Fiserv Inc (FISV) 2015 Q2 法說會逐字稿

Welcome to the Fiserv 2015 second quarter earnings conference call. All participants will be in listen-only mode until the question-and-answer session begins following the presentation. As a reminder, today's call is being recorded. At this time, I will turn the call over to Stephanie Gregor, Vice President of Investor Relations at Fiserv. Ms. Gregor, you may begin.

Thank you and good afternoon. With me today are Jeff Yabuki, our Chief Executive Officer, Tom Hirsch, our Chief Financial Officer, and Mark Ernst, our Chief Operating Officer. Please note that our earnings release and supplemental presentation for the quarter are available on the Investor Relations section of Fiserv.com.

Our remarks today will include forward-looking statements about, among other matters, expected operating and financial results and our strategic initiative. 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 for a discussion of these risk factors.

You should also refer to our materials for today's call for an explanation of the non-GAAP financial measures discussed in this conference call, along with the reconciliation to 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 to our planning and forecasting for future periods. Unless stated otherwise, performance comparisons made throughout this call are year-over-year metrics.

With that, I will turn the call over to Jeff.

Thanks, Stephanie, and good afternoon, everyone. At last month's Investor Day we shared strategy, our focus of annually increasing rate of internal revenue growth, further expanding both operating margin and cash flow, and most important, our plans to deliver compelling and differentiating value to clients. We are increasingly optimistic about the opportunities ahead. We delivered another quarter of solid results including 4% internal revenue growth, strong margin expansion, and excellent free cash flow.

Importantly, our results were in line with our plans, and we remain on track to achieve our full year financial performance outlook. Adjusted operating income growth was 8% both in the quarter and year-to-date. Adjusted operating margin performance was exceptional, increasing 120 basis points in the quarter to 31.8%. Adjusted EPS was up 17% in the quarter and is up 12% year-to-date.

Free cash flow totaled $439 million for the first 6 months of the year, and importantly free cash flow per share through June is up a very strong 18% for the period. We also gained sales momentum recording a sequential increase in sales value of 11% in the quarter and 10% increase over the same period last year. We are poised for revenue acceleration in the second half of the year, and expect to exit the year positioned to increase our internal revenue growth rate again in 2016.

Each quarter we update you on progress against our three strategic focus areas which given our recent Investor Day will be a bit more abridged than normal. The three areas are first, continue to build high quality revenue while meeting our earnings commitments; second, build and extend client relationships with an increased emphasis on payment and channel solution; and third, deliver innovation and integration which enables differentiation and value for our clients.

We've executed well in the quarter and year-to-date, delivering 4% internal revenue growth, despite more than 50 basis points of foreign currency headwinds in both periods. Our high quality revenue strategy supported strong adjusted operating margin expansion of 140 basis points in the first half of the year. Our focus on market differentiation breeds high quality revenue, and that helped us sign Synchrony Bank with over $35 billion of assets to our signature account processing platform in the quarter, along with a broad suite of payment solutions.

Our second priority is to build and extend client relationships with an increased emphasis on our payments and channels business. During the quarter, we added more than 100 new retail and business clients to our mobility ASP solutions and exited the quarter with more than 3.5 million retail subscribers. Our focus on digital services has us positioned to deliver unique client value for years to come.

At our Investor Day, we shared our strategy for expanding biller services as part of our commitment to further adoption of real time payments. We moved the needle in the quarter by significantly expanding our on-demand payment relationship with Direct Energy, one of the largest utility companies in the nation. We also signed a top 40 financial institution for our e-bill and bill matrix solutions in the quarter.

Lastly, US Bank, the fifth largest bank in the country, selected Biller Advantage to provide electronic billing, presentment, and payments to a broad range of its business customers. We were also excited to announce that United Way, the largest privately supported nonprofit organization in the world, will now allow any of the roughly 6 million US donors to use Popmoney to make contributions directly from a digitally enabled bank account.

Interest in DNA remains strong across all sized institutions and charter types, which was again evident in our sales result. For example, Georgia's Own Credit Union, a $1.9 billion institution with over 180,000 members, selected our DNA platform for its advanced technology, strong commercial capabilities, and an open architecture that will enable enhanced service to its members. We had 11 new DNA clients go live in the first half of the year versus 15 in all of last year. We remain on pace to double the number of DNA implementations this year. As many of these clients have selected a full suite of Fiserv solutions, we expect to see revenue benefits across both reporting segments.

Our third priority is to deliver innovation and integration which enables differentiation for our clients. Our new agility solution was recently included on the innovators' list for transaction services by Global Finance Magazine. This recognition is for banks and fin tech providers that use cutting edge technology to disrupt the transaction services market.

We also had five clients recognized at the Retail Banker International awards for initiatives executed in conjunction with Fiserv. These highly regarded awards focus on organizations that deliver excellence for their customers. We are pleased to partner with each of these organizations to provide technology and innovation that enables best in class results.

