markets. It is becoming a much -- it is becoming a very viable way to serve some of the underserved, underbanked communities, and so we continue to see conversations around that. But the conversations we were having around Durbin have lessened.

Got you. That is helpful. And then I guess just second and last, can you elaborate a little bit more on this conversion at Intuit on bill pay? Is it -- was there an upgrade in your interface or some sort of a platform that is driving this, or is this a price, or is this sort of just let's consolidate everything back onto the legacy Metavante platform because it is just easier for Intuit to have one rather than two?

Well, I think at the end of the day we have a tremendous relationship with Intuit, first and foremost, and I think that relationship drove an expansion of the partnership. But I also think when you look at the investments we have made in our bill payment platform, you are seeing -- we are seeing substantial results in the market with new signings. And so Fifth Third is a great example of that, and as we highlighted, that is a number of top 30 institutions in the last 12 months.

So the product is very functionally rich. It is a very strong solution in the market. Combine that with our overall relationship, it just made sense to expand that going forward.

Yes, it has been a very successful relationship and a win-win for both Intuit and ourselves. So, as we have worked together closely with the senior executives and the operations people at Intuit, it has been very rewarding for both sides, and that has allowed us to continue to grow the relationship.

All right. Thanks, guys. Nice work.

David Togut, Evercore Partners.

Gary, within your Financial Solutions segment, have you seen any change in pricing trends if you look at the span of banks you serve from credit unions up to megabanks?

You know, David, I would not say we have seen any change. I mean it is very competitive. The market is very competitive, and the nice thing given FIS's scale and our product suite, we are able to compete very effectively in those markets. But I would say we have not seen any demonstratable change in recent months.

And then just a question on capital allocation for you, Mike. With FIS shares trading at the same price at which you repurchased 23% of the outstanding last year, why not get more aggressive here on share repurchase instead of acquiring a business at a premium?

Well, I mean, David, you obviously understand that you look at those things at all kinds of points in time. So we disclosed our discussions with Misys almost three weeks ago now, and the market has moved around a little bit because of that.

I think we have been very consistent. We have said that we will look first to grow our business through M&A where we can get a return on our investment and get some leverage. We think we have a good team to do that. We think we have a successful track record. And if we can't find deals that get the proper return, we will use that capital to buy back shares. And obviously at our current trading price, the share is a lot more attractive than it was even a month or two ago.

So suffice it to say, we will always continue to keep those two things in mind, and we will always judge any use of capital for M&A against that relatively low risk share repurchase.

Can you say (multiple speakers) earn proper return from acquisitions, what are you referring to exactly? Are you saying accretive to EPS or using some type of IRR metric?

Well, we do both, but at the end of the day, we think it is important that we get a return on cash. So we look at an IRR hurdle that would be consistent with what our return to the shareholders is over a period of time.

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