Fidelity National Information Services Inc (FIS) 2012 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the FIS second-quarter earnings call.

At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session; instructions will be given at that time. (Operator Instructions). As a reminder, today's conference is being recorded.

I would now like to hand the conference over to Ms. Mary Waggoner, Senior Vice President, Investor Relations. Please go ahead.

Thank you Paul. Welcome to everyone joining us today for our second-quarter earnings report.

Joining me today are Frank Martire, Chairman and Chief Executive Officer, Gary Norcross, President and Chief Operating Officer, and Mike Hayford, Chief Financial Officer.

Today's news release and supplemental slide presentation have been posted to our website at FISglobal.com. A replay of today's presentation will be available shortly after the call.

Please refer to the Safe Harbor language on Slide 3 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.

As a reminder, today's discussion will focus on results from continuing operations reflecting the reclassification of our healthcare business as a discontinued operation. Also included in discontinued operations are expenses related to our former BPO operation in Brazil.

Today's remarks will also include references to non-GAAP financial measures in order to provide more meaningful comparisons between the periods presented as outlined on Slide 4. Reconciliations between GAAP and non-GAAP results are provided in the attachment to the press release and the supplemental slide presentation.

Now, if you will turn your attention to Slides 6, I will turn the call over to Frank Martire. Frank?

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

We are very pleased with our strong second-quarter financial results. Organic revenue growth was 5.1% driven by continued solid performance across all businesses. EBITDA increased 7.7% and the EBITDA margin expanded 120 basis points to 30%. Earnings per share totaled $0.66, which represents a 22% increase compared to the second quarter of 2011. As you can see from the chart on the right, we have seen steady improvement in organic growth driven by execution of our business plan and improved confidence within the banking industry compared to 2009.

I will now continue with Slide 7. In June, we announced a definitive agreement to divest our healthcare business. The sale is consistent with our primary focus on serving financial institutions and operating in markets where we have meaningful scale. We expect to complete the sale by the end of the third quarter. We'll provide additional details regarding the transaction later on the call.

We continue to maintain a strong focus on serving our clients and expanding relationships. I recently visited with several key clients and business leaders across the United States as well as Europe and Brazil. The feedback from these meetings provided me with even greater confidence that our time, efforts and resources are focused in the areas that are most important to our clients and that the overall business strategy is working.

Finding new sources of growth, improving overall profitability and differentiating through institutions from the competition rank high on our clients' list of priorities, as do managing risk and regulatory compliance. Our proven ability to deliver industry-leading solutions and provide value to our clients through leverage and scale are among the many advantages that FIS brings to our clients.

During the second quarter, I met with several clients to provide them with an update on our business and the improvements we are making in the area of information security and risk management. These conversations have been very productive. Gary will provide more detail later on the call.

I am very pleased with our strong performance through the first half of 2012, and we are positioned to achieve our full-year objectives. As always, our management team and employees are focused on serving our clients, executing the strategy that we communicated as our investor day in February, and driving value for our shareholders.

Now, I will turn it over to Gary for the business report. Gary?

Thanks, Frank, and thanks to everyone for being with us today. My presentation begins on Slide 9. I'll cover some of the business highlights for the quarter and provide updates on information security and the status of the M&I migration plan. I'll start with North America.

Ongoing client engagement is the top priority for our account managers and sales team. As we have discussed in the past, this direct engagement is one of the many ways we identify and close cross-sell opportunities across our client base.

In May, we hosted our large financial institution client conference in Milwaukee. Similar to our Community Bank Conference in April, the atmosphere was focused on the future and how FIS can help our clients be more successful in this challenging economic, regulatory, and competitive environment.

We are seeing continued strength around demand for professional services, outsourced technology and consulting expertise. The demand is being driven by several market trends that are forcing financial institutions to reevaluate their business models, including emerging mobile technologies, increased regulatory compliance costs, and higher capital requirements. These trends are also driving growth within Capco, which delivered solid revenue growth and margin expansion in both North America and Europe in the second quarter.

The team has worked through the large client loss in North America, diversified the client base and the business is performing in line with our expectations. We continued to add new clients in the quarter, including several new core processing relationships. As we have discussed in the past, these relationships drive strong reoccurring revenue and provide cross-sell opportunities for additional financial containment solutions. For example, Cadence Bank, a longtime FIS core processing client, recently expanded its relationship through the deployment of several new solutions, including our debit, ATM driving and fraud management solutions.

I am also very pleased to announce a new seven-year agreement with a leading provider of indirect automotive loans and leases in North America. This new relationship, which further confirms FIS as the leader in global auto finance technology, includes outsourced consumer loan and lease processing as well as our default management and sales and service solutions.

As Frank mentioned, risk and compliance are key areas of the focus for our clients, particularly given the current regulatory environment. Our recent acquisitions of ICS Risk Advisors and Memento are resonating very well with financial institutions as they work to manage their higher workloads associated with risk and regulatory compliance. ICS has increased its sales over the prior year, including cross-sales to existing FIS clients. We have also received strong interest from clients regarding Memento, which we expect to translate into new business.

