Fidelity National Information Services Inc (FIS) 2014 Q2 法說會逐字稿

Welcome to the FIS second-quarter earnings conference call.

(Operator Instructions)

And also as a reminder, today's teleconference is being recorded. At this time, I will turn the conference call over to your host, Ms. Nancy Murphy. Please go ahead.

Thank you, Tony. Good morning, everyone, and welcome to our second-quarter 2014 earnings conference call. Frank Martire, Chairman and Chief Executive Officer, will begin with a summary of our financial performance. Gary Norcross, President and Chief Operating Officer, will follow with the operations report. And Woody Woodall, Chief Financial Officer, will continue with a detailed financial review. Today's news release and the supplemental slide presentation are available on our website at FISGlobal.com.

Let me remind you that today's remarks 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. Please refer to the Safe Harbor language on slide 3 of the presentation.

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

With that, I'll turn the call over to Frank to discuss the financial highlights on slide 6. Frank?

Thanks, Nancy. Good morning, everyone, and thank you for joining us on today's call. I am pleased to open the morning's call by reporting that the second quarter proved to be another strong quarter for FIS. Once again, we delivered profitable organic growth, continuing our record of consistent performance in line with expectations.

We continue to execute our global growth strategy with a focus on optimizing our Business, and delivering strategic value to our clients. We remain confident in our 2014 outlook and focus on driving superior returns for our shareholders.

Looking at details of the quarter, revenue increased by 6% in total to $1.6 billion, and year to date to $3.1 billion. This marks our 18th consecutive quarter of organic revenue growth. Adjusted earnings per share rose 6% to $0.75. Strong cash flow and disciplined capital allocation enabled us to return a record $463 million to our shareholders in dividends and share repurchases in the first six months of the year. Finally, we achieved strong sales execution in the quarter, and are entering the second half of the year with a robust pipeline.

We are excited about the growth opportunities for our Business, as the global financial service landscape evolves. Our results reflect our unmatched combination of technology, services, and consulting solutions, which drive transformational change for our clients. We continue to align our investments with market opportunities and client needs to drive profitable growth.

Our first-half results and consistent performance reinforce our confidence in achieving our 2014 goals. It also highlights the strength of our operating model and continuous steady execution, which is consistent with our growth strategy to deliver value and profitable results to our clients and shareholders.

I'll now turn the call over to Gary for our business strategy and operating highlights. Gary?

Thanks, Frank, and thanks again to everyone for joining us this morning. Turning to slide 8, as Frank discussed, the second quarter was another strong quarter for FIS. Our market-focused approach, and investment in innovation and service-related offerings, have delivered strong business results, and our emphasis on overall operational efficiency continues to translate to consistent, profitable growth for FIS.

In the quarter, we recorded strong sales with good deal flow and key strategic wins across all markets. We further strengthened our pipeline across all segments and the markets they serve. We continue to expand our solution footprint through investing in our platforms and targeted acquisitions. This includes our recent acquisition of Reliance Financial, which I'll discuss in a few minutes.

We continue to reaffirm our investment strategy to better penetrate the global financial institution market with strong indications this focus is driving increased traction, which we expect will translate into higher revenue and profit growth for the Company, but will create some near-term margin constraints. All of this allows us to remain well positioned to capitalize on the increasing industry demand for scalable, outsource solutions and services.

We identified this trend early, and began positioning FIS to deliver these capabilities on a global scale. Today, our unique business model, encompassing financial technology, outsource solutions, and consulting services, is driving transformational change for our clients. We have captured a steady stream of new wins and expanded business by meeting pressing industry needs for efficiency, growth, security, and improved customer experience. This represents a recurring theme for today's conversation.

Turning to the markets, in North America, we had a very strong sales quarter with several large strategic wins reflecting renewed market demand, and continued confidence in our depth and breadth of solutions, delivery excellence, and transformational capabilities. First, I'd like to highlight a significant competitive win involving one of the industry's highly respected and innovative banking brands, a win that we believe represents one of the largest D&B contracts to date in the US.

Starting in October, FIS will replace 10 million magnetic stripe cards with new chip-and-pin technology over a 24-month period. This relationship, with a client known for its industry firsts, underscores FIS's ability to lead the industry and bring transformational technology to the markets we serve. Our experience, best-in-class platform, delivery capabilities, and commitment to security resulted in this win against a strong competitive landscape. We are very pleased to have been selected, and are excited with our leadership role in this space.

Next, I'd like to highlight Bank Leumi USA, who selected FIS to deliver a unified core banking and wealth-management platform to provide a universal view of its customers' portfolios. This common platform and single point of access for customer accounts provides consolidated data for tracking analytics, and a simpler interface for risk monitoring and response. This sophisticated and transformational solution also supports their specific risk and regulatory requirements. The solution will be fully outsourced to FIS, and will include a suite of front-end eBanking and ePayment solutions designed to simplify customer interactions across accounts, and improve customer services.

Lastly, we are pleased to highlight our recent acquisition of Reliance Financial, which expands our solution capabilities in the growing wealth-management market. Combining our current wealth-based solution technology with Reliance services capabilities and seasoned leadership team creates an end-to-end outsource solution, and expands the strategic value and services we bring to our client base, enabling us to efficiently serve this growing market. This business serves more than 200 clients today, and is expected to double in size over the next five years. We believe this will be a powerful addition to FIS.

