Fiserv Inc (FISV) 2013 Q2 法說會逐字稿

Welcome to the Fiserv second quarter 2013 earnings conference call. All participants will be in listen-only mode until the question-and-answer session begins following the presentation. Today's call is being broadcast live over the Internet at www.fiserv.com and is being recorded for future reference. In addition, there are supplemental materials for today's call available at the Company's website. To access those materials, go to the Company's website, and click on the link in the Events section of its homepage. The call is expected to last about an hour, and you may disconnect from the call at any time.

Now I will turn the call over to Eric Nelson, Vice President of Investor Relations at Fiserv.

Thank you and welcome to our earnings call for the second quarter.

With me today are Jeff Yabuki, our Chief Executive Officer; Tom Hirsch, our CFO; and Mark Ernst, our Chief Operating Officer.

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, amongst other matters, adjusted revenue growth, adjusted internal revenue growth, adjusted operating margins, adjusted Earnings per Share, free cash flow, free cash flow per share, revenue and cost synergies, sales pipelines, acquisitions, and our strategic initiatives. 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 www.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 measures. 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 future periods.

Also, please mark your calendars for our annual investor day, which will be held in Boston on December 10. Invitations will be sent this fall. In the meanwhile, please contact our investor relations team for additional information.

With that, let me turn the call over to Jeff.

Thank you Eric, and good afternoon everyone.

Our strong results for the quarter are consistent with our plan, which anticipated an acceleration of revenue and earnings throughout the year. New business is coming online as expected, and we have good visibility to the remainder of the year. We are on track to achieve our full year financial objectives.

Adjusted revenue increased 12% in the quarter and is up 9% year to date. Adjusted internal revenue growth accelerated slightly more than anticipated to 4% in the quarter. We achieved 7% internal revenue growth in our payment segment, which was the highest level since the first quarter of 2008.

Adjusted operating margin in the quarter expanded 110 basis points to 30.5% and was up 210 basis points sequentially. Operating margin benefited from revenue growth in our scale businesses, favorable mix, and strong operational effectiveness results. Overall adjusted operating margin is up 50 basis points through June 30.

Adjusted earnings per share increased 18% to $1.50 in the quarter and up 16% to $2.83 through June 30. Free cash flow per share grew 26% to $2.67 through the first half of the year. This excludes $116 million of a distribution received from our StoneRiver joint venture in the quarter. Growing market momentum is visible in our results. Sales in the quarter, excluding Open Solutions, were on track at 102% of quota. For the six month period, actual sales were up 9% versus the prior year, which is better than the headline, given that last year's second quarter included the TD Bank Bill Payment sale, which was one of our largest transactions ever.

At the start of the year, we shared three key enterprise priorities to help you gauge our progress. First, to continue to build high-quality revenue growth and meet our earnings commitments. Next, to extend market momentum into deeper client relationships and a larger share of our strategic solutions. And last, to deliver innovation and integration to enhance results for our clients with an important focus on Open Solutions. We progressed well against our first priority in the quarter.

Growth stemmed from a number of areas across the Company, including the onboarding of large Bill Payment wins, online banking transformations, accelerating growth in mobile, and solid performance in our debit, payments and account processing businesses. The quality of our new revenue is apparent as adjusted operating income grew 16% in the quarter and is up 10% year to date both on the strength of expanding margins and the Open Solutions acquisition. These results translated to 18% adjusted earnings per share growth in the quarter.

Our second priority is to deepen client relationships with a larger share of our strategic solutions, such as our market leading Payments and Digital Channels offerings. We signed 98 new Mobiliti clients in the quarter and 188 year to date, which brings the total number of mobile clients to nearly 1600. Mobiliti ASP subscribers have more than tripled in the last 12 months, and we are up 23% sequentially. Financial institutions are focused on offering unique mobile banking experiences to better serve their customers.

We expanded the Popmoney instant payment program in the quarter as our Real-Time payment offerings begin to take hold. During the quarter we announced that PNC Bank would offer Popmoney instant payments, and we also expanded our Real-Time reach by adding the STAR debit network. Since then, we have signed several additional Popmoney instant payments clients that should also go live later this year; lastly, we signed 71 new Bill Payment clients in the quarter.

Our third priority is to deliver innovation and integration for our clients with a focus on Open Solutions. Late in the second quarter, we introduced our ASP version of tablet banking, which enables financial institutions to provide a differentiated experience to any of the more than 50 million tablet owners in the US. This new solution is currently available to the more than 1200 financial institutions on our Mobiliti ASP solution.

Among a number of sales wins in the quarter, we signed Investors Banks headquartered in Short Hills, New Jersey with over $12 billion in assets. This fast-growing bank will utilize the Signature account processing platform as part of a broad suite of integrated Fiserv solutions.

