Jul 29, 2010
Executives
Thomas Hirsch - Chief Financial Officer, Principal Accounting Officer, Executive Vice President, Assistant Secretary and Treasurer Jeffery Yabuki - Chief Executive Officer, President and Director
Analysts
Christopher Shutler - William Blair & Company L.L.C. Tim Fox - Deutsche Bank AG Bryan Keane - Crédit Suisse AG Tien-Tsin Huang - JP Morgan Chase & Co David Koning - Robert W.
Baird & Co. Incorporated Kartik Mehta - Northcoast Research John Kraft - D.A.
Davidson & Co. Ashwin Shirvaikar - Citigroup Inc Glenn Greene - Oppenheimer & Co.
Inc.
Operator
Welcome to the Fiserv Second Quarter 2010 Earnings Conference Call. [Operator Instructions] Now I will turn the call over to Jeff Yabuki, President and CEO of Fiserv.
Sir, you may begin.
Jeffery Yabuki
Thank you. Good afternoon, everyone, and thanks for joining us for our second quarter earnings call.
Joining me today is our Chief Financial Officer, Tom Hirsch. Our remarks today will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
We will make forward-looking statements about, among other matters, adjusted internal revenue growth, adjusted earnings per share, adjusted operating margins, free cash flow, sales pipelines and our strategic initiative Fiserv 2.0. Forward-looking statements may differ materially from actual results and are subject to a number of risks and uncertainties.
Please refer to our earnings release which can be found on our website at fiserv.com for a discussion of these risk factors. You should also refer to our earnings release for an explanation of the non-GAAP financial measures discussed in this conference call and for a reconciliation of those measures to the nearest applicable GAAP measure.
These non-GAAP measures are indicators that management uses to provide additional meaningful comparisons between current results and prior reported results, and as a basis for planning and forecasting for future periods. We had solid performance in the second quarter across each of our key measures and are gaining momentum going into the second half of the year.
We are seeing the ramp in 2010 performance that was anticipated within our guidance and we remain right on track to achieve our full-year outlook. Internal revenue growth in the quarter was 2%.
Adjusted operating margin of 29.6% expanded 70 basis points on both a sequential and year-over-year basis. Adjusted earnings per share for the quarter increased 11% to $1 compared to $0.90 last year.
Free cash flow increased 12% in the quarter, contributing to a strong 14% increase in free cash flow for the first half of the year to $353 million. In our last call, we shared that we had been working a number of important sales opportunities and that we expected two of them to close in the second quarter.
In fact, one deal had already closed prior to our first quarter announcement, and the other, a potentially a ground breaking channel transformation, was announced earlier today. During the quarter, we expanded our relationship with The WestPac Group, the second largest bank in Australia.
The WestPac Group, through a very competitive process, chose our solutions to transform their online banking presence. The WestPac Group serves more than 2 million active online customers and expects this channel to continue to grow.
We will establish a technology center of excellence in Sydney that will house senior product strategists and developers to enable the WestPac Group initiative along with other growth in the region. We believe this could be the start of a significant cycle of online banking renewal around the world.
Customers are demanding more online access to services with varied preferences on how and when they want it. Meeting this need will require financial institutions to enhance their digital capabilities, which we believe could create material opportunities for our market-leading global online banking technology and digital solutions.
We couldn't be happier to partner with an organization as progressive as The WestPac Group, which continues to embrace this important change. Let me now update you on our three key enterprise priorities for 2010.
First, to deliver positive adjusted internal revenue growth and meet our earnings commitments. Next, to center the Fiserv culture on growth, leading to improved enterprise win rates and a higher share of our strategic products.
And third, to provide innovative solutions that increase differentiation and enhance results for our clients. As I mentioned up front, we delivered 2% internal revenue growth in the quarter and adjusted earnings per share increased 11%.
Our quality of earnings remains strong as evidenced by the continuing margin expansion even in the face of planned incremental investments, as well as the exceptional conversion of earnings to free cash flow. We are on track to achieve our full-year adjusted internal revenue growth and earnings per share targets.
Although it is listed as our second priority for the year, our top transformational focus is to fully center the Fiserv culture on growth. We consider growth in terms of clients, wallet share and innovation, all bundled together with a wrapper of superior client service.
We believe that winning formula will deliver exceptional value for our clients, associates and you, our shareholders. The creation of our single sales organization has bolstered performance and is contributing to building a stronger pipeline.
We had strong sales results in the quarter, signing a number of new clients as well as expanding relationships across a broad continuum of products, including account processing. Sales quota attainment in the quarter was 102%.
As another proof point, the second quarter's result included a record level of payment wins with 215 new sales in the quarter, a 34% increase over last year's Q2. This included 157 new bill payment sales and 58 in debit processing.
Market momentum is strong. Delivering meaningful innovation, our third key priority, is an area where we are truly differentiating ourselves in terms of new products and services.
We are investing across multiple fronts, which should allow us to better serve the needs of a dynamic market and extend our leadership position for many years to come. Interest continues to grow in Acumen, our next generation account processing platform for large credit unions.
In the quarter, we announced that Consumer's Credit Union of Waukegan, Illinois became the second U.S.-based credit union to choose our state-of-the-art, fully integrated solution. We expect to see additional Acumen wins in the second half of 2010 as the sales pipeline continues to grow, and even more success over the next several years.
We also went live with ZashPay, our new person-to-person payments or P2P solution in the quarter. As of June 30, we had signed over 160 institutions, an increase of 120 signings in the second quarter alone.