Real time money movement is at the forefront of many financial industry conversations which is right in our wheelhouse. We provide real time processing capabilities for a number of clients, and accordingly real time transactions grew over 40% in the quarter and are up nearly 50% year-to-date. We also announced a strategic partnership with Early Warning Services to fully extend our real time reach and capabilities.

With that, let me turn the call over to Tom to provide additional detail on our financial result.

Thanks, Jeff, and good afternoon, everyone. Adjusted revenue was $1.2 billion in the quarter and $2.4 billion year-to-date. Internal revenue growth was 4% in both the quarter and for the year-to-date. Growth on a constant currency basis was 5% in the quarter, when excluding the 60-basis point negative impact from foreign currency. The net change in license and termination fee revenue was not material to our result in either the quarter or year-to-date period.

Our focus on high quality revenue growth and optimizing efficiency in our business model continues to pay off. Adjusted operating income increased 8% in both the quarter and year-to-date to $390 million and $761 million, respectively. Adjusted operating margin in the quarter was up 120 basis points over the prior year to 31.8%. First half adjusted operating margin is up 140 basis points, driven by high quality revenue and scale benefits across both segments along with continued operational efficiency savings.

While we continue to expect strong margin performance, we have a more difficult margin comparison for the balance of the year, as the second half adjusted operating margin in 2014 was nearly 100 basis points higher than the first half of 2014. Adjusted earnings per share increased 17% to $0.95 in the quarter. For the first half of the year, adjusted earnings per share is up 12% to $1.83, even with a $0.05 headwind from a higher year-to-date tax rate.

Now, I will move on to the segment detail. Internal revenue growth in the payment segment accelerated sequentially to 6% in the second quarter from 4% in the first quarter. Adjusted revenue was $627 million in the quarter led by strength in our card services, biller, bill payment, and digital channels divisions. Results in our output solutions business were relatively flat compared to the prior year, due to benefits from larger than normal breach reissuances last year and lower than anticipated EMV-related revenue year-to-date.

As we indicated at Investor Day, we continue to invest in preparation for EMV and enter the second half of the year with a good size production order book. However, we continue to see variability around the timing of the EMV revenue especially in debit and prepaid which is the majority of our secure card client base.

During the quarter we further extended existing relationships with our market leading payment solutions, signing 40 debit and 70 bill payment clients in the quarter. Transaction growth rates held steady with debit in the low-double digits and bill payment in the low-single digits. As Jeff mentioned earlier, we continue to have success across our recurring revenue, mobility ASP retail, and business solutions.

Payment segment operating income was up 12% in the quarter to $208 million, and year-to-date was up 9% to $399 million. Adjusted operating margin in the segment expanded 190 basis points to 33.2% for the quarter. Through June 30, segment adjusted operating margin is up a very strong 130 basis points to 32.2%, driven by high quality revenue growth and strong operating leverage.

Adjusted revenue in the financial segment grew 2% in the quarter to $609 million and 3% in the first 6 months of the year to $1.2 billion. Segment revenue growth, led by our account processing and lending solutions divisions, was partially impacted by a 70 basis point negative currency impact in the second quarter. Operating income in the financial segment was up 3% in the quarter to $209 million, and for the first half of the year was up 6% to $413 million.

Despite a very difficult prior year comparison, adjusted operating margin expanded 40 basis points in the quarter to 34.5%. Through June 30 the segment adjusted operating margin is up 130 basis points to 34.4%. Our strong results have been driven by scale centered growth in our account processing and lending businesses, along with benefits realized from our operational efficiency programs partially offset by solutions investments, including our Agiliti platform.

Corporate segment net operating performance for the second quarter and year-to-date are in line with the prior year. Our adjusted effective tax rate was 34.6% in the quarter which was slightly lower than the prior year. The adjusted tax rate of 34.9% through June was 180 basis points higher than the prior year's rate of 33.1% due to larger discrete tax benefits recognized in last year's first quarter. We continued to expect a 35% adjusted effective tax rate for the full year.

We are pleased with our strong free cash flow performance in the first half of the year. Free cash flow increased 11% to $439 million, and on a per-share basis grew 18% over the prior year to $1.82. We anticipate much higher tax payments in the second half of the year which will likely compress free cash flow growth in that period.

We took important steps to improve our long-term debt structure and flexibility in the quarter. First, we extended the maturity on our $2 billion revolving debt facility to April, 2020. We also raised $1.75 billion of proceeds in a public offering of 5- and 10-year senior notes, primarily to refinance nearer term obligations. These transactions significantly extended our debt maturities while lowering our weighted average pre-tax cost of debt to 3.3%.

