Fidelity National Information Services Inc (FIS) 2013 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 listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time.

(Operator Instructions)

And as a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Ms. Mary Waggoner, Senior Vice President of Investor Relations. Please go ahead.

Thanks to everyone joining us this morning for our second-quarter earnings report. With me to discuss our results are Frank Martire, Chairman and Chief Executive Officer, Gary Norcross, President and Chief Operating Officer, and Woody Woodall, 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. 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 attachments to the Press Release and the supplemental slide. With that, I will now turn the call over to Frank Martire. Frank?

Thanks, Mary. Good morning, everyone, and thank you for joining us on today's call. I will begin today's business review with a summary of our financial performance and business highlights. Gary will follow with the business and operations report, and Woody will provide additional insight into our financial performance and our outlook for the remainder of 2013. Turning to slide 6, we delivered solid organic growth in the second quarter, with a 4% increase over prior year. This marks the 14th consecutive quarter of organic growth, which underscores the strength of our business model and our strong client relationships. Adjusted EPS increased 8% to $0.71 per share. For the six months ended June 30, organic revenue rose 4%, the margin expanded 40 basis points, and EPS grew 11%.

We are pleased with our financial results through the first half of 2013, which are in line with our expectations. We are also encouraged by the ongoing sales execution, including the addition of new clients such as Sainsbury's Bank in the UK, as well as expanding relationships with existing client such as KeyBanc and Sterling Savings Bank in North America. In addition, we are excited about the opportunities we are seeing in emerging payments, such as the Merchant Customer Exchange. These wins lend additional credence to the depth and breadth of our solutions, the strength of our people, and our ability to provide long-term, strategic value to our clients. Continuing on slide 7. The business strategies that we outlined in February of 2012 continues to drive benefits to our Company, our clients and our shareholders. Our strategy is summarized as follows. First, we remain committed to optimizing performance through organic growth, with an ongoing focus on double-digit growth and earnings per share.

Second, we are delivering strategic value to our clients through solution, innovation and transformation. This includes the expansion of our mobile capabilities with the acquisition of mFoundry, and leveraging our existing infrastructure to develop new and innovative capabilities for the industry. Finally, we are highly committed to enhancing shareholder value through a combination of strong financial performance and meaningful share repurchases and dividends. We returned $353 million to our shareholders in the first half of 2013, and we have returned approximately $1.5 billion to our shareholders since the beginning of 2011. We remain very excited about the future of our Company and our ability to deliver superior performance. On behalf of the Management team, I would like to thank our clients and shareholders for their ongoing support and our employees for their dedication in driving our continued success. Now I will turn the call over to Gary for the business summary and the operations report. Gary?

Thanks, Frank, and thanks again to everyone for joining us this morning. FIS continues to drive solid results, demonstrating our ability to deliver consistent performance and managed our strategic plan. As Frank mentioned, we continue to generate solid growth and drive strong revenue performance. We are pleased with our first half of the year results, which are in line with our expectations. My remarks today will cover two main areas. First, I will discuss our overall sales performance, highlighting the continued demand for our full breadth of solutions in each of our key markets. Separately, I will highlight ongoing solution innovation through our new, commercial agreement with the Merchant Customer Exchange. This significant win demonstrates our ongoing success in enabling business innovation and transformation, and illustrates the value of our leveraged investments in enabling payment services.

I will start with our global sales performance on slide 9. Overall demand for solutions and services has remained consistent over the past several quarters. Financial institution bookings are up year-to-date, and we perceive further upward momentum. Demand is broad-based around core enhancements, mobile solutions, emerging payments and services. Also, significant transformational activity is occurring across all channels and regions as many institutions improve there overall customer experience, build brand loyalty, streamline operations and reduce costs. This momentum is being driven by cross-sell opportunities created from our innovation-focused client events and the execution of our go-to-market strategy. Please turn to slide 10. In North America, our comprehensive solution suite enables us to deliver strategic value to our clients.

We see continued activity around core upgrades and replacements, continued strength in consulting services, increasing demand for our mobile solutions and exciting new opportunities around our payment capabilities. Demand for FIS core solutions underscores the need for updated technology, with an emphasis on improving the overall customer experience through the real-time integration across all channels. For example, an $8 billion financial institution located in the southeast, which operates hundreds of branches across 17 states, recently selected FIS commercial and retail loan processing solutions to replace the banks 15-year-old technology. The upgrade will provide more robust feature functionality, the ability to streamline processes and enhance platform integration. In contrast, Texas-based Industry Bancshares has opted to replace its core banking system, which is installed just four years ago, with a more robust solution from FIS. The bank will also deploy our item processing and branch automation solutions.

These enhancements will enable it to expedite customer service and provide clients with real-time access across all delivery channels. These new clients continue a steady trend of core processing wins, with 30 new deals in 2012 followed by additional new signings in the first quarter of 2013, including Beneficial Bank, USAA and GE Capital. In addition to our leverage core processing capabilities, we also assist clients with business planning and new product development. A good example of this and to and-to-end approach is KeyBanc, which is launching a new payments channel for its commercial customers. Working with the bank, we developed a customized, prepaid card solution that aligns closely with their commercial payment strategy. As part of this new multi-year agreement, FIS will provide outsourced transaction processing, integrated voice response, and card fulfillment services. Turning to mobile, accelerating adoption of digital channels is driving continued, strong demand and cross-sell opportunities for our solutions, as financial institutions move to strengthen consumer loyalty and engagement through this dynamic and fast-growing channel.

