Fidelity National Information Services Inc (FIS) 2003 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Fidelity National Financial first quarter earnings call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Instructions will be given at that time. If you should require further assistance during this call, press zero, then star. As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Mr. Dan Murphy. Please go ahead.

Thank you. Good morning, everyone. And thank you for joining us for our first quarter 2003 earnings conference call. Joining me today are Bill Foley our Chairman and CEO, Frank Willey our V-Chairman, Randy Quirk our president, and Al Stinson our CFO.

Bill Foley will begin with a strategic overview for the quart, Randy will provide an update on the business and market conditions, and Al will review the financials for the quarter. We will then open the call up for questions and answers. This conference call may contain statements related to future events and expectations, and as such constitutes forward-looking statements. These forward looking statements are subject to Known and unknown risks and uncertainties and other factors that may cause actual results, performance, or achievements of the company to be different from those expressed or implied above. The company expressly disclaims any duty to update or revise forward-looking statements.

The risks and uncertainties which forward-looking statements are subject to include but are not limited to the effect of governmental regulations, the economy, competition, and other risks detailed from time to time in the management's discussion and analysis section of the company's Form 10-K and other reports and filings with the SEC.

This conference call will be available for replay via webcast at our website at www.fnf.com. It will be available for phone replay beginning 12 o’clock Pacific time today through Friday, April 25th. The replay number is 800-475-6701, and the access code is 681629. With that, let me turn the call over to Bill Foley our chairman and CEO.

Thanks, Dan. Thank you for being with us this morning. This quarter continued a long consecutive string of tremendous performance for FNF. We earned nearly $144m or $1.44 per share in the quarter.

Quarterly revenue exceeded $1b again, and we continued to generate significant cash flow from operations, with $189m in cash flow in the first quarter. We also continued to repurchase our shares, buying back nearly 600,000 shares during the first quarter for about $20m.

Through yesterday, we have repurchased 2.8m shares since implementing the systematic buy-back program on May 15th, 2002.To further indicate our optimistic view of the future, our board of directors authorized a five for four stock split, coupled with an acceleration of our quarterly dividend by 60 days. That will result in a payment of five dividends during 2003, at the same rate that they were paid during the first quarter per share.

On April 1st we closed the acquisition of the financial services division of Alltel Information Services, renaming it Fidelity Information Services. We are excited about the potential of this business and what it can mean for the future of FNF.

Fidelity Information Services is the leading system in the nation, processing almost half of U.S. residential mortgage loans through processing relationships that include 18 of the top 25 mortgage originators in the country. We are a leader in providing core bank technology and processing system services for medium and large banks, including deposit, consumer lending, commercial lending, mortgage lending, and financial management systems for 48 of the top 50 banks.

We also provide a complete suite of fully integrated banking platforms for community banks and other smaller financial institutions that seek a highly leveraged platform of products that provide a menu of front end systems, relationship management capabilities, and back office processing support and reporting systems.

The Fidelity Information Services provides a recurring stream of revenues and earnings that is not specifically tied to the level of mortgage originations that will become very evident when the core title and escrow operations inevitably begin to slow down some day. We are currently finalizing plans to provide an investor conference in New York during the summer. The main focus will be presentations from the businesses of Fidelity Information Services. More specific information will be available in the near future.

We announced this morning that our board of directors has authorized FNF management to negotiate with the City of Jacksonville Florida, with respect to the relocation of our corporate headquarters. Upon the successful completion of those negotiations, management has been further authorized to execute all relevant documents necessary to effect a relocation of our corporate headquarters to Jacksonville. If negotiations are successful, we expect the relocation to take place in phases over the next 12 months. We acquired a 500,000 square foot office complex in downtown Jacksonville through the recent acquisition of Alltel Information Services.

The mortgage business of what is now called Fidelity Information Services which includes the mortgage servicing center which processes nearly 50% of all residential mortgages in the country is currently headquartered in Jacksonville. We considered many factors over the last several months in concluding that serious consideration must be given to a relocation of our corporate headquarters. The success and subsequent growth of our company has made it very difficult for us to find real estate that can accommodate our corporate office space needs in a city the size of Santa Barbara. By moving into Jacksonville, we will eliminate the cost of leasing space for our corporate headquarters.

The southeastern coast location, the eastern time zone, and the availability of a major airport all provide efficient access to many of our major customers in the large business centers on the East Coast and in the central and other parts of the country.

