Fiserv Inc (FISV) 2010 Q2 法說會逐字稿

Welcome to the Fiserv second-quarter 2010 earnings conference call. All participants will be in a listen-only mode until the question-and-answer session that begins following the presentation. Today's call is being recorded. It is also being broadcast live over the Internet at www.Fiserv.com. In addition, there are supplemental materials that will be referenced on today's call available at the Company's website.

To access those materials, go to the Company's website at www.Fiserv.com and click on the access presentation link on the homepage. The call is expected to last about an hour, and you may disconnect from the call at any time. Now we will turn the call over to Jeff Yabuki, President and CEO of Fiserv. Sir, you may begin.

Thank you. Good afternoon, everyone, and thanks for joining us for our second quarter earnings call. Joining me today is our Chief Financial Officer Tom Hirsch. Our remarks today will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

We will make forward-looking statements about, among other matters, adjusted internal revenue growth, adjusted earnings per share, adjusted operating margins, free cash flow, sales pipelines and our strategic initiative, Fiserv 2.0.

Forward-looking statements may differ materially from actual results and are subject to a number of risks and uncertainties. Please refer to our earnings release which can be found on our website at Fiserv.com for a discussion of these risk factors.

You should also refer to our earnings release for an explanation of the non-GAAP financial measures discussed in this conference call and for a reconciliation of those measures to the nearest applicable GAAP measure. These non-GAAP measures are indicators that management uses to provide additional meaningful comparisons between current results and prior reported results and as a basis for planning and forecasting for future periods.

We had solid performance in the second quarter across each of our key measures and are gaining momentum going into the second half of the year. We are seeing the ramp in 2010 performance that was anticipated within our guidance and we remain right on track to achieve our full-year outlook.

Internal revenue growth in the quarter was 2%. Adjusted operating margin of 29.6% expanded 70 basis points on both a sequential and year-over-year basis. Adjusted earnings per share for the quarter increased 11% to $1 dollar compared to $0.90 last year. Free cash flow increased 12% in the quarter, contributing to a strong 14% increase in free cash flow for the first half of the year to $353 million.

In our last call, we shared that we had been working a number of important sales opportunities and that we expected two of them to close in the second quarter. In fact, one deal had already closed prior to our first-quarter announcement and the other, a potentially groundbreaking channel transformation, was announced earlier today.

During the quarter, we expanded our relationship with the Westpac Group, the second largest bank in Australia. The Westpac Group, through a very competitive process, chose our solutions to transform their online banking presence. The Westpac Group serves more than 2 million active online customers and expects this channel to continue to grow.

We will establish a technology center of excellence in Sydney that will house senior product strategists and developers to enable the Westpac Group initiative along with other growth in the region. We believe this could be the start of a significant cycle of online banking renewal around the world.

Customers are demanding more online access to services with varied preferences on how and when they want it. Meeting this need will require financial institutions to enhance their digital capabilities, which we believe could create material opportunities for our market-leading global online banking technology and digital solutions. We couldn't be happier to partner with an organization as progressive as the Westpac Group which continues to embrace this important change.

Let me now update you on our three key enterprise priorities for 2010. First, to deliver positive adjusted internal revenue growth and meet our earnings commitments. Next, to center the Fiserv culture on growth, leading to improved enterprise win rates and a higher share of our strategic products. And third, to provide innovative solutions that increase differentiation and enhance results for our clients.

As I mentioned up front, we delivered 2% internal revenue growth in the quarter and adjusted earnings per share increased 11%. Our quality of earnings remains strong as evidenced by the continuing margin expansion, even in the face of planned incremental investments as well as the exceptional conversion of earnings to free cash flow. We are on track to achieve our full-year adjusted internal revenue growth and earnings per share targets.

Although it is listed as our second priority for the year, our top transformational focus is to fully center the Fiserv culture on growth. We consider growth in terms of clients, wallet share, and innovation, all bundled together with a wrapper of superior client service. We believe that winning formula will deliver exceptional value for our clients, associates, and you, our shareholders.

The creation of our single sales organization has bolstered performance and is contributing to building a stronger pipeline. We had strong sales results in the quarter, signing a number of new clients as well as expanding relationships across a broad continuum of products including account processing. Sales quota attainment in the quarter was 102%.

As another proof point, the second quarter's results included a record level of payment wins with 215 new sales in the quarter, a 34% increase over last year's Q2. This included 157 new bill payment sales and 58 in debit processing. Market momentum is strong.

Delivering meaningful innovation, our third key priority, is an area where we are truly differentiating ourselves in terms of new products and services. We are investing across multiple fronts which should allow us to better serve the needs of a dynamic market and extend our leadership position for many years to come.

Interest continues to grow in Acumen, our next generation account processing platform for large credit unions. In the quarter, we announced that Consumers Credit Union of Waukegan, Illinois, became the second US-based credit union to choose our state-of-the-art, fully integrated solution. We expect to see additional Acumen wins in the second half of 2010 as the sales pipeline continues to grow and even more success over the next several years.

We also went live with ZashPay, our new person-to-person payments, or P-to-P solution, in the quarter. As of June 30, we had signed over 160 institutions, an increase of 120 signings in the second quarter alone. We expect to add clients at a strong clip as demand grows.