We are very pleased with the increasing penetration of our mobile solution within our client base. As an example, we are partnering with Sterling Savings Bank, a $9 billion institution based in Spokane, Washington. Sterling migrated to our core solution in 2011 and will expand their relationship with FIS by deploying a wide range of digital solutions that include mobile banking, remote deposit capture and mobile prepaid. In addition to mobile, the bank also is enhancing its business banking offering by augmenting its consumer online banking channel to include account origination and deposit capabilities. These and many other similar engagements offer continued endorsement for the breadth of our capabilities as well as our go-to-market strategy in North America. Next, I'll cover International markets on slide 11. Our business continues to perform very well. Revenue is up more than 9% year-to-date, and the International pipeline is the strongest in our Company's history.

In the quarter, results were driven by strong growth in Latin America, consulting services in Europe, and new client implementations in Asia. Based on the robust pipeline and our past success in the International market, we believe FIS is well-positioned to continue to drive higher growth than domestic-only providers. With that as a backdrop, earlier this month I attended our third annual International conference in London. Overall attendance was up 50% over last year, with clients from 45 countries around the world. The event centered on the changing buyer for financial services and the need for financial institutions to evolve to new customer interaction models, a sentiment embraced by the International participants. Much like our North American conferences, we expect this client event to influence deals and create new cross-sell opportunities. Specific to our markets, in Europe, banks continue to face a challenging environment as economic headwinds, increased regulation and a changing financial services landscape persist.

While overall IT spending is expected to remain flat, these market dynamics are directing more investment spend to third-party providers like FIS. Our European consulting business continues to generate strong growth. We are engaged in more discussions around our outsourced processing solutions and service capabilities. As an example, in May, Sainsbury, a leading retailer in the United Kingdom, announced plans to acquire the remaining 50% ownership in Sainsbury Bank from Lloyds Banking Group. Sainsbury also announced the selection of FIS as the bank's new technology partner, whereby we will deliver real-time core banking and back office processing support on an outsourced basis. We have executed a heads of terms and are generated revenue under our current arrangement. We are very excited about this opportunity, and look forward to providing additional details once the bank receives regulatory approval and all agreements have been finalized, which we expect to occur in the third quarter.

In Asia, new banking requirements and the next wave of technology replacements are aiding our core solution opportunities. In addition, financial institutions are increasing their investments in specific channels, including unified payments and serving the under-banked. For example, we continue to see strong increases in our payments business as we expand our footprint throughout Southeast Asia and India. The India ATM initiative is progressing as planned, and transaction volumes are ramping up in line with our expectations. In addition, we are benefiting from growth within existing clients such as Karnataka Bank, which also is broadening its ATM presence to reach the under-bank market. Given our experience and successful track record in deploying and managing ATMs in India, we are very optimistic about further expansion in the region. Turning to Latin America, Brazil continues to be a strong source of growth, and we remain bullish on the region.

Our card business continues to deliver double-digit increases, driven by new client additions and continued growth in card usage and adoption. This, in turn, is driving higher demand for our cardholder support services. Having just returned from Brazil, we are very pleased with our performance there. We are encouraged by the opportunity to further expand our offerings in Brazil, and across the region where we have lower penetration. Next, if you will turn to slide 12, I will provide a brief update on our go-to-market strategy for global financial institutions. As we discussed on the first quarter call, our target group within this market includes more than 25 of the largest global and multinational financial institutions. To better serve this market, we have built a highly-experienced and dedicated global team to focus exclusively on these clients where we have strong C-suite relationships. This team is highly complementary to our existing bench of financial technology and consulting professionals, and will be instrumental in helping us to maximize opportunities in this key market. We look forward to sharing additional details as this plan progresses.

Finally, if you would turn to slide 13, I will provide additional details about our new commercial agreement with Merchant Customer Exchange. This is potentially one of the most significant payment deals for the industry in the last several years. MCX is a consortium of leading retailers who seek to offer an integrated mobile commerce platform that will enhance the customer experience and strengthen customer loyalty. We are very excited to support this groundbreaking initiative, which once again, is a testament to the breadth and scalability of our Payment Solutions. This encompasses the ability to integrate and interface with multiple platforms, our expertise in payment network management, and our strong relationships in the financial institution and retail markets. This strategic agreement includes the design, build and ongoing management of the MCX network within the existing FIS payments network infrastructure. FIS will provide payment processing, payment network infrastructure and payment rails, including the switching, routing and settlement functions. This will enable MCX to authorize and execute transactions in real-time. MCX will govern the network rules and economics.

The total financial benefit to FIS could be significant, depending on the overall success of MCX in the broader market. However, under the minimum contractual fees, this is a large sale for FIS and will generate re-occurring revenue spanning the next seven years. This endeavor is a great example of our ability to leverage our core competencies, technology investments and broad solution suite to drive customer-specific innovation. In closing, consider the key take-aways outlined on slide 14. We are confident in our global business strategy and are committed to delivering our plan of operational excellence. We are pleased with our first half performance and remain focused on driving profitable, organic revenue growth, which we have seen for 14 consecutive quarters. We continue to drive new sales, as evidenced by the growth and financial institution bookings, and we are encouraged by the strength of the global sales pipeline. Overall, we believe the powerful combination of FIS technology solutions, service capabilities and consulting expertise, coupled with our global scale, offered an unparalleled value proposition in the market. Again, thank you for joining us this morning. Woody will now highlight our financial results.