We continue to focus capital allocation on share repurchase. Our total payout ratio was 121% of adjusted income. We repurchased 3.1 million shares of stock in the quarter for $245 million. Through June 30, we have repurchased 6.9 million shares at an average cost of $77 per share, totaling $535 million. At quarter's end, there was 235.2 million shares outstanding and 12.9 million shares remaining under our existing share repurchase authorization.

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

Thanks, Tom. As I said up front, sales in the quarter were up 10% over the prior year, 11% sequentially, and were 85% of quota. We saw strong pipeline growth in the quarter across the Company, including several of the areas we discussed in detail at Investor Day. We expect strong sales performance in the second half of the year.

Integrated sales were $67 million in the quarter, which puts us over our $950 million 5-year program goal about 6 months earlier than we originally anticipated. Our continuing strong performance speaks to the value of our integrated solutions combined with compelling market opportunity. We've recorded $111 million of integrated sales through June or 44% of our full year target.

We've also realized $27 million of operational effectiveness savings to date, in line with our goals for the year. Going forward, we remain bullish on the opportunity to enhance our infrastructure through projects such as the data center and real estate consolidation in Atlanta, which is our largest domestic market area. We are pleased with our progress and anticipate completion in Q4.

As we shared at Investor Day, the FI market remains stable. We continue to work with clients to leverage opportunities arising from the eventuality of interest rate gains, new sources of non-interest income, and enhanced operational efficiency. Both financial institutions and merchants are marching cautiously towards compliance for the October EMV liability ship date, and there continues to be a heightened level of discussion on faster payments.

As I mentioned up front, we remain on track to achieve our full year financial outlook which includes another step up in internal revenue growth. Internal revenue growth for the full year is still expected to be 5% to 6%, and as I shared at Investor Day, we'll likely move towards 5% primarily due to slower than anticipated EMV adoption and negative foreign currency impacts. We still expect adjusted earnings per share growth to be 11% to 14% or $3.73 to $3.83 with a bias above the midpoint of the range for the full year.

We also anticipate that adjusted operating margin will expand more than 50 basis points, and that free cash flow per share will be at least $4.12 for the year. For modeling purposes, we expect much stronger revenue growth in the fourth quarter due primarily to the timing of EMV and license revenue, prior-year comparisons, and revenue impact from new client implementations.

We're pleased with our results through June and fully expect to deliver on our full year financial expectations. We are executing well in our existing businesses and making strong progress with innovation based growth. When taken together, we believe this will contribute to further acceleration of our internal revenue growth in 2016 and beyond. This only happens as a result of the incredible contributions of our 21,000 associates around the world who work tirelessly each day to deliver quality, service, and innovation to our clients.

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

Thank you, sir.

(Operator Instructions)

David Togut, Evercore ISI.

Thank you. Good afternoon, Tom and Jeff. Jeff, you called out much stronger revenue growth expectation for the fourth quarter this year. I gather that's from some of the DNA implementations that are coming on stream. Can you dimension for us, for example, what the 11 implementations mean for the back half of the year, and additional implementations you might be seeing coming on stream in Q3 and Q4?

We had said that we plan to double the number of implementations for the year, which would put us in the 25 to 30 range for the full year. We did 15 last year. We're 11 to date. Obviously, we're picking up some of the revenue from those 11, so for those 11 we'll get, call it, in the range of somewhere between 6 and 8 months on average, but we'll also get revenue from each of the remaining implementations that go live in the second half of the year. That's both in DNA as well as all of the surround solutions that go with it. We've been fortunate a large majority of the clients who have selected DNA have also selected a broad suite of our solution to go along with that.

In addition to that, to DNA, we also have, as you'll remember from our last couple Investor Days talked about the progress that we've made primarily in the large bank space. A number of those clients we also anticipate going live in this year, so we're starting to get the benefit from, again, the account processing platform revenue as well as the surround revenue that goes with them as well.

Putting that all together, should we expect the financial segment revenue growth to exit the year closer to mid-single digits, closing some of the gap we see with payments, which has been by far the faster growing segment this year?

Yes, David, we're going to continue to see acceleration in both segments in the second half of the year. Yes, that means clearly the segment is impacted by license revenue and different sorts of things like that. We are clearly going to have an acceleration as we look into 2016 in the financial segment in the back half of this year.

We'd also expect to see continuing acceleration in the payment section. We're going to expect to see them both accelerate as we exit 2015.

David, to your point on both of the segments, I think the other thing that Jeff highlighted, he talked about the core processing segment, but in the second half of the year we clearly have the biller headwinds that we've been talking about in the first half of the year. That business continues to do very well from a transaction growth and a new sales standpoint, so we expect a very strong second half in our biller business.

Clearly, I highlighted on the call also that our output solutions business which includes EMV was fairly flat compared to the prior year in the first six months of the year. Again, we expect good revenue acceleration in both the base business in that output solutions business and also with EMV. Then in the fourth quarter specifically, some stronger license sales in regards to that which is usual, but it's going to be a little bit more heavy this year. Those are some of the things that give us good visibility and confidence as we look in to the second half of the year.