Importantly, our P-to-P service can be accessed either through a participating financial institution via our bill payment technology, or consumers can go direct to ZashPay.com which helps expand our network even faster. We are processing transactions and already have 250,000 registered users. We're seeing a wide range in transaction amounts, as low as a few dollars and as high as $8,000.

Research has told us that consumers want digital payments to be fast and easy. Our service allows consumers to send transactions in one to three days directly to any bank account in the US, faster than any other P-to-P service, using only an e-mail address or a mobile phone number.

Because ZashPay provides tangible value to consumers, financial institutions can charge for this service, which produces valuable fee revenue. Although it is early, we can already see numerous ways that [Zashing] money becomes the standard for person-to-person payments. You can learn more and even sign up for the service at ZashPay.com.

Now let me turn the call over to Tom for more detail on the results.

Thanks, Jeff, and good afternoon, everyone. Throughout my discussion, I will refer to the supplemental information included in the slide presentation which is available on our website.

As shown on slide three, adjusted revenue increased by 2% organically to $970 million in the quarter, a solid acceleration over the negative 1% in the first quarter. Year-to-date adjusted revenue was roughly flat at $1.9 billion, in line with our expectations. Revenue growth in the quarter was broad-based, led by steady growth from our key recurring revenue payments businesses, such as electronic banking and debit processing, which together represent approximately 70% of our payment segment.

We also saw similar strong performance in our account processing businesses, which represent about 70% of the Financial segment revenue. This strength was partially offset by softness in item processing, lending, and output solutions which continued to negatively impact our revenue growth rate in the quarter and year-to-date.

Contract termination fees increased $8 million in the quarter to $12 million and have increased $9 million for the year to $14 million. The increase in termination fees in the quarter was due primarily to an item processing client acquired by another institution. We expect termination fees to return to more normalized levels as market activity accelerates over time.

License fees, which represent only about 5% of consolidated revenue, declined by $5 million in the quarter and are down $11 million for the first six months of the year. We continue to expect choppiness in license revenue between quarters. However, we still expect buying patterns to be relatively stable on a year-over-year basis.

Adjusted earnings per share in the second quarter increased 11% to $1 compared with the prior year. Year-to-date adjusted earnings per share was up 8% to $1.95 versus $1.80 last year.

Adjusted operating margin in the second quarter was 29.6%, an increase of 70 basis points over the second quarter of 2009. The increase in margin was positively impacted by continuing operating leverage in our recurring revenue businesses, cost efficiencies and termination fees. These positive factors were offset by continued increased investments and lower license revenue.

Adjusted operating margin through June 30 was 29.2%, an increase of 20 basis points over the prior year's level and 50 basis points higher than the margin for all of 2009.

Now we will move on to the segment results. Payment segment adjusted revenue was $487 million in the quarter and $973 million year-to-date, net of postage reimbursements and output solutions. As shown on slide five, adjusted internal revenue growth in the payment segment was 3% in the quarter and 1% year-to-date.

Payments revenue growth in the quarter was driven primarily by electronic banking, card services, and investment services, partially offset by a slight decrease in output solutions. These results include the negative impact of a large client bringing ATM management in-house at the beginning of 2010 which negatively impacts segment revenue growth by about 1 percentage point each quarter and for the full year.

[Flow of] income in the quarter continued to be virtually nonexistent as interest rates remained at historically low levels.

Bill payment transaction volume increased 9% in the quarter and was up 3% sequentially. As in the first quarter, this stat excludes the volume from a large bank remittance-only client that was acquired in 2008 and migrated off our platform in the fourth quarter of 2009.

During the second quarter, the majority of our bill payment clients, experienced mid-teens average transaction growth rates versus the prior year. And importantly, each of our ten largest bill payment clients showed sequential bill payment improvement in the quarter.

Card services revenue growth was driven primarily by a 22% increase in transaction volumes from our core debit products. We continue to benefit from both the consumer adoption of debit and adding new debit clients. Even in the face of regulatory change, we believe that debit transactions will remain a favored vehicle for consumers which should continue to bolster transaction growth over the foreseeable future.

Turning to slide six, operating income for the Payments segment was $151 million in the quarter and $299 million year-to-date. Adjusted operating margin of 31% in the quarter was flat compared to the prior year. Through June 30, adjusted operating margin was down 60 basis points to 30.8%.

The strong margin fall-through in our recurring revenue businesses was offset by higher product development expenses, integration investments, and weakness in output solutions. We also had incremental CheckFree integration costs in the segment, including severance related to a call center consolidation of approximately $2 million in the quarter and $5 million year-to-date.

The Financial segment generated revenue of $487 million in the quarter, and $959 million year-to-date. As shown on slide five, adjusted internal revenue growth in the segment was 1% in the quarter and down 1% year-to-date. Growth in the second quarter was driven by mid-single-digit growth in our account processing businesses and an increase in termination fee revenue.

This was partially offset by lower license revenue, continued reductions in check processing volumes, and softness in our lending solutions businesses. Operating income for the Financial segment was $151 million in the second quarter. Adjusted operating margin was 30.9%, an increase of 100 basis points over the prior year period.

Operating income through June 30 was $287 million and adjusted operating margin was up 30 basis points to 29.9% compared with the prior year. The increase in operating margin for the quarter and year-to-date were driven by growth in account processing recurring revenue and the increase in termination fees.