Thanks, Gary. I will begin on slide 16 with a summary of our consolidated results. Consolidated revenue increased 3.8% to $1.5 billion and grew 3.7% on an organic basis in the second quarter, after normalizing for currency and acquisitions. These results include approximately $14 million in previously-disclosed termination fees related to M&I, which partially offset the related loss of high margin account processing revenue. As we discussed last quarter, these termination fees will decline in the second half of the year. EBITDA grew 2.8% to $450 million. The EBITDA margin was 29.8% compared to 30% in the second quarter of 2012, reflecting a less favorable revenue mix and higher information security costs. Incremental information security costs reduced the margin by approximately 60 basis points.

Adjusted net earnings from continuing operations increased 5.5% to $209 million, and adjusted earnings per share increased 7.6% to $0.71, compared to $0.66 in the 2012 quarter. Consistent with our guidance for full-year 2013, and as we discussed on last quarter's call, we did not expect the rate of organic growth and margin expansion that we saw in the first quarter to carry forward into the second quarter, given the strong weighting of termination fees early in the year. For the first half of 2013, revenue increased 4.2% on a reported and organic basis, adjusted EBITDA increased 5.5% to $878 million and the margin expansion 40 basis points to 29.4%. Adjusted earnings per share rose 10.8% to $1.33 per share. We are pleased with our strong first half results, which are in line with our expectations. Next, I will continue on slide 17 with the segment review.

Financial solutions revenue increased 4.2% to $587 million in the second quarter, and grew 2.7% organically, driven by strong growth in e-banking solutions, global commercial services and consulting revenue. Financial solutions EBITDA increased 7.5% to $231 million, and the EBITDA margin expanded 120 basis points to 39.4%, driven primarily by increased termination fees and higher license revenue compared to the prior-year quarter. While we continue to anticipate mid-single-digit revenue growth within this segment for the year, we expect growth in the third quarter to remain challenging due to the de-conversion of the M&I accounts in October of 2012. Turning to slide 18, Payment Solutions revenue increased 2.8% to $623 million. Revenue increased 4.2%, excluding the check businesses, driven by growth in e-payments and output solutions.

Payment Solutions EBITDA increased 5.3% to $263 million in the quarter, and the margin increased 100 basis points to 42.2%, driven primarily by higher termination fees. As a reminder, our payments business follows a seasonal trend of lower revenue in the third quarter compared to the second quarter, due to the increased volumes for processing of tax payments in the second quarter. Now I'll cover our International business on slide 19. Organic revenue grew 7.9% in the quarter, led by strong growth in Latin America, including double-digit growth in Brazil, our European consulting practice, and new client implementations in Asia. Growth within our International segment was affected by lower license revenue, and a client de-conversion in Germany, which caused a 4 point headwind for the quarter.

We expect organic growth in the second half of 2013 to be much stronger, with the on-boarding of several new clients such as Sainsbury's, First Bank of Puerto Rico, and Vietinbank, as well as the ongoing ATM expansion in India. We continue to anticipate double-digit growth in International for the year. The currency impact on International revenue was $6.6 million in the second quarter, or about 2 points, resulting in reported growth of 5.6%. Slide 27 in the appendix provides a composition of International revenue by local currency. International EBITDA increased 2.7% to $65 million in the second quarter. EBITDA margins declined 60 basis points to 21.4%, primarily due to the items I described earlier, which impacted the International margin by 190 basis points. The earnings impact from foreign currency rates was not material. Corporate expense increased $19 million to $109 million in the quarter, driven by increased investments in information security, risk management, and higher-than-anticipated medical costs. We anticipate a corporate expense of approximately $105 million per quarter for the balance of the year.

Next, I will provide a reconciliation of GAAP-to-non-GAAP earnings per share on slide 20. GAAP earnings totaled $0.31 per share compared to $0.52 per share in the second quarter of 2012. These GAAP results are adjusted to exclude $0.14 of acquisition-related amortization, and $0.14 related to refinancing activities completed in the second quarter. The remaining $0.12 represents an adjustment to the estimated future Capco earn-out, driven by the strong year-to-date results and improved expectations about the future performance of this business, which increases the earn-out liability. We continue to see strong demand for consulting and services work. This brings us to adjusted earnings per share of $0.71, which is a 7.6% increase compared to $0.66 in the prior-year quarter. The effective tax rate was 30% compared to 29% in the second quarter of 2012. Both periods reflect the favorable resolution of certain tax positions taken by the Company. We continue to anticipate an effective tax rate of approximately 32% to 33% for the full year 2013.

The average diluted share count declined to 294.3 million in the quarter compared to 298.3 million in the second quarter of 2012. Basic shares outstanding were 292.1 million as of June 30. Moving on to cash flow on slide 21, cash flow from operations totaled $199 million in the second quarter of 2013 after adjusting for the $52 million bond premium payment and the $10 million net change in settlement activity. Capital expenditures totaled $83 million, or approximately 5.5% of revenue, which brings us to free cash flow of $115 million compared to $178 million in the prior-year quarter. The decline resulted from higher cash tax payments in the current period. We still anticipate free cash flow for the year to be in line with adjusted earnings. Our uses of free cash flow during the second quarter remain consistent with our capital allocation priorities of investing for growth, returning cash to shareholders and strengthening the balance sheet.

As depicted on slide 22, we returned more than $188 million to shareholders in the second quarter, including $63 million in dividends and $125 million in share repurchases. We repurchased 2.8 million shares on the open market at an average cost of $44.25 per share. Year-to-date we have repurchased 5.5 million shares, at a cost of approximately $225 million. Approximately $424 million remains available under the existing share repurchase authorization. As we discussed last quarter, we refinanced a portion of our debt in April and issued $1.25 billion in new bonds. In May, we completed the redemption of the $750 million of 7.625% bonds that were due in 2017. Debt outstanding totaled $4.8 billion as of June 30, up from $4.6 billion as of March 31. The weighted average rate declined to 3.8% at quarter-end. Total debt-to-EBITDA was 2.7 times at quarter-end. This is slightly above our targeted debt-to-EBITDA ratio, which is at or slightly below 2.5 turns. We anticipate reaching our target by the end of the year.