We are also seeing solid demand for our Wealth Management solutions. We added several new clients in the first half of 2012, including the new agreement with First Farmers and Merchants Bank which we announced last week.

As we discussed last quarter, we have seen growth within our nice debit business as a result of the Durbin amendment. Looking ahead, we are somewhat more cautious in light of Visa's aggressive pricing. To put it in perspective, while NYCE is a great business, it generates less than 3% of our total revenue.

We've seen improved growth and strong margin expansion within our payments business over the past three quarters. We expect the second half of 2012 to be somewhat more challenging due to a planned client deconversion, more difficult comparisons and some uncertainty related to the Visa pricing changes that I mentioned earlier.

Overall, sales in the first half of the year were comparable to the first half of 2011, driven by new sales to non-financial institutions. I am pleased to announce that we will soon begin providing mainframe computing services to one of the country's largest mobile phone carriers. Opportunities like this leverage our processing environment and provide profitable long-term reoccurring revenue streams.

Sales to North America financial institutions declined in the second quarter relative to the prior year. Although we believe the letter that regulated financial institutions received in the first quarter may have caused a delay in closing some deals that we expected to sign in the second quarter, we think it's a timing issue. And we do not believe we have lost any significant new business as a result of the letter.

One of the benefits of having a broad solution set and diverse client base is that the success we are having in signing new global commercial and international clients is helping to offset some of the delays we experienced in sales to North America financial institutions in the second quarter. While we will continue to monitor the North American financial institution sales activity, we are very encouraged with the overall strength of the sales pipeline.

Turning to Slide 10, I will provide an update on the status of the M&I migration project. As we have discussed throughout 2011, FIS provides multiple core and payment solutions to both M&I and BMO Harris. We have been working on a plan to consolidate the respective core and payment platform since BMO Harris announced plans to acquire M&I approximately 18 months ago. In the second quarter, we gained more clarity around the migration plan. As we have stated in the past, we will continue to have a substantial relationship with the combined entity going forward.

While we continue to negotiate terms and service agreements for the various solutions, we now expect to transition the legacy M&I accounts from our fully outsourced core processing solution to the Bank's in-house FIS platform in the fourth quarter of 2012. The Bank will continue to license our software and FIS will provide ongoing support and professional services under an application management agreement.

As we previously discussed, we do not expect any significant impact to our 2012 results. Based on discussions in the second quarter, we continue to anticipate a revenue impact in 2013. Also, given the magnitude of the overall relationship and the opportunity to provide more services to BMO in the future, we anticipate forgoing a short-term benefit in 2013 in favor of a long-term strategic relationship with the eighth largest bank in North America. Mike will discuss the expected financial impact later in the call.

As we discussed earlier, we are very encouraged by the overall strength of our sales pipeline. We will continue to work aggressively to drive new sales to backfill any excess capacity created by the change in our ongoing relationships with BMO.

Next, I will provide an update on our international business on Slide 11. In May, we hosted our Second Annual International Conference in Dubai. Overall attendance was up 20% compared to last year with clients from 26 countries around the world representing all international regions. Topics touched a broad range of industry issues, including innovation in banking, managing risk and compliance, as well as leveraging FIS capabilities around outsourcing and services. We are pleased with the continued sequential and year-over-year growth trends in our international operations.

As we expected, organic revenue growth improved to 10% in the second quarter and the margin increased by 110 basis points. All major regions delivered solid performance.

Our European business continues to perform well. We are seeing demand for Professional Services, including the ING implementation project which began in the fourth quarter of 2011. As we have discussed in the past, the majority of our core processing and payment solutions are mission-critical and enable our clients to operate on a daily basis. Our European business is focused primarily on Northern Europe and less than 0.5% of our consolidated revenue comes from client in Portugal, Italy, Ireland, Greece and Spain.

Similar to what we are seeing in North America, the challenges created by increased regulation in a difficult economy continue to drive demand within Capco's European practice, which has experienced strong growth since we acquired the company in 2010. We continue to pursue opportunities in emerging markets, including Brazil, India and China, as overall growth within these countries is expected to outpace the US by anywhere from 2 to 4 times. Our Brazil joint venture continues to perform well, driven by continued growth in card issuance, transaction volumes, and support services.

We are also making good progress to expand our presence in the Asia-Pacific region. I am very pleased to announce that we recently completed a large core implementation project for BAAC, which has approximately 20 million customer accounts and operates more than 1000 branches in Thailand. We are also excited about opportunities to grow our payments business throughout the region, including India, where we currently support nearly 4000 ATMs.

Next, if you will turn to Slide 12, I will address our continued focus on information security. Over the past year, we have spoken about the cyber attack that occurred in the first quarter of 2011 and the personnel and technology improvements that we have made to our business in 2011 and 2012. On our first-quarter call, we also acknowledged the receipt of a regulatory letter that was distributed to our regulated financial institution clients in March of 2012. We continue to address the recommendations described in the letter and are taking additional steps to strengthen our information security. We have also engaged additional third-party experts to analyze the security of our systems, including ongoing assessment and monitoring with respect to the 2011 cyber attack and to validate to our customers the improvements that we have made are continuing to make -- and continuing to make information security.