This is particularly important with respect to those financial institutions that are customers or potential customers of Fidelity Information Services. That business is an important piece of the future of FNF, and the Jacksonville location allows our management team to be more personally involved in Fidelity Information Services business.

Overall, the larger Metropolitan location, the access to a highly skilled and educated work force, the proactive business environment, and the cost of living and housing, all make Jacksonville a very attractive location for our corporate headquarters and for our employees.

There are a lot of other things going on at FNF these days. We closed four acquisitions in the first quarter. The bankers insurance acquisition closed early in January with flood insurance processing providing $13m of revenue in the first quarter. Additionally yesterday we announced the acquisition of the mutual of Omaha flood insurance business. This involves more than 220,000 flood insurance policies, and combined with our current flood operations, makes FNF the largest flood insurance company in the country with annual gross premiums of more than $300m and seeded commission revenue of approximately $100m.

We also closed Lender Service Inc. or LSI in mid February and we have combined our national lender services division into LSI. LSI bolsters our national lender capabilities as it is the largest appraisal company in the country, providing appraisal, title, and closing services to 23 of the nation's largest 25 mortgage lenders.

Finally, we closed on the previously announced American National Financial and key title acquisitions, both of which are key pieces of our strategy to grow the Ticor Title brand. American National Financial brought a significant expansion of Ticor's operations and referral network throughout the Western United States, particularly in California, Arizona, and Nevada. Key title, through its branch operation in Oregon, bolsters operations in the State of Oregon.

Last week the California insurance commission said ex-reopening the issue concerning the legality of Radian (ph) [FNIS] -- in the State of California. The cease and desist order issued last year prohibiting Radian from selling the product remains in effect in California. No other State that issued a cease and desist order against Radian, including the states of California, Pennsylvania, North Carolina, and Connecticut, are affected by the California decision. Commissioner Garamendi (ph) set no date or time schedule for the introduction of additional evidence and issued a statement that he will not comment on the issue.

We continue to review our title rates and products for opportunities to better serve the needs of our customers. We will soon be filing enhancements to our refinanced rate structures. Also, in a major announcement, we will shortly be filing, throughout the United States, a master lien protection policy with similar limited coverage and pricing for those -- for lenders able to tolerate greater risk for their own lending portfolios.

We continue to believe and will strongly argue that this product is title insurance, and to issue such a product, a company must be a licensed title underwriter. Let me ask Randy Quirk to comment on business conditions.

Thank you, Bill. First quarter order volumes continued to show significant strength, with an amazing 1.25m orders opened and 740,000 orders closed. Open orders were up 108% over the first quarter of 2002, and closed orders increased by 52%. Even more impressive, opened orders increased 26% from the very strong fourth quarter 2002 levels.

Open orders gained momentum as the fourth quarter progressed, averaging 17,800 open orders per day in January, 20,000 in February, and more than 24,000 in March. To put these in context, we have averaged 15,800 open orders per day in the fourth quarter of last year. That momentum has continued into the second quarter as we have averaged more than 21,000 open orders per day in the first few weeks of April. Another way of assessing the strength and order volumes is the closing percentage, which is simply closed orders divided by open orders. Our closing percentage for the first quarter was 60% versus 82% in the first quarter of 2002.

Additionally, our closing percentage declined each month during the quarter, from 63% in January to 62% in February and 55% in March. This means that our inventory of orders is building dramatically as open orders are increasing much faster than closed orders. The second and third quarter financial results will be positively impacted by this trend in open order momentum.

We monitor productivity per employee, primarily through revenue per employee, and open and closed orders per employee. For the first quarter, revenue per employee per month for the company was $16,300, compared with $14,400 for the first quarter of 2002 and $17,700 for the fourth quarter of 2002. The revenue per employee figure declined from the fourth quarter because of the huge increase in the percentage of orders at are refinanced transactions, which generate lower revenue per order than a resale transaction. Also, during the first quarter, we opened more than 28 orders per employee per month and closed 17.

We began our first installation of MGS late in the first quarter and the Fidelity National title empire office in California. The functionality of the system met our expectations. However, the speed or screen turnover of this system was not satisfactory, particularly given the significant volume of transactions that our title operations are processing today. [FNIS] has been charged with improving the speed at which the MGM system operates and we are looking at the effect on our rollout time line. Let me turn the call over to Al Stinson to discuss the first quarter financials in more detail.