Before opening the lines for questions, I will summarize a few key take-aways for the quarter and our outlook for the remainder of the year on slide 23. We are pleased with our first half results, which are in line with our expectations. We remain encouraged by the stable to improving macro trends in the market, as evidenced by continuing demand for consulting and services. We are maintaining our outlook for 3% to 5% organic revenue growth and 4% to 6% reported revenue growth. Due to the continuing strong demand for consulting and services, we anticipate the EBITDA margin to trend toward the lower end of our guidance for 30 to 50 basis points of margin expansion in 2013. We continue to anticipate adjusted earnings per share of $2.77 to $2.87, which is an increase of 11% to 15% over 2012. Free cash flow is expected to convert at approximately 100% of adjusted net earnings for the full year, and we remain focused on deploying cash in value-enhancing ways, including investing for future growth, maintaining a strong balance sheet, and returning cash to shareholders. That concludes our review of the second-quarter results. Operator, we can now open the line for questions.

(Operator Instructions)

Ashwin Shirvaikar, Citi.

Looks like pretty good execution here. My question is with regards to the 4% to 6% revenue growth range. At this stage, half the year being done, what causes you to be at the lower end of the range versus the upper end of the range? How would you bias that? I understand 3Q is weaker than 2Q, and that's seasonal, and then you end up with a stronger 4Q. But any comments there?

Again, look at organic revenue for the first half of the year is 4%, and it is in line with our expectations, and we're ready pleased with it. We'll continue to see strong demand in services and consulting revenue, and have pretty good visibility into the back half of the year. With regard to reported revenue growth, we had mFoundry in there, which has got some growth in there, and some of the acquisitions from last year that are driving some additional growth. So we're pleased with our first half of the year, and feel comfortable with our growth, but we're not at a point, Ashwin, where we are ready to increase the revenue guidance at this point.

Yes, Ashwin, just to build on Woody 's comments, you're seeing every quarter. You're continuing to see our sales coming off in very highly re-occurring outsourced leverage transactions. When you look at the Sainsbury's example and you look at MCX, these take time to convert, take time to ramp up. And we're really seen that continued decline in big license deals which -- so long-term it's a great outcome for us as a Company. But those deals just continue to push, and they take longer to on board and start put into the revenue line.

And on top of that we were very strong pipeline to go with it.

Yes.

Right. So as I take those comments and think forward into the rest of this year and 2014, would -- is it safe to say that, as we think about the next 18 months, that hole that's left by M&I is going to be filled, at this point? You feel good about --

We're not giving '14 guidance at this point, Ashwin, but as we've talked about on previous calls and as you've seen on this call, we're very pleased with our sales success. We may not get it exactly the way it came off, but combination of the India ATM deals, Bremer Bank, Webster Bank, Guaranty Bank, Sainsbury's, MCX deal, Vietin. All of these wins are items that will help us fill that hole in 2014.

Exactly. RIght. We never thought that we would feel fill like-for-like on the M&I platform. We knew that our strength as a Company is our diversification of product, our diversification of platform, diversification of market. And so you continue to see us log these big wins around the globe, and all of these things will help us as we go into 2014.

Understood. And then one last question, information security, obviously a 60 basis point hurt to costs this quarter. How much of that is one-time expenses versus things that become part of the base of cost?

Yes, I think as you -- as we annualize through 2013, it will be more of a normal run rate, if you will. I don't think you have got a lot of one-times from an information security and risk standpoint in Q2. It's much more business as usual. As you read the paper and look at the news globally, information security and cyber attacks are more prevalent and complicated, more sophisticated than ever. And we have to be prepared to repel and defend against these attacks. So we continue to invest in that area. Information security has always been a top priority for FIS, and will continue to be that.

But there's not a lot of one-time in this. And as Woody says, this is really the new normal, and everybody in this industry are going to be subjected to making those investments.

Right.

Brett Huff, Stephens Incorporated.

A couple quick questions for you. It seems to me that you guys are having a lot of success on the big deals, but that you have a little bit of a mix headwind, and I think that was probably expected as you move -- have more and more success in the bigger banks and with Capco. In our view, that should give us more confidence on the Street that you have potential upside to 4% or 5%-type organic growth. So as we look forward, should we feel more optimistic on potential upside for the organic growth? But just know that may come with not quite as large a margin expansion as we have come to expect? Is that a way to think about the medium-term for you all?

Brett, this is Gary. I think that's well said. We had forecasted over now, for multiple quarters, this move towards outsourcing, this move toward services. Certainly our consulting practice leads the way with an indicator of what's going on in the various markets. And we see it as a very positive aspect as well that we're signing these larger, more complex, more transformative deals. Clearly, we have the M&I grow-over that we have to deal with, but we deal with grow-overs every year. This one's just a little more chunky. But we feel good about our go-to-market. We feel good about the success we're having. We've said, also in multiple quarters, the rate at which our licensing business had dropped off was a little faster than I think we thought. We actually don't see that as a bad thing. Once again, I think clients are looking for ways to transform their environments, get costs out, go with the provider that has the scale and capabilities for them to be successful in the future. And we're seeing it in not only in our pipeline, as Frank mentioned, which is very robust, but in the signings that we're having every quarter.