The integration of Open Solutions continues to go quite well. We closed five new DNA sales in the quarter and have as many DNA transactions closed through June 30 as were completed in all of 2012. The DNA pipeline is building rapidly, and we project great sales for the foreseeable future.

We are steadily integrating our leading surround solutions for the open account processing client base. Bill Payment, card, online banking and mobile are currently the most sought-after solutions. To date, we have gained more traction than we expected on our revenue synergy extractors. We're also making excellent progress against our expense synergy goals, as indicated by our strong first-half operational effectiveness results. We now expect to exceed our original expense and revenue synergy goals for the Open acquisition of $50 million and $75 million respectively.

Now let me turn the call over to Tom to provide additional details for the quarter.

Thank you Jeff, and good afternoon everyone.

Adjusted revenue increased 12% in the second quarter to $1.1 billion and increased 9% in the first six months to $2.2 billion compared to the prior-year period. Adjusted internal revenue growth was 4% in the second quarter and is 2% year to date. Adjusted earnings per share increased 18% to $1.50 in the quarter and is up 16% to $2.83 through June 30. Adjusted operating income increased 16% in the quarter to $347 million compared to last year.

Adjusted operating margin was 30.5%, an increase of 110 basis points over the prior-year quarter and up 210 basis points sequentially. Margin expansion was driven by strong operational effectiveness results, business mix, and high-quality revenue growth in our Payment segment. For the first six months, adjusted operating income was $655 million, an increase of 10% compared to the prior year. Adjusted operating margin improved 50 basis points to 29.5%.

Now on to the segment results. Adjusted internal revenue in the Payment segment increased 7% to $562 million in the quarter and increased 4% to $1.1 billion in the first six months. Excellent performance in card services, Biller, and Digital Channels, and acceleration in our Bill Payment business, drove the strong revenue growth.

Bill Payment transaction growth, which was boosted by the significant sales wins, accelerated to 7% in the quarter and was up 4 percentage points sequentially. Also, e-Bill transactions continued to progress, up 5% year-over-year for the second quarter in a row.

Debit transactions in our Card business continue to grow well above the market, up 15% in the quarter, 2 percentage points sequentially, and up 14% year-to-date. We have also added 74 new debit clients over the first six months of the year. We continue to build the issuer side of the Popmoney network, adding 64 financial institutions in the quarter and 153 year to date. We continue to see important opportunities for growth in this space, and in particular, where Popmoney intersects with Real-Time.

Payment segment operating income was up 14% in the quarter to $179 million. Year-to-date operating income increased 10% to $345 million, all of which is organic. Adjusted operating margin in the segment was 32% in the second quarter, an increase of 210 basis points over the prior year and up 150 points sequentially. Year to date adjusted operating margin for the segment was up 150 basis points to 31.2%. Margin expansion was driven by increased operating leverage in our scale businesses, including Card Services, Bill Payment, and Digital Channels, partially offset by the impact of the Bank of America renewal.

Adjusted revenue in the financial segment increased 18% in the quarter to $590 million and 14% to $1.1 billion for the first six months of the year compared with the prior year periods. Adjusted internal revenue accelerated nicely, growing 2% in the quarter compared to the negative 2% reported in the first quarter. Although the majority of the total revenue gain in the segment was from Open Solutions, internal revenue growth in the quarter was driven by our lending and account processing businesses, along with strong license sales.

Adjusted operating income in the financial segment was up 17% in the quarter, to $191 million, and adjusted operating margin declined by 10 basis points to 32.4% compared to the prior year, which is primarily related to the impact of the large account processing client deconversion and Open Solutions acquisition. Adjusted operating margin in the segment expanded 260 basis points sequentially, driven primarily by operational effectiveness results, including synergies and improved license revenue.

Year to date, the adjusted operating income in the segment was up 13% to $356 million, and operating margin declined 20 basis points to 31.1%. The adjusted operating loss in the corporate segment for the second quarter was $23 million, increasing by $2 million over the second quarter of 2012 and consistent with the first quarter.

The effective tax rate for the quarter was up 70 basis points to 35% over the adjusted prior year period rate. Through June 30, our adjusted effective tax rate is up 40 basis points to 34.8%. We expect the rate in the second half of the year to be between 36% and 37%. Free cash flow per share was strong, growing 26% to $2.67 through June 30, primarily as a result of increased earnings and lower tax payments compared to the prior year.

As Jeff highlighted earlier, we received a $122 million cash distribution from our StoneRiver joint venture in connection with the recapitalization, of which $116 million is excluded from free cash flow. To date, we have received more than 100% of our original investment back in cash. We continue to seek additional value creation opportunities.

