Fidelity National Information Services, Inc. (FIS) Q2 2012 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the FIS Second Quarter Earnings Call. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to turn the conference over to Ms. Mary Waggoner, Senior Vice President, Investor Relations. Please go ahead.

Thank you, Paul. Welcome to everyone joining us today for our second quarter earnings report. Joining me today are Frank Martire, Chairman and Chief Executive Officer; Gary Norcross, President and Chief Operating Officer; and Mike Hayford, Chief Financial Officer. Today's news release and supplemental slide presentation have been posted to our website at fisglobal.com. A replay of today's presentation will be available shortly after the call. Please refer to the Safe Harbor language on Slide 3 of the presentation. Today's discussion will contain forward-looking statements. These statements are subject to risks and uncertainties as described in the press release and other filings with the SEC. The company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. As a reminder, today's discussion will focus on results from continuing operations, reflecting the reclassification of our Healthcare business as a discontinued operation. Also included in discontinued operations are expenses related to our former BPO operation in Brazil. Today's remarks will also include references to non-GAAP financial measures in order to provide more meaningful comparisons between the periods presented, as outlined on Slide 4. Reconciliations between GAAP and non-GAAP results are provided in the attachment to the press release and the supplemental slide presentation. Now if you will turn your attention to Slide 6, I will turn the call over to Frank Martire. Frank?

Thanks, Mary. Good afternoon, everyone, and thank you for joining us on today's call. I'll begin today's business review with a brief summary of our financial performance and business highlights for the second quarter. Gary will follow with the operations report and Mike will provide additional insight into our financial results and our outlook for the remainder of the year. We are very pleased with our strong second quarter financial results. Organic revenue growth was 5.1%, driven by continued solid performance across all businesses. EBITDA increased 7.7% and the EBITDA margin expanded 120 basis points to 30%. Earnings per share totaled $0.66, which represents a 22% increase compared to the second quarter of 2011. As you can see from the chart on the right, we have seen steady improvement in organic growth, driven by execution of our business plan and improved confidence within the banking industry compared to 2009. I will now continue with Slide 7. In June, we announced a definitive agreement to divest our Healthcare business. The sale is consistent with our primary focus on serving financial institutions and operating in markets where we have meaningful scale. We expect to complete the sale by the end of the third quarter. We'll provide additional details regarding the transaction later on the call. We continue to maintain a strong focus on serving our clients and expanding relationships. I recently visited with several key clients and business leaders across the United States, as well as Europe and Brazil. The feedback from these meetings provided me with even greater confidence that our time, efforts and resources are focused in the areas that are most important to our clients and that the overall business strategy is working. Finding new sources of growth, improving overall profitability and differentiating through institutions from the competition rank high on our clients' list of priorities, as do managing risk and regulatory compliance. Our proven ability to deliver industry-leading solutions and provide value to our clients through leverage and scale are among the many advantages that FIS brings to our clients. During the second quarter, I met with several clients to provide them with an update on our business and the improvements we are making in the area of information security and risk management. These conversations have been very productive. Gary will provide more detail later on the call. I am very pleased with our strong performance through the first half of 2012, and we are positioned to achieve our full-year objectives. As always, our management team and employees are focused on serving our clients, executing the strategy that we communicated at our Investor Day in February and driving value for our shareholders. Now I will turn it over to Gary for the business report. Gary?