This performance was partially offset by a decline in license fees and incremental investments in areas such as Acumen, our new hosted PEP+ ACH solution, and innovative deposit transformation solutions designed to help financial institutions deal with the impact of financial regulation.

Adjusted operating loss in our Corporate and Other segment was $15 million in the quarter and $24 million year-to-date. The $6 million sequential increase in the second quarter loss over the $9 million loss in the first quarter was due primarily to the building gain recorded in the first quarter.

As Jeff highlighted up front, the quality of our earnings is in part evidenced by our strong conversion of earnings to free cash flow. Free cash flow for the first half of the year has grown 14% over the prior year to $353 million.

Free cash flow per share increased 16% to $2.30 compared with $1.99 in 2009. We used our strong free cash flow in the quarter to repurchase 2.8 million shares for $135 million. As of June 30, we have repurchased 4.2 million shares at a total cost of $202 million and have about 3 million shares remaining in our outstanding repurchase authorization.

We also repaid $76 million of debt in the quarter. We have repaid $202 million in the first half of the year and have $58 million of required debt repayment remaining in 2010. As of June 30, our total debt of approximately $3.4 billion results in a trailing 12-month debt-to-EBITDA ratio of approximately 2.6 times.

We also completed a small acquisition towards the very end of the quarter, AdviceAmerica, which is a best-in-class provider of integrated advisor desktop solutions, which extends our investment services capabilities into front office applications.

Net interest expense was $46 million in the quarter, as compared to $55 million in the second quarter of 2009. The decline resulted from lower debt balances and the positive impact of interest rate hedges that rolled off at the end of 2009.

Our effective tax rate for the quarter and year-to-date is approximately 38% which includes the negative impact of the R&D tax credit which has not yet been authorized in 2010. Now I will turn the call back over to Jeff.

Thanks, Tom. As I mentioned in my opening comments, sales in the second quarter were strong, achieving 102% of quota. Year-to-date quota attainment is 92% as compared to 90% through the first half of 2009. As noted in our last call, we increased the 2010 sales quota over the level of 2009.

Although year-to-date quota attainment is down a bit to target, our actual sales results through June 30 are up 8% versus the prior year. New client wins and sales to existing clients were solid across most segments. Sales cycles remain longer than normal as financial institutions monitor economic conditions and begin to sort out the impacts of financial reform.

Our sales pipeline in terms of both size and quality remains strong. We are optimistic that we will attain our full-year sales goal. Integrated sales were $30 million in the second quarter and $53 million through the first half of the year. Year-to-date integrated sales are 13% ahead of last year's level and we remain on track to meet our target of $105 million for the full year.

The leading areas of integrated sales continue to be in the areas of payments, efficiency-based products and channel solutions. We have signed over 350 new bill payment and debit clients in the first six months of 2010 alone and the percentage of competitive takeaways is increasing. The breadth and depth of our account processing business continues to serve as an important distribution opportunity for our industry-leading payments solutions.

Our operational effectiveness initiatives generated $15 million of cost saves in the second quarter and $34 million in the first half of the year, roughly 85% of our 2010 target. Our plan called for the majority of our cost saves to occur in the first half of the year and we remain on track to achieve our operational effectiveness target for 2010.

While we are pleased that we should achieve our $250 million cost savings result a full one year ahead of schedule, we're not stopping there. We see a number of interesting opportunities to be more efficient and effective within our business model, which we will discuss in more detail at Investor Day.

Before we take questions, let me update you on our view of the environment and guidance for the full-year.

As we expected, the number of regulatory actions continues to rise. There have been 114 actions through July 23, 43 more than in the prior year and in line with our forecast. We continue to expect the number of regulatory actions to peak in 2010 and absent a material step down in the economy, begin to tail off in 2011. Overall, as was the case last year, we still expect the negative impact of regulatory actions to be less onerous than the approximately 3% per year historical decline of banks, thrifts and credit unions due to market consolidation.

We're seeing a slight pick-up in the level of voluntary or non-regulatory assisted M&A activity which we view as a positive sign for the banking industry. We're encouraged by the client conversations and technology spending patterns that we have observed throughout the first half of the year.

Financial institutions are increasingly focused on technology solutions that can help them win and retain customers, generate more revenue and enhance their operating efficiency. Although we expect that to generally continue, we do not expect a full return to normalized IT spending until the economy is on a firmer footing and the ramifications of the broad financial industry legislation are better understood.

Regulatory change is front and center as the industry grapples with the complexities of what is passed and what is still to come. New legislation, such as the Dodd-Frank bill, which includes the Durbin amendment, will require the drafting of hundreds of new regulations to support the bill over the course of the next 12 months.

It is simply too early and the legislation too complex to determine how, where, and when various industry participants will be impacted. In addition, we fully expect innovation to prevail and that new opportunities will emerge that are not in play today.

That said, our initial and quite preliminary view is that the risks and opportunities of the new legislation on Fiserv are generally balanced. We intend to have a seat at the table, working with our broad range of clients to design solutions that will allow Fiserv to capitalize on the opportunities that will emerge in this new world.

