Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

For an understanding of the significant factors that influenced our results, the following discussion should be read in conjunction with our unaudited consolidated financial statements and related notes appearing elsewhere in this report. This management's discussion and analysis should also be read in conjunction with the management's discussion and analysis and consolidated financial statements for the year ended December 31, 2011 included in our registration statement on Form S-1 (File no. 333-182802) filed with the SEC.

Overview

We are the third largest merchant acquirer and the largest PIN debit acquirer by transaction volume, according to the Nilson Report, and a leading, integrated payment processor in the United States differentiated by a single, proprietary technology platform. This enables us to efficiently provide a suite of comprehensive services to both merchants and financial institutions of all sizes in the United States. Our technology platform offers our clients a single point of access and service that is easy to connect to and use in order to access a broad range of payment services and solutions. Our integrated business and single platform also enable us to innovate, develop and deploy new services and provide us with significant economies of scale. Our varied and broad distribution provides us with a diverse client base and channel partner relationships.

We believe our single, proprietary technology platform is differentiated from our competitors' multiple platform architectures. Because of our single point of service and ability to collect, manage and analyze data across the payment processing value chain, we can identify and develop new services more efficiently. Once developed, we can more cost-effectively deploy new solutions to our clients through our single platform. Our single scalable platform also enables us to efficiently manage, update and maintain our technology, increase capacity and speed and realize significant operating leverage.

We enable merchants of all sizes to accept and process credit, debit and prepaid payments and provide them supporting services, such as information solutions, interchange management and fraud management, as well as vertical- specific solutions in sectors such as grocery, pharmacy, retail, petroleum and restaurants/quick service restaurants, or QSRs. We also provide mission critical payment services to financial institutions, such as card issuer processing, payment network processing, fraud protection, card production, prepaid program management, ATM driving and network gateway and switching services that utilize our proprietary Jeanie PIN debit payment network.

We provide small and mid-sized clients with the comprehensive solutions that we have developed to address the extensive requirements of our large clients. We then tailor these solutions to the unique needs of our small and mid-sized clients. In addition, we take a consultative approach to providing these services that helps our clients enhance their payments-related services.

We distribute our services through direct and indirect distribution channels using a unified sales approach that enables us to efficiently and effectively target merchants and financial institutions of all sizes. Our direct channel includes a national sales force that targets financial institutions and national merchants, regional and mid-market sales teams that sell solutions to merchants, financial institutions and third-party reseller clients and a telesales operation that targets small and mid-sized merchants. Our indirect channel to merchants includes relationships with a broad range of independent sales organizations, or ISOs, merchant banks, value-added resellers and trade associations that target merchants, including difficult to reach small and mid-sized merchants. Our indirect channel to financial institutions includes relationships with third-party resellers and core processors.

Our Segments, Revenue and Expenses

Segments

We operate as a single integrated business and report our results of operations in two segments, Merchant Services and Financial Institution Services. We evaluate segment performance based upon segment profit, which is defined as net revenue, which represents total revenue less network fees and other costs, less sales and marketing expense attributable to that segment.

Merchant Services

We provide a comprehensive suite of payment processing services, including acquiring and processing transactions, value-added services and merchant services for banks and credit unions. According to the Nilson Report, we are the third largest merchant acquirer by transaction volume and the largest PIN debit acquirer in the United States, serving a diverse set of merchants across a variety of end-markets, sizes and geographies. We authorize, clear, settle and provide reporting for electronic payment transactions for our merchant services clients. Our client base includes over 400,000 merchant locations.

We provide our merchant services to merchants of varying sizes, which provides us with a number of key benefits. Given their size, large merchants generally receive customized payment processing solutions and lower per transaction pricing. These merchants provide us with significant operating scale efficiencies and recurring revenues, due to the large transaction volume that they generate. Small and mid-sized merchants are more difficult to reach on an individual basis, but generally generate higher per transaction fees.