Brett, the thing is, our clients are looking for these services and capabilities, so we have the prize. But fortunately, we're well-positioned with all the servicing offerings that we could get to our clients today. And that's what they're looking for. They're looking for that mix, not only of product but all the servicing capabilities.

So to your margin question specifically, clearly these larger opportunities come on at lower margin than a license fee transaction. As you know, historically FIS has always done an excellent job at controlling our cost and getting our cost out in margin expansion, but we're always looking for good, profitable revenue growth. And so, if we have to take a little less margin expansion to get that, we see that as a good outcome. But we'll continue to stay focused on the cost side of the equation as well, because we know, as these deals in our pipeline continues to transform, there's going to be areas that we're going to be able to pull down investment in or reduce our cost structure to help augment that.

Great. And just a second question. Can you give us any numbers on the bookings this quarter? It sounds like they're going well, and although I know it's probably hard to think about when MCX and all that kind of stuff could potentially be. But could you give us that number? And is there any impact that you've seen from any additional FDIC letters or things going on there? Could you address that?

No it's a good question. We're going to try to not to talk about where we are bookings year-to-date every quarter. But as I said in my prepared remarks, they are definitely up year-to-date and actually up very nicely. When you talk about our report of exam, as you know, that is a confidential document, but certainly we're working with our clients on that, and at this point, monitoring it very closely. Our pipeline is very strong. Our booking success was very strong in Q2. We feel we're going to have a good, solid Q3 results as well, but we're going to continue to monitor that.

That's what I needed.

Glenn Greene, Oppenheimer.

The first one, I just wanted to drill down on International a little bit. It sounded like Brazil was fine, still in the double digits, and most of the somewhat slower growth, the 8% organic, was Europe. And if I heard Woody right, it's sounded like a 4 point headwind from a German bank or client de-conversion? Could you just talk through that drag? And was that known and -- that you expected heading into the year? It sounds like a pretty large client. And then how do we get comfort, then -- you seem very confident that it will accelerate meaningfully in the back half. How do we get comfort there?

Let's take your first part of the question first. Brazil did see double-digit growth again. We continue to see a good growth down there in both new client adds as well as card adoption and usage. So saw good growth in Brazil. I think there were some people worried about some of the macro trends down there. We have not seen it to date, so very positive on Brazil. In Europe, our European business did lose a client in Germany. That, combined with lower license fees, we're about a four-point headwind. I know as Gary and I have talked about with you guys the last couple quarters, we continue to see a shift between one-time license fee more to ongoing outsourcing revenue, which will be lumpy from quarter to quarter from time to time. So we did see a client de-conversion. We saw some lower license fee in second quarter. That's not necessarily a bad thing with the change to license -- to outsourcing from license. But it did have about a 4 point headwind in the quarter.

Glenn, to build on that, our confidence in Europe, to your point specifically, while were confident in Europe, we typically don't do this. It's very rare for us to talk about a potential client signing. But since Sainsbury Bank actually announced we are the vendor of choice, that certainly -- and when they're -- we've already got a fairly significant staff engaged there and working on the implementation. We feel very good about Europe in general. We've forecasted that for the last several quarters with all the consulting activity. You continue to see that grow and rise every quarter. And so we feel good about that, and now we're starting to see some of these large transformational deals we had talked about. Now of course, Sainsbury has got to get regulatory approval, and we've got to get the final agreement signed. But they are -- we do have people engaged there at fairly significant amount, and they are paying us. So we feel good about where Europe is going.

And the back half of the year, we're still very comfortable with double-digit growth in International.

Absolutely.

Okay and that probably -- and that includes both double-digit in Brazil and in Europe?

That's aggregate International segment growth, double-digit.

Yes.

Okay. I'll take a little bit of that off-line. But one more question. The $50 million adjustments related to Capco, and it sounded like related to earn-outs. Can you talk about that a bit? How that's determined, what it's based on, and how you have the visibility toward that?

Yes. If you look at when we did the acquisition of Capco, there was an earn-out connected to revenue and profit performance over a several-year time horizon. As we have look at Capco 's ability to drive additional services in the LFI space or the GFI space. Our viewpoint around that division has improved. We believe that their ability to grow the revenue and the profit has improved from our original base case. And what that does is it requires a change in the estimated earn-out liability -- or an increase to the estimated earn-out liability. So, that's really what drove that --

(multiple speakers) So you had initially taken it down, I recall, and now you are taking it back up?

That's correct.

Just your outlook looks better?

That's correct.

Yes, Glenn, it's actually a win-win situation for us. It's very good for the Company, and it is excellent for the Capco personnel also.

Okay. Terrific.

David Togut, Evercore Partners.

Can you bracket for us what the three large contract wins, or expansion of existing clients, might mean for you long-term? If we look at, for example, Sainsbury, KeyBanc and MCX? How big could these contract signings be, either on a TCV basis or an annualized revenue contribution?

David, this is Gary. We're going to try to avoid giving specifics around these contracts, as they are confidential. I can certainly -- we feel confident that Sainsbury will be the largest core banking deal done in Europe that we are from a sizing standpoint. MCX is a highlight in my prepared remarks. Even just under the minimums to operate the network will be a significant win for us. We judge significant wins as contracts greater than $25 million, just to give you some scoping. Obviously, these would be much larger than that. So -- but in general these are very, very nice transactions for us and can produce meaningful movement for us.

When you say greater than $25 million, do you mean TCV or $25 million a year in revenue?

Correct, TCV. When we start looking at large contracts, when you get a total contract value of greater than $25 million, we consider that a fairly large transaction. We have, given our size, as you would imagine, we do thousands and thousands contracts a year. And so a deal of the size greater than $25 million over the terms, a fairly significant deal for us.