Got it. Then a quick final question, any thoughts, Jeff, on PayPal's acquisition of Xoom and possible impact on the P2P space?

I thought the Xoom acquisition was a good acquisition from my vantage point. It looks like a good acquisition for PayPal being able to leverage not just the large number of accounts that they have in the US, but they have a very attractive worldwide footprint. I think Xoom has built a nice revenue model, but a good technology platform that will be likely valuable for them as they continue to move forward.

I see it to be interesting but not that impactful, again, from my vantage point to P2P more directly. I do see it valuable within the PayPal network, but more importantly creating a much larger visibility to a cross-border capability that a lot of digital users don't have access to today.

Understood. Thank you. Tom, appreciate the June 30 share count as well.

Sure, David.

Thanks, David.

Glenn Greene, Oppenheimer.

Thanks. I guess I'll just build on the last question. I just want to understand a little bit better the visibility to the back half organic growth acceleration. Your 4% year-to-date implies at least 6% in the back half. Your commentary on the fourth quarter suggests it might be higher than that in the fourth quarter, so maybe 7%. Do you have the visibility based on the DNA conversion, some of the large bank account conversions, and some of the headwinds, whether it's the biller headwinds or output headwinds abating? I guess what I'm getting at is how much incremental new books of business do you need to sign, or is it a function of really the conversions happening as you planned?

Glenn, even though as you know the substantial majority of our revenue is recurring, I think we said at Investor Day last year it was about 86%, we still have to always continue to sign business. As you know revenue, a few million dollars of revenue, can impact your growth rate in any quarter. From our perspective, we have pretty darn good visibility to the big chunks of revenue that we need to deliver in the second half of the year, and as we commented on, we think it will buy us even further to the fourth quarter.

The big blocks of revenue as Tom talked about just to reiterate are the revenue that's coming from the conversions. DNAs are one that we've talked about a lot, but we have DNA and our signature platform. Frankly, we've got good sized clients coming in there that will spread across both of the segments. The second area is in our biller business as Tom referenced again. It's growing quite well. We also have the benefit of some headwinds that have now abated as we cross the threshold of the middle of this year. We get the combined benefit of better compare and some nice growth.

The third area is really around our output solutions business which is responsible for EMV. We talked about the size of our production book which is quite strong. It's really a matter of when are the banks going to take delivery of the product? When are they going to be ready for it? We've indicated that it's slipped based on what our internal expectations were at the beginning of the year. It's not a demand item at all. In fact, I think demand is probably in better shape than we would have anticipated it to be holistically, but the timing of the revenues has been slipping. That's why we believe we're going to have a pretty nice boost and likely going to be bias into the fourth quarter.

Then the last thing is around license revenue. We do expect to see more license revenue based on what we can see in the pipe coming in, in the fourth quarter this year, and we also had a little bit of tougher compare in the third quarter. That's why that growth will look a little bit stronger in Q4. Overall, we have pretty good visibility to those numbers. We have actually good solid visibility into how that will translate, that exit rate will translate in to growth in to next year like we talked about at Investor Day. We have a high level of confidence that we'll be able to add that 50 to 100 basis points of growth in 2016.

Okay. Similar question on the margin side, Tom, you, I think, were prepared for this, but up 140 basis points year-to-date, and the guide is for now greater than 50 basis points. Is there any incremental investment in the back half, or is it just the function of somewhat of a tougher comp?

Glenn, I'd say obviously we're very pleased with our performance in the first half of the year on the margin side. It was ahead of our internal expectations, better performance, and some timing. That said, we clearly expect to exceed 50 basis points of margin expansion for the year, given where we are in the first half.

We do, as you mentioned, face some more difficult comparisons in the second half, mainly around 2014 because the second half was about 100 basis points higher than the first half of 2014. There's nothing else unusual going on there. We're going to deliver good margin performance, but we do have some tougher comps. We'll clearly exceed 50 basis points.

Glenn, the other thing I'd add to that is when you heard in our prepared marks that we talked about that we now expect on our adjusted EPS for the year that we now have a bias above the midpoint of the range for the full year, I think that really begins to reflect the fact that our margin as we talked about will absolutely be greater than the 50 basis points. We think we've picked that up there.

Okay, great. Thanks a lot, guys.

Thank you.

Ramsey El-Assal, Jefferies.

Thank you. I have a question on, you mentioned another bank in Georgia taking up relatively larger asset-sized bank taking on the DNA platform. Can you speak a little more to the opportunity there for DNA, up-market at the larger asset sized banks? Is the pipeline there growing? Are you seeing incremental interest, deploying that solution in a segment of banks that maybe you didn't factor on to begin with?