Financial Institution Services

We provide integrated card issuer processing, payment network processing and value-added services to financial institutions. Our services include a comprehensive suite of transaction processing capabilities, including fraud protection, card production, prepaid cards and ATM driving and allow financial institutions to offer electronic payments solutions to their customers on a secure and reliable technology platform at a competitive cost. We provide these services using a consultative approach that helps our financial institution clients enhance their payments-related business.

We serve a diverse set of financial institutions, including regional banks, community banks, credit unions and regional PIN debit networks. We focus on small to mid-sized institutions with less than $15 billion in assets. Smaller financial institutions, including many of our clients, generally do not have the scale or infrastructure typical of large banks and are more likely to outsource payment processing needs. We provide a turnkey solution to such institutions to enable them to offer payment processing solutions. Our client base includes over 1,300 financial institutions.

Revenue

We generate revenue primarily by processing electronic payment transactions. Set forth below is a description of our revenues by segment and factors impacting segment revenues.

Merchant Services

Our Merchant Services segment revenues are primarily derived from processing credit and debit card transactions. Merchant Services revenue is primarily comprised of fees charged to businesses, net of interchange fees, for payment processing services, including authorization, capture, clearing, settlement and information reporting of electronic transactions. The fees charged consist of either a percentage of the dollar volume of the transaction or a fixed fee, or both, and are recognized at the time of the transaction. Merchant Services revenue also includes a number of revenue items that are incurred by us and are reimbursable as the costs are passed through to and paid by our clients. These items primarily consist of Visa, MasterCard and other payment network fees. In addition, for sales through ISOs and certain other referral sources in which we are the primary party to the contract

with the merchant, we record the full amount of the fees collected from the merchant as revenue. Associated residual payments made to ISOs are included in sales and marketing expenses. Merchant Services revenue also includes revenue from ancillary services such as fraud management, equipment sales and terminal rent. Revenue in our Merchant Services segment is impacted primarily by transaction volume, average transaction size, the mix of merchant types in our client portfolio, the performance of our merchant clients and the effectiveness of our distribution channels.

Financial Institution Services

Our Financial Institution Services revenues are primarily derived from debit, credit and ATM card transaction processing, ATM driving and support, and PIN debit processing services. Financial Institution Services revenue associated with processing transactions includes per transaction and account related fees, card production fees and fees generated from our Jeanie network. Financial Institution Services revenue is impacted by the number of financial institutions using our services as well as their transaction volume. The number of financial institutions in the United States has declined as a result of prevailing economic conditions, consolidation as well as other market and regulatory pressures. These factors have contributed to industry-wide pricing compression of the fees that financial institutions are willing to pay for payment processing.

Network Fees and Other Costs

Network fees and other costs consist primarily of charges incurred by us which we pass through to our clients, including Visa, MasterCard and other payment network fees, card production costs, telecommunication charges, postage and other third party processing expenses.

Net Revenue

Net revenue is revenue, less network fees and other costs and reflects revenue generated from the services we provide to our clients. Management uses net revenue to assess our operating performance. We believe that net revenue, when reviewed together with revenue, is meaningful to our investors in order to understand our performance.

Expenses

Set forth below is a brief description of the components of our expenses, aside from the network fees and other costs discussed above:

† Sales and marketing expense primarily consists of salaries and benefits paid to sales personnel, sales management and other sales and marketing personnel, advertising and promotional costs and residual payments made to ISOs and other third party resellers.

† Other operating costs primarily consist of salaries and benefits paid to operational and IT personnel, costs associated with operating our technology platform and data centers, information technology costs for processing transactions, product development costs, software consulting fees and maintenance costs.

† General and administrative expenses primarily consist of salaries and benefits paid to executive management and administrative employees, including finance, human resources, product development, legal and risk management, share-based compensation costs, equipment and occupancy costs and consulting costs. In connection with our IPO, we issued restricted stock and unrestricted stock to our employees who were holders of phantom units under Vantiv Holding's Management Phantom Equity Plan, which terminated in connection with our IPO. In addition, pursuant to the 2012 Vantiv, Inc. Equity Incentive Plan ("2012 Equity Incentive Plan"), we made additional equity grants on the date of

our IPO and plan to make additional grants under such plan in the future. As such, we expect share-based compensation expense to increase as compared to historical periods.