Net interest expense for the quarter was up slightly over the prior year period due to a $6 million investment gain included in last year's second quarter. Total debt at June 30 was just under $4 billion or 2.6 times trailing 12 month adjusted EBITDA. We repurchased 2.3 million shares of stock in the quarter for $204 million, and through June 30, have repurchased 3.1 million shares for $271 million. As of quarter's end, there were 131.1 million shares outstanding and 2.4 million shares remaining under our existing share repurchase authorization.

With that, I would like to turn the call back over to Jeff.

Thank you.

As I mentioned upfront, sales excluding Open Solutions were solid in the quarter, attaining 102% of quota, and are 94% of year-to-date quota. Actual sales through June 30 were up 9% versus last year, which included the very significant TD Bank Bill Payment sale in last year's second quarter. Excluding the TD Bank transaction, sales through June 30 are up 27% year-over-year, our pipeline remains healthy, and we are optimistic that we will achieve our full year sales target. Integrated sales were $63 million in the quarter, and are $101 million through the first half of the year versus our $210 million annual target.

Payments in Digital Channel solutions led our performance again this quarter. We are on track to achieve our integrated sales objective for the year. Our operational effectiveness goal for 2013 is $60 million, which includes the anticipated Open Solutions cost synergies. We achieved $32 million of savings, or 53% of our annual target in the first six months of the year. We've captured some synergy benefits earlier than anticipated, which contributed to our strong first half results. We are well-positioned to meet our operational effectiveness objective for the year.

The environment continued to be stable in the quarter, with discussion of possible interest rate movement providing a bit more optimism across the market. Regulatory actions continued to be a modest, with 16 in the second quarter and only 25 year-to-date, which is down about 30% compared to the same period last year. We're also seeing a gradual pick up of M&A activity in the banking market, which we view as a generally positive environmental sign.

Our view of technology spend has not changed from the first quarter. Financial institutions remain focused on solutions that can help them generate revenue, deal with the complex regulatory environment, and create efficiency.

As I said up front, our overall results are in line with our expectations, and we are on track to achieve our full year results. We still expect full year adjusted revenue to increase by more than 10% and adjusted internal revenue to grow 3% to 4% with a slight bias to increase growth later in the year due to a combination of normal year end seasonality and an easier fourth quarter compare.

We expect adjusted EPS to grow in a range of 15% to 19% or $5.84 to $6.03 per share. We continue to expect operating margin to expand between 10 and 50 basis points for the full year. And finally, we expect free cash flow to increase by at least 18% or greater than $6.55 per share for the full year.

In summary, we feel good as we enter the second half of the year. The onboarding of larger transactions is progressing well, and sales performance is tracking. We continue to make strong progress in the Open Solutions integration, and we're enthusiastic about the significant interest in DNA.

Overall we expect to achieve our 2013 targets and have meaningful momentum as we exit the year. Our success is attributable to the engagement of more than 21,000 associates who are helping Fiserv clients architect a new financial services experience around the world.

With that, let's open the line for questions.

(Operator Instructions)

David Togut, Evercore.

Congratulations on the solid acceleration organic revenue growth, that is very nice to see. Is the composition of growth that you saw in the quarter, high single-digit payment growth plus low single-digit financial, is that the sort of breakdown we should expect for the balance of the year?

Yes, I think that is reasonable. We're going to have some fluctuations, as you know, David, in the financial segment as license fees and other factors. But yes, I think that is reasonable from a range standpoint.

Got it. Second, Jeff, you highlighted greater expected revenue synergies from the Open deal. Can you drill down a little bit into where you're seeing the incremental growth above your expectations?

Yes, I would say -- the increased expectations are taking two forms. There is far faster engagement in the process. In other words, we have -- the client base is quite excited to have the opportunity to basically shop within the financial services technology store that we have. And so, whether it is on the debit or credit card side, or online banking, mobile, Bill Payment, those kinds of things.

And you have tremendous interest there, as well as in other products that we probably have not prioritized, and that could be anywhere from our multi channel management solutions to our statements -- custom statement offerings and just lots and lots of interest there, which we think is attributable not just to the fact that the services were not there. But also this whole notion of specifically around the DNA platform, they bring a more modern technology architecture to bear. And these products in combination with DNA really go a long way in crafting this new financial services experience, which we think will be quite important over the next 5 to 10 years.

To add to that, David, I think the sales pipeline that we're seeing in regards to Open and the other value content around DNA have built a lot faster than we would have anticipated sitting here back at the start of the year. So, that is a very positive sign.

I see, I appreciate the detail. Finally, Jeff you're probably aware a number of your competitors are targeting some of the Open Solutions/DNA customers. What have you seen in terms of client retention with these customers particularly in this transition period?