We expect to add clients at a strong clip as demand grows. Importantly, our P2P service can be accessed here through a participating financial institution via our bill payment technology or consumers can go direct at ZashPay.com, which helps expand our network even faster.
We are processing transactions and already have 250,000 registered users. We are seeing a wide range in transaction amounts, as low as a few dollars and as high as $8,000.
Research has told us that consumers want digital payments to be fast and easy. Our service allows consumers to send transactions in one to three days directly to any bank account in the U.S.
faster than any other P2P service using only an e-mail address or a mobile phone number. Because ZashPay provides tangible value to consumers, financial institutions can charge for this service which produces valuable fee revenue.
Although it's early, we can already see numerous ways that Zashing money becomes a standard for person-to-person payments. You can learn more and even sign up for this service at ZashPay.com.
Now let me turn the call over to Tom for more detail on the results.
Thomas Hirsch
Thanks, Jeff, and good afternoon, everyone. Throughout my discussion, I will refer to the supplemental information included in the slide presentation which is available on our website.
As shown on Slide 3, adjusted revenue increased by 2% organically to $970 million in the quarter, a solid acceleration over the negative 1% in the first quarter. Year-to-date, adjusted revenue was roughly flat at $1.9 billion, in line with our expectations.
Revenue growth in the quarter was broad-based, led by steady growth from our key recurring revenue payments businesses such as electronic banking and debit processing, which together represent approximately 70% of our Payments segment. We also saw a similar strong performance in our account processing businesses, which represent about 70% of the Financial segment revenue.
This strength was partially offset by softness in item processing, lending and Output Solutions, which continued to negatively impact our revenue growth rate in the quarter and year-to-date. Contract termination fees increased $8 million in the quarter to $12 million and have increased $9 million for the year to $14 million.
The increase in termination fees in the quarter was due primarily to an item processing client acquired by another institution. We expect termination fees to return to more normalized levels as market activity accelerates over time.
License fees, which represent only about 5% of consolidated revenue, declined by $5 million in the quarter and are down $11 million for the first six months of the year. We continue to expect choppiness in license revenue between quarters.
However, we still expect buying patterns to be relatively stable on a year-over-year basis. Adjusted earnings per share in the second quarter increased 11% to $1 compared with the prior-year.
Year-to-date adjusted earnings per share was up 8% to $1.95 versus $1.80 last year. Adjusted operating margin in the second quarter was 29.6%, an increase of 70 basis points over the second quarter of 2009.
The increase in margin was positively impacted by continuing operating leverage in our recurring revenue businesses, cost efficiencies and termination fees. These positive factors were offset by continued increased investments and lower license revenue.
Adjusted operating margin through June 30 was 29.2%, an increase of 20 basis points over the prior year's level and 50 basis points higher than the margin for all of 2009. Now I will move on to the segment results.
Payments segment adjusted revenue was $487 million in the quarter and $973 million year-to-date, net of postage reimbursements in Output Solutions. As shown on Slide 5, adjusted internal revenue growth in the Payments segment was 3% in the quarter and 1% year-to-date.
Payments revenue growth in the quarter was driven primarily by electronic banking, card services and Investment Services, partially offset by a slight decrease in Output Solutions. These results include the negative impact of a large client bringing ATM management in-house at the beginning of 2010, which negatively impacts segment revenue growth by about one percentage point each quarter and for the full year.
[ph] Flow (19:18) income in the quarter continued to be virtually nonexistent as interest rates remained at historically low levels. Bill payment transaction volume increased 9% in the quarter and was up 3% sequentially.
As in the first quarter, this data excludes the volume from a large bank remittance-only client that was acquired in 2008 and migrated off our platform in the fourth quarter of 2009. During the second quarter, the majority of our bill payment clients experienced mid-teens average transaction growth rates versus the prior year.
And importantly, each of our 10 largest bill payment clients showed sequential bill payment improvement in the quarter. Card services revenue growth was driven primarily by a 22% increase in transaction volumes from our core debit products.
We continue to benefit from both the consumer adoption of debit and adding new debit clients. Even in the face of regulatory change, we believe that debit transactions will remain a favored vehicle for consumers, which should continue to bolster transaction growth over the foreseeable future.
Turning to Slide 6, operating income for the Payments segment was $151 million in the quarter and $299 million year-to-date. Adjusted operating margin of 31% in the quarter was flat compared to the prior year.
Through June 30, adjusted operating margin was down 60 basis points to 30.8%. The strong margin fall-through in our recurring revenue businesses was offset by higher product development expenses, integration investments and weakness in Output Solutions.
We also had incremental CheckFree integration costs in the segment, including severance related to a call center consolidation of approximately $2 million in the quarter and $5 million year-to-date. The Financial segment generated revenue of $487 million in the quarter and $959 million year-to-date.
As shown on Slide 5, adjusted internal revenue growth in the segment was 1% in the quarter and down 1% year-to-date. Growth in the second quarter was driven by mid-single digit growth in our account processing businesses and an increase in termination fee revenue.
This was partially offset by lower license revenue, continued reductions in check processing volumes and softness in our lending solutions businesses. Operating income for the Financial segment was $151 million in the second quarter.
Adjusted operating margin was 30.9%, an increase of 100 basis points over the prior-year period. Operating income through June 30 was $287 million and adjusted operating margin was up 30 basis points to 29.9% compared with the prior year.