Switching to our international segment, we achieved 12% organic revenue growth while continuing to drive strong demand for our solutions across all regions, with a number of significant new deals closing during the quarter. Starting with Asia, this market delivers significant opportunities with organizations looking to serve the underbanked and emerging payment sectors. For example, you will recall our success last year in launching Mahila Bank, India's first bank aimed at the financial empowerment of the country's women.

This has been followed this quarter by [Shebalit], an Indian cooperative bank, who has selected FIS to deliver a completely outsourced banking solution. This trend towards banking utility models is also visible in other countries, as banks are looking to FIS to help drive efficiency and best practices. Meanwhile, our ATM outsourcing growth in India continues, with new business wins with Bank of India, Karnataka Bank, Muthoot Finance, joining a long list of major players relying on FIS to install, operate and maintain their payments infrastructure.

We also continue to find success for our core banking technology with banks wishing to keep their processing in-house. As an example, Philippine National Bank has selected to deploy FIS core blanking platform after its merger with Allied Banking Corporation. This core replacement now takes us to 4 out of the top 10 banks running our core systems in the Philippines.

I'm also pleased to report that CIMB Thai has signed with FIS for credit card processing, positioning us in Thailand's growing card-processing market. In addition, the Bank of Philippine Island, BPI, has joined the growing list of financial institutions migrating onto FIS switching products, and represents one of three switching deals we concluded in Asia-Pacific this quarter.

In Europe, we are continuing to make good progress on our major projects with Sainsbury's Bank and ING. The Sainsbury migration took a major step forward this quarter with the first technology deliverables that form the base for the bank's infrastructure. Meanwhile, at ING, the bank is continuing to make good progress on its transformation project based on FIS's core banking platform.

Moving to Latin America, our Business continues to perform well and grow, despite a slower macroeconomic environment. In Brazil, where we are the largest third-party card processor through our joint venture with Bradesco, we saw another quarter of growth in cards and transaction volumes. We continue to believe this market provides a long growth runway driven by the secular shift from cash to card-based digital payments.

In addition to these highlighted projects, we continue to generate positive momentum with existing deployments, and expand business with established client relationships. Record attendance at our Annual International Client Conference, hosted in June, enhanced our robust pipeline and our full-year outlook in the international market, which remains strong and on target.

Next, we continue to make good progress in our growth of the global financial institutions market, and remain pleased with our early results. Our strategic investments in this market show early signs of progress. Our pipeline is growing, and we are continuing to close large strategic transformational deals.

As we referenced on our last earnings call, early in the second quarter, global investment banking firm, Jefferies, selected FIS as its long-term strategic technology partner to deliver IT transformational services worldwide. As their single-source provider, FIS brings needed expertise in change management and outsourcing, financial technology and capital market consulting capabilities, enabling Jefferies to manage cost, and maximize gains for greater efficiencies. This is a value proposition that is unique in our industry, and unmatched by our competitors.

Additionally, at the end of last year, we told you about our innovation strategy to incubate early-stage exploratory consulting services focused on disruptive technologies that are changing the industry and defining new customer interaction models. We are pleased to announce that we have closed our first engagement with a very large and prominent retail bank that first experiences exploratory consulting approach through one of our innovation centers. Using this approach, we have defined a unique solution that is centered on the modern lifestyle, and combines digital technology in a physical environment. This innovative new solution will deliver an entirely new way for this bank to interact with, and add value to, its customers. These early results and our increasing pipeline continue to fuel our confidence for investing in this market.

Turning to slide 9, and before I turn it over to Woody, let me take a minute to recap a few key points. We had a strong second quarter, and we're proud of the results and our performance in the first half of the year. Our strong quarter reflects a combination of new wins, implementations, and expanded client relationships. We remain committed to optimizing our Business, and delivering strategic value to our clients, which is central to our global growth strategy. We will continue to invest in the markets and solutions that are central to driving profitable growth.

Now, I'll turn it over to Woody for the financial report.

Thanks, Gary. I'll begin on slide 11 with a summary of our consolidated results for the quarter.

Consolidated revenue increased 6% on a reported basis and 5% on an organic basis to $1.6 billion, driven by growth in all markets. Adjusted EBITDA increased 3% to $466 million, while the EBITDA margin was 29.2%, a decrease of 60 basis points from the prior-year quarter, reflecting a change in revenue mix, including higher growth in international markets, consulting and services, as well as increased investment in the global financial institutions market. Adjusted net earnings from continuing operations increased to $217 million from $210 million, and adjusted earnings per share increased 6% to $0.75 per share from $0.71 per share in the prior-year quarter.

For the first half of 2014, adjusted revenue increased 5% on a reported basis and 4% organically to $3.1 billion. Adjusted EBITDA increased 4% to $914 million, and the EBITDA margin was 29.2% compared to 29.4% in the prior-year period. Adjusted net earnings from continuing operations increased 6% to $417 million, and adjusted earnings per share increased 8% to $1.43 per share.