Yes. So we are quite bullish about what we're seeing going on in the existing Open Solutions space. Again, the lion's share -- the substantial majority of the synergy value is going to come from existing clients adding on current Fiserv solutions. The reception has been quite warm, and that does not mean that we will not lose a client at some point. That is, unfortunately, part of how the business works. But I am not currently aware of situations where we have been under attack by clients and have those responses going the wrong way. So, on balance within the DNA base and the Total Plus base and the Open base overall, we are feeling quite good about that.

Understood. Thank you very much.

Tien-Tsin Huang, JPMorgan.

Hello, just a follow-up on David's question around retention, the same thing on Harland. I guess with the Harland acquisition and NDH taking it over, what is the strategy for potentially going after the account base? What is the implication for Fiserv and that type of thing?

Tien-Tsin, obviously we've been competing against that base for a long time. And to some extent, any time you have a transition, especially a transition like this, it has clients reconsider, is this the right path for us and what does that mean? Being that we have done so many acquisitions over the years, we know exactly what that feels like. And we have a pretty good handle on how to compete against that.

So on one hand, we think it is good news. You continue to see validation that there's going to be combinations of providers. On the other hand, we think this represents a good opportunity to go out and win some incremental business, frankly none of which has been factored into how we thought about the world given how new this announcement is.

Fair enough. Then I think you said internal revenue growth accelerated a bit faster than expected. Can we attribute that primarily maybe to the license sales and the financial segment, or was it more than that?

Yes, I will give it a shot and let Tom correct or add where it should be. We did have a good quarter on license revenue in the financial segment, probably a little bit more than we thought we would have. But as you know, license revenue tends to bounce around.

But on the payment side, the 7% payment growth, as you know, that is not license revenue; that is kind of high-quality recurring revenue that we think will be pretty sticky moving into the rest of this year and into '14. From that standpoint, we feel good about the composition of the mix between payments, and in the financial segment, and expect to see the financial segment to continue to do quite well for the remainder of the year.

Great, last one for me, I promise. The backlog converting -- is that on time? It sounds like the onboarding of large transactions you talked about is being -- is going well, I think, is what you said. Is that still the case, any change there?

No, we are in good shape. There were a couple of transactions that needed to go live in the month of July, and we are right there.

Terrific. That is great. Thank you for the update.

Dave Koning, Baird.

Great job. I guess first of all just wondering how much if we disaggregate the payment business, how much of the growth came from the new deal signings, the large deal signings? And maybe how much is the underlying growth excluding that?

So that is a good question. I mean the majority of the growth every year is going to come from the existing base. It will come from transactions, new transactions, more of the same kinds of transactions, so you will see that every year, because obviously you're replacing revenue that may have run off in one way or another. For this year in particular, and we will see it again next year, we've had, as you know, a number of large clients, so at the margin, that is layering on in a way that is quite positive. We are seeing pretty good growth just in the fundamentals of our different businesses.

You can see it in a place like e-Bill, for example, the second quarter of 5% transaction growth back-to-back after having no 5% quarters last year. Some of that is coming from new Bill Payment clients, much of that is coming from new feature function that we have embedded in the product that is creating and enhancing the experience for our Bill Payment users.

We just put a new release into the markets, which is in fact helping the Bill Payment users to have yet again another level of high-quality experience. So we're continuing to tweak and mold our ability to change the adoption patterns, so that is helping, as well. And then things like we mentioned, Dave, the tablet ASP offering that we just went live with over the last 45 days, we are really excited about how even something like that is looking.

So, a lot of them are kind of tweaking around and building the pockets of transaction capabilities within the base combined with those larger wins. It is those larger wins that will take us out over multiple periods, and so that gives us some confidence in the momentum that I mentioned going into 14.

Great. Great, and just one follow-up, on the Open deal, it sounds like you are doing a great job on the cost savings side. What year is the biggest impacted year from the cost savings? I'm guessing it's probably next year, because this year, you probably have solid savings, but they transition through the year, and next year is maybe the biggest impact?

I think it is really about equal between both the first two years of the majority of the synergy benefits. Cost synergy.

Okay. Great job.

Darrin Peller, Barclays.

I want to jump in on the Bill Pay side. Again, obviously the new additions are helping in this quarter's growth. First of all, I know there's more to come. I think you mentioned last call that towards the end of the year fourth-quarter, there's another sizable deal, is that still on track? Are there others that are in the pipeline that are similar?

Yes, as of the first quarter, the end of the first quarter, only one of our larger transactions had gone live. And so now that is fully live, and that was TD Bank as we had mentioned. The remaining larger transactions have just started to go live, in fact, in July. And then we'll have a couple of more go live towards the end of the year. And then the Wells deal will go live in '14.