† Depreciation and amortization expense consists of our depreciation expense related to investments in property, equipment and software as well as our amortization of intangible assets, principally customer relationships acquired in connection with the acquisition of a majority interest in Vantiv Holding in June 2009 and our subsequent acquisitions.

† Interest expense-net consists primarily of interest on borrowings under our senior secured credit facilities less interest income earned on our cash and cash equivalents.

† Income tax expense (benefit) represents federal, state and local taxes based on income in multiple jurisdictions.

† Non-operating expenses consist of charges related to the refinancing of our senior secured credit facilities and the early termination of our interest rate swaps in connection with our March 2012 debt refinancing and a one-time activity fee assessed by MasterCard as a result of our IPO.

Factors and Trends Impacting Our Business and Results of Operations

We expect a number of factors will impact our business, results of operations and financial condition. In general, our revenue is impacted by the number and dollar volume of card based transactions which in turn are impacted by general economic conditions, consumer spending and the emergence of new technologies and payment types, such as ecommerce, mobile payments, and prepaid cards. In our Merchant Services segment, our net revenues are impacted by the mix of the size of merchants that we provide services to as well as the mix of transaction volume by merchant category. In our Financial Institution Services segment, our net revenues are also impacted by the mix of the size of financial institutions that we provide services to as well as consolidation and market and industry pressures, which have contributed and are expected to continue to contribute to pricing compression of payment processing fees in this segment. In addition, we anticipate that network fees and other costs will increase at a higher rate than transaction volume growth which will continue to increase the rate of growth in revenue, particularly in our Merchant Services segment where network fees and other costs are a higher percentage of revenue. However, this does not materially affect the rate of growth of our net revenue as such costs are generally passed through to our clients. We also expect our results of operations to be impacted by anticipated changes to our expenses, as described above, as well as by the factors affecting the comparability of our results of operations and regulatory reform described below.

Factors Affecting the Comparability of Our Results of Operations

As a result of a number of factors, our historical results of operations are not comparable from period to period and may not be comparable to our financial results of operations in future periods. Set forth below is a brief discussion of the key factors impacting the comparability of our results of operations.

Transition, Acquisition and Integration Costs

Subsequent to our separation from Fifth Third Bank in June 2009, our expenses included certain transition costs, including costs incurred for our human resources, finance, marketing and legal functions and severance costs, consulting fees related to non-recurring transition projects and expenses related to various strategic and separation initiatives. In connection with our acquisitions in 2010, we incurred acquisition and integration costs, consisting primarily of consulting fees for integration services. These costs are included in other operating costs and general and administrative expenses. For the three months ended June 30, 2012 and 2011, transition, acquisition and integration costs were $2.0 million and $14.6 million, respectively. For the six months ended June 30, 2012 and 2011, transition, acquisition and integration costs were $4.0 million and $27.6 million, respectively.

Share-Based Compensation

Prior to our IPO, certain employees and directors of Vantiv Holding participated in the Vantiv Holding Management Phantom Equity Plan. In connection with the IPO, outstanding awards under the Vantiv Holding Management Phantom Equity Plan were converted into unrestricted and restricted stock, issued under the 2012 Equity Incentive Plan. On the IPO date, we also granted restricted stock units to members of our board of directors and certain employees and intend to grant additional share-based awards in the future. During the three months ended June 30, 2012 and 2011, we incurred share-based compensation expense of $8.8 million and $0.7 million, respectively, which is included in general and administrative expense. During the six months ended June 30, 2012 and 2011, we incurred share-based compensation expense of $17.5 million and $1.4 million, respectively, which is included in general and administrative expense. Total share-based compensation expense is expected to be approximately $35.0 million during the year ending December 31, 2012. We will incur additional charges in the future related to additional equity grants under the 2012 Equity Incentive Plan. See Note 9 in "Item I - Unaudited Consolidated Financial Statements."