Thank you, Randy. Net earnings were $144m in the quarter, an increase of 42% over first quarter 2002 net earnings of $101m. Diluted EPS of $1.44 were up 40% over first quarter 2002, diluted EPS of $1.03. Our profit margin for the quarter was 16.4%, compared to 15.1% in the first quarter of 2002.

Our cash flow from operations for the quarter was $189m, compared to $164m in the first quarter of 2002. Title premiums of $968m increased 33% over the first quarter of 2002. Direct premiums grew by 40%, driven by the significant refinance volumes, while agency premiums increased by 26%. Escrow and other title related fees of $267m increased by 41% over the prior year, consistent with a direct premium increase. Total revenue of $1.4b increased by approximately 35% over the first quarter of 2002. Real estate-related services generated $174m or 12% of total revenue for the quarter, a 50% increase over the prior year quarter. [FNIS] accounted for $89m or 51% of that revenue.

In other real estate services, default management services contributed $33m, insurance services $16m, primarily from the flood insurance processing business; relocation services $13m, home warranty $12m, investment property exchange $7m, and home builders financial network, $4m of revenue.

Interest and investment income of $17m was a decline of $1m from the first quarter of 2002. The steep decline in intermediate interest rates affected the interest income component, with a larger investment portfolio helping to offset the decline in interest rates.

Net realized gains were $6.6m in the quarter. Other revenue of $4m consists of the servicing and collection function of FNF capital. On the expense side, agent commissions were $387m, a 25% increase over the first quarter of 2002, consistent with a 26% increase in the agency title premiums, as agent commissions remained 78% of total agency premiums.

Personnel cost of $441m were 34% higher than in the first quarter of 2002, and other operating expenses of $316m increased by 43%. Higher personnel and other operating expenses were driven higher by the significant increase in open and closed order volumes. The provision for claims was $48m, as we continue to provide for claim losses at 5% of gross title premiums. Actual claims paid during the quarter were $42m. The additional $9m increase in the reserve came from the (inaudible) in LSI acquisitions, resulting in a $15m increase to our reserve for claim loss to $903m as of the end of the quarter. Interest expense was $8m during the first quarter. Total debt increased to $717m as a result of the early March issuance of $250m in 5.25% coupon ten-year notes at an all-in cost of 5.43%. Our debt to total cap ratio was 21% at March 31.

The tax rate increased to 37%, and we expect the tax rate to be 38% for the full year 2003. The increase is driven by foreign taxes associated with the international business at Fidelity Information Services.

Minority interest for the quarter was $5.3m, primarily consisting of the income from the 34% of FNIS that FNF does not own, the 25% of HFN we do not own, and the 25% of [inaudible] that FNIS does not know. Our investment portfolio grew to more than $3.3b, an increase of $300m over year end 2002. There are certain legal and regulatory restrictions on some of those investments, including secure trust deposits of nearly $800m, statutory premium reserves for underwriters of about $800m, and the cash component of the AIS acquisition that occurred on April 1. Of the $3.3b, $972m was theoretically available for corporate use, with $271m in non-regulated entities and $701m held to regulated underwriters.

Our $3.3b investment portfolio includes cash and short-term investments of $1.7b and fixed income investments of $1.6b. The fixed income portfolio has a weighted average rating of double A plus, and we have only $27m in non-investment grade investments. Our convertible preferred stock investment in lending tree comprises $22m of that $27m in non-investment grade securities. Book value per share was $25.24 at March 31.

Let me now turn the call over to our operator to open it up for any questions.

Thank you. Ladies and gentlemen, if you wish to ask a question, please press the 1 on your touch-tone phone. You will hear a tone indicating that you have been placed in queue. You may remove yourself from queue by pressing the pound key. Once again, if you have a question, please press the 1 at this time. And our first question comes from the line of Robert Napoli, U.S. Bancorp Piper Jaffray.

I have a lot of things. I'll just ask two questions on. The Radian-like product that you've announced this morning, how attractive do you think that's going to be to the market? Are Fannie and Freddy approving the product, and to what extent does that product compare to the products you're offering today affect your profit margins? My last question would just be on the closed orders and if you could talk about the technology. Are the closed order percentages down because of the new technology being slower than you would like it to be and what issues does that cause for you? Those are my two questions.

