Fiserv, Inc.
Q2 2016 Earnings Call Transcript

Published: 3 Aug 2016

[Operator:]

Welcome to the Fiserv 2016 Second Quarter Earnings Conference Call. All participants will be in a 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. You may begin.

[Stephanie Gregor:]

Thank you and good afternoon. With me today are Jeff Yabuki, our Chief Executive Officer; Bob Hau, 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, anticipated benefits related to acquisitions, and our strategic initiatives. Forward-looking statements may differ materially from actual results and are subject to a number of risks and uncertainties. Please refer to our earnings release 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 a reconciliation of those measures to the nearest applicable GAAP measures. These non-GAAP measures are indicators that management uses to provide additional meaningful comparisons between current results and prior reported results and as a basis for planning and forecasting 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.

[Jeffery W. Yabuki:]

Thanks, Stephanie, and good afternoon everyone. We executed the business well in the quarter, delivering solid financial results, strong sales performance and continued progress on our strategic growth initiatives. Internal revenue growth was 4%. Adjusted operating margin expanded 10 basis points and adjusted earnings per share grew 14%. Sales performance was strong in the quarter, attaining more than 100% of quota and was 34% ahead of last year's second quarter. Importantly, that momentum carried over into July, producing one of the best sales months in our history. Given the strength of our results to date, and our expectation of revenue growth acceleration in the second half of the year, we are increasing our adjusted earnings per share guidance to $4.38 to $4.45, an increase of 13% to 15% over last year. Now, let me provide an update on our three key shareholder priorities for 2016, which as a reminder, our first, continue to build high-quality revenue while meeting our earnings commitments; second, build and enhance client relationships with an emphasis on digital and payment solutions; and third, to deliver innovation and integration, which enables differentiated value for our clients. We continue to focus our efforts on increasing our level of high quality revenue growth. As such, our internal revenue growth of 4% in the quarter was highlighted by 6% growth in our payments segment. We saw continued strength in our transactional businesses and EMV card distribution. Overall, internal revenue growth in the quarter was compressed by 80 basis points from a combination of lower termination fees, EMV deferral and negative currency impact. Adjusted operating margin was up 10 basis points in the quarter and is up 40 basis points through June 30, in line with our expectations. This was led by strong performance in our payments segment which recorded increases in adjusted operating margin of 110 and 170 basis points in the quarter and first six months of the year respectively. As I mentioned, we raised our earnings per share guidance on the back of a 17% increase in adjusted EPS for the first half of the year. Free cash flow per share to date has trailed adjusted EPS a bit, up 7% through June, which we expect to normalize relative to earnings growth in the second half of the 2016. We're well on track to meet our financial commitments for the year. Our second priority is to build and enhance client relationships with an emphasis on digital and payment solutions. One of our flagship payment technologies is our RXP bill payment solution, with over 25 million active users across more than 4,000 financial institutions, including eight of the top 10 banks. Bill payment remains the killer digital app for banking, and during the quarter, we were pleased to renew our longstanding client relationships with PNC Bank, with $350 billion of assets, and SunTrust Bank, with $190 billion in assets. We've spoken about the opportunity to differentiate our real-time network now, through our unique biller relationships. During the quarter, we expanded our network by signing one of the nation's largest wireless providers to process payments on our BillMatrix platform. In early July, we also signed one of the largest Blue Cross Blue Shield insurers to a comprehensive suite of payment services to provide its members with more convenient health insurance payment options. Our solution will be leveraged for multichannel payments from the state's public exchange, insurer site, IVR, company agents and a good number of our more than 23,000 walk-in locations across the country. Payment effectiveness requires scale, and we are pleased to be increasing ours in a unique area of our value proposition. Along those lines, you may have seen we inked an agreement with Early Warning, a bank-owned consortium to enable clients to participate in an emerging P2P network, connecting many of the leading financial institutions in the United States together. This furthers our role as a key enabler and advocate for our clients to participate in the ongoing evolution of payments in the manner in which they choose. Demand for EMV issuance has remained strong, and card personalization volume is growing. As personalization of cards got closer to the number of cards manufactured, the amount of the incremental revenue deferral in the quarter reduced sequentially, but remained at levels higher than anticipated in our internal plan. That said, we expect EMV card demand to remain healthy for the next several years, and also anticipate that to be followed by a wave of contactless card issuance. Mobiliti ASP users grew by nearly 40% over the prior year's quarter to 4.8 million users and grew 7% sequentially. We also had strong growth in our Mobiliti business solution, with end users growing more than 50% quarter-over-quarter. We're still in the very early stages of the digitization of the bank's most important customers. Our third priority is to deliver innovation and integration which enables differentiated value for our clients. During the quarter, Fiserv was recognized multiple times for our innovation including inclusion in the InformationWeek Elite 100, a list of the most innovative users of business technology. We won Best Use of Technology at the PYMNTS.com Alexa awards by connecting our best-in-market Corillian solution to Amazon Echo for voice-based financial transactions and information at the speed of thought. Westpac Bank, the second largest bank in Australia with assets of over A$830 billion of Westpac Live was ranked number one in Forrester's 2016 Global Mobile Banking Functionality Benchmark Report in July. Westpac's mobile banking offering is built on our market-leading Corillian solution and is supported by Fiserv. To further digitize branch banking, we announced Verifast, our state-of-the-art Palm Authentication solution. This solution, which relies on sophisticated biometric technology that goes well beyond fingerprint, enables authentication via palm vein patterns and blood flow in the hand. This fast, easy and secure experience is producing much higher customer satisfaction and improving associate productivity. We see significant deployment opportunities for the back office, teller line, and service desks in the roughly 28,000 branches spanning our nearly 5,000 account processing clients in the US. Lastly, eight new DNA clients went live in the quarter including three with assets over $1 billion, which brings us to 12 implementations for the year to date as compared to 11 in the same period last year. With that, let me turn the call over to Bob to provide more detail on our financial results.