As I mentioned earlier, our 2010 guidance remains unchanged. We continue to expect 2010 adjusted internal revenue growth to be in a range of 1% to 3% including stronger growth in our Payments segment. We still expect 2010 adjusted earnings per share growth of 8% to 11% and full-year free cash flow to grow 5% to 8% to over $700 million. We anticipate the Company adjusted operating margin will expand by at least 50 basis points for the year.

And finally on guidance, we believe that given the environment any perceived over performance in the quarter should be viewed as de-risking our full-year outlook.

As I mentioned, we're pleased with our results for the quarter and are on track for the full year. The strength of our business model and the quality our nearly 20,000 associates have coalesced to deliver meaningful value to our clients and to generate strong financial performance in one of the most difficult environments ever seen. We are winning in the markets where it matters most -- account processing, payments and channel solutions -- and we are well-positioned to lead as digital transformation reshapes the financial industry.

Lastly, let me remind you that we are holding our annual Investor Day on October 5 in New York City. If you are interested in receiving details on the conference, please contact our Investor Relations department. With that, let's open the line for questions.

Thank you. (Operator Instructions) One moment for the first question, please. The first question comes from Dave Koning, Baird. Your line is open.

Hey, guys, nice reacceleration.

Hey, Dave, thanks.

I'd say, first of all, it was really nice to see growth again in both segments. Is that something you expect now, just given, I guess, that the environment seems to be a little more stable? Do you expect both segments to continue to grow each quarter the rest of the year or will there be a little choppiness quarter-to-quarter?

We continue to expect -- we don't give segment guidance, and clearly we expect our Payments segment over time to be higher than our Financial segment, but we're in a good trend line going into the second half of the year. The second quarter clearly showed acceleration in both areas over the first quarter and we're on our plan for the year. And the second half is going to be stronger and we're building momentum as we go through the year and into 2011.

I would say at the same time, Dave, to your point I still believe we could see some choppiness in terms of -- I wouldn't say that the segment performance or the quarterly performance will be even.

I think we're going to continue to see building, so we went from minus 1 to 2. We expect that momentum, right, that trend to continue. So, we would expect to bias to more strength later in the year as we have seen so far in the first half of 2010.

Okay, good. And secondly, bill pay transactions, I thought that was very encouraging to see 9% growth again. Is that really a function of you just getting into your big banks and getting them to really push bill pay more again or just consumers starting to use it more again? Or maybe you could talk a little bit more about the dynamics there and how you expect that to continue?

Yes, it is a combination of things. One of the big items is we have had so much success in delivering bill payment into our account processing base, well over 1,000 clients that we have moved in since we acquired CheckFree. So that's creating a nice tailwind.

And the big ticket item is consumers are -- we're seeing that acceleration, they are paying a few more bills. But as you know, because our business -- we have many large clients, I think Tom mentioned in his remarks, the strength in -- the sequential strength in the top ten clients certainly helped to bolster that bill payment growth rate.

Okay, good. And then finally, you talked quite a bit about investments again this year. You are putting up a very nice year of about 10% EPS growth in the face of both a tough economy, bank environment, and while you're investing a lot. Is that something that, as we look into next year, it both helps the revenue and then maybe some of those expenses even fall off? Or maybe you can describe a little bit of how that might play out.

I think I will take this and then turn it back over to Jeff, but clearly this year we looked at more of an investment year, to your point, Dave. We highlighted some of the things, I think, that we spent incrementally more money on, whether that is Acumen, ZashPay, our PEP+ ACH investment. There are a number of things that we've added in the current year that we planned on to really deal with the environment as it gets better into 2011.

So as we look at 2011 we are going to continue to invest but I think this year clearly was more of an investment year than we have had in the past. But we want to ensure we invest for the future and that's what we're doing to continue to build our growth pipeline in those areas that are important, as we announced with the Westpac Group. Online banking; key area for investment and that will continue to drive growth over the future.

Great. Thanks, guys.

Thank you, Dave.

The next question comes from Tien-Tsin Huang, JPMorgan. Your line is open.

Hey, thanks so much. Good quarter. I just wanted to ask about the internal growth target as a follow-up to Dave's question. I guess you're running around flat now year-to-date. At this stage, should we be leaning towards the low end perhaps, given that you're running at that flat level or are you going to see some ramp-up in some of these closed deals that we could still get to the midpoint of the higher end?

Yes, I think for now, had we believed that it made sense to move the numbers we certainly would have. And we are very pleased with the momentum that we saw in this quarter. The transactions that we referenced, like the Westpac Group, will clearly help. As well as we have a number of good-sized transactions, whether it be American Savings Bank or Tesco, other transactions that we had been working on that just are -- either just went live or are just going live.

So we feel good about the momentum that we have right now. We think that the growth will buy us more to the fourth quarter than the third, but we think we will continue to see that momentum and it's premature to kind of close anything down at this point.

Yes --

Okay, that's fair.

Yes, I would think also the other item I would add to that is our Payment segment growth rate which was roughly 3% in the quarter, I mean, that is probably the highest it has been in four to five quarters. And that was still -- in the quarter, was a [little] drag from our output business. So we continue to build nice streams of revenue across the Company in that particular area and so that is a real positive from my standpoint.

Good. The Westpac win, obviously a good one. What is the margin profile for something like that and does it include a lot of professional services work at the front end to get that going?