Okay. Thanks, Bob. This is Bill. Actually taking your last question first, the closed order of percentage being down is strictly a factor of when the orders were flowing through our direct operations systems. And also a function of the fact that LSI was acquired on February 6th, and we've had a significant influx of new orders from the LSI acquisition, and those orders again are flowing through the system but are not yet closed.

Really the closed order percentage being down is not a function of technology, because our current technology is more than adequate to process our orders. But it is more of a -- it relates directly to the fact that we have such a large influx of orders really kicking in at the beginning of February and just accelerating through March, that they just weren't closed in the first quarter. What will happen is they will close in the second quarter, and you will see our closing percentage move back to -- move back to the norm of 70% to 75% and even above 75% as we move through the year.

When you say 70%, 75%, are you looking at that as closed in the quarter of last month's openings?

Well, I'm saying that our closing percentage will increase in the circumstance, closer to -- second quarter, closer to the 70% to the 60% it achieved in the first quarter. We're still going to open a lot of orders. We're opening at the rate of about 21,000 orders a day.

Right.

You remember in the fourth quarter of last year, we opened at the rate of about 15,700 orders a day. We're generating a lot of orders. There are a lot of -- the fee for file is down slightly, but it's not significant. There's a lot of business flowing through our system.

How much of your open orders were from acquisitions?

Not much because the American National Financial acquisition, which we closed during the quarter, actually closed on March 28th, and none of those orders were included. They will start being included now beginning the month of April.

American National Financial runs -- I think it's around 1,000 to 1200 orders per day. They're a good contributor of orders and they're also a contributor of higher-end orders, a lot of resale business and REFI business. They're running at the rate Of about 20,000 orders a month through LSI. Those are title orders. So the acquisition has had an impact on our order flow. They will also have an impact on our closing ratios as we start closing those orders. We do get a benefit from American National Financial because during the month of April, we will close their orders that were open previously, and we never counted those as openings because we didn't own the company. So that's kind of my open/closed order report. Is that an adequate answer?

Yes, it is.

Okay. Going back to the Radiant product has not been approved by Fannie Mae or Freddy Mac. The rating is welcome to file a product such as this but they need to be a licensed underwriter. We are simply responding to requests from our customers that they liked the product. General speaking they were using no insurance. Normally Radian is issued in connection with a second lien type situation, so it does not provide the same level of coverage as title insurance. It provides a mortgage pool type of coverage.

We are just simply responding to the needs of our customers by filing this product. We continue to -- we will continue to assert it is title insurance, and we expect Radian, we expect the states to require Radian to qualify as a licensed insurance underwriter should they desire to issue this product. They're welcome to come in and issue the product. Just get licensed. I have Frank Willey with me. He has been intimately involved with our master lien protection products. Do you have anything to add to that?

No, I think in terms of describing what the marketplace is, Bill, I think you've done that adequately.

To supple the response regarding Fannie and Freddy. They have never accepted a Radian-like product for their own portfolio pools. They have talked about allowing it in limited circumstances where the financial institution providing the mortgages to them were willing to issue an indemnity or some level of guarantee to protect them. So at this juncture, they have not approved a Radian-like product, as I said, for mortgages and pools owned by Freddy or Fannie.

Bill also articulated correctly it's a limited product in terms of its scope and application, because it doesn't insure a particular loan, it insures a pool of loans. It has very limited coverage. A lot of the attributes of title insurance are not present. So sub-lenders want to utilize the product in connection with their own loan portfolios and customized products to which, as Bill mentioned, we have filed competing and comparable products which will allow them to have that same opportunity. Regulatorily, as indicated, we continue to contend that we don't have any objections to them getting into the title insurance business.

We do have an objection to them being an unregulated entity trying to enter into the title insurance business, and ignoring the statutory and regulatory framework that governs the conduct of title insurers. You probably are aware, there's several mortgage insurers that have title insurance operations that don't offer any products like this because of their adherence to mono line statutes, and even the various mortgage insurers actually have filed objections to Radian's initiatives.

We're confident and comfortable that the end result of this will not have any impact on market share profitability or any of our other product lines. We just believe the way we positioned our additional products and services that we're just continuing to respond to market demands and evolving -- and the evolving marketplace.

When you say no effect on profitability, isn't that product -- doesn't it have a much lower revenue per title? How does that -- a title, using the pool insurance, is it equally as profitable on a bottom-line dollars of income as the product you use today?