The increase in operating margin for the quarter and year-to-date were driven by growth in account processing recurring revenue and the increase in termination fees. This performance was partially offset by a decline in license fees and incremental investments in areas such as Acumen, our new hosted PEP+ ACH solution, and innovative transformation solutions designed to help financial institutions deal with the impact of financial regulation.
Adjusted operating loss in our Corporate and Other segment was $15 million in the quarter and $24 million year-to-date. The $6 million sequential increase in the second quarter loss over the $9 million loss in the first quarter was due primarily to the building gain recorded in the first quarter.
As Jeff highlighted up front, the quality of our earnings is in part evidenced by our strong conversion of earnings to free cash flow. Free cash flow for the first half of the year has grown 14% over the prior-year, to $353 million.
Free cash flow per share increased 16% to $2.30 compared with $1.99 in 2009. We used our strong free cash flow in the quarter to repurchase 2.8 million shares for $135 million.
As of June 30, we have repurchased 4.2 million shares at a total cost of $202 million, and have about 3 million shares remaining in our outstanding repurchase authorization. We also repaid $76 million of debt in the quarter.
We have repaid $202 million in the first half of the year and have $58 million of required debt repayment remaining in 2010. As of June 30, our total debt of approximately $3.4 billion results in a trailing 12-month debt to EBITDA ratio of approximately 2.6x.
We also completed a small acquisition towards the very end of the quarter, AdviceAmerica, which is a best in class provider of integrated advisor desktop solutions, which extends our Investment Services capabilities into front office applications. Net interest expense was $46 million in the quarter as compared to $55 million in the second quarter of 2009.
The decline resulted from lower debt balances and the positive impact of interest rate hedges that rolled off at the end of 2009. Our effective tax rate for the quarter and year-to-date is approximately 38%, which includes the negative impact of the R&D tax credit, which has not yet been authorized in 2010.
Now I will turn the call back over to Jeff.
Jeffery Yabuki
Thanks, Tom. As I mentioned in my opening comments, sales in the second quarter were strong, achieving 102% of quota.
Year-to-date quota attainment is 92% as compared to 90% through the first half of 2009. As noted in our last call, we increased the 2010 sales quota over the level of 2009.
Although year-to-date quota attainment is down a bit to target, our actual sales results through June 30 are up 8% versus the prior year. New client wins and sales to existing clients were solid across most segments.
Sales cycles remain longer than normal, as financial institutions monitor economic conditions and begin to sort out the impacts of financial reform. Our sales pipeline, in terms of both size and quality, remains strong.
We are optimistic that we will attain our full-year sales goal. Integrated sales were $30 million in the second quarter and $53 million through the first half of the year.
Year-to-date integrated sales are 13% ahead of last year's level, and we remain on track to meet our target of $105 million for the full year. The leading areas of integrated sales continue to be in the areas of Payments, efficiency-based products and channel solutions.
We've signed over 350 new bill payment and debit clients in the first six months of 2010 alone, and the percentage of competitive takeaways is increasing. The breadth and depth of our Account Processing business continues to serve as an important distribution opportunity for our industry-leading payment solutions.
Our operational effectiveness initiatives generated $15 million of cost saves in the second quarter and $34 million in the first half of the year, roughly 85% of our 2010 target. Our plan called for the majority of our cost saves to occur in the first half of the year and we remain on-track to achieve our operational effectiveness target for 2010.
While we are pleased that we should achieve our $250 million cost savings result a full one year ahead of schedule, we're not stopping there. We see a number of interesting opportunities to be more efficient and effective within our business model, which we will discuss in more detail at Investor Day.
Before we take questions, let me update you on our view of the environment and guidance for the full year. As we expected, the number of regulatory actions continues to rise.
There have been 114 actions through July 23, 43 more than in the prior year and in line with our forecast. We continue to expect the number of regulatory actions to peak in 2010, and absent a material step-down in the economy, begin to tail off in 2011.
Overall, as was the case last year, we still expect the negative impact of regulatory actions to be less onerous than the approximately 3% per year historical decline of banks, thrifts and credit unions due to market consolidation. We're seeing a slight pickup in the level of voluntary or non-regulatory assisted, M&A activity, which we view as a positive sign for the banking industry.
We're encouraged by the client conversations and technology spending patterns that we have observed throughout the first half of the year. Financial institutions are increasingly focused on technology solutions that can help them win and retain customers, generate more revenue and enhance their operating efficiency.
Although we expect that to generally continue, we do not expect a full return to normalized IT spending until the economy is on a firmer footing and the ramifications of the broad financial industry legislation are better understood. Regulatory change is front and center as the industry grapples with the complexities of what has passed and what's still to come.
New legislation, such as the Dodd-Frank Bill, which includes the Durbin Amendment, will require the drafting of hundreds of new regulations to support the bill over the course of the next 12 months. It's simply too early and the legislation too complex to determine how, where and when various industry participants will be impacted.
In addition, we fully expect innovation to prevail and that new opportunities will emerge that are not in play today. That said, our initial and quite preliminary view is that the risks and opportunities of the new legislation on Fiserv are generally balanced.
We intend to have a seat at the table working with our broad range of clients to design solutions that will allow Fiserv to capitalize on the opportunities that will emerge in this new world. As I mentioned earlier, our 2010 guidance remains unchanged.