We are actually pretty early in the live dates of these larger transactions. Now keep in mind, these transactions go on slowly. They do not all jump in any one month. So they will anniversary -- there will be like a six-month run on.

I was just going to ask you about that. Once you actually bring it on, obviously the deal is done and everything is technologically set up to actually operate. The transition of consumers using the actual product takes time, right? How long does it actually take until it peeks out?

It depends on what the bank wants to do, because the banks will gauge how they want to migrate their users over. Some of them will migrate them over a relatively short period of time. Some of them may migrate them over a 3- to 4-month period, it really does depend. The other element that is important to keep in mind, because at least we believe our Bill Payment product is very differentiated, we tend to see when people move over to our product, we tend to see people transact more, get more utility out of things like e-Bill, our risk model, and those kinds of benefits to the end user.

So there is a level of take up that happens even in the end users who have been using the product on a more frequent basis. So again, from my own hypothetical, I would say -- six-ish months from the time the last clients start to go live is probably a good way to think about it.

That is helpful. So, to follow-up on that, is there any reason if you have that, the new business that just came on with TD and you have Wells coming on later, is there any reason to think the payment segment which showed acceleration, should it accelerate a little further through the rest of the year?

Well you have -- if that were the only thing in this segment, that would be right. But you have in the payment segment, which is roughly a $2 billion revenue segment, you have a variety of different things that can moderate up and down in a quarter. When we announced in the first quarter we were very confident that we would see between 4% and 8% growth in the payment segment for the remainder of the year. It is hard for me to see how we would have gigantic swings in that just because of the recurring revenue. But I do think there could be some slight swings on the margins that could happen. But on balance, we feel pretty good about where we are given the performance in the second quarter and our visibility for the remainder of the year.

If I can sneak one last financial one in before I turn it back to the queue, on the free cash flow side, obviously it is up pretty well year to date. Yet you're calling still for about 18% you said, your year over year growth is $655 million plus for the year. What is the dynamic? Obviously it can be lumpy, but what is the dynamic in the second half of the year that would bring it down versus the first half?

There's a lot of changes that go on. Clearly we still need a strong second half and we anticipate that. Generally our second-half free cash flow is fairly strong. If you look at last year, we generated roughly about $470 million of free cash flow in the second half of the year. So, there was a lot of variability that impacts working capital, but our guidance is very strong from a standpoint of 18% increase, and greater than from a free cash flow per share standpoint.

Okay. That is great. Thanks guys.

Julio Quinteros, Goldman Sachs.

Just going back to the payments results themselves, the organic growth you showed there, I'm trying to get my arms around just a thought about how much of it is now a function of the integrated approach that you guys take? Are you seeing an uptick because your mobile platform, your P2P platform and your Bill Payment platform, if you will, all come into the market at the same time? Or in a more integrated fashion, finally getting more -- resonating better with the FI clients or with the consumers? I'm trying to get my arms around the driver itself, and how much having sort of the integrated pieces in front of you guys should be adding to the growth profile overall?

Yes. Clearly we have seen -- over the last couple years, we have seen more than 100% growth in the mobile channel for something like Bill Payment. So I do believe the channel access, how we got the products integrated are clearly contributing to the growth that we're seeing in the market or in the product, in the Bill Payment product. We obviously have P2P, which I think had 84%, 85% growth. Obviously that is on a small transaction base. As you know, Julio, over time, that will grow, and we fundamentally believe that space is conceptually as big as Bill pay, if not bigger.

Now, it will take years to get there, but you have a variety of different factors that are adding in the drive, and you have the continuing push on debit, the number of clients wins we are having. And we also are having -- remember, in our payment segment, we have our Channels business. And we are seeing a lot of growth, I think the number of subscribers to our ASP mobile solution is up 3 times over where it was last year.

Those people we are exposing P2P and Bill Payment and mobile capture and those kinds of technologies, all of which are driving transactions in the payment segment. So yes, we think we have an embedded advantage. It is going to be integration. We also think people are absolutely still figuring it out and how they are going to operate there. So all of that is conspiring to help us along with these big clients that we have won over the last few years.

I think that really does change a little bit the dynamic that in some ways where -- kind of historically we would be looking at something like is debit volume growing, and how do we think about that tracing back? For you guys, if these smaller areas are the ones, obviously revenue contribution is still relatively small. If they continue to ramp, then some of those metrics I guess would be -- the ones that we see publicly would be probably a little bit less relevant. Would you agree that maybe thinking about what mobile volume could be doing, and what P2P could be doing, and some of the other mobile capture components could mean to overall growth longer-term, as well?