Actually, Bob, we get about $275 per policy that's issued in this master lien protection policy. Generally speaking, this policy will be issued to companies that presently are not obtaining title insurance or are obtaining strictly an evidence of title, what we call a flag report or some other type of abbreviated policy.

What these lenders are looking for is some level of protection, some level of insurance. So we actually believe that it will expand our ability to service the customers that are interested in Radian-type product because we'll have greater market penetration, and the profitability on this product, the margins will run 40% to 50% as opposed to a 20% margin in the title insurance arena.

So a lower fee but less work, higher margins, and new customer base that we'll be attacking.

Okay. Thank you.

Our next question comes from the line of Jennifer Childe, Bear, Stearns. Please go ahead.

Thank you. Al, could you please provide the components of the non-FNIS real estate service revenue?

The non-FNIS, yes, I will do that. The amount that is non-FNIS is $85.5m for the quarter -- that's the total revenue. Some of the larger components of that are home warranty --

Did you already -- I thought you ran through the FNIS-related.

the FNIS-related is $88.7m, Fidelity is $85.4m. The total is $174m.

Whatever you didn't run through, could you run through?

On FNIS revenue?

I'm not sure -- you went through a list pretty quickly of certain real estate-related revenues, and I'm not sure if that was FNIS or not.

On the FNIS side -- yes, right. On FNIS what we have is tax, flood, credit, and market appraisal, and that's really the appraisal business, market intelligence is the appraisal business. Those are the largest components of FNIS's revenue. For example, flood is about $7m, market intelligence is $21m, our tax business is $16m, and credit is about $5m. Now, there's a few others, but that's really the primary components of it.

Of the total real estate-related revenues, how many of those would you consider recurring in nature?

I think FNIS, in their conference call today, is probably going to give you some more definitive comments on that. But a large percentage of it is recurring, about 85% actually is on a recurring basis.

Okay. I'm curious why the average fee per order declined sequentially as Q4 was heavily refinance-oriented too. Sort of in conjunction with that, your average fee per order always seems to be below, significantly below First American's, and I'm curious why that's so.

A couple of comments. The first and the fourth quarter would have included a lot of commercial business at the end of the year, which always raises your average fee per file. Then when you get into the first quarter, if you look at those order volumes, obviously a great deal of them are refinanced transactions with a lower fee per file.

A couple of notes. Our direct orders opened for the quarter increased 108% over the prior year quarter. I mean, that's a huge change. And the bulk of that increase is refinanced transactions, which do have a lower fee per file.

Jennifer, we also have a couple of other components. The LSI orders have an average fee per file about $450, which again is significantly below our refinance order level. Our abbreviated product that we sell to some of our major lenders, which we refer to as aqua, has a fee per file of around $375. And there were significant numbers of aqua orders closed in the first quarter. So those orders tend to bring down our overall fee per file. If we were looking at apples to apples to our competitors that don't offer those products, we would have a fee per file equal to or greater to their fee per file because of our heavier emphasis on commercial business.

Thank you.

There are no additional questions. Please continue. I'm sorry, sir. We do have a question now from the like of Michael Vinciquerra from Raymond James.

Al, I was hoping you could give us more detail on the rise in personnel and other operating expense lines. You mentioned it briefly, I think. But much higher than we had anticipated. And I'm wondering how much might be related to some of these acquisitions and then if there was anything else mixed in there, such as banking fees or anything like that. Thanks.

Mike, I think when you put those increases in context with the dramatic rise in open orders, what's happening is we're obviously front-ending a lot of cost, because that work is being done in the first quarter on closings that are going to occur in the second quarter.

I know that's certainly the case in other operating expenses where you have the title search cost and that kind of thing, that's incremental, and we don't have the revenue attached to it. And to a lesser extent, that would be the case with personnel.

There is some minor increase associated with a mix of our business because the acquisitions that you're talking about, a couple of them do have a lower personnel cost ratio than Title does and more of an operating cost. So there is some of that going on. But I think most of it does relate to the dramatic increase in order flow.

Okay. So we might expect, over the next quarter or two, that your operating margin, you know, as calculated, just write off the income statement, should rise somewhat noticeably.

Yes, I think that's absolutely true. We're at plus 16% today, and we could get quite a bit higher than that.