As we discussed in prior quarters, termination fees in 2013 related to the BMO/M&I merger resulted in a revenue headwind of about 100 basis points in the second-quarter 2014. This headwind was partially offset by contractual fees related to Umpqua Bank's acquisition of Sterling Bank. These fees contributed approximately 80 basis points to Q2 2014 revenue growth, and are non-recurring in nature. As we discussed last quarter, this important win of the outsourced processing of the combined banks significantly increases the long-term value of this relationship. We are pleased with these results, which are consistent with our outlook for the year.

Now, I'll continue on slide 12, with a review of segment results. Financial solutions revenue was $629 million, an increase of 6% on an organic basis, reflecting growth in consulting, professional services, and digital banking. Results also included the contractual fees related to the Umpqua/Sterling win I referenced. Financial solutions EBITDA increased 8% to $249 million, while EBITDA margin expanded 20 basis points year over year to 39.6%.

Turning to slide 13, payment solutions revenue was $624 million, about flat with the prior-year quarter, reflecting growth in network solutions, bill payment services, and image and output solutions, offset by lower termination fees. Payment solutions EBITDA was $253 million, and the EBITDA margin was 40.6%, down from 42.2% in the second-quarter 2013, primarily reflecting lower termination fees and revenue mix.

As a reminder, looking forward to the third quarter, the payment segment has difficult year-over-year comparisons due to elevated license sales and termination fees in the third-quarter 2013. Also, this segment has a seasonal trend of lower sequential revenue in the third quarter, due to the increased volumes for processing tax payments in the second quarter.

Moving to slide 14, international revenue was $347 million, and grew 12% organically in the quarter. We continue to see organic growth across all major regions, including strong double-digit growth in Europe and Asia, and continuing growth in Latin America. International EBITDA increased 11% to $73 million. EBITDA margin was 21.1%, down 70 basis points, primarily reflecting increased investment in the global financial institutions market.

As Gary discussed, we are pleased with our early progress in the global financial institutions market. Consistent with our plan, in the first half we've invested an incremental $15 million, primarily to expand our dedicated client teams, and are on track with the $30 million for the full year. We expect revenue growth in this market to gain traction late in 2014 and into 2015.

Corporate expense was $109 million, unchanged from the prior year, reflecting diligent cost management. We expect corporate expenses to remain at a similar level for the remainder of the year.

Moving on to a reconciliation of GAAP to non-GAAP EPS on slide 15, GAAP earnings increased to $0.62 per share. Second-quarter 2014 GAAP results are adjusted to exclude $0.13 per share in acquisition-related purchase amortization.

The effective tax rate was 30% in the second-quarter 2014 and the prior-year quarter. Both periods reflect favorable resolution of certain tax matters of about $0.04 per share. We continue to expect an effective tax rate of 33% to 34% for the full-year 2014.

Moving on to cash flow on slide 16, adjusted cash flow from operations totaled $245 million, up from $199 million in the second-quarter 2013. Capital expenditures were $97 million, consistent with our target of 5.5% to 6% of revenue through the first half of 2014. Free cash flow increased to $149 million from $115 million in the second-quarter 2013. As a reminder, free cash flow conversion in the second half of the year is historically higher than the first half, due to timing of payments, including taxes and incentives.

Turning to slide 17, we returned approximately $219 million to shareholders in the second quarter, including $68 million in dividends and $151 million to repurchase 2.8 million shares in the open market. Repurchase activity reduced our weighted average diluted shares to 289.2 million in the second quarter, from 294.3 million last year. At the end of the quarter, basic and diluted shares outstanding were 284.6 million and 288.4 million, respectively. Approximately $1.7 billion remains under our repurchase authorization, and we expect to repurchase shares throughout the second half of 2014.

Moving on to the balance sheet, debt totaled $4.9 billion. In June, we issued $1 billion in new senior notes to refinance existing debt at lower rates, and to extend the duration of our capital structure. In July, we completed the redemption of $500 million 7 7/8% notes, and expect to record a third-quarter charge for costs related to the refinancing activities of approximately $0.08 per share. The refinancing results in a reduction in our weighted average interest rate to 3.2%, which was anticipated in our annual guidance. Our leverage ratio is 2.6 times, and we continue to target the ratio at or slightly below 2.5 times debt to EBITDA.

As Gary mentioned, we are pleased to have completed the acquisition of Reliance Financial in mid-July, which provides long-term growth opportunity in the wealth-management space. In 2014, we expect the acquisition to be neutral to EPS, and to provide a slight revenue tailwind as we build the sales pipeline.

Moving on to slide 18, we are reaffirming our outlook for 2014, including organic revenue growth of 4.5% to 6.5%; adjusted EBITDA growth of 4.5% to 6.5%; adjusted earnings per share in a range of $3.05 to $3.16 per share, reflecting growth of 8% to 12%; and free cash flow approximating adjusted net earnings.

To add further color to Q3, we continue to see line of sight through accelerated revenue growth towards the higher end of our guidance range. As we have previously described, this growth includes international, consulting and services, which come on at lower margins. Additionally, we have difficult comparisons due to elevated termination fees and license sales noted in the third-quarter last year. As a result, we expect pressure on year-over-year EBITDA margin comparisons in Q3.