And David, Sainsbury and MCX both, on any metric you look at, they are significant deals.

Yes, exactly.

They're both very significant, David. And it's not only about what they are today, but what they could potentially could be in the future for us.

I see. And then just as a quick second question. Gary, can you give us a sense of unit pricing trends, the core financial services business. Let's say, starting with community banks, credit unions, and working your way up to your larger bank customers?

Yes. It's been pretty consistent, David, and it really has not changed much. We continue to see some price compression on the unit cost at renewal time around existing services. We've typically guided somewhere between 100 and 150 basis points of headwind. But we also continue to see us take much more wallet share during that process, through the renewal process -- or throughout the agreement. And so we continue to see renewals as an opportunity to do a cross sell and up-sell. That's what typically is going on in the community markets, both credit union and community banks.

As you move up into really the large, financial institutions and International, those tend to be much more services-oriented and much more complex transactions. So that the whole concept of unit costs are a little different in that market. Tends to be geared around the service of capability, a person, or a delivery. And those deals are of the size that it's just really driven by the market. There's not unique trends because those, when you get to that size, tend to be unique. We shared the unit cost in India. That was an exception. When we went through the India process, and as you know, the ended up being -- we disclosed that one $0.5 billion CV. And so -- but that one -- those unit costs were very, very profitable, considering all of the circles that went, they were on the higher end of those circles.

Dave Koning, Baird.

The first question I had is on FX. It's pretty straightforward, just on the revenue side. But the one nice thing you've got is the big Indian footprint of expenses that we would have expected to help the recent rupee movement to help the expense base a little bit. I'm wondering, maybe you can give -- how big of your -- what percentage of your expenses are in rupees? And maybe what that impact is? Or some sort of formulas to help us understand what the impact of the rupee benefits can be?

Let me just take you back, looking at revenue, it was about $7 million for the quarter so, a relatively small impact for us. Net 2 points on the International growth rate. For the earnings impact in the aggregate was very, very small, minutia, basically. We haven't given out specific India cost base with regard to our exposure, or of the benefit that we might get out of India. I can tell you for the second quarter, our overall earnings impact around FX rates was just not material, Dave.

Okay. Great. And then the second thing, just reviewing the timing of the M&I termination fees. If I remember right, last Q4 was the beginning of some of those. And then Q1 and Q2 of this year were maybe the highest. And then the back half of this year, much lower and then they're gone by Q1 of '14. Is that about right? Maybe can you size it a little bit?

That's right. I think in October was the actual de-conversion, so fourth-quarter you'll definitely see an impact. You will see an impact, because we had some heightened services in the third quarter of 2012. So until we annualize that into the fourth quarter, you will still see it as a bit of a headwind in the third quarter.

Okay. Great.

Julio Quinteros, Goldman Sachs.

A couple of quick ones on the technology front, maybe to understand a little bit more about the work with MCX that you guys are doing. Can you talk a little bit about the capability itself? Is this a PIN debit offering, an ACH offering, will there be any credit card functionality? And then lastly, is mFoundry incorporated into the solution that you guys have proposed for MCX?

Yes. All good questions, Julio. Let me just start at the top and tell you what it is. Basically, what we're doing is leveraging our network services infrastructure. So we're doing all switching, we're doing all routing, we're doing all settlement, we're doing all network management. If one of our clients happens to be the issuer, then also we'll do the authorization, as you would expect. As far as -- so that's what's in it from an FIS standpoint. So basically we're running it into our network. We do a lot of that, as you would expect. We do it not only for ourself. We own a couple of networks, but we also do for some third parties, for some other large networks out there. So this is not a difficult process for us, but leveraging a lot of our capabilities, so it's a great win.

As far as, is mFoundry involved in this transaction today? No, but there's certainly some opportunities as we continue to evolve with mobile, with PayNet, with some of those other things. Today, we -- as I said, it's just we're doing all the infrastructure work for them. MCX is really going to drive what is offered amongst this network. So we bring value and financial institution exposure. We will help MCX with a lot of financial institutions and wanting to join the network, but they'll decide whether credit will be offered as well today. Certainly the capabilities are there to offer credit. The -- today it's going to be a debit-oriented platform and it is going to be a mobile wallet offering. So more of a card not present at the start. But MCX will be laying out more of their vision and timing for it to roll out and end those things.

Will also have ACH component?

There will be a potential for some ACH there as well. As I said, MCX will drive how they want to settle those transactions, and obviously if the financial institutions, once they are a member of MCX, there is definitely going to be a real-time settlement as well.

Okay. And maybe staying on the technology themes, a little bit of an update on EMV in terms of what you're seeing with the large clients and your own rollout efforts around EMV?

We have talked about this on prior calls. Given our size and scale internationally, EMV is not something for us to be worried about. We have been doing EMV for years outside of the US. We certainly are rolling it out now domestically. Some of our larger clients are starting to roll it out on a small scale. We're ready for EMV when the market is ready for it. And we continue -- as I said, we do have some limited rollout in the US now, especially in our larger-scale clients where they have a lot of International travel.

Okay, got it. And then lastly, anything on the regulatory investment side? Would that create any opportunities or tailwinds as you start thinking about '14 and '15 and the post Dodd-Frank world with increased compliance requirement disclosures? Have you guys seen any momentum on that front at all yet from a demand perspective?

We've done a number of tuck-in acquisitions recently, right? And we've got a lot of capabilities to help train our clients around compliance and regulatory. We continue to see consulting services drive across that. Will it be a tailwind for us? We always think that -- we've always said, traditionally, regulatory change is a good thing for FIS. And having been with the Company 25 years, I can look over a long period of time, but any time there is a significant regulatory change, it tends to be very positive for FIS.