We continue to expect 2010 adjusted internal revenue growth to be in a range of 1% to 3%, including stronger growth in our Payments segment. We still expect 2010 adjusted earnings per share growth of 8% to 11% and full-year free cash flow to grow 5% to 8% to over $700 million.
We anticipate the company-adjusted operating margin will expand by at least 50 basis points for the year. And finally on guidance, we believe that given the environment, any perceived overperformance in the quarter should be viewed as de-risking our full-year outlook.
As I mentioned, we're pleased with our results for the quarter and are on track for the full year. The strength of our business model and the quality of our nearly 20,000 associates have coalesced to deliver meaningful value to our clients and to generate strong financial performance in one of the most difficult environments ever seen.
We are winning in the markets where it matters most, account processing, payments and channel solutions, and we are well-positioned to lead as digital transformation reshapes the financial industry. Lastly, let me remind you that we are holding our annual Investor Day on October 5 in New York City.
If you're interested in receiving details on the conference, please contact our Investor Relations department. With that, let's open the line for questions.
Operator
[Operator Instructions] The first question comes from Dave Koning, Baird.
David Koning - Robert W. Baird & Co. Incorporated
First of all, it was really nice to see growth again in both segments. Is that something you expect now just given I guess the environment seems to be a little more stable?
Did you expect both segments to continue to grow through [ph] (32:57) each quarter for the rest of the year? Or will there be a little choppiness quarter-to-quarter?
Jeffery Yabuki
We continue to expect -- we don't give segment guidance, and clearly we expect our Payments segment over time to be higher than our financials segment – but we're in a good trend line going into the second half of the year. The second quarter clearly showed acceleration in both areas over the first quarter and we're on our plan for the year and the second half is going to be stronger and we're building momentum as we go through the year and into 2011.
Thomas Hirsch
I would say at the same time, Dave, to your point, I still believe we could see some choppiness in terms of the -- I wouldn't say that the segment performance or the quarterly performance will be even. I think we're going to continue to see building, so we went from minus 1 to 2.
We expect that momentum like that trend to continue. So we would expect to buy us some more strength later in the year as we've seen so far in the first half of 2010.
David Koning - Robert W. Baird & Co. Incorporated
And secondly, bill pay transactions, I thought that was very encouraging to see 9% growth again. Is that really a function of you just getting into your big banks and getting them to really push bill pay more again or just consumers starting to use it more again.
Maybe you could talk a little bit more about the dynamics there and how you expect that to continue.
Jeffery Yabuki
Yes, it's a combination of things. One of the big items is we've had so much success in delivering bill payment into our account processing base, well over 1,000 clients that we have moved in since we acquired CheckFree.
So that's creating a nice tailwind. And the big ticket item is consumers are, we're seeing that acceleration, they're paying a few more bills.
But as you know, because our business, we have many large clients. I think Tom mentioned in his remarks, the sequential strength in the top 10 clients certainly helped to bolster that bill payment growth rate.
David Koning - Robert W. Baird & Co. Incorporated
And then finally, you talked quite a bit about investments again this year. You're putting up a very nice year, about 10% EPS growth in the face of both a tough economy, bank environment and while you're investing a lot.
Is that something that -- as you look into next year it both helps the revenue and then maybe some of those expenses even fall off? And maybe you can describe a little bit of how that might play out?
Thomas Hirsch
Dave, I think I'll take this and then turn it back over to Jeff. But clearly this year, we looked at more of an investment year to your point, Dave.
When we highlight some of the things, I think that we spent incrementally more money on them, whether that's Acumen, ZashPay, our PEP+ ACH investment, I mean there's a number of things that we've added in the current year that we planned on to really deal with the environment as it gets better into 2011. So as we look at '11, we're going to continue to invest.
But I think this year clearly was more of an investment year than we've had in the past. But we want to ensure we invest for the future and that's what we're doing to continue to build our growth pipeline and in those areas that are important.
As we announced with The WestPac Group, online banking, key area for investment and that will continue to drive growth over the future.
Operator
The next question comes from Tien-Tsin Huang, JPMorgan.
Tien-Tsin Huang - JP Morgan Chase & Co
I just wanted to ask about the internal growth target as a follow-up to Dave's question. I guess you're running around flat now year-to-date.
At this stage, should we be leaning towards the low end perhaps given that you're running at that flat level or are you going to see some ramp-up in some of these close deals that we could still get to the midpoint or the higher-end?
Jeffery Yabuki
I think for now, had we believed that it made sense to move the numbers, we certainly would have, and we are very pleased with the momentum that we saw in this quarter, the transactions that we referenced like The WestPac Group will clearly help, as well as we had a number of good size transactions whether it be American Savings Bank or Tesco, other transactions that we had been working on that either just went live or are just going live. So we feel good about the momentum that we have right now.
We think that the growth will bias more due to the fourth quarter than the third but we think we'll continue to see that momentum and it's premature to close anything down at this point.
Thomas Hirsch
And I would think also the other item I would add to that is our Payments segment growth rate, which was roughly 3% in the quarter. I mean that's probably the highest it's been in four to five quarters and that was still in the quarter with a little drag from our output business.
So we continue to build nice streams of revenue across the company in that particular area, and so that's real positive from my standpoint.
Tien-Tsin Huang - JP Morgan Chase & Co
Good. The WestPac win, obviously a good one, what's the margin profile for something like that?
And does it include a lot of professional services work at the front end to get that going?
Jeffery Yabuki
I think it's a transaction where we have license and maintenance and services. So good transaction, it's -- The WestPac Group, they're a good partner of ours, we've been partners with them for more than 20 years, and they're also a large, sophisticated institution.