Thanks, Frank, and thanks to everyone for being with us today. My presentation begins on Slide 9. I'll cover some of the business highlights for the quarter and provide updates on information security and the status of the M&I migration plan. I'll start with North America. Ongoing client engagement is the top priority for our account managers and sales team. As we have discussed in the past, this direct engagement is one of the many ways we identify and close cross-sell opportunities across our client base. In May, we hosted our large financial institution client conference in Milwaukee. Similar to our community bank conference in April, the atmosphere was focused on the future and how FIS can help our clients be more successful in this challenging economic, regulatory and competitive environment. We are seeing continued strength around demand for professional services, outsourced technology and consulting expertise. The demand is being driven by several market trends that are forcing financial institutions to reevaluate their business models, including emerging mobile technologies, increased regulatory compliance costs and higher capital requirements. These trends are also driving growth within Capco, which delivered solid revenue growth and margin expansion in both North America and Europe in the second quarter. The team has worked through the large client loss in North America, diversified the client base, and the business is performing in line with our expectations. We continued to add new clients in the quarter, including several new core processing relationships. As we have discussed in the past, these relationships drive strong reoccurring revenue and provide cross-sell opportunities for additional Financial and Payment Solutions. For example, Cadence Bank, a long-time FIS core processing client, recently expanded its relationship through the deployment of several new solutions, including our debit, ATM driving and fraud management solutions. I am also very pleased to announce a new 7-year agreement with a leading provider of indirect automotive loans and leases in North America. This new relationship, which further confirms FIS as the leader in global auto finance technology, includes outsourced consumer loan and lease processing, as well as our default management and sales and service solutions. As Frank mentioned, risk and compliance are key areas or the focus for our clients, particularly given the current regulatory environment. Our recent acquisitions of ICS Risk Advisors and Memento are resonating very well with financial institutions as they work to manage their higher workloads associated with risk and regulatory compliance. ICS has increased its sales over the prior year, including cross sales to existing FIS clients. We have also received strong interest from clients regarding Memento to -- which we expect to translate into new business. We are also seeing solid demand for our wealth management solutions. We added several new clients in the first half of 2012, including the new agreement with First Farmers and Merchants Bank, which we announced last week. As we discussed last quarter, we have seen growth within our NYCE debit business as a result of the Durbin Amendment. Looking ahead, we are somewhat more cautious in light of Visa's aggressive pricing. To put it in perspective, while NYCE is a great business, it generates less than 3% of our total revenue. We have seen improved growth and strong margin expansion within our Payments business over the past 3 quarters. We expect the second half of 2012 to be somewhat more challenging due to a planned client deconversion, more difficult comparisons and some uncertainty related to the Visa pricing changes that I mentioned earlier. Overall, sales in the first half of the year were comparable to the first half of 2011, driven by new sales to nonfinancial institutions. I am pleased to announce that we will soon begin providing mainframe computing services to one of the country's largest mobile phone carriers. Opportunities like this leverage our processing environment and provide profitable, long-term, reoccurring revenue streams. Sales to North American financial institutions declined in the second quarter relative to the prior year. Although we believe the letter that regulated financial institutions received in the first quarter may have caused a delay in closing some deals that we expected to sign in the second quarter, we think it's a timing issue. And we do not believe we have lost any significant new business as a result of the letter. One of the benefits of having a broad solution set and diverse client base is that the success we are having in signing new global commercial and international clients is helping to offset some of the delays we experienced in sales to North America financial institutions in the second quarter. While we will continue to monitor the North American financial institutions sales activity, we are very encouraged with the overall strength of the sales pipeline. Turning to Slide 10. I will provide an update on the status of the M&I migration project. As we have discussed throughout 2011, FIS provides multiple core and payment solutions to both M&I and BMO Harris. We have been working on a plan to consolidate the respective core and payment platforms since BMO Harris announced plans to acquire M&I approximately 18 months ago. In the second quarter, we gained more clarity around the migration plan. As we have stated in the past, we will continue to have a substantial relationship with the combined entity going forward. While we continue to negotiate terms and service agreements for the various solutions, we now expect to transition the legacy M&I accounts from our fully outsourced core processing solution to the bank's in-house FIS platform in the fourth quarter of 2012. The bank will continue to license our software and FIS will provide ongoing support and professional services under an application management agreement. As we've previously discussed, we do not expect any significant impact to our 2012 results. Based on discussions in the second quarter, we continue to anticipate a revenue impact in 2013. Also, given the magnitude of the overall relationship and the opportunity to provide more services to BMO in the future, we anticipate foregoing a short-term benefit in 2013 in favor of a long-term strategic relationship with the eighth largest bank in North America. Mike will discuss the expected financial impact later in the call. As we discussed earlier, we are very encouraged by the overall strength of our sales pipeline. We will continue to work aggressively to drive new sales to backfill any excess capacity created by the change in our ongoing relationship with BMO. Next, I will provide an update on our international business on Slide 11. In May, we hosted our second annual international conference in Dubai. Overall attendance was up 20% compared to last year, with clients from 26 countries around the world, representing all international regions. Topics touched a broad range of industry issues, including innovation in banking, managing risk and compliance as well as leveraging FIS capabilities around outsourcing and services. We are pleased with the continued sequential and year-over-year growth trends in our international operations. As we expected, organic revenue growth improved to 10% in the second quarter and the margin increased by 110 basis points. All major regions delivered solid performance. Our European business continues to perform well. We are seeing demand for professional services, including the ING implementation project, which began in the fourth quarter of 2011. As we have discussed in the past, the majority of our core processing and payment solutions are mission-critical and enable our clients to operate on a daily basis. Our European business is focused primarily on Northern Europe, and less than 1/2 of 1% of our consolidated revenue comes from clients in Portugal, Italy, Ireland, Greece and Spain. Similar to what we are seeing in North America, the challenges created by increased regulation and a difficult economy continue to drive demand within Capco's European practice, which has experienced strong growth since we acquired the company in 2010. We continue to pursue opportunities in emerging markets, including Brazil, India and China, as overall growth within these countries is expected to outpace the U.S. by anywhere from 2x to 4x. Our Brazil joint venture continues to perform well, driven by continued growth in card issuance, transaction volumes and support services. We are also making good progress to expand our presence in the Asia Pacific region. I am very pleased to announce that we recently completed a large core implementation project for BAAC, which has approximately 20 million customer accounts and operates more than 1,000 branches in Thailand. We are also excited about opportunities to grow our Payments business throughout the region, including India, where we currently support nearly 4,000 ATMs. Next, if you will turn to Slide 12, I will address our continued focus on information security. Over the past year, we have spoken about the cyber attack that occurred in the first quarter of 2011 and the personnel and technology improvements that we have made to our business in 2011 and 2012. On our first quarter call, we also acknowledged the receipt of a regulatory letter that was distributed to our regulated financial institution clients in March of 2012. We continue to address the recommendations described in the letter and are taking additional steps to strengthen our information security. We have also engaged additional third-party experts to analyze the security of our systems, including ongoing assessment and monitoring with respect to the 2011 cyber attack and to validate to our customers the improvements that we have made or continuing to make -- and continuing to make to information security. The security issue has created opportunities for us to proactively engage with clients to solicit their feedback and to discuss how FIS can assist our clients in meeting their future business needs. Information security will remain a top priority for FIS in 2012 and beyond. In closing, I'd like to leave you with the following key takeaways, which are outlined on Slide 13: We continue to deliver on our plan to drive revenue growth and margin expansion, as evidenced by the 5.1% organic growth and 120-basis-point margin expansion in the second quarter and our strong performance year-to-date; we expect to transition the legacy M&I accounts from our fully outsourced solution to an in-house FIS licensed solution in the fourth quarter of 2012. While we will face some near-term headwinds, the good news is that we expect to have a long-term relationship with BMO, and we are optimistic that we can further expand our relationship with the bank over time. And as I stated at the beginning of my presentation, we remain focused on generating new sales and driving value to our clients. Again, thank you for joining us this afternoon. I'll now turn it over to Mike for the financial report.