[Robert W. Hau:]

Thanks, Jeff, and good afternoon everyone. Adjusted revenue for the quarter grew 6% to $1.3 billion, and increased 5% to $2.5 billion in the first half of the year. Internal revenue growth was 4% in both the quarter and year to date. These results included 80 and 50 basis points respectively of combined negative impact due to EMV revenue deferrals, reduction in termination fees and FX headwinds. Adjusted operating income in the quarter increased 6% to $413 million and is up a healthy 7% year to date to $812 million. Adjusted operating margin was 31.9% in both the quarter and year to date periods, increasing 10 basis points and 40-basis points respectively over the prior year periods. These gains are due primarily to strong payments segment performance and progress in operational efficiency initiatives, offset somewhat by expected margin pressure from acquisitions and continuing investments in new product innovation. Adjusted earnings per share increased 14% to $1.08 in the quarter and for the first half of the year, adjusted earnings per share is up a robust 17% to $2.14. Our strong first half performance has resulted in increasing our adjusted EPS outlook for the year. At the segment level, our payments business continued to deliver strong results with internal revenue growth of 6% in the quarter and 7% year to date. Adjusted revenue, which includes a full quarter's contribution from our two recent acquisitions, grew 11% in the quarter to $693 million. Performance was led by strong results in card services and output solutions including EMV and solid growth in e-payments. As Jeff mentioned, while we experienced improved EMV personalization, we still lag manufacturing and as a result deferred an additional $3 million of revenue in the quarter. Payments segment adjusted revenue was up 10% year to date to $1.4 billion. We further extended existing relationships with our market leading solutions including signing 45 debit clients, nearly 60 mobile clients and more than 80 bill payment clients in the quarter. Debit transaction growth in the quarter remained in the high single digits and P2P transaction growth was again more than 30%. Importantly as Jeff noted, we expanded our base of Mobiliti ASP subscribers by nearly 40% in the quarter to 4.8 million. We continue to believe we're in the early innings of the digital transformation and see significant runway into the future growth as consumers further integrate digital and specifically mobile banking into the fabric of their day to day lives. Payments segment adjusted operating margin was excellent, increasing 14% in the quarter to $238 million and year to date was up 16% to $463 million. Segment adjusted operating margin crossed 34% for the first time, expanding 110 basis points to 34.3% and was up 170 basis points to 33.9% for the first half of the year. This strong performance is even better when considering the adjusted operating margin compression from the businesses we acquired early in the year. Our acquisition integration efforts are progressing well and we expect to begin realizing synergy benefits late this year and into 2017. Adjusted revenue in the financial segment was $613 million in the quarter and $1.2 million (sic) [$1.2 billion] in the first half of the year. Internal revenue growth in the financial segment was 1% in both the quarter and year to date. Segment growth in the quarter was negatively impacted by a combination of currency, implementation timing, and a reduction of specialized regulatory-based services and lower termination fees. For the full year, we now expect lower termination fees compared to last year. This is due primarily to an estimated reduction of termination fee revenue in Q3 of $15 million to $20 million compared to the higher than typical level in the third quarter of last year, most of which did not originate in the account processing businesses. And while a reduction in termination fee revenue is generally good for the long-term health of the business, it can create comparability issues as we're seeing this year. That said, we expect to return to more normal termination fee revenue in the fourth quarter. We continue to expect stronger financial segment growth in the second half of the year, as we see higher license-related revenue, new client implementations, revenue from the rollout of new innovative technology solutions such as Notifi and Palm Authentication and improved termination fee comparison in Q4. Adjusted operating income in the financial segment was $202 million in the quarter and $397 million year to date. Adjusted operating margin was down 150 basis points in the quarter to 33%, but was up 40 basis points sequentially. Adjusted margin in the quarter was impacted by several factors, including lower termination fees and incremental investments in innovation-based solutions such as Agiliti and Notifi. Corporate adjusted net operating loss for the quarter was in line with expectations and generally consistent with the comparable prior-year results. Our adjusted effective tax rate was 34.3% in the quarter, slightly lower than the prior year's comparable rate of 34.6%. And while we continue to anticipate an adjusted effective tax rate of about 35% for the full year, our comparable tax rate for the second half of the year at about 36% is significantly higher than last year's adjusted effective tax rate for the second half of 2015, which was just over 34%. Free cash flow was $442 million during the first half of the year, with the timing of working capital, including receivables and tax payments, impacting the first half of the year results, which we expect to improve by the end of the year. Free cash flow per share is up 7% to $1.95 for the first six months of the year. Total debt outstanding was $4.6 billion as of June 30 or 2.4 times trailing 12 month adjusted EBITDA. We continue to utilize share repurchase as our capital allocation benchmark, repurchasing 2.8 million shares of stock in the quarter for $283 million. Through June 30, we have repurchased 6.2 million shares at an average cost of $97 per share. And at quarter's end, there were 220.6 million shares outstanding and 11.2 million shares remaining under our existing share repurchase authorization. With that, let me turn the call back to Jeff.