The security issue has created opportunities for us to proactively engage with clients to solicit their feedback and to discuss how FIS can assist our clients in meeting their future business needs. Information security will remain a top priority for FIS in 2012 and beyond.

In closing, I'd like to leave you with the following key takeaways which are outlined on Slide 13. We continue to deliver on our plan to drive revenue growth and margin expansion, as evidenced by the 5.1% organic growth and 120 basis point margin expansion in the second quarter and our strong performance year-to-date. We expect to transition the legacy M&I accounts from our fully outsourced solution to an in-house FIS licensed solution in the fourth quarter of 2012.

While we will face some near-term headwinds, the good news is that we expect to have a long-term relationship with BMO and we are optimistic that we can further expand our relationship with the bank over time. And as I stated at the beginning of my presentation, we remain focused on generating new sales and driving value to our clients.

Again, thank you for joining us this afternoon. I'll now turn it over to Mike for the financial report.

Thanks Gary.

As a reminder, the healthcare business has been classified as a discontinued operation for all periods presented as a result of the definitive agreement that we executed on June 25. In accordance with GAAP, revenues and expenses from discontinued operations are collapsed and classified as a separate line item on the income statement.

In the second quarter of 2012, we reclassified reduced revenue and EBITDA by approximately $32 million and $11 million respectively and reduced earnings per share from continuing operations by $0.02. We furnished an 8K on July 3 to recast our historical financial results to reflect the healthcare business as a discontinued operation.

I'll continue the presentation on Slide 15. Consolidated revenue increased 3.1% to $1.5 billion in the second quarter. Organic growth after being normalized for currency and acquisitions was 5.1% driven by growth in processing volumes, higher professional services and consulting revenues and payment transaction growth.

Second-quarter EBITDA increased 7.7% to $438 million. The EBITDA margin expanded 120 basis points to 30.0%, reflecting organic revenue growth and disciplined cost management.

Next, I will provide additional detail on the operating segments, starting with FSG on Slide 16. Financial Solutions revenue increased 9.1% to $563 million compared to the second quarter of 2011 and grew 7.8% organically, driven by growth in Account Processing, Professional Services, Consulting, and Global Commercial Services.

As Gary mentioned, we are pleased with the improved performance within Capco's North American Consulting practice. The team has done a nice job of selling through the large client loss in 2011 and improving profitability.

Financial Solutions EBITDA increased 3.2% to $215 million compared to $208 million in the 2011 quarter. The EBITDA margin was 38.2% compared to 40.3% in the prior year, reflecting higher Professional Services revenue and Consulting revenues and growth in the Global Commercial Services. The margin was also impacted by the increased spending related to security and infrastructure improvement.

Next, I will provide some additional details regarding the M&I core migration project. At the February 14 investor day, we stated that we expected the revenue impact in 2013. We also stated that we anticipated being able to preserve the earnings from the M&I relationship in 2013 based on our contract.

During the second quarter, as Gary mentioned, we gained more clarity regarding the M&I migration plan. We expect to complete the core migration in the fourth quarter of 2012.

Although we do not yet have a new agreement, we are currently estimating approximately $60 million decline in annual EBITDA run rate. We expect the impact in 2013 to be about half of that.

Just to be clear, we are not providing guidance for 2013. We are simply updating what we now know about M&I, specifically that we anticipate giving up a portion of the contractual fee in 2013 in exchange for a long-term relationship with BMO. Consistent with our prior communication, the impact on 2012 is already included in our guidance.

As showing on Slide 17, Payment Solutions revenue increased slightly to $606 million. Revenue increased 2.7%, excluding the check businesses, driven by continued growth in electronic payments, including our PIN debt network and EFT processing and bill payment.

Payment Solutions EBITDA increased 8.6% to $250 million compared to $230 million in the second quarter of 2011. The EBITDA margin increased 310 basis points to 41.2% in the second quarter of 2012 compared to 38.1% in the second quarter of 2011, driven by growth in electronic transactions and cost management initiatives.

Turning to International on Slide 18, International revenues declined 1.9% on a reported basis and grew 10% organically, excluding $35 million currency impact. The increase was driven by growth in our European processing and consulting businesses, higher card issuance and usage in Brazil, and our expanded presence in Asia, including the BAAC implementation that Gary discussed. International EBITDA increased 3.4% to $63 million compared to $61 million in the prior-year quarter. The margin improved 110 basis points to 22% compared to 20.9% in the prior year.

Foreign currency exchange rates reduced revenue by $35 million in the second quarter. There was no material impact to our consolidated earnings as the currency benefit related to our captive operation in India helped to mitigate the impact of currency on our international results.

Please turn to Slide 19 for a reconciliation of net earnings. GAAP the earnings from continuing operations totaled $156 million in the second quarter. Adding back the $42 million in after-tax purchase amortization results in adjusted earnings from continuing operations of $198 million, which is an increase of 18.1% compared to the prior year.