Ramsey, this is Mark Ernst. Let me take that. The reference was to Georgia's Own which is a credit union, and we've had great success with DNA with the credit union market in general and continue to have a strong pipeline in the credit union market. I think your question really goes to the topic that we covered at Investor Day, which was that one of the things that's been a bit surprising to us pleasantly with DNA is that that technology is opening doors for us in the larger bank market, for some banks that are looking for that kind of technology.

We've got a nice solid pipeline of institutions that are looking at that as a possibility. Clearly the sales cycle on some of those transactions is a bit longer because of the size of the institution, but yes, we clearly see that in our pipelines.

Ramsey, the only thing I would add to that is, as Mark referenced at Investor Day, we did talk about our happiness with how we're doing with DNA in the larger bank space. That was an area that we had not anticipated specifically in the large in-house real time market, and there are several opportunities that we're working on and involved in.

The beauty of that is we are competing against platforms that frankly not just some of the domestic platforms but some of the platforms outside of the US. The more swings we get at the plate, the more likely it is that we're going to begin penetrating that space. Frankly, as we begin penetrating that space, we have a high degree of confidence that the combination of that technology with our surround solutions, with our expertise and knowledge of the US banking market is going to make us quite formidable and turn in to some very attractive revenue call it over the next two to four years.

Great. I misheard you I guess in your prepared remarks in terms of the size of the bank, and whether it was a credit union or not. Thanks for those comments. Very helpful. I wanted to ask you a longer term question. It seems there's a little more buzz these days with cloud-based offerings. Obviously, you guys have Agiliti. I think [MNS] is building something. Fidelity is working on something. I think (inaudible) has something out there.

In the US specifically, do you see any change in the appetite of banks to put their smaller banks that your service, to put their core accounting processing in the public cloud? I guess the question is if they become more comfortable doing that, does that open up the door to new entrants or competition in a way that you've not seen in the past? I know it's a relatively long-term question, but just curious on your thoughts there.

Sure. It's an interesting question that sometimes bounces from conjecture to nomenclature. What I mean by that is most of us who have been providing outsource services to banks for years and years would say we didn't know it, but we basically were offering cloud-based services, and we continue to do that. The question of does the utilization of a public cloud change the barriers to entering the business, I suspect the people who are trying to get in would say yes.

We would say that at least our belief is that the public cloud as we know it today doesn't have the robustness that would be necessary to support the regulatory environment. Then there are some private cloud utilizations that I think can come in, and we're certainly looking at that as a way to provide the most modern technology solutions possible. I would say yes, it will allow people to talk about being in the market. The reality is in order to make a solution like that work, you have to win enough clients to get to scale so that investment makes sense. It's a long, long road to get there.

Ultimately, I would not be so bold to say no one will crack that code. Someone may crack that code, and I can tell you that we're looking for what are the best ways to use these emerging technologies to make sure we have the winning solution in the market.

That's terrific. Thanks for your comment.

Jim Schneider, Goldman Sachs.

Good afternoon, and thanks for taking my question. On the DNA activations and customers going live, I think, Jeff, you talked about before 30 wins coming online. I think you said something in the range of 25 to 30 coming online when you talked about it today. Was there any change in terms of your expectations, in terms of anybody pushing off 2016, or how should we think about the confidence level in terms of getting from 25 versus the 30 number?

Yes, Jim, thanks for asking that question. I realized when I was saying it that I was going to look for an opportunity to correct that. I originally said 25 to 30 because I was trying to recall if it was 14 or 15 and clearly it was 15, and clearly planned to bring 30 live. There's been no slippage in that. It doesn't mean that there won't be, but we have every reason to believe that we'll put all 30 online this year.

Okay, that's really helpful. Then I guess a benefit of [Rich's], but in terms of the integrated sales target, now that you've met the 5-year goal 6 months early, can you give us some color on how you're thinking about the next 2 years or some other timeframe beyond this?

I would say that right now we're looking at making sure that we continue to deliver generally the level we've had over the last several years. As we get further down the road on some of these newer technology initiatives, whether it be our integrated payment solution or our NOW Network, or the next-generation capabilities of mobility, I think you'll see us likely look to put some new targets out there. For now we're going to continue to run at the level we're at now, look to build it up. We know the only way we can really grow since there are not a lot of new financial institutions in the market is by selling more deeply in.

One of the things that we're quite focused on is we've traditionally set this up as a way to extend the privileged relationship that exists on the account processing side. One of the comments in our prepared remarks was actually signing a top 40 financial institution to some of our biller solutions. That interestingly is a lending client that was referred to our biller area. We're really now over the last 18 months really been building some muscle and building out that ability to identify good, exciting solutions for us to deliver to our non-account processing solutions, and then also beginning to bring our account processing area, being able to cross over into the account processing solutions.