[Jeffery W. Yabuki:]

Thanks, Bob. As we mentioned up front, sales in the second quarter were excellent, coming in 34% higher than last year's second quarter and 108% of quota. Performance was strong across the board and included only a minimal number of large transactions. Sales momentum continued to be very strong in July. We signed several large transactions, which underpinned one of our best single month sales performance in our history. Importantly, several of these wins have shorter implementation cycles and should provide measurable impact revenue in the fourth quarter. At this point, we fully expect to exceed our sales goal for the year. Integrated sales were $66 million in the quarter, flat to the prior year and up 38% sequentially, driven primarily by digital and payments solutions. Delivering value to clients through our add-on solutions continues to be a very important element of our company strategy. Our operational effectiveness program moved forward in the quarter, including measurable progress on our data center optimization program. To date we've combined seven centers and expect to complete additional locations, including one of our largest in footprint later this year. While we're deriving some benefit from these actions currently, there should be a larger aggregate benefit in future years. That said, we did capture $17 million of saves in the quarter and through June 30, we've achieved nearly 70% of our full year operational effectiveness goal of $40 million. Q2 had more than its fair share of events influencing the environment. We saw a mini-crash in alternative lending as certain high fliers experienced turbulence in their loan portfolios, and while these losses may temporarily slow the proliferation of new lending technologies, we continue to believe the opportunity to introduce new, innovative technology is significant. Our offerings are well-positioned to benefit directly and indirectly from the continuing rise of the digital financial consumer, which remains a top priority for technology spend across the banking landscape. We also witnessed the volatility of Brexit during the quarter and the related strengthening of the dollar around the world. Although early, we do not anticipate measurable Brexit impact on our non-US business, other than increased currency translation pressure on revenue, which is incorporated in our full year outlook. We remain on track to achieve our full year financial objectives. We continue to expect 2016 internal revenue growth of 5% to 6%, driven by stronger performance in the second half of the year. Given the lower than anticipated termination fees, which as Bob mentioned is exacerbated in the third quarter, the increased pressure of FX and the effect of a larger EMV revenue deferral, we now expect internal revenue growth to bias towards 5% for the full year. We expect a much higher internal revenue growth rate in Q4 compared to Q3, given termination fee comparisons, sales and implementation revenue and additional contributions from our strategic growth initiatives. As a result of our strong first half performance along with the anticipated growth acceleration in the second half of the year, we've increased our adjusted earnings per share guidance range to $4.38 to $4.45, which is growth of 13% to 15% over the $3.87 in 2015. We continue to expect adjusted operating margin to increase at least 50 basis points for the year, which includes more than 30 basis points of negative impact from acquisitions and the impact of reduced termination fee revenue. And last, we continue to expect free cash flow per share to be at least $4.70 for the full year. We exit the first half of the year well positioned to meet our current financially goals and have sales momentum to continue moving us forward. As important, we continue to make progress on our journey to sustainably increase our level of high quality internal revenue growth. Before we go to Q&A, allow me to recognize the more than 22,000 associates who make a difference for our clients through innovation and excellence each and every day. With that, Kerry, let's open the line for questions.

[Operator:]

Thank you. We will now begin the question-and-answer session. Our first question is from David Togut of Evercore ISI. Your line is now open.

[David Mark Togut:]

Thank you. Good afternoon. Based on some of your comments about organic growth biasing toward 5% for 2016 as a whole, how should we start to think about next year in a particular – I'm thinking back to your Analyst Day from last year where you mapped out a 50 to 100 basis point target increase in organic growth over the long term.

[Jeffery W. Yabuki:]

Yeah. Thanks, David. So, first of all, we feel actually quite good about the trajectory of our growth rate. We believe that we will grow or expand our internal revenue growth rate in 2016 over 2015 within the 50 to 100 basis point range. But the encouraging news for us is that we do expect to have a much higher growth in the second half of the year and we expect that to be the jumping off point going into 2017. So we feel like we're on track. Our strategic initiatives are coming online. We had a little bit more lumpiness in our revenue this year than we're used to, but again that doesn't affect our longer term view and we would expect to see our internal revenue growth rate continue to increase 50 to 100 basis points a year into the foreseeable future.

[David Mark Togut:]

Do you have a pretty good line of sight as to how the EMV card personalization revenue deferral is going to roll into Q3 and Q4?

[Jeffery W. Yabuki:]

Yes.

[David Mark Togut:]

Got it. And then you called out some nice growth in DNA implementations year to date. Can you talk about the general competitive environment in the large credit union space? You called out in the first quarter call a go live on the Vibrant Credit Union. I mean, how do you see share trends going forward?

[Jeffery W. Yabuki:]

So we continue to have a very, very strong success with DNA on the larger end of the credit union space as well as on the larger end of the bank space. On the credit union side, we have continued to win substantially more than our fair share of competitive takeaways when we go up against anyone in the market. So our win/loss record is quite high going up against a prospect. So we do very well in that environment. And frankly, the Vibrant go live is was very important to us. As you know well, David, because you've known us for a long time, these tend to be longer tail sales processes and then longer tail implementations. With Vibrant going live just in Q1, that created a level of energy in the market and we have confidence that that will turn into additional conversations. And frankly, we would have an expectation that would turn into additional wins on the larger credit union end of the market.

[David Mark Togut:]

Understood. And then Jeff, your comments regarding the EMV growth runway, I think you're probably the most bullish in terms of the length of the runway in which you can grow EMV related revenue. Is there anything specific about your customer base on the card issuer side that let's say would give you a longer-term runway for growth? We're starting to see some managements caution that EMV benefit may be near an end, particularly Vantiv on their FI business.

[Mark A. Ernst:]

Yeah. Hey, Togut, this is Mark. Or David this is Mark. The key thing that I'd say that's different is because we are so much focused on debit and debit has been later than a lot of the credit processors, we think that there's more runway left for us because of that bias. I'd say that's the biggest thing.