Weighted average shares totaled 298 million in the second quarter 2012 compared to 311 million shares in the second quarter 2011. Adjusted earnings per share from continuing operations increased 22.2% to $0.66 a share compared to $0.54 per share in the second quarter of 2011.

The effective tax rate declined to 29% in the second quarter of 2012 compared to 32% in the prior-year quarter and 34% in the first quarter of 2012. The lower rate is due to the favorable resolution of certain tax provision -- positions taken by the Company. We now anticipate a full-year effective tax rate of approximately 33% for 2012, which, for modeling purposes, equates to 34% in the third and fourth quarters.

As shown on Slide 20, cash flow from operations totaled $259 million in the second quarter of 2012. Capital expenditures increased to $91 million compared to $68 million in the second quarter of 2011, primarily due to the additional investments we are making in information security.

Free cash flow, which excludes settlement activity, totaled $178 million in the second quarter of 2012 compared to $185 million in the prior-year quarter. The decline was due to require payment of $28 million to our Brazil joint venture partner in the second quarter of 2012.

Next, on Slide 21, we continue to execute on our capital allocation strategy, which includes ongoing investments in business, strengthening the balance sheet, returning excess cash to shareholders, and acquiring new products to cross-sell to our clients.

Total debt outstanding as of June 30 was $4.9 million and the weighted average interest rate declined slightly to 4.6% compared to March 31.

During the second quarter, we paid off our Term loan B which we believe it is another step on the path to investment grade.

Debt to EBITDA was 2.9 times -- sorry, 2.8 times at the end of the quarter. During the quarter, we paid $59 million in shareholder dividends and repurchased 1.5 million shares at a cost of $50 million. We returned approximately $270 million in cash to shareholders in the first half of 2012. We have $950 million in remaining share authorization under the existing plan, and we expect to use our operating cash to buy approximately 50 million of stock per quarter for the remainder of 2012.

We also completed the ICS/Memento acquisitions in April for a combined cost of approximately $45 million. We will continue to look for additional product-focused acquisitions to drive higher cost sales for our global distribution channels.

Now if you turn to Slide 22, I will provide additional details regarding the sale of our healthcare business which we announced on June 25. We expect to complete the sale by the end of the third quarter. As Frank described, the divestiture is consistent with our strategy to focus primarily on businesses where we have scale and can utilize our global distribution channels to sell additional products and services. The transaction was valued at $335 million in cash, and we expect to receive net proceeds of $220 million after-tax upon closing. The sale is expected to reduce full-year 2012 earnings from continuing operations by up to $0.07 per share. We expect to use the proceeds from the sale in a manner that is consistent with our capital allocation strategy to offset the dilutive impact. As a result, we do not expect the sale to have a material impact on earnings per share in 2013.

We expect to incur an after-tax GAAP loss of approximately $55 million, or $0.19 per share, upon completion of the sale in the third quarter. The loss will be included in discontinued operations.

Before opening the line for questions, I will provide a few key take-aways from today's overview as summarized on Slide 23. We are executing the strategy that we communicated at the February 14 investor day, namely providing organic growth and margin expansion, returning cash to shareholders through dividends and share repurchases and focusing on tuck-in product acquisitions.

While sales to North America financial institutions declined in the second quarter, we believe it's a timing issue. We do not believe we have had significant losses of new business as a result of the regulatory letter.

In the second quarter, we gained additional clarity on the M&I core migration plan. As we have discussed in the past, we do not expect any significant impact on our 2012 results related to the planned fourth-quarter conversion.

We anticipate a future EBITDA run rate impact of approximately $60 million a year, and we expect that the impact in 2013 will be reduced by approximately half that amount due to contractual fees. Again, this impact is specific to updating information regarding M&I. We will provide overall guidance for 2013 during our next year's investor conference.

We are off to a good start for the year. While we expect a more challenging second half due to the planned client deconversions and more difficult comparisons in our payment business and ongoing investments in risk management, information security, we are well positioned to deliver on our 2012 growth targets and EBITDA margin expansion.

Last, as outlined on Slide 24, after adjusting our previous guidance for the sale of the healthcare business, which is now expected to reduce overall earnings in 2012 by up to $0.07 a share, we are raising our full-year outlook from continuing operations to $2.45 to $2.55 due to more favorable effective tax rates.

Operator, you can now open the line for questions.

(Operator Instructions). Dave Koning, Baird.

Hey guys, great quarter again. I guess, first of all, just a little more clarity on the M&I Harris relationship. I think I remember back when Metavante was acquired, you were on about a $120 million revenue run rate, and I know Harris adds a little more to that. But it seems like a pretty high incremental margin if you are only losing part of that revenue and to lose $60 million of EBITDA. Is that just it, that it is very high incremental margin?

Yes David, this is Gary. Obviously, one of the benefits to our environment is when you operate fully outsourced environments on highly leveraged platforms, those parental margins can be very high. We'll continue to have a significant relationship with BMO Harris going forward. In fact, they will still be a top 10 client. We certainly think we will drive higher revenue through our Professional Services engagement as well, and obviously we will continue to sell additional clients onto that platform. But at the end of the day, we are going to have a very strong relationship with them going forward.