Yes, it is a transaction where we have license and maintenance and services. So, good transaction. It is -- the Westpac Group, they are a good partner of ours. We have been partners with them for more than 20 years. And they are also a large, sophisticated institution.

This project will move in over the next, probably over the next 18 months, but it is good; it is business that looks like the rest of our business. It is not recurring in terms of payment processing, but it is good solid license and services revenue.

Okay. Okay. Last one just ZashPay, it is pretty cool product. On the advertising side, how are you going to get the awareness level of something like this up or are you completely reliant upon the banks to roll it out? And I'm curious in terms of the banks that have signed up or the pipeline of banks that are looking at it, do you have any large banks in there, in the mix? Something like a Bank of America?

So, the -- as you well know, Tien-Tsin, probably better than most of us, is that the size of the network is critical for P-to-P. And we have a number of different ways that we're looking to build that network through financial institutions, as well as building awareness outside. We had a small amount of marketing and advertising this quarter.

I'm going to beg off on this until Investor Day and we will talk about it in more detail. But clearly we are looking at where the largest groups of clients are housed today across the financial institution landscape as a way to increase the size of that network.

Okay, very good. Thanks.

Thank you.

The next question comes from Bryan Keane, Credit Suisse. Your line is open.

Hi, guys, and congratulations on a solid quarter.

Thanks, Bryan.

I just wanted -- I was jumping around on a couple different calls so I didn't hear it all, but I just wanted to understand, moving into the second half of the year I think you expect an uptick in revenue growth and in organic growth. Should we expect that right away going into the third and then an acceleration on to the fourth so we should see improvement off of the 2% number? I'm just trying to get some clarification.

Yes, Bryan, and you know this well, we don't really manage the Company on a quarterly basis. What we can see right now is that we will have building momentum throughout the remainder of the year much like we had this year.

And we would guess if we had to that it will be stronger at the end of the year than it will be in the third quarter. But for now, we wouldn't -- we would expect it to be positive in both quarters but the strength to bias to the end of the year.

Okay, and just a question on the regulatory environment. I don't know if you covered that some, but I would be interested with your thoughts there and especially with the amount of bankruptcies we have seen this year. I think you said last call you said that was pretty much to your plans, but just interested to know the impact that is having on Fiserv's P&L.

Sure. So I believe to date there have been about 114 institutions that have been acted upon by the government, about 43 more than the prior year. That's in line with -- we thought at the beginning of the year we would see somewhere between 200 and 250 and we think we're on track for that.

And from our standpoint, as I think most people know, each week we track what happens to these institutions, who they get acquired by, because they obviously don't close, they just move around. And to date we're down slightly in terms of the exact numbers since the closures started. And so there has been some impact to our P&L, but actually much less than the impact would have been had we been seeing just normal M&A consolidation in the market.

The downside is you don't see termination fees, but the upside is that is there are more institutions today than there would have been but for the little blip we have seen in the banking sector.

Okay. Thank you very much.

Thanks, Bryan.

The next question comes from John Kraft, D.A. Davidson. Your line is open.

Hey, Jeff. Hey, Tom. Congrats on a solid and clean quarter.

Thanks, John.

Just wanted to follow-up on the bill pay commentary, I guess because not all your competitors appear to be seeing some of the same trends. What percent -- do you know off-hand what percent of your bill pay transactions are walk-up or expedited type payments?

I mean, as a percent of the total transactions, it is a very small --.

Very small.

Very, very small number.

Okay. That's helpful. And then, in the past I think you have provided some growth metrics for transactions around the -- from the debit side. Did you provide that?

Yes, they were up. In the second quarter our debit volume was up 22%, which is roughly in line with where we were in the first quarter.

Great, thanks. And then this Westpac deal, congrats to your Corillian team there. How long of an implementation process might that take?

Yes, it's not surprisingly going to be a long process. We're going to let the Westpac Group do the discussion on the timing of when they are going to go live with the technology.

But it is a -- Westpac is a large, sophisticated institution. It is going to go for a fairly long period of time and we will be engaged working very closely with them. It's one of the reasons why we're actually opening a new technology center down in Sydney.

Something that is going to start latter half of 2010 then, maybe?

Yes, absolutely.

Okay. And then just lastly, regarding the financial operating margin, obviously it looks like it is about as good as it has ever been. Given the termination fee that came in, is that repeatable?

Yes, I think one of the things we talk about is that, yes, the termination fees kind of were up about in that segment. I think, overall we said in the quarter, John, they are up about $8 million but our license fees were down about $5 million, too, in that segment. So those two kind of offset a little bit. We did get some positive impact but clearly the license fees are higher margin and so are the termination fees.

So -- overall, we had a good margin quarter there. We continue to crank on our operational effectiveness initiatives. But clearly it was good quarter; we haven't been that high in a while. And so from that standpoint I think the detriment is we're going to have -- we will have a repeat of the termination fee but going forward we will continue to generate more license revenue as that kind of comes back in the second half.

Yes, and, John, I would say just one other thing is in the financial segment, which includes our item processing business, one of the things that generally may be misunderstood is that as that business, which is shrinking at a fairly healthy clip, as that business goes away, which is very low-margin business, it is replaced by much -- by revenue that has a much more attractive margin characteristic. And that has a wonderful blending effect on our margins.