In summary, we are pleased with our first-half financial performance and our outlook for the full-year 2014. We remain focused on executing our growth strategy, generating strong profitability and cash flow, and deploying capital in value-enhancing ways.

That concludes our prepared remarks. Operator, please open the line for questions.

Operator, can you open up the lines for questions, please?

(Operator Instructions)

Glenn Greene, Oppenheimer.

First, I'll start on Woody's last comment at the end there. Maybe just give us a little bit of color around the visibility toward the higher end of the organic revenue growth and frame the margin pressures, sort of the same dynamic that we've been talking about of lower revenue, the revenue mix causing that impact on the margins, perhaps faster consulting and International growth?

Yes. As we've described, as we laid out guidance for the first half of the year, we anticipated growth to grow in the second half of the year compared to the first half of the year. We've seen that. We saw 4% organic in Q1, 5% organic in Q2 which was a little bit of a tailwind. We were excited about that growth, but we anticipate continuing to see accelerated growth in the back half of the year. In conjunction with that growth, those will be in the more of the International revenue growth.

It will be more in the consulting and services area. Again, those don't come on at the same margins as the traditional processing revenue. You combine that with some of the large license sales and termination fees that we noted in last year's Q3, it's going to put some pressure on EBITDA margin but again, seeing that accelerated revenue growth that we anticipated.

Maybe for Gary, there was a lot of commentary, a lot of deal activity, it sounded like a bunch of new wins. Maybe you could frame the sales environment relative to what it's been three, six, nine months ago. Does your commentary imply that you're seeing a pickup in activity? Does this give you more confidence about accelerating growth, not only into the back half of 2014, but into 2015?

Glenn, no. It's a great question. We are very confident in what we're seeing in the sales and excited about the results. The sales team's operating very well across North America, the International group, and in the global Financial group. Our pipeline continues to go up in all markets. We're seeing great deal flow, which is exciting. We're seeing stuff run through the pipeline on a faster basis and our sales success is up significantly over last year.

We do feel confident about the back half of the year and we feel good about next year. To Woody's point, I'm actually pleased to see the growth in the services business and the processing business and less license fee and less term fee gives you a much more stable revenue growth curve. It allows you to run the business in a much more effective way, so we're pretty bullish on where things are headed and the opportunities that exist in front of us.

All right, I have some more questions but I will jump back in the queue. Thanks.

Brett Huff, Stephens.

First of all, just to follow-up on the transformational deals, Gary, that you mentioned, can you give us a sense of what you see out there? I think there's two, at least that I think of, or two buckets: one is the more traditional core deals that you all had done in a legacy way and then the new IT infrastructure deals. I know that the Global FI effort is barking up both of those trees, but can you give us a sense for, more specifically, how those pipelines are developing? Is there a region where you're feeling like there's going to be some activity soon? Can you give us a little more color on that?

Yes. I think it's interesting what we're seeing across all the markets. Just the classic deals that we traditionally sold where it was a single product and an implementation, even a single product on an outsourcing basis, while we're continuing to see that in the international market, frankly across GFI and even across North America, we're seeing deals that are much more transformational in nature.

Not only will they have intellectual property and capital, but really a long-term services component where we're taking a huge piece of the IT infrastructure. I think the transformational opportunity you're probably referencing is the Jefferies' deal that we just announced. But what we're seeing is, even in that market, you've got a very large institution needing to reduce their costs in a very material way that take a whole bunch of disparate applications and pull them together and wrap best practices around it, streamline the overall operation, reduce application complexity, and deliver it over a long-term value proposition, so they can not only control their costs but drive efficiencies as they grow their business.

We're seeing these kind of engagements where, frankly, it puts FIS in a very unique position. We can't really think of any competitor that can bring the capabilities around product, bring the capabilities around service, and then bring the capabilities around consulting expertise to drive all that together to truly drive that long-term result. We see it with the signing of Jefferies. We're seeing it in our pipeline execution.

Frankly, even back up to some of the large deals that we announced where you look at what we're doing with Sainsbury, when you look at things we're doing with Umpqua. These are deals that all have all of those components. So it's not just product-led, it's a comprehensive product suite. It's wrapped around with those types of services and IT infrastructure and when we look at our pipeline, Brett, we've got more and more of those type deals coming into the queue.

Brett, these are not one-off opportunities when you look at Jefferies and some others. We have a very strong pipeline that supports that they will continue and there's many more that will come.

That's helpful. Second question on margins, in taking some of these larger deals on with more of a mixed component, not just product-driven, that it has a little bit of a degradation impact on margins. As you guys think forward over the next year or two years or medium-term, do we still feel like that we're going to grow margins by 50 basis points, give or take over time, even with that mix shift?

As we've talked about before, it depends on where the revenues come from. If they continue to come at a faster pace internationally and at a faster pace in these deals that have a lower overall margin profile, it'll be difficult to continue to expand margins every year on that basis. However, we would also think, at that same time, we would accelerate top line growth higher than that 5% we've seen over the last few years.