That's right, that's very important to us. They're clearly a top-tier bank and one that we want to build a very large relationship with, and one we've had a great partnership with over many years.

Yes, okay. There's no reason, over a long period of time, that you couldn't build it back up pretty significantly?

Absolutely.

Absolutely. That's what we will do.

Okay. And then the second one is, the last few years, the second-half EBITDA margin has usually been about 3% better than the first-half EBITDA margin. This quarter -- this year, the way the guidance is kind of setting up is for a little less; it looks a little like 200 basis points better, maybe even a little less than that in the second half relative to the first half. Is that because some of the growth might be coming out at a little lower margin or is it conservatism or maybe kind of fill us in on that.

Well, I think we had a very strong start to the year, obviously. We had some particular payments. We had some revenue come on at very strong margins. And so I think it's a great start to the first half of the year. I think we've got, as we referenced some challenging comps the second half and we have some clients who have been deconverting, so it's a little bit different than we saw last year, but that's how we anticipate the year to hold out.

Great, thanks. Nice job.

Thank you.

Glenn Greene, Oppenheimer.

Thanks, good afternoon. I just wanted to make sure I'm understanding sort of the pipeline and sales activity, so maybe just the questions for Gary. If I heard right, North America sales was down a little bit year-over-year, but in aggregate you were sort of saying sales was kind of flat year-over-year. Maybe you could sort of give me a little bit of help on sort of the environment and sort of, more importantly, pipeline activities?

Yes. It's a great question, I appreciate you asking for the clarification. All in all, our sales were on par for the full year when you look at our international sales, or nonfinancial institutions sales. Clearly, within North American financial institutions in the second quarter, we saw a little slowdown. As we mentioned, we don't feel we've lost any business due to our clients getting a letter from the regulators, although we will say we've had a number of conversations and we do think that some of those deals got delayed into the third quarter, but we are very confident, based on our pipeline, not only in financial institutions but also in non-financials and international we are going to continue to end of the year very strong.

So other than the letter that went out, I mean I guess a lot of people are sort of concerned about the macro environment and sort of spending activity and levels, and there's obviously been a lot of mixed messages from a lot of the big IT services companies regarding North America financial services. So was there anything beyond sort of the letter kind of stemming deal closures?

You know, not really. At the end of the day, we actually -- the number of deals that we had signed to financial institutions were actually up. So our clients are making decisions. We think some of our bigger deals just got pushed into third quarter because we were having other conversations. And so at the end of the day, our clients, especially financial institutions worldwide, they are all dealing with regulatory challenges, frankly unprecedented regulatory challenges. They are generating in a very, very obviously difficult economy, but even if the economy rebounds, they are trying to figure out how to reinvent themselves. So we saw strong growth in our Professional Services business, so we can't lose sight of that as well. So all in all, we still think we can get back what we missed in the second quarter on the full year within financial institutions, and we think nonfinancial as well as international is going to continue to have a strong year.

Then how about quickly an update on Capco, sort of thinking both North America and Europe, and particularly interested in activity for transformation or larger deals sort of leveraging both Capco and FIS products.

Yes, Capco was up significantly. They had a fantastic quarter and it was both in North America and in Europe. And we continue to see Capco's consulting business, as I said, grow very strongly. And most of it is around more transformative type consulting engagements. I tell you, the way our teams are working, our sales teams and our business lines with Capco, both North America and Europe, we are very pleased with. And that organization is certainly performing within our expectations at this time.

Any way to put a number on the Capco growth?

We haven't really carved Capco out. What we shared last year is they were a little behind our expectations and plan, and we are excited that, in the second quarter, they are ahead of (multiple speakers) plan or expectations for them. So you saw the size we acquired them was around a little over $200 million, and so obviously we think (inaudible) growth at that point.

Okay, thank you.

David Togut, Evercore Partners.

Thank you. Good afternoon gentlemen. Mike, could you quantify some of the underlying drivers of the 310 basis points of EBITDA margin expansion in Payment Solutions in the quarter? And if you adjust for the BMO Harris fourth-quarter anticipated impact, to what extent are some of these underlying drivers one-time in nature or sustainable?

The PSG margin, you can see we had some revenue growth, but we clearly had much stronger EBITDA growth in that business. And the teams continue to find ways to drive efficiency in PSG, so these are activities and actions that we had taken last fall heading into 2012. And then quite frankly, they had some decent transaction volumes. We had good volumes in NYCE for the first half of the year; we had good volumes in our debit issuing business; we had good volumes in bill pay. So those transactions come on at very high incremental margins. So that's what's driving the PSG side.

BMO Harris fourth quarter, we had -- looking at where we were going to be for the year and where we were going to end up with the clarity in the second quarter, we feel comfortable with where we are at in '12. And that business comes off and then, as Gary talked about, the team's got to go out and refill the hole, if you will. We've got a bridge in '13, and then we've got to put some new clients back on those platforms and that's what the teams are out looking to do.