This project will move in over the next, probably over the next 18 months. But it's good, it is business that looks like the rest of our business.
It's not recurring in terms of payment processing, but it's good solid license and services revenue.
Tien-Tsin Huang - JP Morgan Chase & Co
Okay. Okay, last one.
Just last Pay, it's a pretty cool product. On the advertising side, how are you going to get the awareness level of something like this up?
Or are you completely reliant upon the banks to roll it out? And I'm curious, in terms of the banks that have signed up or the pipeline of banks that are looking at it, do you have any large banks in there in the mix, something like a Bank of America?
Jeffery Yabuki
So as you well know, Tien-Tsin, probably better than most of us, is that by the size of the network is critical for P2P. And we have a number of different ways that we're looking to build that network through financial institutions, as well as building awareness outside.
We had a small amount of marketing and advertising this quarter, and I'm going to beg [ph] (39:53) off on this until Investor Day and we'll talk about it in more detail. But clearly, we are looking at where the largest groups' clients are housed today across the financial institution landscape as a way to increase size of that network.
Operator
The next question comes from Bryan Keane, Credit Suisse.
Bryan Keane - Crédit Suisse AG
I just wanted to -- I was jumping around on a couple different calls so I didn't hear it all, but I just wanted to understand, moving into the second half of the year, I think you expect an uptick in revenue growth and in organic growth. Should we expect that right away going into the third and then an acceleration onto the fourth so we should see improvement off of the 2% number?
I'm just trying to get some clarification.
Jeffery Yabuki
You know, Bryan, and you know this well, we don't really manage the company on a quarterly basis. What we can see right now is that we will have building momentum throughout the remainder of the year much like we had this year.
And we would guess if we had to, that it'll be stronger at the end of the year than it will be in the third quarter. But for now, we would expect it to be positive in both quarters, but the strength is biased toward the end of the year.
Bryan Keane - Crédit Suisse AG
Okay. And just a question on the regulatory environment.
I don't know if you covered that some, but I'd be interested in your thoughts there and especially, with the amount of bankruptcies we've seen this year, I think last call you said that was pretty much kind of to your plans. But just interested to know the impact that's having on Fiserv's P&L?
Thomas Hirsch
Sure. So I believe to date, there've been about 114 institutions that have been acted upon by the government, about 43 more than the prior year.
That's in line with the -- we thought at the beginning of the year, we would see somewhere between 200 and 250 and we think we're on track for that. And if from our standpoint, as I think most people know, each week, we track what happens to these institutions, who they get acquired by, because they obviously don't close, they just move around.
And to date, we're down slightly in terms of the exact number since the closure started. And so there's been some impact to our P&L.
But actually, much less than the impact would've been, had we been seeing just normal M&A consolidation in the market. The downside is you don't see termination fees, but the upside is that there are more institutions today than there would've been but for the little blip we've seen in the banking sector.
Operator
The next question comes from John Kraft, D.A. Davidson.
John Kraft - D.A. Davidson & Co.
Just wanted to follow up on the bill pay commentary, I guess because not all your competitors appear to be seeing some of the same trends. What percent, do you know offhand what percent of your bill pay transactions are walk up or expedited-type payments?
Jeffery Yabuki
I mean as a percent of the total transactions, it's a very small -- very, very, very small number.
John Kraft - D.A. Davidson & Co.
Okay, that's helpful. And then in the past, I think you've provided some growth metrics for transactions around the debit side?
Jeffery Yabuki
Yes.
Unidentified Analyst
Did you provide that?
Thomas Hirsch
Yes, they were up in the second quarter. Our debit volume was up 22%, which is roughly in line with where we were in the first quarter.
John Kraft - D.A. Davidson & Co.
Great, thanks. And then this WestPac deal -- congrats to your Corillian team there -- how long of an implementation process might that take?
Jeffery Yabuki
Yes, it's not surprisingly going to be a long process. We're going to let The WestPac Group do the discussion on the timing of when they're going to go live with the technology.
But it's -- WestPac is a large sophisticated institution that's going to go for a fairly long period of time and will be engaged -- working very closely with them is one of the reasons why we're actually opening a new technology center down in Sydney.
John Kraft - D.A. Davidson & Co.
Something that's going to start latter half of 2010 then, maybe?
Jeffery Yabuki
Yes, absolutely.
John Kraft - D.A. Davidson & Co.
Okay. And then just lastly, regarding the financial operating margin, obviously it looks like it's about as good as it's ever been.
Given the termination fee that came in, is that repeatable?
Thomas Hirsch
Yes, I think one of the things we talk about is that, yes, the termination fees kind of were up -- about in that segment, I think overall we said in the quarter, John, they were up about $8 million but our license fees were down about $5 million, two in that segment. So those two kind of offset a little bit.
We did get some positive impact but clearly, the license fees are higher-margin and so are the termination fees. So overall, we had a good margin quarter there.
We continue to crank on our operational effectiveness initiatives. But clearly it was a good quarter --we haven't been that high in a while, and so from that standpoint, I think the detriment is we're going to have while we repeat the termination fee but going forward, we'll continue to generate more license revenues as that kind of comes back in the second half.
Jeffery Yabuki
And John, I would say just one other thing is in the financial segment, which includes our Item Processing business, one of the things that generally may be misunderstood is that as that business, which is shrinking at a fairly healthy cliff, as that business goes away, which is very low margin business, it's replaced by revenue that has a much more attractive margin characteristic. And that has a wonderful blending effect on our margins.