Yes. I think the lag effect -- if you even think about taking a jump onto your debit example for a minute. We are still growing somewhere between 300 and 500 basis points faster than the market because of the lag right into the 6000 community oriented -- call it the $30 billion and less banks. So we are going to, we think, continue to be the beneficiary because we've got more ramp-up going on in this space, and we are winning at a much higher rate than most.

I would expect that exact phenomenon to exist. We have seen it in the Bill Payment area, so our Bill Payment transactions in the smaller end of the markets are growing very, very fast relative to the overall market. And so, we would expect to see that in all of these different spaces with the exception of P2P. Because we really are the financial institutions centric market leader, we would probably lead the market there as opposed to lag.

Got it. Last, any major efforts or thoughts around ACH as an alternative, especially in the mobile world where merchants seem to be very focused on the arbitrage way of interchange? Do you guys see that as being a credible alternative that the merchants would actually want to move more aggressively on, especially as they consider some of the digital wallet offerings that might be out there? Tying it back more directly to ACH?

So yes, we are doing a lot of work. As you probably know, Julio, we own PEP+, so the ACH standard across the US. We are doing a lot of work now, and it really developed leading technology in that area that will allow financial institutions to move ACHs as we work through the risk side of it, moving ACH on a Real-Time basis. As it moves into the market, I do think there are opportunities there. From our perspective, we are probably more focused on the financial institution side.

We view ourselves as being very issuer centric, and therefore, that is really where our focus is. But we are obviously paying a lot of attention on what is going on in the market with merchants, and frankly the battle that is occurring between insurers and merchants. We do think ACH -- in fact, we're very confident that ACH will play a role in there. It's just that does that role look like and how does that evolve?

Eric mentioned investor day. This is one of the areas we will want to talk about at investor day. Because we do think the whole notion of Real-Time as we laid out a couple of years ago, as it is evolving and how the pieces come together, we think we are very well-positioned to take advantage of those new opportunities.

Got it. Great. Thanks guys. Good luck.

Brett Huff, Stephens Inc.

Thanks, congratulations on the nice quarter. It's nice to see the benefits of some of those big deals you guys signed come on. Congratulations on that. I have a question on just general monetization, updates of some of your growth products. Most of my questions have been answered, but I want to ask can you just give us updated thoughts on how the monetization -- not necessarily the penetration, but the monetization of Mobiliti happens, and also the peer to peer, how is this model evolving at your FI partners? Thank you for the time.

This is Mark Ernst, I will try to cover some of that. Fundamentally, we have a model that principally pays us based on consumer adoption. We get a little bit of a fee for people from financial institutions as they bring both of those products into their portfolio of offerings. For the most part, we are partners with our financial institution clients. They bring -- as they get more consumer penetration into those offerings, we through our ASP and our pricing it as an ASP, we benefit alongside of them. As those things get more penetration over time, we think we will see nice growth in revenues to go along with it.

Yes, I think the other aspect of that is how these services end up getting priced at the financial institution market. So right now, we see some financial institutions who are charging for mobile capture, we know financial institutions will charge for Real-Time P2P. We see there are opportunities potentially to actually have financial institutions charge for mobile capture with Real-Time or immediate funds availability.

There are a variety of derivatives that are going on out there. To the extent that our products and services are best aligned with the economic incentives, i.e., revenue and earnings at the financial institution level, I think we will see a much larger push as Mark said on the consumer adoption element of that.

Great, that is what I needed. Thank you for your time.

Glenn Greene, Oppenheimer & Company.

Thanks and good afternoon and good results, as well. A couple of number questions, and Tom, you may have alluded to this, could you talk a little bit, a little more color on the payments margin strengths? And sort of the context of -- part of it I'm sure is the revenue growth. But the incremental profits were even higher than the incremental revenue from a Q to Q perspective, so looking at if there is better explanation for where the margin strength, both Q to Q and year over year?

I think the drop through, especially on the year-over-year basis, was very strong. But I think, Glenn, it's really the high-quality revenue growth that we have been talking about strategically for a number of different years. For the last couple of years, and that coming to fruition. We have very strong businesses of scale both in card services, which is our debit processing business, our Bill pay business, et cetera.

And it is really a combination of those from that standpoint. And as you know, our operational effectiveness initiatives continue to be strong. That is really the primary drivers.

I would say the other thing is, we have been may fairly sizable investments in our channels businesses with specifically in something like mobile ASP. And as those revenues come on, we have the opportunity to recoup the investments that we make in prior years. And so, again, even not just the scale businesses, we would still be a mobile as a subscale business, but that is really on a absolute basis, not on an incremental basis.

Okay. Just Tom on the financial side, the uptick on the organic was partly year-over-year license revenue growth? Any way you can help us directionally quantify that, either the increase in the license revenue, or how much it contributed to the organic revenue growth?