Any specific large buckets of efficiencies to point to, whether it be data center consolidation or procurement?

I think it's a little of everything. We talked at investor day that with kind of finalizing the activities that we've done on the merger synergy plan with Metavante, it's now all blocking and tackling, a lot of little things, so the team continues with the consolidating, particularly item processing where the volumes are going down. They have done an outstanding job consolidating the number of centers that we operate. They'll keep doing that, but whether it's vendor costs, or procurements, or the operating cost, they're just good execution right now.

David, we do that as a course of business always, and then we are a little more focused on that during the budget process.

Yes.

I see. Mike, could you quantify the annual increase in information security spending that we should expect?

We talked about -- we didn't do a specific number, but we talked about reinvesting some of the incremental margin improvement that we would have seen in '12 back into the business, specifically infrastructure and information security. So it's -- it's a number that has an impact obviously, and we've talked about some of the things we're doing to improve our environment. But we'll continue to spend throughout '12 and there will be spending going forward, but there's obviously a little bit of a bump in '12 as we catch up some activities.

David, this is Gary. Obviously, this is something that is part of the business now. And it's -- the bar has been raised, it should be, and all providers are going to have to make investments in this space going forward.

Thank you very much.

Greg Smith, Sterne Agee.

Hi guys. I just want to be sure I understand the BMO M&I issue. So it's $30 million of EBITDA that you're going to lose in 2013, and then the full run rate $60 million, all things being equal, you'd lose in 2014? Is that correct?

$60 million is the annualized run rate. And again, we are talking specifically to the consolidated impact of BMO Harris and M&I consolidating the environments together. So the $60 million is a run rate. Next year with -- and again, we are getting information. It's not finalized, because we haven't finalized the deal with them yet, but we anticipate in '13 that $60 million will be mitigated by half due to our contractual arrangement.

How does that time throughout the year?

Again, the activity would end -- most of the migrations would be done by the fourth quarter of '12. And then so we would have that spread probably throughout '13.

Okay. And then just thinking about the impact of currency, it definitely seemed like you benefited from your captive in India. Is there any way to size that, what the total number of expenses are in India?

Yes, we obviously -- and again, that is -- it's predominately captive activities we do there. We use it to support our product sets that are based in the US. And because of that, it was favorable to us. Obviously, it gave us kind of a hedge against the diminution we saw in other parts of the world. But it's a small number. At the end of the day, the delta between what the impact was on the international side versus the benefit we got from our captive probably netted out less than a few pennies.

Okay. Then just as we think about currency exposure in other markets, I guess Brazil, and then thinking about Brazil and then Capco, are things pretty well matched up where, in Brazil, your -- you have significant expenses there matched against the revenue and same for Capco? I mean -- therefore you're always somewhat hedged on the expense side? There's no big mismatch, is there?

No I think that's --

That's right.

-- really around the globe for us, that Brazil is very matched. The expenses we have driving that are based down in Brazil. Our European operations, whether it's Capco, whether it's the other centers we operate, the costs are in-country, same currency. So the only one that's mismatched has some benefit for us right now, which is India.

Great. And then just do you have a rough estimate for the tax rate in 2013?

Wow. What should we --

Again, we are excited about the benefit we got in the second quarter, but it obviously changes the rate to the good. But why don't we wait until we do the whole '13 and we (inaudible) we've been in that 33% to 34% range now a couple of years, but we've got to do a little planning here before I give you a number.

Okay, great, thanks guys.

John Kraft, D.A. Davidson.

I wanted to go back to that mobile telco win you talked about, and I guess my question is if there is an opportunity to leverage it into a new vertical, or is this just a one-off I guess, particularly in light of your plans to divest out of the health vertical?

This is Gary. Obviously, we have been committed to these types of businesses for a number of years. Really what we are doing is selling computing services to adjacent markets that leverage our existing structure. So we deliver a lot of mainframe services to financial institutions, as you would expect. So, the ability to leverage that excess capacity and underwrite our overall delivery cost at very nice margins to nonfinancial institutions. So no, we have no plans of divesting this type of business. It's just a natural leverage for our significant data processing footprint in North America.

And there's the opportunity for other potential telcos, you think?

Absolutely. It's been a high growth area for us. That team has done a very good job finding opportunities that leverages our existing capacity. And I think that's something -- that's something very important that we focus on in the sales cycle. We are not after looking for non -- for services that we don't already have scale in. So mainframe is a great example where we bring significant scale, server management, something where we bring significant scale. So these are opportunities that allow us to underwrite our delivery cost to the financial institution marketplace, allows us to help us expand our margin because we are bringing more scale on the platform, getting more efficiencies out of it.

And John, we execute very well there. So we have a good reputation.

Yes.

Okay, thanks. Then I guess just one more if I could on the M&I conversion, specific to the move from the -- or to the in-house license that will happen I guess in Q4 of this year, is there a -- I know it's in guidance, but is there a revenue chunk that you'll get from that conversion?