Okay. Second of all, kind of for Bill, Bill, when you were at our conference in March, you mentioned something about what the -- with the Alltel, you would hit $33m in the numbers that Al went through. Do you guys have a feel for what the default revenues might have been if you would have included Alltel's business for the quarter?

Well, Mike, really, our business model for Alltel is that our desire is to fully integrate our default services platform with the Alltel mortgage servicing platform and basically become a sub-servicer. Not competing with our customers but supporting our customers. And as they start availing themselves of our sub-servicing platform, they will then avail themselves of all our default services.

And my take on it is that since we presently service 46% of the mortgage loans in the country, if our default -- if a sub-servicing platform or full integration of our products and services were effective, our 15% market share in default could move toward 30%. And if that were the case, the $33m in default 1m services would be $66m in the quarter.

Of course, we are in good times, and good times are normally followed by times that aren't so good, and that default business, of course, increases significantly in poor economic conditions, when the real estate market is not quite as vibrant.

Okay. Thanks. That's helpful.

Thank you.

Our next question comes from the line of Steven Eismann (ph) from Chilton..

Could you go over the property availability dynamics of the new Radian-type product that you're filing versus your old product?

Actually, it's -- it's not really a product that replaces a product, it's a product that services a need that we were not satisfying.

Some of the customers that were using the Radian product were -- we just weren't doing business with them, or if we were doing business with them, we were giving them a series of products, evaluation products and abbreviated insurance products that don't provide a high level of insurance. It might have totaled $125 to $150 per policy in total. The Radian product is $275 per policy. So what it really does is we probably should have caught on to this at an earlier point in time. We really just need to file the Radian product, get it approved by all the states, and start issuing it, and we will garner business from companies that we are not doing business with today.

So it's really -- it's really more of an add-on business as opposed to a replacement of business. There may be some lenders, large lenders, that will prefer the Radian product to other abbreviated products or other products that we have that are not full title insurance. And in that case, it's basically a wash.

But the margins in the Radian product are very, very good because really the processing costs are nominal. We believe it is a 40% to 50% profit margin products and our normal products are around 20% to 25% at the operating level.

I think you need to keep into perspective also -- it sounds like by your question, and a lot of the questions we have fielded lately in connection with this, is that you're under a misconception a Radian-like product will replace a very significant part of our currently existing market share.

And as Bill indicated, that really is not at all the case. If anything, it is supplemental to areas of market share that we haven't focused on in the past. It is not the replacement of a large part of currently existing market share, with lower revenue or lower margin-producing or profit-producing types of business. So the public relations aspect of this whole issue have gotten a lot more substance and validation than it actually deserves in terms of the impact it will have, which we are indicating to you is none, on our continued profitability and revenue generation.

Okay. Thank you.

Thank you. Our next question comes from the line of Alan Danzig, Fox-Pitt Kelton.

Hi. I had a couple questions. The first was, I noticed there was a large increase in tangible assets in the quarter. I was just wondering what the nature of those were, whether it was goodwill or title plants acquired, etc.

Alan, the increase in intangibles relates to the four acquisitions that we did in the first quarter. The total increase in goodwill was approximately $220m, and that solely relates to the four acquisitions that we described earlier.

Okay. And my other question is, is there now a revised timetable for the rollout of NGS?

This is Randy Quirk. Our revised timetable, we'd put it somewhere within the next 60 or 90 days. FNIS is still doing some work on addressing these speed issues, so we'll be looking at that particular time and the location of our rollout.

Okay. Thank you.

We have a follow-up question from the line of Robert Napoli, U.S. Bancorp Piper Jaffray.

Two questions. I wanted to clarify an answer you had earlier, Bill. The open/close percentage. The way I understood -- you said that the title orders open in the first quarter, there would be no -- as far as you're aware, you don't think there will be any significant change in the percentage of those titles, orders that were opened in the first quarter, that get closed. You don't see any change in that trend. Is that correct? Then I have a follow-up.

No, I do see a change. What we had was a spike in open orders and closings normally track the openings by 60 to 90 days. So the result is that the spike in open orders will move toward the second quarter, and our closing ratio will move back toward a normalized figure, which is 70% to 75% of orders open closed -- if you've tracked the orders opened in a quarter, normally the closing ratio is 70% to 75%. However, we're not closing the same orders we opened. We're closing orders from the previous --

No, I understand. But of those orders you opened, the same amount of those opened orders will close at some point in time.

Oh, absolutely correct.