[Jeffery W. Yabuki:]

Yeah, and I would also add to that David that we remember that we produce cards for a much larger group than just our issuer, kind of our debit issuer banks and so, and much of that business to Mark's point is on the debit side. So not only do we have a fair runway in our own base, but as well as all the other issuers that don't yet use our debit processing services.

[David Mark Togut:]

Understood. Thank you very much.

[Jeffery W. Yabuki:]

Thank you.

[Operator:]

Thank you. Our next question is from Ramsey El-Assal of Jefferies. Your line is now open.

[Ramsey El-Assal:]

Hi, guys.

[Jeffery W. Yabuki:]

Hi, Ramsey.

[Ramsey El-Assal:]

Given the fairly steep back half acceleration, can you help us think through kind of risk factors that might cause you to come in lower than where you think you're going to come in? Are you depending on implementations that can't get pushed back or how should we sort of assess the risk of what's to come here?

[Jeffery W. Yabuki:]

Yeah. So, a great question Ramsey. So, we obviously are committed to producing internal revenue growth within our outlook, right, we said biasing to 5% for the year. And the payments segment has performed quite well all year long and we do expect a bit of continuing compound growth coming there as well as new live clients as we've been talking about for the last several years. So that points the majority of the focus on the financial segment. And our calculus, and we've looked at this sort of a variety of different ways, primarily because we are expecting more growth later in the year that we have historically seen and it really comes down to a couple of factors and let me lay them out. The first one is we've had some kind of lumpiness in the prior year on our compares. So we had some regulatory, and we talked about in the first quarter, some license related revenue that was lumpy in our 2015 numbers and we've had to overcome the substantial majority of that in the first half of the year. And so we see that easing on both fronts, and therefore we're already covering that in terms of our recurring revenue and we would expect is that lumpiness in the prior year went away that we'll get some comparable benefit. The second item, and this is one of the larger ones, is just this, the continuing growth in our transactional services. Now some of these are certainly on the payments side, lending, I'm sorry, Mobiliti, EMV as we were talking about the reduction of the deferral. But we've also seen some very good growth in our lending businesses. Our largest account processing client went live late in Q2. So all of those we believe will provide benefit. The next item is you'll remember back to last year, we had a pretty slow sales year really until Q4 and it was actually primarily in December, actually December of 2015 was by far our largest sales month in history. And as you know, most of our implementations run six, nine, 12 months or more, so the revenue that we signed last December, it's starting to come live in this second half of the year and a lot of that was in the financial segment. So, we're excited about that. And then lastly, on the sales front, we mentioned on our prepared remarks a couple of the large wins that we had this year have either unusually short implementation cycles or they are made to be unusually short because we were working them well before we signed them. So in fact, we would expect a number of those larger deals to contribute revenue in Q4. All of those items we have pretty darn good visibility to. And then lastly, just the compound effect again of some of our innovation-based initiatives, programs like our integrated payment strategy, Notifi, Agiliti and the like. So we've got a long laundry list, knowing that this would be an important point. We've got it. We've got them recorded and we've got our management and our teams focused to make sure that we achieve the numbers in the second half of the year. But again, I think very importantly is these growth engines are not one and done engines. These are engines that will sustain. It will give us we think very good, a very good tailwind entering into 2016. And then when you combine that with the very good sale – into 2017, I'm sorry – when you combine that with the very good sales performance that we're seeing this year and we expect to see this year, we're pretty bullish on how 2017 is starting to stack up.

[Ramsey El-Assal:]

Great. That's super helpful. Another question I wanted to ask was about free cash flow. You'd mentioned there were a couple of puts and takes in terms of why it is, on absolute basis, I think relatively flat versus last year and not growing too fast on a per share basis. Can you revisit that? For some reason, I was expecting the EMV revenue deferral to have a similar positive impact on cash flow, but I might not be getting that correct. Could you go through again just sort of the cash flow dynamics and why you expect them, what's been weighing on them and why they're going to pick up a little later in the year?

[Robert W. Hau:]

Yeah, Ramsey. It's Bob. There were the two key drivers that I talked about from a working capital standpoint in terms of accounts receivable as well as the timing of our tax payments, with actually the bigger weighting on accounts receivable. And yes, you're right. The way to think about EMV, some of that deferral is cash positive because we see the cash in advance of booking the revenue. But that has declined pretty precipitously over last four quarters, down to only about $3 million this quarter. So not a big driver from a cash flow standpoint. And that receivables collection is really a timing and in fact we started to see that collection turn already in July. So those receivables have started to turn into cash already for third quarter.

[Ramsey El-Assal:]

Got it. Thanks a lot, guys. That's all for me.

[Jeffery W. Yabuki:]

Thanks, Ramsey.

[Operator:]

Thank you. Our next question is from Tien-Tsin Huang of JPMorgan. Your line is now open.

[Tien-Tsin Huang:]

Hey, good afternoon. Just wanted to I guess clarify just I guess the bias to the 5%. It sounds like term fees is the biggest contributor to that. And then I may have missed it. If that's the case, then how are you able to I guess upgrade your EPS target, given that's a higher margin component? Is it just mix or you are pulling some levers to get there?

[Jeffery W. Yabuki:]

Yeah. Tien-Tsin you did hear that on the termination fees and it is by far the largest single impacting item, I would say are the unplanned item in our results, or our estimated results for 2016. Obviously, it's kind of a mixed bag, right, on one hand, it's always better to not have termination fee revenue. On the other hand, termination fee revenue tends to have fairly high margins as you note. You probably heard in our prepared remarks that we're doing quite a nice job on our operational effectiveness program. We're already at about 70% of our earlier target and the beauty of that is that's real economic benefit that the margins on that are comparable to margins on term fees. So there is some benefit there. And frankly, as you know well, if you look at the sources of our growth being in the payments segment, the payments segment, I think we mentioned in our remarks crossed over 34% for the first time ever, I mean, the mix of the revenue is actually working quite favorably for us this year and we're not pulling any levers beyond the normal levers that we always pull. It just so happens that in some of the products, take Mobiliti that we invested in several years ago, once you cross the line on that, the contributions are pretty attractive.