M&I -- keep in mind we have a long-standing relationship with M&I on an outsourcing basis. We've have a long-standing relationship with BMO Harris, some things on an outsourced basis. The core banking system has been run in-house for years. So as you would expect, when we do -- when our clients do acquisitions, a lot of times they engage us for Professional Services activities to help convert those clients onto their platform. So we have -- that's very typical for us, and that's one of the drivers of our Professional Services numbers.

Ongoing, we're going to continue to have a very large relationship with BMO Harris. And so all we were doing was bringing clarity that getting an extension in a contract and a long-term agreement with the eighth largest bank in North America is prudent, given the size of our company and where we think the market is going. So, we'll have a good long-term relationship with them.

Okay, thanks Gary. That's all I have.

Julio Quinteros, Goldman Sachs.

Hey guys. Wanted to maybe just start off real quickly with the Financial Services segment, outsourcing in terms of demand. Can you just parse through a little bit, on the demand side, large clients versus small clients? Any distinctions to call out there in terms of the cadence?

Clearly, in the smaller market, we are overseeing massive movements to outsourcing. We have been saying that for years. And I would tell you we continue to see that trend. We've also continued to see a very large trend towards outsourcing in the large financial institution marketplace as well, but it's not near as advanced as what you would see in the classic community markets.

Also, when you are in the large financial institution, we are seeing a lot more services business driven there. So every quarter we have seen growth in our Professional Services business, and we think that trend is going to continue. But we do think there is a big opportunity in the large financial institution space for outsourcing business. We've signed some significant outsourcing in the LFI space. All so far this year, in fact, the matter even -- very deal that we had in the second quarter -- we are counting on second quarter -- got pushed into this quarter we actually signed today, so we will be announcing that here over the next several weeks. So we are seeing good movement in and around outsourcing for sure.

Then maybe just on NYCE part of the business segment, I think you guys said that it was around 3% of revenue. Is there some thought there on whether that business can get any bigger or any way to think about the growth potential of that business, or is this just a business that stays under the kind of pressure we are seeing right now, given some of the competitive dynamics there?

No, we think it still has opportunity. The team has done an excellent job coming up with both offensive and defensive strategies in that business. As we've shared with you the last couple of quarters, we saw some nice growth through the Durbin amendment. Obviously, we are seeing some of our transactions slow with some of the (inaudible) in pricing, but we've got a number of strategies ourselves we are deploying. And we feel good about some of the early results of those strategies. So, we think that solution has -- still has some growth in the future for us.

And then lastly, on the international side, a big bead relative to our numbers on the margin front. Can you just walk through what drove some of that upside in the international margins or at least relative to the numbers we had?

Well, at the end of the day, keep in mind our international business and we talked about it for years. So our international margins have always been less than what we've seen in the domestic US. But what we have driven -- what we've consistently said is, as we build scale in the countries that we are focused on, right, we're going to continue to see expanding margins of that. So, the team has done a great job selling. Frankly, we are continuing to see a move towards outsourcing, even international, and I think you're starting to see our overall software license fees continue to get smaller. And so as that scale comes up in those various countries, whether it's Brazil, whether it's Europe, or the UK, or in Asia, some of the deals we've mentioned, those transactions and those accounts and those new clients come on at very high margins for us.

And also, the team does an excellent job controlling cost. Frank talks about it. We execute our business every day looking for opportunities to become more efficient, and then we continue to drive our sales force through incentives to close as much business as possible. So really it's nothing more than good sales execution, good cost control, and scale in the markets we are operating in.

Okay. So barring a large contract award or some new investment initiative, this level that you guys have reached should be sustainable?

Oh, yes, absolutely. We still think there's opportunities to grow our margins, keep in mind, in all of our markets.

Great, thank you guys. Good luck.

Peter Heckman, Avondale Partners.

Good afternoon gentlemen. I had a follow-up on -- I know that some of these negotiations are ongoing, but it sounds to me as if the M&I, BMO Harris consolidation is maybe that a portion of that $60 million loss of EBITDA is coming from a one-time contract termination payment. And if so, which quarter would we expect that to come in?

Again, what we are doing with BMO Harris, because we had really relationships on both sides of that, so we are really taking a contractual -- typically if you have a relationship and your customer gets acquired, you have a termination fee in that situation. Here we have an ongoing relationship, so we've really tied together the ongoing portion, and as Gary talked, an extension of that relationship with the migration of M&I. So it's a little different than a typical termination work because it's not a termination in this situation, and so it will -- we just don't anticipate a one-time bump that will hit a specific quarter as opposed to just kind of a transition through the current relationship down to where we just gave you an expectation after '13.

Okay. And then for some of the big pieces that you may be able to win in terms of that relationship, can you identify any big pieces of the combined M&I/BMO Harris you currently have, like bill pay for example?