Non-operating Expenses.

For the six months ended June 30, 2012, we recorded $86.7 million within non-operating expenses related to the refinancing of our senior secured credit facilities and the early termination of our interest rate swaps in March 2012. Also recorded within non-operating expenses for the six months ended June 30, 2012 was a $6.0 million one-time activity fee assessed by MasterCard as a result of our IPO. For the six months ended June 30, 2011, we recorded $13.8 million within non-operating expenses related to the refinancing of our senior secured credit facilities in May 2011.

Non-Controlling Interest

As a result of the non-controlling ownership interests in Vantiv Holding held by Fifth Third subsequent to our IPO and by Fifth Third and JPDN prior to our IPO, our results of operations include net income attributable to non-controlling interests. Net income attributable to non-controlling interests during the three months ended June 30, 2012 and 2011 was $24.6 million and $6.3 million, respectively. Net income attributable to non-controlling interests during the six months ended June 30, 2012 and 2011 was $0.1 million and $7.5 million, respectively. The sale or redemption of ownership interests in Vantiv Holding by Fifth Third pursuant to the Exchange Agreement will reduce the amount recorded as non-controlling interest and increase net earnings attributable to our stockholders.

Cash Net Income

In order to provide better comparability in assessing our results of operations on a period over period basis, we calculate and review cash net income, which includes adjustments to exclude amortization of intangible assets acquired in business combinations; share-based compensation expense; transition costs associated with our separation from Fifth Third Bank; integration costs incurred in connection with acquisitions; and conversion of non-controlling interests into shares of Class A common stock. For purposes of providing better comparability, we also made adjustment to interest and depreciation expense in 2011. Cash net income is a non-GAAP financial measure and should be considered together with GAAP operating results (see reconciliation of cash net income to GAAP net income (loss) below).

The table below provides a reconciliation of cash net income to GAAP net income for the three and six months ended June 30, 2012 and 2011:

                                     Three Months Ended           Six Months Ended
                                          June 30,                    June 30,
                                     2012          2011          2012          2011
                                       (in thousands)              (in thousands)
Net income                        $    47,578   $    11,661   $     4,650   $    16,360
Transition, acquisition and
integration costs (1)                   1,980        14,648         4,039        27,629
Share-based compensation                8,829           741        17,492         1,393
Intangible amortization (2)            29,286        30,975        58,575        62,179
Depreciation and amortization
adjustment (3)                              -           (68 )           -        (2,665 )
Interest expense adjustment (4)             -         2,327             -         6,323
Non-operating expenses (5)                836        13,799        92,672        13,799
Income tax expense adjustment
(6)                                   (20,553 )     (28,101 )     (67,108 )     (46,563 )
Cash net income                   $    67,956   $    45,982   $   110,320   $    78,455

(2) Represents amortization of intangible assets acquired in business combinations, primarily customer related intangible assets.

(3) Represents adjustment to depreciation and amortization associated with our property and equipment, assuming that our property and equipment at December 31, 2011 was in place on January 1, 2011.

(4) Represents adjustment to interest expense to reflect what our interest expense would have been for the three and six months ended June 30, 2011 if our level of debt and applicable terms as of December 31, 2011 was outstanding on January 1, 2011.

(5) Expenses primarily associated with the refinancing of our debt in March 2012 and May 2011 and the termination of our interest rate swaps in March 2012.

(6) Represents adjustment to income tax expense assuming conversion of non-controlling interests into shares of Class A common stock.

Results of Operations



The following tables set forth our statements of income in dollars and as a
percentage of net revenue for the periods presented.