A couple of these new DNA solutions that we're out pitching right now to these larger institutions, both of them originated out of relationships that we have in other payment and channel solutions where we have credibility with those clients. Therefore, they're looking at us to potentially bring in DNA. We're building a lot of muscle in there regardless of the fact that we haven't set a new program goal.

Just a quick housekeeping question, any moving pieces to think about in terms of [term fees] for Q3 and Q4?

No.

Thanks so much.

Thank you.

Tien-tsin Huang, JPMorgan.

Hi, great. Thanks. I'm just curious about sales cycles. It feels like it's improving. Is that the case? I heard the wins like Synchrony, a lot of good wins on DNA. I'm just curious how the sales cycle is shaping up.

I'd say, Tien-tsin, we've continued to have momentum in our results. I would actually say that our first half results were a little bit, even though they were nice performance against the prior year, they were a little lighter in the first half of the year than we would have anticipated at the beginning of the year. We've seen a lot of strength in our pipeline, and we're quite bullish about prospects in the second half of the year.

That said, to be a little bit more direct on your question, I would say sales cycles are feeling about the same in terms of duration. I don't see any big changes in there, and I would say that there's a lot of interest in the market to look at things like real time, areas in which we see operational efficiency. Frankly, some of the new products, we talked about immediate funds on Investor Day. Some of the products are going to drive high quality fee revenue. We're seeing a lot of interest in those arenas.

Okay. I guess to just clarify, maybe build on that, what exactly drove the acceleration on the payments segment? If you could rank some items?

Do you mean in the second quarter?

The second quarter.

It's really continued growth across the board in three or four businesses there. Continued acceleration, our card service business, our bill payment business, [add some] incremental in our channels business, which is our online and mobile business, and then a little acceleration from our biller business. Those headwinds in our biller business are still in there in the second quarter, so those completely go away in the second half. We're going to continue to see some good ramp, some really growth across all four of those businesses.

You can see that on our P&L in the product revenue line item, but given EMV and some prior year comparison to base business, that business was flattish. Again, we continue to have good momentum in those other businesses, as we head into the second half, and we should see much improved performance in our output business in the second half.

Understood. One more, if you don't mind, the United Way win, I thought that was a cool one because it fits pretty well with the NOW Network. I'm just trying to understand a little bit better the integration that's required on the United Way side, do you work with the [choirs] to turn Popmoney on as, I guess I call it, the payment tender. I'm just trying to understand how it scales using United Way as the case study, if that makes sense.

It's a good question. We work directly with United Way to integrate. One of the interesting use cases we see with Popmoney is we think about it simplistically as a disbursement use case, so allowing us to basically allow a consumer or business to move money to another consumer or business.

Mechanically, it feels a little bit more like an ACH, an ACH receipt as opposed to taking it through an acquirer on a point of sale basis. They'll have that payment capability up. We are going to have to get it integrated in to our bank partners. We'll have it available on the public site, but it will take about six months to get it fully integrated into the actually bank based product. We think it's going to not just drive transaction volume, but we like the visibility aspect of it, the billboarding aspect of it, quite a bit.

Interesting. Thank you.

Thank you.

Dave Koning, Baird.

Hi, guys. Great job as always.

Thank you.

Just a couple questions on cash, first of all, with the refinancing. You ended with $530 million in cash which usually you end around $300 million. I'm just wondering with that extra cash a little more than normal do you expect to deploy that and bring it down below $300 million through repurchases or anything else over the next quarter?

Dave, obviously, we're going to redeploy that cash to enhance shareholder value. We have a number of means to be able to do that, but as you know, our debt ratio, our debt-to-EBITDA ratio is at the lower end of our range. We have a number of options with that cash that's sitting on our balance sheet at June 30. We're going to continue to redeploy that to build shareholder value.

Great. Then the second one, I was looking back at CapEx, from 2008 to 2012, every year it was $200 million, or a little less than that even on a full-year basis. This quarter it was $113 million just for the quarter, and it looks like over the last couple years it's trended up a bit. I'm just wondering what's behind that. Is that investment into open solutions, or what else? Should this higher level be sustainable?

Dave, just so you know, we have about $50 million that's in our footnote that's in there in CapEx, associated with our Alpharetta, primarily lease hold improvements. That's the largest domestic location we have, so we're consolidating, just from a real estate stand point, about 10 locations into one facility. We're also consolidating two of our larger data centers into our data center infrastructure, but Dave, we incurred about $50 million of leasehold improvements in that CapEx number through the first six months. That's what's driving that.

We're going to continue to be at 5% to 6% revenues on an ongoing basis. This is one of those things that's going to occur largely very infrequently, just because of the fact that it's our largest domestic location. Again, they're leasehold improvements. When you take that out, we're going to be up to the 5% to 6% range. Most of our investment, as you know, really goes from a P&L from a standpoint of development dollars, etc.

Totally makes sense. Great job. Thank you.

Thank you.

Darrin Peller, Barclays.