So while it is on quarter-by-quarter, you have these nice step-ups, over time we fully expect those margins to be able to continue to grow on the basis of a combination of mix as well as incremental cost efficiency.
Thomas Hirsch
And just to add to that -- and John, if you actually look at our income statement on Page 6 of our press release, you can kind of see our processing and services revenue of the company. It was up roughly about $30 million and our cost of processing services was actually down.
And that, to Jeff's point, is really kind of that mix where we have some of that check processing business, which is declining but is getting replaced by higher-margin kind of scalable-type revenues. So we continue to see that and that'll continue to happen over time.
Operator
The next question comes from Glenn Greene, Oppenheimer.
Glenn Greene - Oppenheimer & Co. Inc.
I guess just the first question and just the high-level sort of update on what you're seeing competitively and maybe you can contrast the core processing side versus the payment side?
Jeffery Yabuki
Sure. It is.
As we mentioned in the conversations that we're having with clients and prospects, they're active, the pipelines are active, the market remains competitive across all fronts and we like that. We enjoy competing.
So that's good news. As we talked about on the payment side, we had tremendous success, one of the highest payments quarters in terms of wins we've ever had.
And again, most of those are competitive takeaways so we feel great about that. On the account processing side, we have actually won more -- we've had more wins for the first six months of the year this year than we did last year.
So we feel like we're making great progress. We don't win them all, but we win more than our fair share.
And then secondly, I would say that along the lines of account processing, we actually are seeing a few more people making decisions to change, and that's a good thing from our perspective, as well as -- I suspect others could jump onto that bandwagon. But that's good news.
And then lastly, as the trend outsourcing continues and given our very large presence as an outsourcer, we think that's very good news. So overall, it remains competitive and we think we're making good strides out there.
Glenn Greene - Oppenheimer & Co. Inc.
And then in sort of the decision making, it sounds like it's picking up very gradually, I guess, and correct me if I'm wrong, but I think, Jeff, at some point, previously you alluded to hoping to get back to quote normal, say, maybe in 2012? Are we sort of on that path?
And is that how you're sort of seeing things?
Jeffery Yabuki
I mean right now, I would say that economically, we believe that we should see that gradual return taking hold pretty firmly in '12. I would say that on one hand, I'm pleasantly surprised that the kinds of conversations that are being held out in the market, I think IT spending is generally -- at least the idea of IT spending -- is picking up and that's a good thing.
And that's unfortunately bound back a little bit by the regulatory uncertainty that's out there. I do believe that people clearly are viewing technology as one of the ways that they have to fight or combat what's out there.
And so we're going to benefit from that over the mid to long term. But I think there's going to be some blips while everyone is sitting at a table trying to figure out what it all means.
Glenn Greene - Oppenheimer & Co. Inc.
Okay. And then just, excuse me if I missed this because I had to jump on late, but your big deal pipeline exiting 1Q, I think you may have found one -- maybe it was WestPac, or maybe there was another.
Just wanted to get an update on where that pipeline stands and what you did close related to that? If you did say that, I apologize.
Jeffery Yabuki
Oh, no problem, Glenn. We still have a number of larger transactions in the pipeline.
We had very good visibility. The two transactions closing in the second quarter -- one had already closed when we did our Q1 announcement, and the second was The WestPac Group which we announced today.
Operator
The next question comes from Kartik Mehta, Northcoast Research.
Kartik Mehta - Northcoast Research
What do think will happen in terms of spending? Obviously, it seems like the market's getting better.
Do you anticipate we'll see a gradual increase over the next few quarters? Or do you anticipate at some quarter, there's a little bit of a hockey stick effect?
Not going from two to eight but maybe where we go from two to four or five?
Jeffery Yabuki
So I want to caveat this by saying I don't have the financial, I don't have the FinTech crystal ball but I would say that last year, we saw a big spike up, a kind of a release of spending in Q4, and it wouldn't surprise me if we saw similar release in spending this year given some of the regulatory uncertainty and just giving sales cycles away, we've seen them. I'm not a believer that a lot of the Òpent-up demandÓ that I've heard referenced out there will kind of alleviate itself into a blast and a quarter.
But I do believe that the money that's being spent on technology today is insufficient to serve as the backbone for the financial industry. And therefore, we are going to have to see a step-up in spending to deal with the normal business demands of the industry, as well as the regulatory challenges.
And then lastly, I do see and expect a fair amount of movement in the new digital channels. So things like what we are doing with The WestPac Group, as well as ZashPay and other forms of electronification.
Kartik Mehta - Northcoast Research
It sounds like if this point in spending does come back, it sounds like you think it'll be higher margin spending, especially on the payment side. Would that be a correct way to think about it, Jeff?
Jeffery Yabuki
I think that the spending will come in higher value ways to the institutions and so depending on your place in the value chain, that could be a good thing and we think we're well-positioned to capture the spend.
Thomas Hirsch
I also think -- Kartik, just to add to that -- as I think over the long term, right, as the revenue pressures continue to build on our clients, there's going to be a gradual trend towards more efficiency because the financial institutions are going to have to get more efficient just with what's going on with their top line in the number of different regulations, etc. So I think for Fiserv and outsources the technology provider, that drive to efficiency is what we do well and so I think over the long term, that is something that will continue and continue to grow over time.