Yes. We've been real clear about that, Brett. We, fundamentally, will give up a little bit of margin to accelerate the top end of the growth curve and we're seeing those results. Do we think there's margin expansion in the business? Absolutely. You continue to see us hold our Corporate numbers flat. You continue to see us execute very well where appropriate costs needs to be taken out. But obviously, we're pushing the Company to a higher growth curve and would expect those results.

To add a little more color just to be clear, we would expect profit growth to accelerate.

Absolutely.

And we would trade margin expansion to try to accelerate that profit growth faster than we have today.

On a dollar basis, you mean?

On a dollar basis, that's correct.

Okay. That's what I needed. Thanks, guys.

Darrin Peller, Barclays.

I just want to start off, first, with understanding the one-time items, mainly around the term fees again, only because, just talking to margins, obviously, margins if we back out the $14 million from last year, at our estimate your margin would have actually expanded about 40 basis points year-over-year during the quarter. Are there any other moving parts? I think there was a benefit in the Financial segment, right? That maybe would be impacting margins this quarter just so we get a sense of what was normalized growth and margin expansion after backing out all those one-time nonoperating items?

Yes. We had a contractual fees related to the Umpqua/Sterling Banks transaction. That was about an 80 basis point tailwind this quarter, so really trying to just give you some color around one-time or non-recurring items in the quarter. Additionally, we continued to invest in the global financial institutions market this year, which has an incremental $30 million headwind year-over-year. That was about $7 million or $8 million in the quarter, so that's about 40 basis points or so of headwind in the quarter. There are some moving parts, but we're just trying to give you some guys some color around where those parts are as we flow through the year.

That helps. Thanks. I was going to ask about $30 million anyway. Following up on that point, can you give us a little sense as to what effectiveness has been of that?

Again, I think your goal was to really focus on the top 30 clients, try to harvest more business out of them by moving some of your experts from the consulting side of the business over and backfilling. How's that been going? Any traction, any new wins?

Darrin, it's going very well. We're very pleased on it and tried to provide some color in the script. When you look at the Jefferies win, it's a direct result of that investment. We've announced another large win prior, unfortunately some of these global institutions don't allow you to disclose their name, in an earlier call. We're seeing great momentum in the pipeline. To Woody's point, we're right on track with our investment.

You're exactly right, what we did was we hired, really, sales teams, if you want to think about it, client relationships teams dedicated to these top financial institutions, so they are a team and they're built around a global client partner. Their expectation and our expectation of that engagement is to drag all the things I discussed; not only consulting and services, but also product and processing and we're seeing strong results around that and seeing a strong pipeline as it grows.

To Woody's point, the mix is a little different, but the deals are long-term in nature. Our pipeline, actually, has grown more in GFI than it has in other markets, but it's grown across all the markets, which would indicate that this level of investment, there was some pent-up demand in those markets and we're executing against it. So we feel good about the investment today.

Darrin, it's not just the number of wins, but also, it's the size of the wins. They're large deals for us and a lot of recurring revenue associated with that.

Absolutely.

That's great. It's showing up, obviously, in the Financial segment and the International segment and certainly hoping you get to the strong guidance results or high end of the guidance and trajectory to next year. One last question, on the Payment side, that's the one area where it didn't look as strong, just based on flattish growth and even if you back out the term fee, maybe just a couple of percent growth. Can you give us a little more granularity as to what the moving parts are and what's really driving the upside versus the holding it back right now and if that should change?

Yes. It's a great question. If you really peel back through PSG, we had some business lines that actually really did perform very well. We saw some strong growth in money movement and some of our network business, et cetera, but your point out is exactly right. We did have the brunt of the large term fee from M&I hit that particular segment, just so happens that's the way they fell last year. While we grew through it on the revenue line, as you know, those term fees come on at 100% margins roughly, as well as software licenses, and anything you sell through that is not going to be able to fill that profit hole in the same manner.

Frankly, when we look, Payments is just in an interesting situation in both Q2 and Q3 of this year. We've got some very difficult comps for that particular segment, a lot of license fees flowed, a lot of term fees flowed through that segment last year. One of the things we're continuing to see is our software licenses just continue to stair-step down, which is positive for us long-term, back to Frank's point about long recurring revenue streams and it makes it much more predictable and makes us frankly, much more confident in what the future holds. But those things do provide a little lumpiness in the bottom line for us.

Okay, guys. Thanks very much.

Bryan Keane, Deutsche Bank.

Just wanted to ask about the (multiple speakers) fees, just on the term fees, how much were in the quarter just versus last year? I just want to make sure I have the right numbers.

The term fees that we really called out last year were mostly around BMO M&I. We talked about that being a $40 million number. We talked about 70% of that being in the first half of the year, ratably between first quarter/second quarter and again, between Financial and Payments about 70%, again, was in Payments versus Financial. So sketch that math out, that will outline the specifics of those term fees in the quarter last year.

And there was really none this year?

Not necessarily term fees. We always have some level of term fees in the year. Typically, we try not to call those out unless they're truly really significant for you guys and we didn't have anything that was really significant in terms of term fees.