Thanks, guys. I just want to hone in for a minute on the margin again. I know you mentioned the mix before. Obviously, 190 basis points is a pretty substantial increase in the payment side in particular. Number one, I'm just making sure there's nothing unusual there, like a term fee or anything else that may have lifted that.

If not, maybe talk about the sustainability to that kind of expansion. If it's all about mix and operating leverage, it's obviously a great sign for the future. Maybe the key parts of your payments business that have such a high level of operating leverage versus the other parts that may not. I think that would be a great understanding.

Yes, Darrin. We appreciate that question. Again, we're really pleased with our overall margins. I'd say that clearly in our payments businesses inside that particular segment, our card business, our bill payment business, and also in our biller business, we're at scale in those particular areas and continue to really have very good operating leverage, and very focused on bringing in high quality revenue. I'd say outside of that, our output business clearly doesn't have that same type of margin dynamic from a long-term standpoint. That's probably the business in there that can move around with EMV as we talked about, as Mark highlighted on Investor Day.

We don't see it having a big impact, but that can move around as that revenue goes around. We feel good about our margin performance. Clearly, it was above our expectations in the first half of the year. We're going to continue to focus on driving high quality revenue, and we'll continue our strategy as we've laid out.

Darrin, the only thing I'd add to that is to say as we've talked about a number of times, we have a mix of super-scaled solutions, bill payment and debit. We have a lot of solutions in that segment which are growing into themselves, and it will be a long time until they scale.

I only bring that up because we do believe that that is one of the big points of validation on why we believe we'll be able to continue to grow the margin at the level that we've talked about. I don't believe we'll be able to grow at 190 basis points on a continuing basis, but there's a lot of runway by the nature of these systems which are big scale systems. You put a lot of money in to them up front, and then the revenue comes on slowly over time, and it flows through nicely.

It's good to see. I guess looking into next year, are there any other big investments needed to keep on pace with the size and scale you're turning into?

I'd say there continues to be things clearly, as Jeff highlighted. If you look at our Investor Day, a lot of those initiatives are inside of our payment segment, whether they be [IPS] or NOW. We're going to continue to invest in our mobile strategy which is a big part and continue to invest in there and online, but clearly our performance was very strong in the first half of the year. We're going to continue to make the necessary investments that we need to make to continue to grow our top line over the longer term. We'll continue to do that, but we clearly have some good scale businesses in our payment segment, and that should continue as long as those businesses continue to grow at the levels they are.

The other thing I would add is we always talk about our operational efficiency measures or metrics and initiatives. A lot of those are paying off for us, and there's no reason to think they won't continue to work for us.

Sure. That's helpful, guys. One last quick one, it was helpful before, Jeff, when you talked through all the items that are going [to help for] acceleration in the second half and into the next year, but just to remind us, the unusual items that had the impact as a headwind in the current year, which (inaudible). Can you remind us of those couple items again, whether it's the term fees or it's certain contracts that moved away or whatever? Obviously, that abates into next year then helps acceleration also.

I think a couple, then I'll turn it over to Jeff. In the current year, we're having a currency impact that's higher than we anticipated. When you look at our 4% growth in the second quarter, it would have been 5% on a constant currency basis. We clearly have a headwind. It was roughly 60 basis points in the second quarter. That's something that was out there.

We talked a little bit about the biller business and some headwinds there in the first half of the year which are dissipating clearly as we get in to the second half of the year. We also did talk a little bit about output in the first half of the year, given the fact that we had a tough compare. Those are probably the three that I see from things that are out there, from just a headwind. As we look out in to the future, we continued to believe some of those will clearly go away.

That's very helpful, guys. That's it for me. Thanks.

Thanks.

Andrew Jeffrey, SunTrust.

Hi, guys. Thanks for taking the question. I appreciate the insight into the drivers of growth acceleration. I know investors are keenly interested there. You mentioned, I think, Jeff, a 40% increase in real time payment transactions in the quarter, maybe 50% in the first half, if I caught that correctly. Can you talk a little bit about at what point you think it's reasonable for us to expect that real time in the context of mobile in particular, where I know you've made a big push with your mobility suite, will start to move the needle in payments? Can we consider that as a 2016 event, or is that overly optimistic?

That's a great question. We think about that all the time. I think we will start to see the seeds in 2016 in terms of beginning to create somewhat of a tailwind, but I don't think we're going to see the real growth benefits start to lay in until 2017. I do think that it will be a bit of a wave. Once it starts it will be very difficult to stop it. I think it will grow rapidly. I think the clients will become attached to that kind of a service delivery, whether it is real time credit of a deposit or being able to send money to a family member immediately, or even paying a bill as if they were at a biller website. As I think about it, I really do think we'll see some level of growth in 2016, but the real measurability will be in 2017.

Okay. It sounds like you remain pretty confident that customers will indeed pay for those functions in the context of what is currently a free P2P environment in the US.