Thanks, Gary. As a reminder, the Healthcare business has been classified as a discontinued operation for all periods presented as a result of the definitive agreement that we executed on June 25. In accordance with GAAP, revenues and expenses from discontinued operations are collapsed and classified as a separate line item on the income statement. In the second quarter of 2012, we -- and EBITDA by approximately $32 million and $11 million, respectively and reduced earnings per share from continuing operations by $0.02. We furnished an 8-K on July 3 to recast our historical financial results to reflect the Healthcare business as a discontinued operation. I'll continue the presentation on Slide 15. Consolidated revenue increased 3.1% to $1.5 billion in the second quarter. Organic growth, after being normalized for currency and acquisitions, was 5.1%, driven by growth in processing volumes, higher professional services and consulting revenues and payment transaction growth. Second quarter EBITDA increased 7.7% to $438 million. The EBITDA margin expanded 120 basis points to 30.0%, reflecting organic revenue growth and disciplined cost management. Next, I will provide additional detail on the operating segments, starting with FSG on Slide 16. Financial Solutions revenue increased 9.1% to $563 million compared to the second quarter of 2011 and grew 7.8% organically, driven by growth in account processing, professional services, consulting and global commercial services. As Gary mentioned, we are pleased with the improved performance within Capco's North American consulting practice. The team has done a nice job of selling through the large client loss in 2011 and improving profitability. Financial Solutions EBITDA increased 3.2% to $215 million compared to $208 million in the 2011 quarter. The EBITDA margin was 38.2% compared to 40.3% in the prior year, reflecting higher professional services revenue and consulting revenues and growth in the global commercial services. The margin was also impacted by the increased spending related to security and infrastructure improvements. Next, I will provide some additional details regarding the M&I core migration project. At the February 14 Investor Day, we stated that we expected a revenue impact in 2013. We also stated that we anticipated being able to preserve the earnings from the M&I relationship in 2013 based on our contract. During the second quarter, as Gary mentioned, we gained more clarity regarding the M&I migration plan. We expect to complete the core migration in the fourth quarter of 2012. Although we do not yet have a new agreement, we are currently estimating approximately $60 million decline in annual EBITDA run rate. We expect the impact in 2013 to be about half of that. Just to be clear, we are not providing guidance for 2013. We are simply updating what we now know about M&I, specifically that we anticipate giving up a portion of the contractual fee in 2013 in exchange for a long-term relationship with BMO. Consistent with our prior communication, the impact on 2012 is already included in our guidance. As showing on Slide 17, Payment Solutions revenue increased slightly to $606 million. Revenue increased 2.7%, excluding the check businesses, driven by continued growth in electronic payments, including our PIN debit network and EFT processing and bill payment. Payment Solutions EBITDA increased 8.6% to $250 million compared to $230 million in the second quarter of 2011. The EBITDA margin increased 310 basis points to 41.2% in the second quarter of 2012 compared to 38.1% in the second quarter of 2011, driven by growth in electronic transactions and cost management initiatives. Turning to international on Slide 18. International revenues declined 1.9% on a reported basis and grew 10% organically, excluding a $35 million currency impact. The increase was driven by growth in our European processing and consulting businesses, higher card issuance and usage in Brazil and our expanded presence in Asia, including the BAAC implementation that Gary discussed. International EBITDA increased 3.4% to $63 million compared to $61 million in the prior-year quarter. The margin improved 110 basis points to 22% compared to 20.9% in the prior year. Foreign currency exchange rates reduced revenue by $35 million in the second quarter. There was no material impact to our consolidated earnings as the currency benefit related to our Capco operations in India helped to mitigate the impact of currency on our international results. Please turn to Slide 19 for a reconciliation of net earnings. GAAP net earnings from continuing operations totaled $156 million in the second quarter. Adding back the $42 million in an after-tax purchase amortization resulted in adjusted earnings from continuing operations of $198 million, which is an increase of 18.1% compared to the prior year. Weighted average shares totaled 298 million in the second quarter of 2012 compared to 311 million shares in the second quarter of 2011. Adjusted earnings per share from continuing operations increased 22.2% to $0.66 a share compared to $0.54 per share in the second quarter of 2011. The effective tax rate declined to 29% in the second quarter of 2012 compared to 32% in the prior-year quarter and 34% in the first quarter of 2012. The lower rate is due to the favorable resolution of certain tax provision -- positions taken by the company. We now anticipate a full year effective tax rate of approximately 33% for 2012, which for modeling purposes, equates to 34% in the third and fourth quarters. As shown on Slide 20, cash flow from operations totaled $259 million in the second quarter of 2012. Capital expenditures increased to $91 million compared to $68 million in the second quarter of 2011, primarily due to the additional investments we are making in information security. Free cash flow, which excludes settlement activity, totaled $178 million in the second quarter of 2012 compared to $185 million in the prior-year quarter. The decline was due to a required payment of $28 million to our Brazil joint venture partner in the second quarter of 2012. Next, on Slide 21. We continue to execute on our capital allocation strategy, which includes ongoing investments in business, strengthening the balance sheet, returning excess cash to shareholders and acquiring new products to cross sell to our clients. Total debt outstanding as of June 30 was $4.9 billion and the weighted average interest rate declined slightly to 4.6% compared to March 31. During the second quarter, we paid off our term loan B, which we believe is another step on the path to investment grade. Debt to EBITDA was 2.9x -- sorry, 2.8X at the end of the quarter. During the quarter, we paid $59 million in shareholder dividends and repurchased 1.5 million shares at a cost of $50 million. We returned approximately $270 million in cash to shareholders in the first half of 2012. We have $950 million in remaining share authorization under the existing plan, and we expect to use our operating cash to buy approximately 50 million of stock per quarter for the remainder of 2012. We also completed the ICS, Memento acquisitions in April for a combined cost of approximately $45 million. We will continue to look for additional product-focused acquisitions to drive higher cross sales through our global distribution channels. Now if you turn to Slide 22, I will provide additional details regarding the sale of our Healthcare business, which we announced on June 25. We expect to complete the sale by the end of the third quarter. As Frank described, the divestiture is consistent with our strategy to focus primarily on businesses where we have scale and can utilize our global distribution channels to sell additional products and services. The transaction was valued at $335 million in cash, and we expect to receive net proceeds of $220 million after tax upon closing. The sale is expected to reduce full year 2012 earnings from continuing operations by up to $0.07 per share. We expect to use the proceeds from the sale in a manner that is consistent with our capital allocation strategy to offset the dilutive impact. As a result, we do not expect the sale to have a material impact on earnings per share in 2013. We expect to incur an after-tax GAAP loss of approximately $55 million or $0.19 per share upon completion of the sale in the third quarter. The loss will be included in discontinued operation. Before opening the line for questions, I will provide a few key takeaways from today's overview, as summarized on Slide 23. We are executing the strategy that we communicated at the February 14 Investor Day, namely, driving organic growth and margin expansion, returning cash to shareholders through dividends and share repurchases and focusing on tuck-in product acquisitions. While sales to North American financial institutions declined in the second quarter, we believe it's a timing issue. We do not believe we have had significant losses of a new business as a result of the regulatory letter. In the second quarter, we gained additional clarity on the M&I core migration plan. As we have discussed in the past, we do not expect any significant impact on the 2012 results related to the planned fourth quarter conversion. We anticipate a future EBITDA run rate impact of approximately $60 million a year, and we expect that the impact in 2013 will be reduced by approximately half that amount due to contractual fees. Again, this impact is specific to updated information regarding M&I. We will provide overall guidance for 2013 during our next year's investor conference. We are off to a good start for the year. While we expect a more challenging second half due to the planned client deconversions and more difficult comparisons in our Payments business and ongoing investments in risk management, information security, we are well positioned to deliver on our 2012 growth targets and EBITDA margin expansion. Last, as outlined on Slide 24, after adjusting our previous guidance for the sale of the Healthcare business, which is now expected to reduce our overall earnings in 2012 by up to $0.07 a share, we are raising our full-year outlook from continuing operations to $2.45 to $2.55 due to more favorable effective tax rate. Operator, you can now open the line for questions.