And we are clearly well-positioned for (inaudible). So we do have the products and the capabilities and servicing arm to do it.

Got it. Good luck.

John Williams, UBS.

Couple quick ones. First, on the deal environment. You had the Harland deal that just came through last week. I know you said it's not a big priority for you to do deals or buy anybody else at this point. But I'm just curious to know what you're seeing in the environment right now, in terms of pricing, in terms of what assets might be out there that could potentially be interesting for either you or potentially anybody else?

John, I think we're going to stay pretty -- we continue to be committed to our strategy. We think it's a strategy that works. Obviously, we've done a lot of very large transactions over the last 10 to 15 years, culminating with Metavante. Since that time, we're really looking for stuff that really brings us new capabilities or breaks us into new markets. So we're looking more for stuff like mFoundry. We see mobile as a great opportunity. We made a minority investment there for years as mobile ramped up, and we think we timed that inflection point of when now mobile is really accelerating. And you hear that in our comments. Buying other companies that have other core banking systems, it just brings too much overlap to our client base. And frankly, for us, given where our assets are today and the strength of those assets and the success we're having around them just really brings us a problem. And so we're not interested in doing those kind of transactions today. They just don't fit our strategy. But we continue to look for things that do bring us new technology, accelerate and augment things that we already have in our portfolio.

Just to add some color around that, again, domestically, we just don't see anything on the horizon. We do continue to look internationally, if we can find new markets or new opportunities that could supplement that large growth market.

So John, if you look domestically, we just have highly competitive core products that we feel really good about. And we just -- honestly, as Gary talked about and Woody right now, we absolutely don't see the need to acquire -- bring in other core products to compete against what we have, when in fact right now we feel we have the best in the marketplace.

Okay. That's helpful. Just in terms -- it's a logical follow-on, capital allocation. Looks like leverage ticked up a bit. Could you run through your priorities? How you think about using capital at this point, and what your intention is surrounding paying down some debt versus doing anything else with the dividends?

Yes. Again, we continue to keep it on three legs, right? Investment for growth, spending 5% to 6% of our revenue back and investing in the business through CapEx. We anticipate keeping our targeted debt at or slightly above below 2.5 turns. It was slightly up on Q2. That's really more seasonality. We tend to tick up slightly in the second quarter and then drive that back down, which we anticipate the drive down to 2.5 times or so by the end of the year. And then we have continued to look at share re-buyback -- share buyback as an additional way to give value back to shareholders. We bought $100 million in the first quarter, $125 million in the second quarter, and have $425 million or so remaining under our authorization. So our capital allocation priorities have remained consistent.

So it does sound like a slight change, though. You had been saying, I think, 2 times to 2.5 times. So it's fair to say it's probably closer to 2.5 times for the foreseeable future, then?

Yes, I think we are targeting, trying to get down to 2.5 times. And then longer-term, the target will be at or slightly below 2.5 times.

Okay, and just one other confirmation. You said International growth was FX adjusted. You said you could do double digits there, that was the plan still?

That's correct. We still feel very confident in double-digit growth for the full year International.

Okay.

Ramsey El-Assal, Jefferies.

Do you guys see any impact, either directly or indirectly, from the European Commission payment regulations that -- at least the proposed relations that were put out recently?

We really don't. No, Ramsey, we always monitor that -- those changes, regulatory changes worldwide, but at this time we don't see any impact.

Okay. Can you give us an update on the rate of decline -- the rate and volume decline you're seeing in your check business? In other words, is it flattening out at all? Or are you still seeing a pretty consistent, steady decrease in the growth rate in that business year-over-year?

Two things. Let's -- we always want to make sure we're clear about our check business. There's really two check businesses. We have the check authorization at the point-of-sale them. And then we have what we would consider the back-office check processing business for financial institutions. As we've shared with you, we think that the check authorization business at the point-of-sale will continue to decline, although we are seeing that decline starting to slow. Interesting, on the back-office business, we've also forecasted -- and we're starting to see that, where our financial institution check processing business is really starting to shallow faster. So the decline is actually slowing. We're actually starting to see maybe that's going to even be a headwind for us or turning into a headwind. Because as -- I mean tailwind, excuse me. As clients start getting their volumes down to a certain level, they are naturally going to want to outsource that function to us. So we actually think, while we have said before this is not a business that you would necessarily get into in 2013, given our scale and size, it's going to be a good business for us. As these volumes continue to come down, more and more people will want to outsource those functions.

Right, because as they're losing volumes, their unit cost has gone up so high, they're looking to see if they could outsource it.

That's right.

To be specific on the numbers, too, we've typically gone to more of a 10% year-over-year decline. First quarter, I think, you saw that more of 3.5% to 4%-type decline. Again, we said one quarter doesn't make a trend, but we have seen second quarter also be in that same range of 3.5% to 4%.

Definitely slowing.

Definitely seeing some slowing in there.

Which is exactly what we predicted. As you get more and more personal volume out of the mix, it's just being augmented. The business volume is not falling off as rapidly.

That's great. That makes sense and it's really helpful. One last one from me. There's been some coverage in the press lately about NYCE's ability to process signature transactions -- signature debit transactions in a penless format for smaller-ticket. SIG over PIN as opposed to Visa's PIN over SIG capability. Is that something that you see as a potential growth opportunity? Are we going to see PIN debit networks, including NYCE, potentially taking signature share? Or is it still pretty -- something you're thinking is going to be pretty niche-y?