Okay. Okay. And then with some of the margin headwinds and obviously, the ramp up strong of the organic growth and the mix of business, just trying to get a sense for EBITDA margins for the full year, does that mean -- or can you just quantify what that means for this year for the EBITDA margins on a year-over-year basis?

Yes. As we've talked when we gave guidance, we expected EBITDA margins to be in line with revenue growth or EBITDA growth to be in line with revenue growth. We added some color to say, if we see revenue growth towards the higher end of that range and if it comes in more of the International space and consulting and services space, you may see EBITDA margins at the lower end of that growth profile. So it will put some pressure on margins this year. How it will ultimately pan out for the year will depend on where the actual revenue flows, but it will put some pressure on overall margin expansion for the year.

Okay. And finally, on the third quarter in particular, there is, I think, a high level of license fees last year, just trying to get a sense of how big that was and how big of a hurdle that is to jump over?

I think we called out, in a combination of the script and/or the margin expansion last year, I'd have to go back and double check, but I know we saw, I think, about 175 basis points of margin expansion in FSG and about 175 of expansion in PSG. A lot of that was driven off of term fees, as well as license fees last year, and I think we called out the specifics around that.

Okay. On the Payment segment, I understand the comp gets tough or is still tough in the third quarter and does it start to expand, then, in the fourth quarter or is that also a difficult comp for the Payment segment?

I think a lot less in terms of difficult comps for the segment. Second and third quarter just had heavy one-times in it that we've tried to highlight for you, but it's an easier comp in the fourth.

Absolutely.

Congrats on the good quarter.

Ashwin Shirvaikar, Citi.

My congratulations. Good quarter here.

Thank you.

My first question is you guys have had some pretty strong signings here, not just this quarter but the last many quarters. I think it would help investors if you gave us some idea of the conversion of these signings into revenues. I know these tend to be longer-term. It can be often 12, 18, 24 month-type conversions, but what are we looking at in terms of a potential acceleration of top line?

Ashwin, we've tried to give you some color on that in the script and we'll try to continue to work and give you more insight over the calls. But if you look, I've talked about the deal flow through the pipeline. So deal flow, not only are we building the pipeline, we're seeing good churn on the pipeline, meaning we're seeing decisions. Obviously, you don't win every decision in the market. We would tell you if we did. But what we're seeing is great deal flow through the pipeline and we're continuing to see growth in the pipeline. So not only are we seeing good deal churn, we're actually replacing that pipeline and the pipeline's growing and our sales success has been growing consistently quarter-over-quarter and Q2 was a very big quarter.

To your point, how we're onboarding some of these larger deals, some of these deals depends on the type of engagement we have. I highlighted Sainsbury Bank, major milestone this quarter getting their IT infrastructure established. We're seeing great -- so that project, as big and complex as it is, which I know a lot of the times these things around the industry will drag out. We hear stories about people's projects getting elongated beyond the original pro forma. This one's right on schedule and so we feel very good about executing. We've got other milestones in Q3 and Q4 and so you'll see that fully onboarded by Q1 of next year. So feel good about that.

ING's another one. Very complex, very large transformational project worldwide. Once again, that project continues to hit every milestone. We're seeing revenue associated with both those deals come on in the manner that we thought. The ATM deal's a great example as well. We announced a very, very large contract that's going to ramp up to $100 million in revenue. Actually, that ATM deployment is right on schedule and in a couple of the regions in India, we're actually a little ahead of our deployment schedule and we're seeing our transaction volumes come up within alignment on our pro forma.

So all of these things, the deal flow is important and we're seeing, frankly, as I answered on another question, we're seeing an acceleration of deal flow. We're seeing decisions are starting to be made on a shorter time period. Some of these large complex deals still take 12-plus months to go through the sales cycle because they're larger, they're more complex, but we're seeing deal flow accelerate. We're seeing pipeline accelerate and we're seeing our sales success and signings accelerate. So, all that makes us pretty confident about the second half of the year. Makes us confident about 2015 and we think the strategy's working very well at this point.

Ashwin, in Woody's commentary, his comment we continue to see line of sight to accelerate revenue growth towards the high-end of our guidance range. So actually, we're starting to see some of that results right now.

Great. So just to clarify that particular comment, Woody, you meant it on a full-year basis or second half when you said high-end?

That was specific to the third quarter from a color standpoint. But to give you guys, we anticipated first half to be slower, second half to be faster and we're seeing good line of sight into that.

Exactly.

Got it. One other question, obviously, completely support the focus on operating profit as opposed to a margin number and operating profit increasing at a faster pace. Having said that, when I look at some of these factors that have been pressuring margins, International, for example, and consulting growth. At what point, given that consulting's pretty much -- I think the consulting headcount has kind of tripled in a couple of years here, and International, you go into a country like the Philippines for example, three banks becomes four banks, five banks, your revenue gets spread over the cost. Shouldn't that ease some of the margin pressure?