[Operator Instructions] Our first question today comes from the line of Dave Koning with Baird. David J. Koning - Robert W. Baird & Co. Incorporated, Research Division: Yes, and I guess first of all, just a little more clarity on the M&I, Harris relationship. I think I remember back when Metavante was acquired, you were at about $120 million revenue run rate, and I know Harris adds a little bit more to that. But it seems like a pretty high incremental margin if you're only losing part of that revenue and to lose $60 million of EBITDA. I mean, is that just it, that it is very high incremental margin?

Yes. David, this is Gary. Obviously, one of the benefits to our environment is when you operate fully outsourced environments on highly leveraged platforms, those incremental margins can be very high. We'll continue to have a significant relationship with BMO Harris going forward. In fact, they'll still be a top 10 client. We certainly think we'll drive higher revenue through our professional services engagement as well. And obviously, we'll continue to sell additional clients onto that platform. But at the end of the day, we're going to have a very strong relationship with them going forward.

David, that's right. That's very important to us. They're clearly a top-tier bank and one that we really want to build a very large relationship with and one that we've had a great partnership with over many years. David J. Koning - Robert W. Baird & Co. Incorporated, Research Division: Yes, okay. And there's no reason over a long period of time that you couldn't build it back up pretty significantly, right?

Absolutely.