So, while it is -- on quarter-by-quarter you have these nice step-ups, over time we fully expect those margins to be able to continue to grow on the basis of a combination of mix, as well as incremental cost efficiency.

Just to add to that -- and, John, if you actually look at our income statement on page six of our press release you can kind of see our processing and services revenue as a Company. It was up roughly about $30 million and our cost of processing services was actually down.

And that, to Jeff's point, is really kind of that mix where we have some of that check processing business, which is declining, but it is getting replaced by higher margin, kind of scalable type revenues. So, we can continue to see that and that will continue to happen over time.

Okay, that's helpful. Good trends. Thanks, guys.

Thank you.

The next question comes from Glenn Greene, Oppenheimer. Your line is open.

Thank you. Good afternoon and congratulations on the results.

Thanks, Glenn.

I guess just the first question and just a high level sort of update on what you're seeing competitively and maybe you can contrast the core processing side versus the payment side.

Sure. It is -- as we mentioned, the conversations that we're having with clients and prospects, they are active. The pipelines are active. The market remains competitive across all fronts and we like that. We enjoy competing so that is good news.

As we talked about on the Payment side, we had tremendous success; one of the highest payments quarters in terms of wins we have ever had. And, again, most of those are competitive takeaways so we feel great about that.

On the account processing side, we have actually won more -- we have had more wins for the first six months of the year this year than we did last year so we feel like we're make great progress. We don't win them all but we win more than our fair share.

And then, secondly, I would say that along the lines of account processing we actually are seeing a few more people making decisions to change and that's a good thing from our perspective, as well as I suspect others could jump on to that bandwagon. But that's good news.

And then lastly, as the trend to outsourcing continues and given our very large presence as an outsourcer, we think that is very good news. So overall it remains competitive and we think we're making good strides out there.

Then in sort of the decision making, it sounds like it is picking up very gradually, I guess. And correct me if I'm wrong, but I think, Jeff, at some point previously you've alluded to hoping to get back to, quote, normalcy in 2012. Are we sort of on that path? And is that how you're sort of seeing things?

I mean, right now, I would say that economically we believe that we should see that gradual return taking hold pretty firmly in 2012. I would say that on one hand I am pleasantly surprised at the kinds of conversations that are being held out in the market. I think IT spending is generally -- at least the idea of IT spending is picking up and that is a good thing.

And that is unfortunately bound back a little bit by the regulatory uncertainty that is out there. I do believe that people clearly are viewing technology as one of the ways they have to fight or combat what is out there. And so we're going to benefit from that over the mid to long term, but I think there is going to be some blips while everyone is sitting at a table trying to figure out what it all means.

Okay, and then just excuse me if I missed this because I had to jump on late, but your big deal pipeline exiting 1Q I think you may have signed one, maybe it was Westpac or maybe there was another. Just wanted to get an update on where that pipeline stands and what you did close related to that. If you did say it I apologize.

No problem, Glenn. So the big -- we still have a number of larger transactions in the pipeline. We had very good visibility to two transactions closing in the second quarter. One had already closed when we did our Q1 announcement and the second was the Westpac Group which we announced today.

Okay, great, thank you very much.

Thank you, Glenn.

The next question comes from Kartik Mehta, Northcoast Research. Your line is open.

Hey, good afternoon, Jeff. What do you think will happen in terms of spending? Obviously, it seems like the market is getting better. Do you anticipate we will see a gradual increase over the next few quarters or do you anticipate at some quarter there is a little bit of a hockey stick effect? Not going from 2 to 8 but maybe where we go from 2 to 4 or 5?

So, I will -- I want to caveat this by saying I don't have the financial -- I don't have the (inaudible) crystal ball. But I would say last year we did see a big spike up, kind of a release of spending in Q4, and it wouldn't surprise me if we saw a similar release in spending this year given the -- some of the regulatory uncertainty and just given sales cycles the way we have seen them.

I'm not a believer that a lot of the, quote, pent-up demand that I've heard referenced out there will alleviate itself into a blast in a quarter. But I do believe that the money that is being spent on technology today is insufficient to serve as the backbone for the financial industry, and, therefore, we are going to have to see a step-up in spending to deal with the normal business demands of the industry, as well as the regulatory challenges.

And then lastly, I do see and expect a fair amount of movement in the new -- in the digital channels. So things like what we are doing with the Westpac Group as well as ZashPay and other forms of electronification.

It sounds like if -- when this spending does come back it sounds like you think it will be higher margin spending, especially on the payment side. Would that be a correct way to think about it, Jeff?

I think that the spending will come in higher value ways to the institutions and so depending on your place in the value chain that could be a good thing. And we think we're well positioned to capture the spend so --

You know, I also think -- Kartik, it is Tom. Just to add to that is I think over the long term, right, as the revenue pressures continue to build on our clients there is going to be a gradual trend towards more efficiency because the financial institutions are going to have to get more efficient just with what is going on with their top line and the number of different regulations, etc.

So I think for Fiserv as an outsourcer, as a technology provider that drive to efficiency is what we do well. And so I think over the long term that is something that will continue and continue to grow over time.

Thank you, Tom. And just one last question, Jeff. Are you getting any more activity for de novos? And the reason I ask that is I am trying to determine if the marketplace is getting better for financial institutions and investors are feeling as if this is an opportune time to maybe get into this industry.