That's right, but remember P2P, in fact P2P would be the smallest of the near-term use cases that we would see for that. I would see bill payment, the RXP based bill payment service, where we have 1.4 billion, 1.5 billion transactions a year. It doesn't take very high percentage of those transactions to really move the needle on real time.

I see real time mobile deposit being a very interesting use case. Today, there are many banks in the US who are charging relatively nominal amounts, anywhere from quarter to a dollar per deposit or per item depending on the institution to use those remote mobile deposit capabilities. I think there's an opportunity there, and then of course, I do see P2P, and then I see B2B as another very intriguing use case.

Yes, I am bullish on that. If you ask me where my nervousness is, it's not on the transactions. It's on the price per transaction. If there's a billion transactions at a relatively small amount, or a hundred million transactions at a relatively large amount, they're still going to create a very interesting scalable opportunity for us, but more important for financial institutions that offer that service. I think there's a number of ways that use case will come together, and we're really excited about it over the next several years.

Okay. A quick one for you, Tom, you've done a great job on working capital management, another good quarter. How much more room do you have to improve cash flows from that particular source?

I think in the working capital side clearly we have a relentless focus internally around continuing to improve that. Clearly, we've done a lot out of that. Our business model, as you well know, our free cash flow per share has been very consistent above our adjusted EPS, probably running at 10% plus a year over the last five years pretty consistently. While we continue to manage and improve working capital, do I think that there's a lot there? No. Do I think we'll continue to manage that tightly? Absolutely. That's how I would hone in on that question.

Okay. Perfect. I appreciate it. Thank you.

Bryan Keane, Deutsche Bank.

Hi, Jeff. I just wanted to see if I could get your outlook on the business, maybe what outperformed so far year-to-date better than your expectations. Then what underperformed that needs to be fixed as you look into going (inaudible) 2016?

Thanks, Bryan. I'd say that most of the businesses are performing well, as I mentioned. We are right on top of our internal expectations for the year. Really the big area that we talked about of underperformance would be impact from foreign currency which is greater than we anticipated it to be, and because we don't issue our numbers on a constant currency basis. We haven't had that benefit, and then in our output solutions, and there's a twofold impact there. The first one is that EMV, while we've had a very large demand and future orders logged, we have not seen the level of production that we had anticipated earlier in the year. That's a matter of timing.

The other thing that's intricately connected to that, because of the large number of breaches last year, we had a lot of reissue. We're finding institutions trying to balance out how do I think about last year's big reissues with the EMV this year, and we're not seeing the number of programs come through that we typically would have. We believe that's solely related to these blips in breach timing from last year. Those are the things that we hadn't anticipated, but on balance we feel like we're making good progress and that we're well positioned for the second half acceleration we had planned originally.

Okay. Helpful. Then the other question I had is on acquisitions and the acquisition environment. What do you see out there in terms of valuations or attractive property right now in the marketplace? Thanks, Jeff.

Thanks, Bryan. We've been pretty disciplined in how we think about our capital and how we allocate that capital. There are a lot of attractive properties out there, lots of payments properties that are out there, but valuations are high. On that basis, when we think about acquisitions, we want to make sure that we're doing things that are strategic, that are going to be accretive to the value that we deliver to our clients, as well as our internal revenue growth rate, and that they're going to generate sustainable and attractive streams of free cash flow. We evaluate lots of things. We don't pull the trigger that much, and I think we'll continue to be wired in that way.

Thanks very much.

Thank you.

Brett Huff, Stephens Incorporated.

Good afternoon, guys.

Hi, Brett.

Just one question, we talked a little bit about Agiliti in the UK challenger banks. Can you give us an update on that? From Investor Day, that was something that piqued my interest and seems like there might be a bigger pot of gold at the end of that rainbow than maybe we thought originally. How's that progressing, and what's your take so far in the last few months?

Thanks, Brett. It's progressing well. We continue to add new names into our pipeline. We continue to build like crazy. We're doing a lot of work to get built, and we expect to go live with our first client at the end of Q4, beginning of Q1. We expect to sign at least a couple clients in this quarter, and I think you'll continue to see us start to announce some names moving forward.

We've been pretty circumspect with the new clients to make sure that we can absolutely deliver on what the clients need, when they need it. We think it's really important that these new challenger banks get started in the right way. The thing that's really been different, Brett, than we had originally anticipated is there are lots and lots of names in our pipeline that are not challenger bank names. That's what makes this opportunity much larger than we anticipated, and that is working quite well. We're, again, I hate to keep saying this, but we're really bullish on that opportunity as well.

Great. I appreciate it.

Thank you.

Thanks everyone for joining us today. We appreciate your support. If you have any questions, please give us a call. Have a great day.

Thank you. That concludes today's conference. Thank you all for joining. You may now disconnect.