Absolutely, that's what we'll do. David J. Koning - Robert W. Baird & Co. Incorporated, Research Division: Okay. And then the second one is last few years, the second half EBITDA margin has usually been about 3% better than the first half EBITDA margin. This year, the way the guidance is kind of setting up is for a little less. It looks more like 200 basis points better, maybe even a little less than that in the second half relative to the first half. Is that because some of the -- the growth might be coming on at a little lower margin? Or is it conservatism? Or maybe you can kind of fill us in on that.

Well, I think we had a very strong start to the year, obviously. We had some -- particularly in payments, we had some revenue come out at very strong margins. And so I think it's a great start to the first half of the year. I think we've got, as we referenced, some challenging comps in the second half, and we have some clients who have been deconverting. So it's a little bit different than we saw last year, but that's how we anticipate the year to fold out.

We have a question from Glenn Greene with Oppenheimer. Glenn Greene - Oppenheimer & Co. Inc., Research Division: I just wanted to make sure I'm understanding sort of the pipeline and sales activity. So maybe this question is for Gary. If I heard right, North America sales was down a little bit year-over-year. But in aggregate, you were sort of saying sales was kind of flat year-over-year. Maybe you can just sort of give me a little bit of help on sort of the environment and, sort of more importantly, pipeline activity.

Yes. No, it's a great question. I appreciate you asking for the clarification. All in all, our sales were on par for the full year when you look at our international sales, our nonfinancial institutions sales. Clearly, within North American financial institutions in the second quarter, we saw a little slowdown. As we mentioned, we don't feel we've lost any business due to our clients getting a letter from the regulators, although we will say we've had a number of conversations, and we do think that some of those deals got delayed into the third quarter. But we're very confident based on our pipeline, not only in financial institutions, but also in nonfinancials and international, we're going to continue to end the year very strong. Glenn Greene - Oppenheimer & Co. Inc., Research Division: So other than the letter that went out, I mean, I guess a lot of people are sort of concerned about the macro environment, sort of spending activity levels, and there's -- obviously, there's been a lot of mixed messages from a lot of the big IT services companies regarding North American financial services. So was there anything beyond just sort of the letter kind of stemming deal closures?

We're not -- we're -- not really. I mean, at the end of the day, we actually -- the number of deals that we had signed to financial institutions were actually up. So our clients are making decisions. We think some of our bigger deals just got pushed into the third quarter because we're having other conversations. And so, at the end of the day, our clients, especially financial institutions worldwide, they're all dealing with regulatory challenges, frankly, unprecedented regulatory challenges. They're generating a very, very, obviously, difficult economy. But even as the economy rebounds, they're trying to figure out how to reinvent themselves. So we saw strong growth in our professional services business. So we can't lose sight of that as well. So all in all, we still think we can get back what we missed in the second quarter on the full year within financial institutions. And we think nonfinancial as well as international is going to continue to have a strong year. Glenn Greene - Oppenheimer & Co. Inc., Research Division: Okay. And then how about, quickly, an update on Capco, sort of thinking both North America and Europe and particularly interested in activity for transformational larger deals, sort of leveraging both Capco and FIS products.

Yes. Well, Capco was up significantly. They had a fantastic quarter, and it was both in North America and in Europe. And we continue to see Capco's consulting business, as I said, grow very strongly, and most of it is around more transformative type consulting engagements. I'll tell you, the way our teams are working, our sales teams and our business lines with Capco, both in North America and Europe, we're very pleased with. And that organization is certainly performing within our expectations at this time. Glenn Greene - Oppenheimer & Co. Inc., Research Division: Any way to put a number on the Capco growth?

Well, I mean, we haven't really carved Capco out. What we shared last year is they were a little behind our expectations and plan. And we're excited that in second quarter, they're ahead of the plan and expectations for them. So the size, you saw the size. We acquired them, it was around a little over $200 million. And so, obviously, we saw growth from that point.

We have a question from David Togut with Evercore Partners.

Mike, could you quantify some of the underlying drivers of the 310 basis points of EBITDA margin expansion in Payment Solutions in the quarter? And if you adjust for the BMO Harris fourth quarter anticipated impact, to what extent are some of these underlying drivers onetime in nature or sustainable?

Well, I mean, the PSG margin, you could see we had some revenue growth, but we clearly had much stronger EBITDA growth in that business. And the teams continue to find ways to drive efficiency in PSG. So these are activities and actions that we have taken in the last fall heading into 2012. And then, quite frankly, they had some decent transaction volumes. We had good volumes, nice first half of the year. We had good volumes in our debit issuing business. We had good volumes in bill pay. So those transactions come on at very high incremental margins. So that's what's driving the PSG side. The BMO Harris fourth quarter, we had -- looking at where we're going to be for the year, where we're going to end up, we declared in the second quarter, we feel comfortable with where we're at in '12. And that business comes off, and then as Gary talked about, team's got to go out and refill the hole, if you will. We've got to bridge in '13, and then we've got to put some new clients back on those platforms and that's -- the teams are out looking to do.

Any specific large buckets of efficiencies to point to, whether it be data center consolidation or procurement?

Well, I think it's a little of everything. We talked at Investor Day that we're kind of finalizing the activities that we've done on the merger synergy plan with Metavante. It's now blocking and tackling a lot of little things. So the team continues with the consolidating, particularly like in item processing, where the volumes are going down, they've done an outstanding job of consolidating the number of centers that we operate. They'll keep doing that. But whether it's center cost or procurement or the operating cost, they're just good execution right now.