So a lot of the business we are still going to keep (multiple speakers) different nature, but bill pay we actually will have. There is the core that (technical difficulty) customer systems. We are operating two platforms. We're going to be operating one that's going to go to an in-house platform that Harris and M&I are going to operate on. There's been some noise around the credit card as an example. We never processed credit cards for M&I, so they really didn't have a decision there. We had a flow-through as part of our relationship with another organization and they kept their card processing there. So the bulk of the applications we are still going to process for them. It's going to be generally an in-house, so obviously you can see from the numbers that the numbers are going down quite a bit, but the relationship is still a very large relationship. It's a great organization. We have a great relationship with them. And we've talked about -- we felt that was an opportunity to expand their relationship as opposed to have a terminating type of situation.

Yes, just add onto that, keep in mind we are talking about BMO Harris, which is the US subsidiary of BMO in Canada. So, we think there's a lot of opportunity to leverage some of our capabilities in the Canadian operation, and so we've got a lot in that environment. We do very little with actual BMO in Canada, and we talk to them about a number of fronts, whether we could leverage a lot of our payment technologies, our core processing technologies. And so as Mike said, having a long-term relationship with BMO Harris and actually extending that we think makes a lot of sense. But then what we've been able to do through this process is really tap into overall BMO in a significant way for the first time, so the dialogue has been very positive around working out this situation. But we think what that's going to do is obviously open some doors to allow us to talk about BMO, the larger enterprise in Canada, on some of our capabilities going forward.

Okay. One last follow-up, I think you had mentioned ING when you mentioned some of the consulting work and a project that was started in the fourth quarter '11. I believe that's another large bank merger where you have the core at both ING Direct and Capital One --

No, keep in mind we were talking about ING as an international client over in the Netherlands, so we are working with them. They have actually sold ING Direct to Capital One, but you are right. We do have both Capital One and ING Direct, but our reference in the earnings call was dealing with ING, which we announced in the fourth quarter of last year, where they are actually migrating all of their country-specific core processing systems onto our technology. And so that's obviously continuing to drive Professional Services business for us internationally as we help them with that deployment and migration.

Okay. And then any early insight in terms of Capital One, ING Direct, which core they may migrate to as a consolidated entity?

You've got to totally different enterprises, right, so you've got Capital One, who's actually bought ING Direct, which is one of the largest direct banks, and so we've got a very strong relationship there. And we are just going to continue to work with them through their strategies. And as they decide how they are going to carry forward their business, obviously FIS will be there to help them. And so we enjoy seeing our clients grow and grow through acquisition, because it usually means great things for FIS.

All right, thanks for all the help.

Bryan Keane, Deutsche Bank.

This is [Ashish] calling on behalf of Bryan Keane. Good results.

A quick question, a quick question on the financials. Financial Solutions segment, that delivered another solid quarter. And so how should we think about this group going forward? Do you think this growth is sustainable going into second half considering all the headwinds that you spoke about? And just a follow-up on that could be the deals, the deals that got pushed out the third quarter, would that have any impact on the near-term revenues?

I think (inaudible) a pretty good string here. The comps in the last half of last year were a little off but they started out last real strong in the first two quarters, and then, through those comps, we've had pretty good third and fourth quarter, the first two quarters this year were solid. I mean we've talked about -- FSG has really come back pretty strong after a slow '09 and '10 where we had kind of these slowdowns due to the financial crisis. And just good steady growth. We get a little bit of noise quarter-to-quarter because of comps or because of something moving around. But as Gary referenced, we feel pretty good about the growth opportunity there.

I don't -- the second-quarter sales again we think is more of a delay than losses, and Gary referenced that in one of the deals we actually got signed here already in the third quarter. So I think we still feel good about FSG. It's going, quarter-to-quarter, it's going to have a few up and downs, but as we look year-over-year we expect it to come back strong, and it has the opportunity to keep growing.

Yes, I can't agree more. At the end of the day, if you look at our - once again, our software business continues to climb because of the trend towards outsourcing that we've been now talking about quarters for just many quarters. And as a result of that, it's a much more predictable business. So FSG doesn't have quite the impact that, say, our PSG segment does with transaction volumes, and some of those things. So we feel good about FSG in the second half of the year, and we feel good about the sales success in that area as well.

As Gary and Mike said, if you look at the last two-year results and how strong our pipeline is today, we can't help but feel good about FSG and how it's performed and how we believe it will perform.

That's great. One quick question on the FX. And this is more particular -- this isn't particular to the FX impact on the topline. So I believe you said the impact was roughly $35 million on the topline for international segment, and the Brazilian Real as well as the euro has significant (inaudible). How do you -- like if they stay at this current conversion rate, how do you think about FX going forward? I was wondering if you have done any kind of calculation or can you provide any kind of insight into it?

Yes, we try to look at that. I don't have a number in front of me in terms of trying to project out the FX. Again, we try to give organic numbers, which eliminate the FX impact, and then at least most of those countries have a natural kind of hedge and balance, and in terms of if we have a negative impact there in terms of lower margin coming back, right now we've got the benefit with India. So without trying to predict what's going to happen with the currencies swinging in the future, I don't really have a specific number. But you look at the second quarter and we don't think we have too much exposure there in the bottom line.

That's great. Congratulations once again and thanks for the call.

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