Absolutely. As we normalize our mix, I think the way you're saying it and as you see expansion in countries, Management expects to start seeing, obviously, some margin tailwinds around some of these businesses and frankly, we're seeing some evidence of that. The consulting business you referenced has continued to perform very well and obviously, we want to keep that growth going. Our consulting business is coming on very traditional margins of what other large consulting groups are doing. There's a lot of opportunity around the globe to continue to sell our products, but no, we absolutely believe that there's margin expansion in the business long-term. I do think you'll see some lumpiness from quarter-to-quarter, but we not only think we'll get operating profit growth, but we do think long-term, we'll get some margin expansion and we'll continue to see that.

Right. Thank you, guys.

David Togut, Evercore.

Gary, on the last call, you indicated that there was an opportunity to expand the India ATM contract to add a few new circles, I believe. Can you update us there on potential expansion opportunities?

Yes. We're starting to actually see that, but not in a circle concept. It's a good question, David. We haven't seen entire circles come back around. What we're starting to see, and I referenced some of them in the call, with Muthoot Financial and Bank of India and others, we're starting to see ATM expansion, not only in public sector banks, but non-public sector banks, but we're starting to see some of the large public sector banks that are struggling in certain circles come to companies like FIS and allowing us to deploy, even in circles we didn't win.

We're starting to see more and more of that because they do have their numbers they've got to get out, they've got to grow their business. So have we seen a complete circle come back around? No. I'm not saying that it won't happen, but it still remains there are certain circles that are struggling throughout India and we continue to take market share based on our results. The team has just done a phenomenal job in India. We've got a great leadership team over there and they're really shining against the competition in deployment of these environments.

Dan Perlin, RBC.

A longer-term picture, I'm just wondering, not to hamper on the margins so much, but as you think about your pipeline, and you obviously have very good line of sight into what that's going to look like, and the business complexion is changing quite a bit. I'm just wondering when you think about the ability for the business to actually produce margin expansion, not absolute dollar growth but actual margin expansion, into 2015 and beyond, just longer-term, is the cost structure appropriate today? Or are you thinking you're just going to get that point via leverage? Because my sense of what I'm hearing is that it's going to take a lot longer than 2015, even if we exclude the $30 million.

I think you may think about it in terms of markets. If you look at our North American market, which is more of our traditional business, you'll continue to see margin expansion as sales in that leveraged environment come on at higher margins than the average Corporate margins.

Absolutely.

If you look at the global Financial institution market, a lot of that is around consulting and services and it's a pull-through of product but there are always services in that sales process. Those we don't expect to come on at the same level of margin as our as our traditional business. And then the International group, we anticipate continuing to expand margins but those overall margins will be less than the Corporate margin, as they are today. They'll, they'll expand and move toward that Corporate margin, but they'll be lower than the overall margin in the short term but expanding. So you have to map out where the math is or where you anticipate the math to be in those different markets to add them together to see what the margin profile looks like over the next three to five years.

And as we said on the GFI space especially, that's an area that, as we continue to see the success we're seeing and as we continue to see it accelerate the top line, don't expect -- we might come back and talk about further investment in that market, frankly to accelerate it even further. So we talked about that when we announced the original $30 million. This is something that we fundamentally believe there's a lot of opportunity there and as the team executes. But to Woody's point, even in GFI, those services businesses, the margins ramp over time because it's long-term to deploy those services.

As the services reach scale, you're going to see even margin expansion there. So that goes back to the earlier question that I think Ashwin talked about, which is we'll see margin expansion across the businesses, but it's going to come in different ways across those markets than the type of mix we're deploying there.

Tien-Tsin Huang, JPMorgan.

I wanted to ask about the EMV win, just curious to learn a little bit more about it. Is it a tradition traditional Visa/MasterCard branded debit card win? Is this just issuer processing or did you also secure the branded business as well?

It's a great question. Right now, it is Visa and MasterCard and it's really the card reissuance side of the EMV. We think it's very significant. We've got, actually, a pretty full pipeline around that side of our business and so we think it's a good opportunity and a good testament. It's, frankly, I think it's the largest EMV deal done so far around cards, but not sure. That's why I said one of the largest, I mean, it's definitely up there.

And when we look at our pipeline, Tien-Tsin, there's a lot of opportunity around this particular space. So we're starting to see -- we have been seeing some EMV activity but it had been more partial reissues, high net worth individuals, people traveling outside the states, et cetera, et cetera. This is the first that, at least in our environment, where we've seen someone convert their entire card portfolio.

Dave Koning, Baird.

My question is, you talked about the revenue acceleration, I know you went over this a little bit, but I'm just wondering when you said towards the high end of the range, did you mean for the full year that you think it can get to the high end of the range or did you mean through the second half and exiting the year, it'll would be toward that higher end of the 4.5% to 6.5% range?

If you go back to how we laid out the guidance in the year, again, we anticipated lower growth in the front half of the year, higher growth in the back half of the year. My comment was specific to Q3 where we really anticipate seeing it towards the higher end of the range. For Q3 specifically, we still think that 4.5% to 6.5% is the right number full year, but we do anticipate more growth in the back half of the year than we did in the front half of the year, for sure.

Peter Heckmann, Avondale Partners.

I did want to just see if you could give us a little additional detail on the Reliance acquisition in terms of how we should be building that into our model? Would that approximate about $60 million in annual revenue?