Ramsey, at this point I might put it under the niche column. I couldn't speak to specifics on it, but we certainly can circle back around, follow-up with you on it. But the team has not been touting that as a huge opportunity at this point.

Okay, fair enough.

Tien-Tsin Huang, JPMorgan.

Great. Thanks for all the detail. Just on the MCX, obviously a good win, there. I'm just curious, how -- I know there's been a lot of question. How bank-friendly is the initiative? I'm assuming your core bank customers will obviously be watching it. I understand the network infrastructure, the gatewaying that you're doing. But how do you plan on balancing both sides?

Yes. No, it's a great question. And as you would expect, Tien-Tsin, we've gotten a lot of calls from our financial institution clients. I think one, what our clients are telling us, there really couldn't be a better partner MCX could have chosen because we are so financially institution -centric. And what -- I think one of the things MCX saw was our ability to access a very high volume of financial institutions. So I think a lot of financial institutions are in a wait-and-see, right? What exactly is MCX going to become? What is the volume that's going to get pushed across of it? They see us as a great opportunity to be an inter-mediator and help negotiate good pricing for the network. So I would tell you that the response has been positive, but there's a lot of questions on exactly what MCX is. But given our long-standing relationships of driving highly bank-centric networks, they certainly see us as a strong advocate for them to get to a win-win.

Great. Yes, it's a good win, definitely a good win. Just on the International, I caught the second-half pickup back to double-digit. Anything in the backlog there we should consider that will definitely push it into the double-digit?

Woody and I both touted Sainsbury coming on.

Right.

If that's continue to ramp up, that's a very large deal. You're seeing Vietinbank that we touted coming on. The Indian ATM rollout is going very well. I'm just very pleased with the result that team is producing. Brazil continues to stay strong. So what we think -- we think that's going to continue to be a tailwind for us as well. So we're bullish on International for the back half of the year.

(multiple speakers) Add a couple with just the strength in the International pipeline.

Yes. Absolutely. Sure.

A combination of pipeline and if you look at the 304 significant deals, their opportunity to grow over the next few years is significant.

Absolutely.

Okay, god. Just wanted to make sure that those were coming in as you adjusted. Last one from me. I caught the question and answer on the Europe regulation stuff. Any chance that that could -- on the interchange in rules, or what have you. Any chance that could help Capco from an advisory standpoint? It seems like that's an area where you could help with adopting (multiple speakers). And then also put a freeze on spend in the region as well as we try to figure out what to actually do. I can see both sides of it. Just trying to better assess the situation.

I'll tell you, our consulting business -- Capco continues to grow very, very nicely, all right? In both Europe and the US. So we're very pleased with the growth. You see it in our accruals we are having to make on the earn-out. Certainly, activities around regulatory compliance and being able to meet the needs of those regulatory changes are great consulting engagements for our team. We have got some of the -- obviously, we have got -- we feel we have got the best consultants in the industry, and so it lines very well with that. And so I think you're right. It can continue to grow further engagements and continue to help propel growth in Europe.

That's a good point, because that's really a sweet spot for Capco.

Yes and then how about just the push towards outsourcing? I can see an argument for banks wanting to cut costs, but then also maybe take a wait-and-see view on things?

What happened is, we've actually got evidence historically -- and Tien-Tsin, if you look back -- I don't know if you remember the Barclays announcement several years ago. But there was a major regulatory change around lending, and they weren't able to implement it through their legacy systems in time to meet the regulatory challenge. So we were able to pick up Barclays through that transaction on an outsourcing business. So I think there is going to continue to be opportunities like that. As I said, historically, regulatory change has always been a positive for FIS. You start with the consulting engagement and the training around it, but then customers have to adopt those regulations, and that plays typically very well into our platforms. And since we're the leader in the outsourcing space, it tends to come on in an outsourcing matter.

So it's generally a clear movement towards outsourcing and that plays well for us.

Great. Makes sense. Always appreciate the feedback.

Brett Huff, Stephens Incorporated.

Just one more question. I wanted to make sure I understood, or heard you right on the new deal wins. I think you're using the term, significant, as anything over $25 million in, I think, value. Can you just reiterate what you did say on those? I know you don't want to get too detailed, but could you just reiterate that for us?

Yes, we view a significant contract, Brett, as anything that has got total contract value of $25 million. Clearly, we sign a lot of deals that are a lot larger than that. The India ATM deal was worth $0.5 billion just on TCV. And I should suggest to you guys, we're conservative in nature. So when we calculate this internally, we look at what are the minimum that have to be paid under that contract, not what the future could hold, right? To judge these sizings. And so certainly, when we look at Sainsbury, when we look at MCX, these are substantially larger than what we would consider a large transaction for us.

And that's within the minimum outside of the potential for growth.

Yes.

And so the India deal is $500 million total contract value to you guys, or in total for the whole thing and you got a chunk of it?

No, to FIS.

That's for FIS, yes.

Okay. That's great. That's what I needed.

And so once again, those are the minimum -- we judge that off minimums or from a conservative standpoint. So we would expect nothing but upside when we talk about contract sizing.

Potentially, should be larger.

Great.

Thanks, everybody, for joining us this morning. We look forward to speaking with you again soon.

Ladies and gentlemen, this conference will be available for replay after 10.30 AM today, through August 13, 2013. You may access the AT&T -executive replay system at any time by dialing 1-800-475-6701 and entering the access code 296797. International participants dial 320-365-3844. Those numbers again are 1-800-475-6701 and 320-365-3844, access code 296797. Thank you. That does conclude the conference for today. Your participation was greatly appreciated. You may now disconnect your lines.