David, we do that as a course of business, always. And then we'll have a little bit more focus on this during the budget process.

I see. And, Mike, could you quantify the annual increase in information security spending that we should expect?

Well, I mean, we talked about -- we didn't do a specific number, but we talked about reinvesting some of the incremental margin improvement that we would have seen in '12 back into the business, specifically infrastructure and information security. So it's a number that has an impact, obviously. And we've talked about some of the things we're doing to improve our environment. But we'll continue to spend throughout '12, and there'll be spending going forward. But there's obviously a little bit of a bump in '12 as we catch up some activities.

Yes. David, this is Gary. And then, obviously, this is just something that is part of the business now. And I mean it's a -- the bar has been raised, it should be. And all providers are going to have to make investments in this space going forward.

We have a question from Greg Smith with Sterne Agee. Gregory Smith - Sterne Agee & Leach Inc., Research Division: Just wanted to be sure I understand the BMO, M&I issue. So it's $30 million of EBITDA that you're going to lose in 2013? And then the full run rate, $60 million, all things being equal you'd lose in 2014?

So the $60 million is the annualized run rate. And again, we're talking specifically to the consolidated impact of BMO Harris and M&I consolidating the environments together. So the $60 million is a run rate next year with -- and again, we're getting information it's not finalized because we haven't finalized the deal with them yet. But we anticipate in '13 that $60 million will be mitigated by half due to our contractual arrangement. Gregory Smith - Sterne Agee & Leach Inc., Research Division: And is that -- how does that time throughout the year?

Again, the activity would end -- most of the migrations would be done by the fourth quarter of '12. And then -- so we will have that spread probably throughout '13. Gregory Smith - Sterne Agee & Leach Inc., Research Division: Okay. And then, just thinking about the impact of currency, it definitely seemed like you had benefited from your captive in India. Is there any way to size that, what the total number of expenses are in India?

Yes. We obviously -- and again, that is -- it's predominantly captive activities we do there. We use it to support our product sets that are based in the U.S. And because of that, it was favorable to us. Obviously, that gave us kind of a hedge against some of the diminution we saw in other parts of the world. But it's a small number. At the end of the day, the delta between what the impact was in the international side versus the benefit we got from our captive probably netted out less than a few pennies. Gregory Smith - Sterne Agee & Leach Inc., Research Division: Okay. And then just as we think about currency exposure in other markets, I guess, Brazil and then thinking about Brazil and then Capco, are things pretty well matched up where in Brazil, you have significant expenses there matched against the revenue, and same for Capco. I mean, therefore, you're always somewhat hedged on the expense side? There's no big mismatch, is there?

No. I think that's to -- really, around the globe for us that Brazil is very matched. The expenses we have driving that are based on in Brazil. Our European operations, whether it's Capco, whether it's the other centers that we operate, the costs are in-country, so same currency. So the only one that's mismatched has some benefit for us right now, which is India. Gregory Smith - Sterne Agee & Leach Inc., Research Division: And then what -- just, Mike, do you have a rough estimate for the tax rate in 2013, which we...

Wow. No, I mean, we -- again, we're excited about the benefit we got in the second quarter, but it changes the rate to our -- to the good. But why don't we wait until we do the whole '13? And we've been in the 33% to 34% range now a couple of years, but we got to do a little planning before I give you a number.

We have a question from John Kraft with D.A. Davidson. John Kraft - D.A. Davidson & Co., Research Division: I wanted to go back to that mobile telco win you talked about. And I guess my question is if there is an opportunity to leverage it into a new vertical or is this just a one-off, I guess particularly in light of your plans to divest out of the health vertical?

Well, John, this is Gary. Obviously, we have been committed to these types of businesses for a number of years. We're -- really what we're doing is selling computing services to adjacent markets that leverage our existing structure. So we deliver a lot of mainframe services to financial institutions, as you would expect. So the ability to leverage that excess capacity and underwrite our overall delivery cost at very nice margins to nonfinancial institutions. So no, we have no plans of divesting this type of business. It's just a natural leverage for our significant data processing footprint in North America. John Kraft - D.A. Davidson & Co., Research Division: And there's opportunity for other potential telcos, you think?

Absolutely. It's been a high-growth area for us. That team has done a very good job finding opportunities that leverages our existing capacity, and I think that's something very important that we focus on in the sales cycle. We're not after looking for non -- for services that we don't already have scale in. So mainframe is a great example where we bring significant scale. Server management's something where we bring significant scale. And so these are opportunities that allow us to underwrite our delivery cost to the financial institution marketplace, allows us to help us expand our margins as we're bringing more scale on the platform, getting more efficiencies out on it.

And John, we execute very well there, so we have a good reputation. John Kraft - D.A. Davidson & Co., Research Division: Okay. And then, I guess just one more, if I could on the M&I conversion. Specific to the move from the -- or to the in-house license that will happen, I guess, in Q4 this year, is there a -- I know it's in guidance, but is there a revenue chunk that you'll get from that conversion?