Yes, including Open Solutions, so in the financial segment, license revenue in the quarter was up about $9 million, which is roughly about 2% positive impact on organic growth in the financial segment in the quarter. It didn't really impact the payment segment, because as Jeff highlighted earlier, most of that is recurring revenue.

Okay, a clarification, you said you had five DNA sales wins in the quarter? Were those competitive takeaways? Just want to be clear on that.

There were some competitive takeaways, and they were some within the Fiserv family making a choice to move to the DNA platform.

I got you.

Glenn, one more note on the license fees, on a year to date basis, it is about flat compared to the prior year, up $2 million, just so you have that.

Okay. Perfect. Thank you guys.

Chris [Sieteck], [Finley] Park.

Very quickly, is it possible for you to talk about the tax benefits that you may realize from the Open Solutions acquisition? Are you realizing them? If you are not, when will you, and is it possible to quantify what they may be next year? And the second one is, I'm not sure you mentioned this, but are you sort of at a comfortable leverage ratio at this point in time? You obviously repurchased a lot of stock. I just want to understand where you are from a credit rating point of view? Thank you.

Chris, I will take that. So I think from the NOL that we acquired in conjunction with the Open Solutions acquisition, that deferred tax asset is going to roll in over the -- and we're getting the benefit right now. But that will be rolling in pretty consistently over the next 4 to 5 years. And so, that benefit is rolled kind of into our cash flow. It does not go through our income statement because it is set up in purchase accounting. So, we will continue to see that, it is rolled in right now. It will continue to be in here for about the next five to six years on a consistent basis. And so, that is from that standpoint. And your second question again?

Leverage.

On the leverage side, we are about 2.6 times. Our target is between 2 and 2.5, and we have been in the higher end of the range, so we will continue to allocate our capital. As you know, we bought back more stock in the second quarter. Share repurchases, our capital allocation benchmark, we will pay down a little bit more debt.

Perfect. Thank you very much.

Ramsey El-Assal, Jefferies.

Hello guys, thank you for taking my call. On the strong sales performance this quarter, have you guys made any adjustments to your sales strategy or your organization? Or is it really just more reflective of a pretty robust end demand environment?

It is -- a few years ago, we made a pretty large change to our organization structure, moving into a single sales organization with very strong tiebacks to the businesses. I think we are gaining -- we are seeing some of those benefits, we have begun to see the benefits over the last couple of years. And I think that will continue.

But I think the lion's share of it is around the fact that we have a really great sales force out there knocking on the doors and really pushing the value we have created, the unique value propositions around integration and innovation, and they are just doing a great job selling the products that our businesses have built. So, I guess it would be demand, and personal sticktoitiveness.

Okay. So, another question on the Popmoney Real-Time. I know it is not rolled out widely, I think you mentioned PNC only, but any superior preliminary read on consumer uptake or consumer usage of the Real-Time versus the non-Real-Time. Is that kind of -- has what you have seen so far matched up with your expectations?

Yes, unfortunately even PNC will not be live until later in the year, in the beginning of the fourth quarter. We do not have -- beyond research, we do not have any real live in market proof points yet. But we are pretty bullish about how the P2P experience changes when you integrate Real-Time. We will be able to talk about that in more detail come the first quarter of '14.

Okay. Thanks. One last one, it seems like with electronic Bill pay, the central competitive match up is really between consolidated bill pay, a model like yours versus a direct model where you can go to a merchant website or mobile app or other channels where a consumer can pay directly. I think the direct version represents the majority of the market at this point. How do you go about capturing more share from the direct billers? I guess what impact do you think mobile will have on that consolidated versus direct competitive landscape?

Sure. From a perspective of markets, as I recall, it is about 50/50, it might be 51/49, it kind of shifts sometimes as between consolidator and Bill direct. I think most importantly, whether it is Biller direct or consolidator as a model, the lion's share, the substantial majority of bills are still not electronic, but there is a lot of room to grow on both sides of that value proposition.

From our perspective, I actually think mobile will go a long way. The mobile and the combination of mobile and P2P will go a long way into bringing a large cross-section of consumers into the electronic Bill Payment consolidator space that we have not had access to historically. And so we are pretty excited about how that product will roll out, and as we shared before, we have been a place where P2P, the majority of P2P right now is actually not person to person transactions per se. It is in fact for a different subset of consumers to pay their bills electronically.

It tells me there is still a lot of runway on the consolidator side. Just one last point I would make, as it relates to the Fiserv business, we have a very large business where we actually facilitate Biller direct payments. Biller direct, so we host those payment services across many of the larger billers in the US today, and that allows us to not only have access to the nonconsolidator side of the markets, as it relates to the payment itself. But also, very importantly, to distribute that bill back into the consolidator population for the nearly half of the population who prefers to pay in that fashion.