Kartik Mehta - Northcoast Research
And just one last question, Jeff. Are you seeing any more activity for De Novos?
And the reason I ask that is I'm trying to determine if the marketplace is getting better for financial institutions and investors are feeling as if this is an opportune time to maybe get into this industry.
Jeffery Yabuki
So, it's a twofold answer to that, Kartik. Lots and lots of investors want to get in the industry and unfortunately, De Novos are not the vehicle to do that right now.
I think -- I may not be perfect on this -- there have only been three De Novos so far this year approved, but there's lots of new capital coming into the industry in different ways, whether it's investing in institutions or through groups that are buying institutions, there is a lot of new capital coming in. And based on, again, the conversations that we're having with market participants, we believe that the issue is not around capital.
It's about the regulatory structure allowing people to set up, whether it's De Novos or other kind of institutions to acquire. And I believe that we probably won't see much of this year on that front, but certainly, as the regulators get the larger mass of institutions redirected that need to be redirected and they can open themselves up to focus on the approval process, we'll see that.
And if you look back in history, you can see that after any significant wave of closings you see a big boost in De Novo, and we fully expect that will happen again.
Operator
The next question comes from Tim Fox, Deutsche Bank.
Tim Fox - Deutsche Bank AG
On the Output Solutions business, you mentioned last quarter that you're hoping that the grow overs shouldn't -- the pressure there shouldn't persist long and you mentioned that it's still here in 2Q. Any sense of when those pressures are going to ease?
Has it been 3Q, 4Q this year? Or is going to be pushed out of it?
Thomas Hirsch
Yes, I think that business, as we've talked about, is a little bit more volatile from that standpoint. I think their forecasts get better in the second half and I would say the first quarter was much more significant.
The second quarter was close from a standpoint of that business was slightly down to the prior year. So it's not a big factor from a growth standpoint, but clearly, we anticipate that the second half will get better and they typically have a fairly strong Q4 as far as just from a business model standpoint.
But that business is less recurring revenue, given the nature of it, so it can kind of move around a little bit more during the year. But it clearly is stabilized.
It was better in Q2 than Q1 as we anticipated but still a little bit of drag on the payments growth rate.
Tim Fox - Deutsche Bank AG
Got it. Okay, and then in the check processing business, obviously, the secular weakness here just from a growth perspective but positive for margins over time.
Can you help frame how to think about that business as a percentage of the total business today? And as that continues to shrink, when does it become less of a revenue headwind as part of the story overall and just the benefit from margins?
Thomas Hirsch
Yes, I think what we've said is overall, in that particular business, it's a little bit more in 10% to 12% to 13% of our financial segment type of revenue. And so it's a business we continue to manage.
It continues to decline, given the secular nature of that. We continue to look at a number of different opportunities and put more scale in there.
But we benefit on the other side as debit, bill payment, all sorts of other transactions increase. So clearly, the margins in that business are lower overall because it requires more labor, and that's really what you're seeing as I highlight earlier in my commentary to John.
You can kind of see the revenue increasing and kind of the margins in that cost to processing and services because the lower margin is turning into over higher-margin electronic form of transactions. And so overall, we clearly lose some on the revenue per transaction, but it's built in and we're building margins and scale and so overall from that standpoint, it's good.
And we'll look to get other pieces of bigger business into that business to hold that secular decline, but that's really where we're at with that business.
Tim Fox - Deutsche Bank AG
That's helpful. And just lastly, nice renewal with SunTrust.
Just wondering if you could talk a little bit about pricing, not necessarily on that contract, but just in general on the renewal there, and pricing in general on your larger renewals would be great.
Jeffery Yabuki
I mean I would say that the pricing environment is just as competitive today in the bill payment world as it was in 2008. We haven't seen a dramatic change in that structure.
And the good news for us is we have some capabilities that are unique and incredibly differentiating, and that gives us a strong footing in the market.
Operator
The next question comes from Ashwin Shirvaikar with Citi.
Ashwin Shirvaikar - Citigroup Inc
My first question is with market demand seemingly getting better here, does that have any impact on capital usage, either working capital or CapEx? And how do you think of that?
Thomas Hirsch
I think overall from a standpoint of our cash flow, I mean we had an exceptional first six months as you can see, and I think as we continue the growth to our top line, we'll have a little bit more working capital from a receivable standpoint. But our cap expenditures that you see in our cash flow is really hard CapEx, and that should not change dramatically as our revenue continues to build.
So we'll continue to have leverage. That being said, the first half from a CapEx standpoint was a little bit lower than we historically had, and we'll have a little bit more of that in the second half.
And also our tax payments were a little bit lower. We'll have a little bit more of that in the second half.
But from a business model standpoint, we don't have to really expand our CapEx or working capital as our revenue builds -- slightly but not materially.
Ashwin Shirvaikar - Citigroup Inc
So on a deal like WestPac -- and congratulations for that, by the way -- on a deal like that when you open up a center for that, is that sort of a shared center that you might have opened up, anyway?
Thomas Hirsch
Yes, because we have a lot of operations in there in Australia already, in Sydney. And so we'll be leveraging that with our existing operations that we have.
Jeffery Yabuki
Right. The biggest use of capital in those transactions is human capital.
And so we're literally transporting human capital from here to there, so that we can build a base of expertise in Sydney that we can use as basically as an ASPAC delivery unit.
Ashwin Shirvaikar - Citigroup Inc
Okay, good. And one last question, just a follow-up on the question on pricing.