Yes. We haven't given specific dollars around it, but we anticipate it being a little bit of a tailwind in revenue in the back half of 2014. Obviously, we closed it mid-July. We don't anticipate any EPS accretion in 2014 from the deal. That EPS accretion will come in 2015. In terms of thinking about it, you look at a $110 million purchase price; at the end of the day, it's not that significant of a deal when you think about what the accretion might look like, but it will be a bit of a tailwind in the back half of 2014 and then further into 2015.

Yes. We're excited about it, though, Pete. When you think about, especially the community banking market, one of the things all financial institutions are clamoring for is how to drive additional fee income and how to make more money and how to penetrate further their customer base with a broader product suite. One of the things we're seeing is we had a great product solutions around wealth management but frankly, a lot of the community institutions just don't have the expertise to deploy full-on back-office trust services.

Reliance Financial allows us now to take the subject matter expertise and intellectual capital and best practices around running a trust organization or wealth management organization, coupled with our product capability, and the combined event's going to put us in a very good position to deploy that offer now through more than 600 sales resources around the US. So we think it's a great opportunity. I even said in my notes we would be disappointed if it didn't double in size in the next five years. And to Woody's point, it's going to contribute accretively in 2015 and beyond with that growth.

It's a great cross-sell opportunity to added value and added product for our clients.

Georgios Mihalos, Credit Suisse.

Just wanted to dig in on the International side a little bit more, very strong growth there. Is there a way to parse out the growth that you're seeing from the consulting side, the Capco side versus, say, the processing side of the business?

If you start thinking about it in terms of regions, we saw extreme double-digit growth, high double-digit growth in Asia-Pacific. We saw very good double-digit growth in Europe and EMEA, both in our traditional business as well as our Capco business. And then in Latin America, we saw mid-single-digit growth. We anticipated seeing some headwinds in terms of overall growth because of the macroeconomics going on in Brazil, but are still seeing good growth there. And then outside of Brazil, again, still sitting at right at double-digit growth. So I hope that adds a little color for you.

Just to be real clear, it's not all consulting growing, that's for sure. We're seeing great ramp up in Sainsbury. We're seeing great results in ING. We're seeing some other significant wins in Europe. Frankly, we talk about other calls that Europe has been a headwind for us over the last several years because it returned slower from the macroeconomic issues. We now have seen that accelerate for us with several large deals to double-digit growth, as Woody just talked about.

We're seeing Brazil slow and it's been a major tailwind for us, although we're still seeing good growth in Brazil and very bullish on our opportunities down there. And then Asia-Pacific is growing very well and very, very strong, in fact, and all of that's non-consulting. Now, the consulting business, don't get me wrong, has done very well and you're seeing a combination of all those things continue to push our International segment at double-digit rates.

Ramsey El-Assal, Jefferies.

I wanted to ask about your International margins. It sounds like some growth acceleration in Asia and Europe has more than offset some macro-driven softness in Latin America. I was wondering if, given the differing product and services mix in these different geographies, Europe versus Asia versus Latin America, does this shift have any impact on how we should think about your International margins over time? I guess it's another way of saying are your margins significantly different in these different geographies?

That's a good question. I think there are some differences in the characteristics. In the areas internationally that we have more of the consulting services, you're seeing a little bit of lower margin. In the area that you are in more leveraged environments, like Brazil, for example, and some of the Southeast Asia stuff, Australia specifically, you've got some higher-margin areas, so there's a blend across the board. The other thing that you saw in the quarter and you'll see this year, this is part of our GFI investment is growing into the International markets. So, you've got that specific investment flowing into the International markets as well.

Yes. Just to build on that, Ramsey, it's a good question. Keep in mind, over the last year now, we've talked about how we've seen a very quick shift from product licensing to outsourcing and so what Woody's point is exactly that. As our outsourcing builds in various markets, you're going to see that margin accelerate. But given the infancy in some of the markets of our outsourcing, you've got to sign more customers to get that scale. But once again, we're very pleased with that transition. It will normalize our growth streams and allow us to give us confidence in our projections in a much more effective way. Also, over time, will produce much more predictable margin expansion.

Like anyplace else, with more size and scale, we're able to leverage more and drive down costs.

Tim Willi, Wells Fargo.

Had a quick modeling question and then one about the business. First, on modeling, did you call out what the revenue decline was around the check processing and the Payments business? I know you typically give that out.

We did not, Tim. I think we've talked about it the last few quarters. We've seen that not as a headwind anymore and as it continues to be a less significant component of the business, we're trying to get away from talking about it. I would tell you, to give you some color this quarter, it wasn't much of a headwind; a slight headwind this quarter, but not much of one.

Thank you. I'll now turn the conference back over to our presenters for any closing comments.

Thank you for your questions, for your continued interest in FIS. Our strategy is working. We are driving profitable results. Clients are reacting favorably to our business model and are driving demand for our solutions and services as we enable our clients to reach their own efficiency and growth requirements. Our solution innovation is helping our clients transform themselves in the financial service landscape. We are very confident in our 2014 outlook and long-term growth prospects and we remain focused on driving superior returns for our shareholders. Thank you to each of you for joining us on today's call and to our FIS employees who are dedicated to the success of our clients each and every day. Thank you.

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