[Tien-Tsin Huang:]

Got it. Okay. So, high incremental margins there. Makes sense. And just as a follow up, just Jeff, you commented, it sounds like June, July are pretty strong from a sales perspective despite what you called out , right, Brexit and the alt lending. So why do you think that's the case? What pulled through some of this strong selling? Because we've heard sort of mixed things around discretionary spend. It sounds like you're seeing good sales execution. Why is there a delta in your mind?

[Jeffery W. Yabuki:]

It's really across two planes, as best I can see. One is a majority of our larger sales are tending to be non-discretionary. So it's using our BillMatrix platform to process payments for one of the very large Blues where there is very interesting dynamics going on in the health insurance and therefore the health payments industry that we're just starting to play in. We've been farming that space for a couple of years. We mentioned we signed one of the largest wireless companies in the US, again to use one of our payment acceptance platforms. And that, we've talked about a lot, is an important differentiator in our NOW strategy. So the ability to route payments, not just through issuers, but being able to have issuers, consumers and billers using the same real-time ecosystem. You may have seen that we signed an arrangement with EWS. So again, building out that payment movement or the movement of money capability. So on the non-issuer side, that's working out quite well. On the issuer side, we're continuing to see lots and lots of energy around capabilities that are improving the digital experience. So, mobile, online. Online is getting an interesting wave of at least refresh lookie-loos saying, hey I've got this really great mobile experience, what do I do with online? And then some of our payments capabilities that are, whether it's our IPS set of capabilities, account transfer, bill payment, which is still kind of as I mentioned the killer app of non point-of-sale payments, those are all the areas which we're getting focus and having good interest and frankly that's why our sales are good. But importantly, our pipeline continues to grow pretty precipitously.

[Tien-Tsin Huang:]

All right, good. Thanks for the insight, Jeff.

[Jeffery W. Yabuki:]

Thank you.

[Operator:]

Thank you. Our next question is from Dave Koning of Baird. Your line is now open.

[David J. Koning:]

Yeah. Hey, guys.

[Jeffery W. Yabuki:]

Hey, Dave.

[David J. Koning:]

Yeah. And I guess, first of all you mentioned about 80 basis point headwind from some of the one-offs this quarter, lower term fees, FX, EMV, the deferral there. Can you give us what that impact is on each of the segments?

[Jeffery W. Yabuki:]

We typically wouldn't do that, but EMV sits in payments and the others are generally I think in financial. So, I'm not exactly giving it to you Dave, but that's the roundabout.

[David J. Koning:]

Yeah. Okay. Okay. And then I guess secondly for Q3, you mentioned the $15 million to $20 million term fee headwind. Does that mean that Q3, the core – it sounds like the core, the full half – the second of the year is going to accelerate, but does Q3 get kind of pushed back down towards kind of the same growth as Q1 and Q2 given that roughly a little over 1% headwind to the business? And then Q4 is where the real acceleration happens, right?

[Jeffery W. Yabuki:]

Yeah. I think that's a good way to think about it because of obviously the termination fees. Those termination fees, while they're not from the account processing businesses, they are sitting in that segment. So, I think that's a reasonable way to think about it.

[David J. Koning:]

Okay. And then I guess, just the last thing, the $26 million of acquisition benefit this quarter, is there any real seasonality there or is that a pretty good number, kind of the rest of the year to think about, that $26 million per quarter?

[Robert W. Hau:]

Yeah, we think that overall the acquisition benefit for the year is about 75% to 85%, so about 25% a quarter. Of course we acquired both those businesses kind of mid to latter part of first quarter. So minimal impact Q1; full benefit in Q2.

[David J. Koning:]

Yeah. Okay. Great. Thank you.

[Jeffery W. Yabuki:]

Thanks, Dave.

[Operator:]

Thank you. Our next question is from Jim Schneider of Goldman Sachs. Your line is now open.

[James Schneider:]

Good afternoon. Thanks for taking my question. I was wondering if you could maybe give us a little bit of an update on where the pipeline of DNA wins stands today? You talked about eight new conversions coming on with three over $1 billion. Can we maybe talk a little bit about – and I think that the total pipeline stands at a little over 20 as of last quarter. So have you refilled that pipeline and do you expect the remaining ones over $1 billion to come on before the year end?

[Jeffery W. Yabuki:]

Well, we're optimistic, Jim, that we're always going to have a nice backlog of DNA wins, but we don't have any reason to believe that our expectation for go-lives in the year has changed. I mean, we're moving that along, and again, as I mentioned to Dave's question earlier, interest in DNA continues to be very strong across all charter types. So from a pipeline perspective, we would expect that to continue to be additive.

[James Schneider:]

That's helpful. And then with respect to the operational effectiveness program, you talked about the 70% attainment toward the $40 million target for the year. Is that something you would expect, that you would kind of potentially pull future program savings into this year or would you plan to kind of get to that $40 million attainment and then just kind of stop and reset for 2017? And can you maybe talk about how much more there is to go on the data center side specifically?

[Mark A. Ernst:]

We don't really manage it around the financials. We manage it to drive as much operational effectiveness as we can. The target that we have has specific programs attached to it and those are all tracking well or better than we might have expected going into the year. But we don't moderate the pace of those around kind of how much is realized in any one given year. So no, we wouldn't slow that down.