So it is a -- there is -- it is a two-fold answer to that, Kartik. Lots and lots of investors want to get in the industry and, unfortunately, de novos are not the vehicle to do that right now. I think -- and I may not be perfect on this -- there have only been three de novos so far this year approved. But there is lots of new capital coming into the industry in different ways. Whether it is investing in institutions or through groups that are buying institutions, there is a lot of new capital coming in.

And we're -- based on, again, the conversations that we're having with market participants, we believe that the issue is not around capital, it is about the regulatory structure allowing people to set up, whether it is de novos or other kinds of institutions, to acquire.

And I believe that we probably won't see much this year on that front, but certainly as the regulators get the larger mass of institutions redirected that need to be redirected and they can open themselves up to focus on the approval process we will see that. And if you look back in history you can see that after any significant wave of closings, you see a big boost in de novo and we fully expect that will happen again.

Thank you, Jeff. Thanks, Tom.

Thanks, Kartik.

Thanks, Kartik.

The next question comes from Tim Fox, Deutsche Bank. Your line is open.

Hi, thanks for taking my question.

Hey, Tim.

First question -- Tom, how are you? On the Output Solutions business you mentioned last quarter that you were hoping that the grow overs should -- the pressure there shouldn't persist long and you mentioned that it is still here in 2Q. Any sense of when those pressures are going to ease? Is it in 3Q, 4Q of this year or is it going to be pushed out a bit?

Yes, I think that business, as we've talked about, is a little more volatile from that standpoint. I think it will -- their forecast is to get better in the second half and I would say the first quarter was much more significant. The second quarter was close from a standpoint of that business was slightly down to the prior year.

So it is not a big factor from a growth standpoint but clearly we anticipate that the second half will get better and they typically have a fairly strong Q4 as far as from a business model standpoint. But that business has less recurring revenue given the nature of it so it can kind of move around a little bit more during the year.

But it clearly is stabilized. It was better in Q2 than Q1, as we anticipated, but still a little bit of drag on the payments growth rate.

Got it. Okay, and then in the check processing business, obviously you -- it's a secular weakness here just from a growth perspective but positive for margins over time.

Can you help frame how to think about that business, as a percentage of the total business today? And as that continues to shrink, when does it become less of a revenue headwind as part of the story overall and just a benefit for margins?

Yes, I think what we have said is overall in that particular business it is a little bit more than 10% to 12% to 13% of our Financial segment type of revenue. And so it is a business we continue to manage.

It continues to decline given the secular nature of that. We continue to look at a number of different opportunities to put more scale in there. But we benefit on the other side as debit, bill payment, all sorts of other transactions increase.

So clearly the margins in that business are lower overall because it requires more labor and that's really what you're seeing. As I highlighted earlier in my commentary to John, you can kind of see the revenue increasing and kind of the margins in that cost of processing and services because the lower margin is turning into -- over higher margin electronic form of transactions.

And so, overall we clearly lose it on the -- lose some on the revenue per transaction but it is built in and we're building margins and scale. And so overall from that standpoint it is good. And we will look to get other pieces of bigger business into that business to hold that secular decline, but that's really where we're at with that business.

That's helpful. And just lastly, nice renewal with SunTrust. Just wondering if you could talk a little bit about pricing -- not necessarily on that contract but just in general on the renewal there. And the pricing in general on your larger renewals would be great, thanks.

I would say the pricing environment is just as competitive today in the bill payment world as it was in 2007. I'm sorry, 2008. We haven't seen a dramatic change in that in that structure. And the good news for us is we have some capabilities that are unique and incredibly differentiating and that gives us a strong footing in the market.

Thank you. Good quarter.

Thank you.

Thanks.

The next question comes from Ashwin Shirvaikar, Citi. Your line is open.

Hey, guys. Congratulations on a good quarter.

Thanks, Ashwin.

Thank you.

My first question is with market demand seemingly getting better here, does that have any impact on capital usage, either working capital or CapEx, and how do you think of that?

I think overall from a standpoint of our cash flow, I mean, we had an exceptional first six months as you can see. And I think as we continue to grow to our top line we will have a little bit more working capital from a receivable standpoint, but our cap expenditures that you see in our cash flow is really hard CapEx. That should not change dramatically as our revenue continues to build, so we will continue to have leverage.

That being said, the first half from a CapEx standpoint, was a little bit lower than we have historically had and we will have a little bit more of that in the second half. Also, our tax payments were a little bit lower. We will have a little bit more of that in the second half.

But from a business model standpoint, we don't have to really expand our CapEx or working capital as our revenue builds. Slightly, but not materially.

Okay. So on a deal like Westpac, and congratulations on that, by the way, the -- on a deal like that, when you open up a center for that, is that sort of a shared center that you might have opened up anyway?

Yes. Because we have -- we have a lot of operations in there, in Australia already in Sydney, and so we will be leveraging that with our existing operations that we have.

Right. The biggest use of capital in those transactions is human capital.

Yes.

And so we're literally transporting human capital from here to there so that we can build a base of expertise in Sydney that we can use as basically an [ASPAC] delivery unit.

Okay, good. And one last question just to follow-up on the prior question on pricing. Could you comment on pricing trends, particularly for renewals? And if you can separate out by segment that would be great.