Well, John, I mean, M&I -- keep in mind, we've had a long-standing relationship with M&I on an outsourcing basis. We've had a long-standing relationship with BMO Harris. Some things, on an outsourced basis, the core banking system has been run in-house for years. So as you would expect, when we do -- when our clients do acquisitions, a lot of times they engage us through professional services activities to help convert those clients onto their platform. So we have -- that's very typical for us, and that's one of the drivers of our professional services numbers. Ongoing, we're going to continue to have a very large relationship with BMO Harris. And so all we were doing was bringing clarity that getting an extension in a contract and a long-term agreement with the eighth largest bank in North America is proven, given the size of our company and where we think the market's going. So we'll have a good, long-term relationship with them.

We have a question from Julio Quinteros with Goldman Sachs.

I wanted to maybe just start off real quickly with the financial services segment and outsourcing in terms of demand. Can you just parse through a little bit on the demand side, large clients versus small clients? Any distinctions to call out there in terms of the cadence?

Well, clearly, in the smaller market, we're seeing massive movements to outsourcing. We've been saying that for years. And I would tell you, we continue to see that trend. We've also continued to see a very large trend towards outsourcing in the large financial institution marketplace as well, but it's not near as advanced as what you would say in the classic community markets. Also, when you're in the large financial institution, we're seeing a lot more services business driven there. So every quarter, we've seen growth in our professional services business, and we think that trend is going to continue. But we do think there's a big opportunity in the large financial institution space for outsourcing business. We've signed some significant outsourcing in the LFI space all so far this year. And fact of the matter or even a very -- a deal that we had in the second quarter, we’re counting on the second quarter, got pushed into this quarter. We actually signed today. So we'll be announcing that here over the next several weeks. So we're seeing good movement in and around outsourcing, for sure.

Okay. And then maybe just on the nice part of the business segment. I think you guys said that it was around 3% of revenue. Is there some thought there on whether that business can get any bigger or any way to think about the growth potential of that business? Or is this just a business that just stays under the kind of pressure that we're seeing right now given some of the competitive dynamics there?

We think it still has opportunity. The team has done an excellent job coming up with both offensive and defensive strategies in that business, as we've shared with you over the last couple of quarters. We saw some nice growth through the Durbin Amendment. Obviously, we're seeing some of our transactions slow with some of the deep end pricing. But we've got a number of strategies ourself we're deploying. And we feel good about some of the early results of those strategies. So we think that solution has -- still has some growth in the future for us.

Okay. And then just lastly, on the international side, big bead relative to our numbers on the margin front. Can you just walk through what drove some of that upside in the international margins or at least relative to the numbers that we had?

Well, at the end of the day, keep in mind, our international business -- and we've talked about it for years, so our international margins have always been less than what we've seen in the domestic U.S. But what we've consistently said is as we build scale in the countries that we're focused on, right, we're going to continue to see expanding margins of that. So the team has done a great job selling. Frankly, we're continuing to see a move towards outsourcing, even in international. And I think you're starting to see our overall software license fees continue to get smaller. And so as that scale comes up in those various countries, whether it's Brazil, whether it's Europe or the U.K. or in Asia, some of the deals we mentioned, those transactions and those accounts and those new clients come on at very high margins for us. So -- and also, the team does an excellent job controlling costs. I mean, Frank talks about it. We execute our business every day looking for opportunities to become more efficient, and then we continue to drive our sales force through incentives to close as much business as possible. So really, it's nothing more than good sales execution, good cost control and scale in the markets we're operating in.

Okay. So barring a large contract award or some new investment initiative, this level that you guys have reached should be sustainable?

Oh, yes. No, we -- absolutely. And we still think there's opportunities to grow our margins, keep in mind, in all of our markets.

We have a question from Peter Heckmann with Avondale Partners.

I had a follow-up on -- and I know that some of these negotiations are ongoing, but it sounds to me as if the M&I-BMO Harris consolidation, maybe that a portion of that $60 million loss of EBITDA is coming from a onetime contract termination payment. And if so, which quarter would we expect that to come in?

Well, again, what we're doing with BMO Harris, because we had really relationships in -- on both sides of that, so we're really taking a contractual -- typically, if you have a relationship and your investment gets acquired, you have a termination fee in that situation. Here, we have an ongoing relationship. So we've really tied together the ongoing portion, and as Gary talked, an extension of that relationship with the migration of M&I. So it's a little different than a typical termination works, because it's not termination in this situation. And so it'll -- we just don't anticipate a onetime bump that will hit a specific quarter as opposed to just kind of a transition through the current relationship down to where we just give you an expectation then after '13.

Okay. And then for some of the big pieces that you may be able to win in terms of that relationship, can you identify any big pieces of the combined M&I, BMO Harris that you don't currently have, like bill pay, for example?

Well, I mean, so a lot of the business we're still going to keep, right, probably be a different name. But bill pay, we actually will have. There's -- the core, the deposit loan, customer systems, we are operating 2 platforms, we're going to be operating one. It's going to go an in-house platform that Harris and M&I are going to operate on. There's been some noise around the credit card, as an example. We never processed credit cards for M&I. So they really didn't have a decision there. We had a flow-through as part of our relationship with another organization, and they kept their card processing there. So the bulk of the applications we're still going to process for them. It's going to be generally an in-house. Obviously, you can see from the numbers that the numbers are going back down quite a bit. But the relationship is still a very large relationship. It's a great organization. We have a great relationship with them. And as we talked about, we felt it was an opportunity to extend the relationship as opposed to have a terminating type of situation.