[Jeffery W. Yabuki:]

Yeah. I would say, Jim, I mean to Mark's point, in most years we exceed our target by a bit and that, I would obviously, given where we are this year, we would expect that. On the data center piece itself, there is a lot of runway, right, as we talked about at our investor day last year. It's taken us awhile to get some muscle and a cadence around it. We've gotten seven so far completed year to date. And we would expect that to continued grow for the next several years. Ultimately we're going to go down to a handful of larger data centers that we think will help deliver a better service to our clients and frankly reduce our costs. So that's a meaningful opportunity moving forward.

[Mark A. Ernst:]

And Jim, I'd just remind you, we're in year one of a five year program that's got a $250 million five year objective for saving. So we're in the very early stages of five years of cost improvement.

[James Schneider:]

That's very helpful. Thank you.

[Mark A. Ernst:]

Thanks, Jim.

[Operator:]

Thank you. Our next question is from Paul Condra of Credit Suisse. Your line is now open. Paul Condra - Credit Suisse Securities (USA) LLC (Broker) Thank you. Afternoon, all.

[Jeffery W. Yabuki:]

Hey, Paul. Paul Condra - Credit Suisse Securities (USA) LLC (Broker) Just a couple, first on the Early Warning, can you just talk a little more about what, I guess what Fiserv gets out of that arrangement and anything about economics that work for you?

[Mark A. Ernst:]

Yeah. So, this is Mark. I mean the arrangement, we're pretty excited about it. The Early Warning, as you probably know is kind of really has picked up the clearXchange business and they have been working on this development of kind of a large bank P2P network that their owners can all sign on to. What we announced today is that we will be a technology provider to offer our technology, our P2P technology, which includes lots of different kind of back-end services that would enable any financial institution in the country to participate in that network that EWS is going to be introducing. So in many ways, I think we're really in the leading position to provide this turnkey technology that financial institutions in general will need. Now, some of the larger banks that are, remember that are owner-members of the EWS have built their own technology, but an awful lot of other financial institutions. And certainly, as you go into the larger number of community institutions still rely on a technology provider like us to give them the back-end systems they need to participate in that kind of a network.

[Jeffery W. Yabuki:]

Yeah. I would also say, Paul, I mean part of this is, we're in the early stages of understanding what it's all going to mean. Like many other service offerings, some banks will create, some institutions will create their own P2P offering and some will use parts of ours or parts of someone else's, but many of them we believe will use all of ours. We've got roughly 2,400 institutions today in the US that are using our Popmoney technology, and as Bob mentioned in his prepared remarks, we're up to a pretty solid cadence of a 30% transactional growth every quarter. We're announcing year over year growth kind of in that range. It is our belief that there are roughly 100 person-to-person payments per household per year. So, 100 times 110 million households roughly in the US that have an opportunity to be digitized, electronified and moved in a different way. And whether that ends up being 5% or 10% or 50%, none of us really know, but we believe that our technology is central to having that happen. So ultimately, we think we'll drive transaction volume. We'll think there will be network gateways. There'll be risk products. There will be all kinds of different pieces of that value chain, and we've been in this for a while. We've got a nice footprint. Some clients will probably link to Early Warning, but what we do know is, with the 5,000 institutions that we provide core account processing for today, we think we'll play an important role in serving them. And the 4,000 institutions that use our bill payment solution, including eight of the top 10 banks in the US will continue to operate with us. We think there is ultimately going to be quite an exciting and interesting payment ecosystem beyond point-of-sale that's created. Paul Condra - Credit Suisse Securities (USA) LLC (Broker) Yeah, I mean it sounds like there is a lot going on. Kind of leads into my next question, which is as you're getting into these emerging areas, lending, mobile, I think you talked about biometrics and P2P, and how does that feed into the way you think about M&A? Do you have all the capabilities you need or are there some assets out there that might make sense?

[Jeffery W. Yabuki:]

I think any of us would be foolish to say we have all of the assets that we need. We feel quite good that we've got the lion's share of what's necessary today. But we will continue to be active reviewers of what's going on in the market and look for opportunities to improve our product set or our solution set to help drive value for our financial institution and non-financial institution clients. So we're active out there, but we'll continue to be pragmatic and compare every allocation of capital to share repurchase as we always do and again look for opportunities to get the tailwinds of the macros whenever we can. Paul Condra - Credit Suisse Securities (USA) LLC (Broker) Okay. Great. Thank you.

[Jeffery W. Yabuki:]

Thank you.

[Operator:]

Thank you. Our next question is from Darrin Peller of Barclays. Your line is now open.

[Darrin Peller:]

Thanks, guys.

[Jeffery W. Yabuki:]

Hi.

[Darrin Peller:]

Just starting off quickly, just if you help us understand what the normalized growth rate do you think would have been in the financial segment if you can sort of address or adjust for all those items that affected this quarter? Just so we can help understand the normalized growth going forward.

[Jeffery W. Yabuki:]

I'm only pausing, Darrin, because I'm trying to think about, we typically don't give much segment-by-segment guidance. But I would say that it would be measurable and probably we'll leave it at that.

[Darrin Peller:]

Okay. All right. Thanks. Let me just follow then on a question that was asked before with your thoughts on what you have in terms of assets. I'm really just trying to understand, A, the competitive environment now. I mean obviously one of your biggest competitors has made a very large acquisition focusing on larger financial institutions. Has that led to a change at all in your area of focus around the core or area of focus around some of the larger banks, on some of the ancillary services you may provide some of the larger financials. And then maybe a follow-on would be, just on the M&A side again, I mean you've talked a lot about international over the years being an opportunity, and yet I think we're still waiting to see if something actually happens on the M&A front there. So can you just update us on your thoughts around anything outside of the domestic market? Thanks.