Yes, we don't -- overall, again, on pricing, I think Jeff hit on it, but we have not -- our pricing on renewals has been very consistent year-over-year. We do get into some competitive situations where a competitor really wants some business and that happens, but it has happened before.

We haven't seen any real large change from that standpoint, but deals happen out there that are very competitive and certain of our competitors sometimes want to buy one or two there. That happens in the marketplace, but overall, as far as renewals like in our core, that has been fairly consistent on a year-over-year basis.

And I would say that one of the things that we are pretty disciplined on is sticking to whatever boundaries we draw around our economic model and so there are certain cases where a transaction may not make economic sense. And if that's the case, we -- as hard as it is at times, we're willing to walk away.

Okay, great. Thank you, guys.

Thanks, Ashwin.

The next question comes from Chris Shutler, William Blair. Your line is open.

Hi, guys. Good afternoon. Just a real quick question here; sorry, I just jumped on a little while ago. But in the consulting business, which I know is a smaller business for Fiserv where you're helping banks kind of retool their fee structure, obviously -- I guess I'm just wondering if you can maybe talk about momentum that you're seeing in that piece of the business? And if you could give us some bigger picture thoughts on some of the most common fees you're seeing FI is interested in implementing, obviously given some of the changes that are occurring.

I mean, obviously there is a lot of debate and a lot of activity on this topic. And to the extent there is good news, and there is, the level of opt-in rates, which was the big driver of the original fee structure conversations, has been substantially higher than were originally anticipated.

And, therefore, some of the more, call it, draconian pricing strategies that were being considered have not actually -- are not going to need to be used. And we have heard people talk about having very little changes to their pricing and then we have seen things like what we all saw in the paper I think that -- what Bank of America did on their statements and things like that.

Yes.

There is not a one size fits all answer but it is on things like some service charges of accounts. I have heard things like charging for people to use a debit card; a variety of different piecemeal, kind of going from a fixed price to an a la carte menu pricing.

I do think it is too early to look at this. I think we need to get through the opt-in cycle, see what that looks like. Get through the Durbin -- kind of the Durbin elements of the Dodd bill and see what that looks like. But clearly, there is a significant amount of energy around what will the pricing look like. And my point around innovation in our prepared comments were these are some really, really smart people that are going to figure out how to use the system to make sure that all of those earnings go away.

And there will be some new product innovation like ZashPay which allows people -- allows institutions the opportunity to charge a consumer a relatively nominal amount for a very highly valued service. So I think we will see more of that and it will play out over the next, I think, three to six months.

We're really focused, to Jeff's point, just to finish up on that, Chris -- is that, like ZashPay as an instance, is helping our clients, right, with their top line. And to the extent we can develop more innovative solutions like ZashPay which is a revenue opportunity for them, those are the areas we're focused on also.

Okay, great. Then just one other one. Last quarter, you guys talked about the solutions conference that you had and you were seeing nice interest in sales proposals there. Just wanted to get your perspective. I know it is still really early, but if you could give us any perspective on conversion rates that kind of thing that you're seeing so far from those folks.

Excuse me. It is early and one of the challenges that I mentioned is we still see, even though we're having good, healthy conversations, we're still seeing these elongated sales cycles. So we will know more throughout the year, but we remain quite encouraged and that is showing up in our pipeline.

Okay, thanks Jeff.

Thank you.

The last question comes from Darrin Peller. Your line is open with Barclays.

Hi, this is Preeta on behalf of Darrin. I just had a quick follow-up on the earlier discussion on the competitive environment. It looks like you had a good win rate this quarter and you're seeing an improvement in the win rate. Your competitors also suggested as well that they are gaining share. Do you think that there might be a vendor consolidation trend in the industry that you and some of the other large players are benefiting from?

Well, if you mean -- by vendor consolidation do you mean that there are others who are losing and, therefore, someone else is winning, I would say yes. I mean, it is -- even though most of the discussion tends to center around a few larger players in this space, there is still an awful lot of fragmentation out there across all segments of the market.

And without going into specific names, I think we have a good idea of who is winning and who is losing. And it makes sense to me that you would hear multiple people say that they are winning at this stage.

All right, that's helpful. And then just another follow-up on the ZashPay service. Who would you consider -- if you could comment a little bit on the competitive environment there, who would you consider your main competitors in the P-to-P landscape and just your outlook for gains in that market? Thanks.

Interestingly, by virtue of the model that we have where we have the advantage of leveraging the RXP, the CheckFree RXP infrastructure and we are able to move money quite fast from one bank account to another. We don't actually think there's material competition out there at this stage because of the uniqueness of our model.

So I think the real competition for us is cash and checks. And so making sure that we have a compelling value proposition so that we can electronify everything from the payment to the babysitter to the payment on the Super Bowl, I think that is the opportunity for us and for this technology. And we really see that as the main obstacle out there.

The other benefit that we have and the winner in P-to-P will be the ones that have the largest network. So the creation of the network is absolutely critical; without a network it takes an awfully long time to move money. And so we're very, very focused on building that network.

All right, thanks a lot.

Thank you.

Great. Well, thanks everyone for joining us. If you have some further questions, please give us a call. Thank you.

Thank you for your participation in today's conference call. The call has concluded. You may go ahead and disconnect at this time.