Fundamentally, we believe that payments are a reflex action to some kind of a request for money. So we are very focused on what are those different ways we can aggregate all of those requests and drop them into the consolidator site so that you can make it easy to pay bills in that fashion? We think one of the value propositions that drives Biller direct is that you don't have to know how much you owe to go pay it. How can we bring that content, make it available at the consolidator we think is a really interesting strategic question. Probably not one we can finish in the next couple of minutes, but it's a great question, and we think we are very excited about the opportunities because of where we play in that landscape.

Thanks.

Ashwin Shirvaikar, Citi.

Good quarter guys. So I may have missed this, I apologize if I did. You guys said you would exceed the $50 million and $75 million synergy targets. I missed where you would go to with the synergy targets?

You didn't miss it because we have not yet published it. We are still working on it, we are highly confident that we're going to be above. We expect that at investor day, we will give a update with where we are with Open Solutions including our new cuts of the synergies.

Okay. Got it. I guess one question on the Acumen, when you had Acumen, you were successful selling it to the market, but the implementation was spread out for a couple of years. Now as you transition some of the clients to DNA, is there a near-term revenue pull in opportunity? Is that happening? In terms of the implementation -- coming in, happening faster? So maybe there was 2014 revenue that gets pulled into 2013 or something like that?

This is Mark Ernst. There is not a lot of impact on 2013. We are working hard within the Open organization to build out the implementation team to take on what we both can see and expect will be a continued acceleration in DNA sales. We have been working really hard and building out the capability. That may lead to some incremental kind of revenue pull in in 201 and 2015 than what we may have seen otherwise with Acumen. That will probably be more than offset by the acceleration that we're seeing in sales interest in DNA overall.

Got it. Okay. Okay. A couple of numbers questions, I think of 2Q or 4Q, should we expect that to be a little bit more back end loaded than usual? You had the ramps coming up?

I don't know that I would say more back end loaded than usual. I think our take for where we can see things right now is, we had a little bit of incremental benefit in the second quarter as Tom referenced around some of the license revenue and the financial segment. At least as we might project out.

And then in the fourth quarter last year, we -- the fourth quarter every year, Ashwin, as you know, we have seasonality in a couple of our businesses, and we had a pretty easy compare. The third-quarter, the organic revenue growth in the last year's Q3 was much better than it was in Q4. On a comparative basis I think you got those drivers. But again, as we talked about earlier, if you are thinking little bit more about the payment segment. We do think that will continue to see ramping to your point.

Got it. And last question really is, (inaudible) minus the sensitivity to interest rate increases, I think maybe in the CheckFree business.

Yes, we are pretty well -- we do not have a lot of full revenue income today in sales. Clearly we have a portfolio there that is not earning a lot from that standpoint. There is upside over the next several years to the extent we have interest rates that get back to normal levels.

Any way to quantify that?

Right now I do not want to do that at this point in time, but I think initially when we purchase CheckFree, they probably had around $40 million in floating income at that particular time.

Okay. Thank you.

Chris Shutler, William Blair.

Thank you for squeezing me in. So first just a cleanup question, what were the term fees in the quarter?

Term fees overall, excluding Open Solutions, they were flat with the prior quarter. And actually on a year to date basis, they are actually down about $5 million, so it was a negative impact internal revenue growth on a year to date basis.

Okay. Got you. And then I wanted to clarify on the commentary around a slight bias towards Q4. You are talking about internal revenue growth and the rates and adjusted earnings being a permit from here into Q3 and then also into Q4?

We are talking about internal revenue growth.

Internal revenue growth. Okay. Last one, Jeff, in the prepared remarks you talked about expectations around tech spending not really changing despite the environment in interest rates at least at the long end of the curve somewhat improving here. So recognizing we've only been in this new environment for a couple of months, curious what you think it will be the tipping point towards FIs maybe being willing to open up their wallets going forward?

I do think that tech spend is probably, this year will end up being somewhere between 30% and 40% of what it was in 2007 on an average level of growth per year. And, I do not believe that is necessarily sustainable. I think there has been a lot of people who have not been spending.

I do think we will see it increase, but there is, I think, little possibility that people will allow tech spend to get ahead of what actually happens around rates, and how those rates actually translate to more net income for the financial institutions. I think people are going to sit on the sidelines a bit, they will fill more optimistic, but I do not think anyone is going to spend ahead of seeing what falls through to the bottom line.

But with that said, the market is far more optimistic right now than they were at the same time last year. You may remember last year, people started out strong and really fell off a cliff a bit. We're not seeing that, and that is why my commentary was really about Q1 outlook to Q2 outlook, in terms of call it a temperature index as opposed to anything else.

Okay. Thanks a lot.

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