Yes. And just to add onto that, keep in mind, we're talking about BMO Harris, which is the U.S. subsidiary of BMO in Canada. And so we think there's a lot of opportunity to leverage some of our capabilities in the Canadian operation. And so we've got a lot in that environment. We do very little with actual BMO in Canada. And we talked to them about a number of fronts, whether we could leverage a lot of our payment technologies, our core processing technologies. And so, as Mike said, having a long-term relationship with BMO Harris and actually extending that, we think, makes a lot of sense. But then, what we've been able to do through this process is really tap into overall BMO in a significant way for the first time. So the dialogue has been very positive around working out this situation. But we think what that's going to do is, obviously, open some doors to allow us to talk about BMO, the larger enterprise in Canada, on some of our capabilities going forward.

Okay. Just one last follow-up. I think you had mentioned ING when you mentioned some of the consulting work and the project that has started in the fourth quarter of '11. I believe that's another large bank merger where you have the core at both ING Direct and Capital One...

No. Keep in mind, we were talking about ING as an international client over in the Netherlands. So we're working with them. They've actually sold ING Direct to Capital One, which, you're right, we do have both Capital One and ING Direct. But our reference in the earnings call was dealing with ING, which we announced in the fourth quarter of last year, where they're actually migrating all of their country-specific core processing systems onto our technology. And so that's obviously continuing to drive professional services business for us internationally as we help them with that deployment and migration.

Okay. And then any early insight in terms of Capital One ING Direct which core they may migrate to as a consolidated entity?

Well, you got 2 totally different enterprise, right? So you've got Capital One, who's actually bought ING Direct, which is one of the largest direct banks. And so we've got a very strong relationship there, and we're just going to continue to work with them through their strategies. And as they decide how they're going to carry forward their business, obviously FIS will be there to help them. And so we enjoy seeing our clients grow and grow through acquisition, because it usually means great things for FIS.

We have a question from Bryan Keane from Deutsche Bank.

This is Ashish, calling on behalf of Bryan Keane. A quick question on the Financial Solutions segment that delivered another solid quarter. And so how should we think about this growth going forward? Do you think this growth is sustainable going into second half, considering all the headwinds that you spoke about? And just to follow up on that would be the deals, the deals that got pushed out to third quarter. Would that have any impact on the near-term revenues?

I mean, I think FSG had a pretty good string here that the comps in the last half of last year were a little off. But they started out last year real strong in the first 2 quarters, and then the -- through those comps, we're going to have pretty good third and fourth quarter. First 2 quarters this year were solid. I mean, we've talked about FSG has really come back pretty strong after a slow '09 and '10, where we had -- kind of the slowdown due to the financial crisis and just good steady growth. We get a little bit of noise quarter-to-quarter because of comps or because of something moving around. But as Gary referenced, we feel pretty good about the growth opportunity. I don't - the third-- the second quarter sales, again, we think is more of a delay than losses, and Gary referenced that -- one of the deals we actually got signed here already in the third quarter. So I think we still feel good about FSG. It's kind of quarter-to-quarter. It's going to have a few up and downs. But as we look year-over-year, we still think it's come back strong and it has the opportunity to keep growing.

Yes, I can't agree more. I mean, at the end of the day, if you look at our -- once again, our software business continues to decline because of the trend towards outsourcing that we've been now talking about quarters -- for just many quarters. And as a result of that, it's a much more predictable business. So FSG doesn't have quite the impact that, say, our PSG segment does with transaction volumes and some of those things. So we feel good about FSG in the second half of the year, and we feel good about the sales success in that area as well.

All right. As Gary and Mike said, if you look at the last 2-year results and how strong our pipeline is today, we can't help but feel good about FSG and how it's performing, how we believe it will perform.

That's great. One quick question on the FX. So -- and this is more particular -- this isn't particular to the FX impact on the top line. So I believe you said the impact was roughly $35 million on the top line for international segment. And the Brazilian real as well as the euro has significantly weakened. How do you -- like if you stay at this current conversion rate, how do you think about FX going forward? I was wondering if you have done any kind of calculation, or can you provide any kind of insight into it?

Yes. I mean, we try to look at that. I don't have a number in front of me in terms of –- kind of project out the FX. Again, we try to give organic numbers, which eliminates the FX impact. And then, at least most of those countries have a natural kind of hedge and balance. And then in terms of if we have a negative impact there in terms of lower margin coming back, right now, we've got the benefit with India. So without trying to predict what's going to happen with the currency swinging in the future, I don't really have a specific number. But if you look at the second quarter -- and we don't think we have too much exposure there on the bottom line.

At this time, there are no further questions in queue.

Thanks very much to everyone who joined us on this afternoon's call. Please stay on the line for replay information, and have a good rest of the evening.

Ladies and gentlemen, this conference will be available for replay after 7 p.m. Eastern time today through midnight Eastern Time on Tuesday, July 31. You may access the AT&T Executive replay service at any time by dialing 1 (800) 475-6701, entering access code 251811. International participants, dial (320) 365-3844. And that does conclude our conference for today. Thank you for your participation and for using AT&T Executive TeleConference. You may now disconnect.