[Jeffery W. Yabuki:]

Sure, Darrin. So, I assume that on the competitive question, you were talking about the guys who bought SunGard. We don't really compete very much against the SunGard assets and that is not strategically aligned with where we're focused in the market. So frankly, we have not seen very much change in the competitive market because of that. And I don't see a lot of parallel between for example what's going on in the P2P space with the Early Warning announcement and our over 2,000 institutions using Popmoney and what is being done in that larger end. And so, strategically that's not where we've elected or opted to focus. So we'll continue to look for ways to increase the robustness and the relevance of our model. But I don't think you'll see us to do something like that. As it relates to the non-US side of the market, the beauty of the US market is it's a relatively singular large market and there are not any other large singularly focused markets in the world with the exception of probably China and perhaps India and those markets have nuances of their own that we won't talk about at this point. So, the challenge for us is being, we'd like in some ways have a larger non-US footprint, but we want that non-US footprint to have the high quality revenue characteristics that we look for, and those would be sustainable recurring streams of revenue that have attractive levels of free cash. So we continue to use those screens and that's always going to be the constraints to how we think about deploying capital both in and out of the US.

[Darrin Peller:]

Okay. That makes sense guys. Thanks very much for the help.

[Jeffery W. Yabuki:]

Thanks, Darrin.

[Operator:]

Thank you. Our next question is from Andrew Jeffrey of SunTrust. Your line is now open.

[Andrew Jeffrey:]

Hi good afternoon. Thanks for taking the call. Nice win with Early Warning.

[Jeffery W. Yabuki:]

Thank you.

[Andrew Jeffrey:]

And Jeff, it sort of I guess dovetails into my bigger picture with regard to Mobiliti and the payments segments obviously performed very nicely. Can you quantify perhaps in your segment organic revenue growth the contribution from Mobiliti solutions in aggregate? And then maybe, I know it's hard to quantify, but maybe and its early, perhaps frame up timing for contribution from the clearXchange solution. I mean is that a function of banks throwing it out? Is it a function of transaction volume on the platform? How should we think about that?

[Jeffery W. Yabuki:]

So let me, I'll give it a shot and Mark will fill in where I have missed. So I'm going to take the second one first. So, we have ideas on how the rollout will go. I think there has been some discussion publicly about advertising and some marketing around the P2P services for some of the larger institutions. We've seen that going on intermittently, but there seems to be a lot of energy around that. And our experience at least with services such as bill pay is when you talk about them to consumers, they tend to want to start using them. So, we would expect to see transactions start to grow as where awareness is raised and perhaps it won't be as – the velocity won't be the same as Venmo, but frankly, we believe that most consumers would prefer to transact in an area that is safe and secure and through their trusted financial institution. And so we're optimistic about how that will turn into growth in the future. We would expect that growth to primarily be to come through as payment transaction volume, some services, helping institutions think about how they're going to best position their offerings or embed some of our technologies in their own unique offerings if they would like to do. There are many, Andrew, institutions who use our bill pay technology, but they embed into an experience that's unique to them. And I think we'll see some of that as we move through P2P. So I think it will come through in a lot of different ways, ultimately be through transactions and either transactions that we initiate or transactions that we accept on behalf of our clients. So, a little bit more of a gateway nuance on top of the normal end to end processing that we do overall.

[Mark A. Ernst:]

The only thing I'd add, as Jeff said, the volume of transactions is where we think this is ultimately going to, why this might be different this time. And fundamentally, we've known for some time that in order to get sort of a ubiquitous P2P offering really to take off in the United States, you needed a couple things that most of these networks were not able to fully deliver. You needed it coming from a trusted financial institution. That's why we have been around this business, and kind of pushing this business so hard. We think that's a big opportunity. It needs to be a branded solution that people will recognize. And that's been a challenge to break through with a brand in the market. But very importantly, there is two other factors that I think is going to come through with this. One is the ubiquity of it, being available through the largest financial institutions and being able to find end points through much of the banking system is really where the promise of what we think the EWS offering plays. The other aspect of this is that network will be at its inception a real-time network. And we think that the consumer value proposition that comes along with a real-time network and a real-time transaction is the kind of thing that will generate more enthusiasm for use over some of the other competitive alternatives. So for all those reasons, we're again optimistic. We've been optimistic about P2P as a potential game changer for some time, and we think this continues to be a nicely evolving line of business.

[Robert W. Hau:]

And Andrew, let me just move on to the other half of your question. We don't disclose what the size of the mobile or digital business is on a standalone basis. We have, at our investor days, we have kind of put wheels out there that give the general sizing as typically part of our, I think it's part of our e-payments business. But it's out there. It's a rapidly growing piece of the business. The growth contributions are important. And I would actually venture to say we are even earlier in our mobile journey and our online transformation journey than we are in our EMV journey. And that is, I mean we have significant growth runway to go. Most of the pundits believe that we'll see over the next three to five years 70% to 80% of banking users be mobile, and that number for us is well, well, well, well south of that. So, we feel quite good about that and again, I would not underestimate the importance of remodeling the digital experience for online as well. So, both of those we think are important. And then we did do the little – the ACI, the Community Financial Services acquisition early on, we're just starting to move those client institutions and ultimately their customers into the mix, and we think there is a lot of value to be created there as well.

[Andrew Jeffrey:]

Okay. That's great perspective. Thank you.

[Jeffery W. Yabuki:]

Thank you.