                                  Three Months Ended
                                       June 30,
                                   2012        2011      $ Change    % Change
                                           (dollars in thousands)
Revenue                         $  469,622   $ 402,564   $  67,058         17 %
Network fees and other costs       209,244     185,694      23,550         13
Net revenue                        260,378     216,870      43,508         20
Sales and marketing                 70,532      59,570      10,962         18
Other operating costs               40,417      34,980       5,437         16
General and administrative          29,190      28,224         966          3
Depreciation and amortization       39,667      39,001         666          2
Income from operations          $   80,572   $  55,095   $  25,477         46 %
Non-financial data:
Transactions (in millions)           3,895       3,222                     21 %




                                  Three Months Ended
                                       June 30,
                                  2012         2011
Net revenue                         100.0 %      100.0 %
Sales and marketing                  27.1         27.5
Other operating costs                15.5         16.1
General and administrative           11.2         13.0
Depreciation and amortization        15.2         18.0
Income from operations               30.9 %       25.4 %




                                  Six Months Ended
                                      June 30,
                                  2012        2011      $ Change    % Change
                                           (dollars in thousands)
Revenue                         $ 902,411   $ 774,010   $ 128,401         17 %
Network fees and other costs      409,452     367,910      41,542         11
Net revenue                       492,959     406,100      86,859         21
Sales and marketing               143,289     115,789      27,500         24
Other operating costs              79,426      72,720       6,706          9
General and administrative         57,787      49,607       8,180         16
Depreciation and amortization      78,562      75,701       2,861          4
Income from operations          $ 133,895   $  92,283   $  41,612         45 %
Non-financial data:
Transactions (in millions)          7,263       6,224                     17 %




                                  Six Months Ended
                                      June 30,
                                  2012        2011
Net revenue                        100.0 %     100.0 %
Sales and marketing                 29.1        28.5
Other operating costs               16.1        17.9
General and administrative          11.7        12.2
Depreciation and amortization       15.9        18.6
Income from operations              27.2 %      22.7 %

Three Months Ended June 30, 2012 Compared to Three Months Ended June 30, 2011 and Six Months Ended June 30, 2012 Compared to Six Months Ended June 30, 2011

Revenue

Revenue increased 17% to $469.6 million for the three months ended June 30, 2012 from $402.6 million for the three months ended June 30, 2011. The increase was due primarily to transaction growth of 21%.

Revenue increased 17% to $902.4 million for the six months ended June 30, 2012 from $774.0 million for the six months ended June 30, 2011. The increase was due primarily to transaction growth of 17%.

Network Fees and Other Costs

Network fees and other costs increased 13% to $209.2 million for the three months ended June 30, 2012 from $185.7 million for the three months ended June 30, 2011. The increase was due primarily to transaction growth of 21%.

Network fees and other costs increased 11% to $409.5 million for the six months ended June 30, 2012 from $367.9 million for the six months ended June 30, 2011. The increase was due primarily to transaction growth of 17%.

Net Revenue

Net revenue increased 20% to $260.4 million for three months ended June 30, 2012 from $216.9 million for the three months ended June 30, 2011. The increase in net revenue was due primarily to transaction growth of 21%.

Net revenue increased 21% to $493.0 million for six months ended June 30, 2012 from $406.1 million for the six months ended June 30, 2011. The increase in net revenue was due primarily to transaction growth of 17%.

Sales and Marketing

Sales and marketing expense increased 18% to $70.5 million for the three months ended June 30, 2012 from $59.6 million for the three months ended June 30, 2011 associated with growth in revenue and an increase in sales and marketing personnel and related costs, including residual payments made to ISOs and other third-party organizations.

Sales and marketing expense increased 24% to $143.3 million for the six months ended June 30, 2012 from $115.8 million for the six months ended June 30, 2011 associated with growth in revenue and an increase in sales and marketing personnel and related costs, including residual payments made to ISOs and other third-party organizations.

Other Operating Costs

Other operating costs increased 16% to $40.4 million for the three months ended June 30, 2012 from $35.0 million for the three months ended June 30, 2011. The increase was primarily driven by an increase in information technology infrastructure and personnel costs associated with growth in transactions, . . .