Could you comment on pricing trends, particularly for renewals? And if you can separate out by segment, that would be great.
Thomas Hirsch
We don't -- overall again on our pricing, I think Jeff hit on it -- but we've not -- our pricing on renewals has been very consistent year-over-year. We do get into some competitive situations where a competitor really wants some business, and that happens, but it's happened before.
So we haven't seen any real large change from that standpoint, but deals happen out there that are very competitive and certain of our competitors sometimes want to buy one or two there. That happens in the marketplace, but overall, as far as renewals like in our core, that's been fairly consistent on a year-over-year basis.
Jeffery Yabuki
I would say that one of the things that we are pretty disciplined on is sticking to whatever boundaries we draw around our economic model. And so there are certain cases where a transaction may not make economic sense, and if that's the case, as hard as it is, at times we're willing to walk away.
Operator
The next question comes from Chris Shutler, William Blair.
Christopher Shutler - William Blair & Company L.L.C.
In the Consulting business, I know it's a smaller business for Fiserv, where your helping banks kind of retool their fee structure. Obviously, I guess I'm just wondering if you can maybe talk about momentum that you're seeing in that piece of the business.
And just if you could give us some bigger picture thoughts on some of the most common fees that you're seeing FI's interested in in implementing, obviously, given some of the changes that are occurring?
Jeffery Yabuki
Yes, I mean, there's a lot of -- obviously there's a lot of debates and a lot of activity on this topic. And to the extent there's good news, and there is.
The level of opt-in rates, by which was the big driver of the original fee structure conversations, has been substantially higher than were originally anticipated. And therefore, some of the more, call it, draconian pricing strategies that were being considered are not going to need to be used.
And we've heard people talk about having very little changes to their pricing, and then we've seen things like what we all saw in the paper, I think, what Bank of America did on their statements and things like that. There is not a one-size-fits-all answer.
But it is on things like some service charges of accounts. I've heard things like charging for people to use a debit card, a variety of different piecemeal kind of going from a fixed price to an a la carte menu pricing.
I do think it's too early to look at this. I think we need to get through the opt-in cycle, see what that looks like, get through the kind of the Durban [ph] (1:04:50) elements of the dog bill and see what that looks like.
But clearly, there is a significant amount of energy around what will the pricing look like. And my point around innovation in our prepared comments were these are some really, really smart people that are going to figure out how to use the system to make sure that all of those earnings go away.
And there will be some new product innovation like ZashPay, which allows people the opportunity -- allows institutions the opportunity to charge a consumer a relatively nominal amount for a very highly valued service. So I think we'll see more of that and it'll play out over the next, I think, three to six months.
Thomas Hirsch
Where we're really focused is, to Jeff's point just to finish up on that, Chris, is that like ZashPay as an instance is helping our clients right with their top line, and to the extent we can develop more innovative solutions like ZashPay, which is a revenue opportunity for them, those are the areas we're focused on, also.
Christopher Shutler - William Blair & Company L.L.C.
Last quarter, you guys talked about the Solutions Conference that you had and you were seeing nice interest in sales proposals there. Just wanted to get your perspective, I know it's still really early but if you could give us any perspective on conversion rates, that kind of thing that you're seeing so far from those folks?
Jeffery Yabuki
It is early, and one of the challenges that I mentioned is we still see, even though we're having good healthy conversations, we're still seeing this elongated sales cycle so we'll know more throughout the year but we remain quite encouraged that that's showing up in our pipeline.
Operator
The last question comes from Darrin Peller, your line is open, with Barclays.
Unidentified Analyst
Hi, this is [ph] Preeta (1:06:54) on behalf of Darren. Just had a quick follow-up on the earlier discussion on the competitive environment.
It looks like you had a good win rate this quarter and you're seeing an improvement in the win rate. I know your competitors also suggested as well that they're gaining share.
Do you think that there might be a vendor consolidation trend in the industry that you and some of the other large players are benefiting from?
Jeffery Yabuki
Well, if you mean by vendor consolidation do you mean that there are others who are losing and therefore, someone else is winning, I would say yes. Even though most of the discussion tends to center around a few larger players in this space, there's still an awful lot of fragmentation out there across all segments of the market.
And without going into specific names, I think we have a good idea of who's winning and who's losing and it makes sense to me that you would hear multiple people say that they're winning at this stage.
Unidentified Analyst
And just another follow-up on the ZashPay service. Who would you consider -- if you could comment a little bit on the competitive environment there, who would you consider your main competitors in the P2P landscape and just your outlook for gains in that market?
Jeffery Yabuki
Interestingly, by virtue of the model that we have, where we have the advantage of leveraging the CheckFree RXP infrastructure and we are able to move money quite fast from one bank account to another, we don't actually think there's material competition out there at this stage because of the uniqueness of our model. So I think the real competition for us is cash and checks and so making sure that we have a compelling value proposition so that we can electronify everything from the payment to the babysitter, to the payment on the Super Bowl, I think that is the opportunity for us and for this technology, and we really see that as the main obstacle out there.
And the other benefit that we have -- the winner in P2P will be the ones that have the largest network, right, and so the creation of the network is absolutely critical. Without a network, it takes an awfully long time to move money.
And so we're very, very focused on building that network. Thanks, everyone, for joining us.
If you have some further questions, please give us a call. Thank you.
Operator
Thank you for your participation in today's conference call. The call has concluded.
You may go ahead and disconnect at this time.