[Operator:]

Thank you. Our next question is from Ashwin Shirvaikar of Citigroup. Your line is now open.

[Ashwin Shirvaikar:]

Hey, guys.

[Jeffery W. Yabuki:]

Hey, Ashwin.

[Mark A. Ernst:]

Hey, Ashwin.

[Ashwin Shirvaikar:]

Jeff, actually your last question is a good segue into what I wanted to ask or clarify. As Mobiliti becomes more or less mainstream, and clearly you have many relevant front end products for that, should that not lower your cost structure over time because these channels are also inherently more self service, more cloud based? Is that already part of your operational effect and your thought process? How should we think about the cost side implications of it?

[Jeffery W. Yabuki:]

Yeah. The answer is, for the client institutions over time, when digital is scale, self service is a much more important piece of the equation. And so I do believe that for the financial institutions, they'll see cost benefits. For us, the most important part of us getting cost benefits is scaling the platform. So the more scale we get in the platform, the lower our costs, kind of a unit cost, will get over time.

[Ashwin Shirvaikar:]

So you won't see lower support costs or anything like that? You are primarily benefiting from growth?

[Jeffery W. Yabuki:]

Yeah, I mean again, if you think about, we supply these technologies to the financial institution. They're supplying them to their end customers. We take in, if we have a core account processing client, we're providing them with support for any one of the 28 different applications that they have. I think as humans get more dependent on self service, it could have a derivative impact on us. But we haven't thought about that as a way of reducing our costs, but I'll certainly have Bob take a look at that.

[Ashwin Shirvaikar:]

Okay. And Bob, sorry to create work for you there. The other question I had was on pipeline, and I think you may have answered part of it, but just want to revisit. It seems like it took maybe six or seven months to go from one sales peak last December to this July, if I can call this July sort of a sales peak. Does that mean that you now have to again replenish for the next one, two quarters in terms of what your sales is going to look like in the second half of the year?

[Jeffery W. Yabuki:]

Yeah, I think that at least from our standpoint, one of the reasons why we're so bullish both for our results this year, but also moving into 2017, is our pipeline. Even with the very strong performance, the pipeline is quite robust right now. And it's not as geometric as we had a peak in December and a peak in July, because frankly, we did have a slower year last year. We had a very, very strong year in 2014. We spent a good part of 2015 replenishing the pipeline, but not just replenishing it by adding in clients, but really looking at our processes and building what we believe is a more sustainable engine for the future in ensuring that that pipeline maintains at a higher level. I would actually say that we have more large transactions in our pipeline right now than – even with our closes in July than we had at the same juncture last year. So, the values, the values and especially the kind of probability weighted values are substantially better now than they were a year ago. And given some of the momentum that we're seeing, we would at least be optimistic that we would be in even better shape a year from now.

[Ashwin Shirvaikar:]

Got it. Thank you, appreciate the color.

[Jeffery W. Yabuki:]

Yeah. Thank you.

[Operator:]

Thank you. Our last question is from Bryan Keane of Deutsche Bank. Your line is now open.

[Bryan C. Keane:]

Yeah, hi, guys.

[Jeffery W. Yabuki:]

Hey, Bryan.

[Bryan C. Keane:]

Just most of my questions have been asked and answered. Just a couple clarifications. In 3Q 2016, if there's not going to really be an acceleration internal revenue growth, I think that would suggest a bigger number in fourth quarter, maybe an 8% internal revenue growth in fourth quarter to make it average out 2.5% for the year. Just want to make sure that's true, because you're also talking about that being the jumping off point for 2017. So, 8% would be a quite higher growth rate than what we've seen in the past when we think about 2017, so...

[Jeffery W. Yabuki:]

Yeah, no, that's right. I mean, I can't speak to the exactness of the numbers. But I would say that they're directionally correct and one of the biggest swing factors tough is the termination swing. So we're getting, Bob, we mentioned in our remarks that we expected termination fee revenue to be down, call it, $15 million, $20 million in Q3. But we expect to return to normal termination fee levels in Q4. So you have that kind of oddity that you have to I think normalize. But beyond that normalization, we always have a little seasonality in Q4, but I think directionally, that's why we have a good amount of confidence when we start thinking about how that translates to 2017.

[Bryan C. Keane:]

Okay. That's helpful. And then just on free cash flow, I know it was flat kind of year to date. What does that look like then for by we get to the full year? Will free cash flow grow with adjusted earnings per share, which I think is expected to grow 13% to 15%? Will that catch up to grow with that kind of growth rate?

[Robert W. Hau:]

That's essentially the right way to think about it, Bryan. We'll see better growth in the second half of the year that will more closely approximate the growth in earnings per share. And as we pointed out in the opening comments, we expect to be at more than $4.70 free cash flow to shares.

[Jeffery W. Yabuki:]

Yeah, Bryan, I think you know pretty well that typically we're running a little bit better than operating earnings in our free cash flow and then we have the benefit of reduced share count. And Bob will probably reprimand me, but basically in Q2, we had a receivable. We had a billed and receivable without any corresponding build in days and we also had a kind of an unusually large tax payment and those kinds of things, we would not expect to recur for the remainder of the year. So, we would expect to be kind of generally back on track.

[Robert W. Hau:]

Correct.

[Bryan C. Keane:]

Okay, super. Thanks for the color.

[Jeffery W. Yabuki:]

Thank you. Thanks everyone for taking time with us this afternoon. It's always a pleasure. If you have any follow-up, please be sure to contact our Investor Relations group. Have a good evening.

[Operator:]

Thank you. And that concludes today's conference. Thank you for participating. You may now disconnect.