And what percentages -- what generally percentage of the open orders do close?

Our normal closing ratio, if we have consistent openings and closings, is around 75%.

Okay. Of the total. Okay. Second, if you can give us some kind of updated color on the Alltel acquisition and kind of customer responses, any significant customer movements, plus or minus, on that, and on Washington Mutual in particular. Washington Mutual seems pretty intent on going the direction that they've been going, so it doesn't seem like, from listening to them, that there's a lot of hope to kind of recover that account.

Washington Mutual, addressing that particular customer first, we're working very closely with Washington Mutual, we have had first set of meetings with WAMU, with regard to how we can help them develop a proprietary system that would service their needs and at the same time couple that with the sale of other products and services we have within the FNF system, whether it be banking products and services or real estate related title products and services.

We have a good relationship with Washington Mutual. We have a new management team in place in our mortgage servicing division, and they'll do a good job of being customer responsive to what Washington Mutual's needs are.

We're very confident that we're going to have a very strong and vibrant and a longstanding customer relationship with Washington Mutual, both from the real estate services and title insurance and from the mortgage servicing or other bank-related services. So that's kind of the WAMU piece of the story.

The balance of the customers, the customer response ran from being -- were very excited that a company that's involved in the real estate business and has a large banking relationships has acquired Alltel, to, "Gee, we're terrified because you don't know anything about what Alltel did. And please reassure us that you're going to keep management in place and that you're going to make the investments necessary with the AIS business that had been made in the past." As a consequence of that, we have addressed all those customer comments, and we've reassured our customers -- and I've done it personally with eight or nine customers with face-to-face visits and another ten to fifteen customers with conference calls, that not only will we continue to service their needs as they need them serviced, but we will make acquisitions in the banking space and mortgage servicing space to round out our product offerings, and further we'll make investments based upon what they say they need, rather than what the perception was that AIS thought they needed.

So AIS was making adequate investments in its business, they just were not investing the way a lot of their customers wanted them to invest. And of course further, the commune cases company, Alltel, the communications company, was up streaming about $100m a year out of AIS for other acquisitions, which makes sense because they're a telecom company.

Our position is that if those -- if those funds, plus additional funds are necessary to grow the FIS business, we're going to do that. We plan on making an announcement in the next week and a half. It's small, but it's a nice product-rounding situation. We also anticipate some significant customer announcements with regard to new customers that are being -- new and existing customers that are signing long-term contracts. So we're very, very excited about AIS. We continue to -- we continue to believe that on a run-rate basis, AIS will do about $850m in revenues this year, up from about $820m last year. We believe the profit margins will be enhanced. And we've identified to date about $36m in synergies that have already been implemented or will be implemented in the near future. We have got our arms around AIS, have a good management team in place, and we're still serious about it, that we're probably going to move the company headquarters to Jacksonville to be closer to our customers.

Do you expect revenue growth in '04 off of an '03 base?

Absolutely. We want to grow this revenue between 10% and 15% a year.

Organically do you expect revenue growth in '04?

About half organically and half through acquisitions. That's our goal in '04.

Thank you.

Our next question comes from the line of David Herman from [inaudible].

Two questions. Going back to the earlier question on sort of the closing ratio, Bill you said 70% to 75%. Could you help me whether that varies, whether the mix is skewed towards REFI or repurchases. That's the question.

It does vary. REFIs tend to have a lower closing ratio than resale transactions. Resale transactions are in the upper 80 percentile in terms of closing percentile. When there's a low REFI environment, our closing ratio will move above 80% on occasion. The other time our closing ratio moves up significantly is when the order flow goes down, which of course we don't want that, but it does go way up when the order flow goes down because we're closing what we would already opened. So that's -- I think I answered the first part of the question.

Yes, you did. The second part is, the direct title revenue per order closed has been coming down, you know, in 2001 and 2002, pretty steadily, based on my numbers, about 630 per order closed in the first quarter. And you made some comments earlier that a part of that was attributable to commercial activity?

Part is attributable to heavy commercial closings toward the end of the year and we had less in the first part of the year, and part of it is also attributable to the fact that in the two months we owned LSI, their fee per file is only $450. That brings it down. And, again, that is a -- those are a lot of more abbreviated products rather than full title insurance products, and a lot of it -- so that's the answer to the LSI question.

Then additionally, we're doing a lot of business in what we call the auk quo product with a few very large lenders that are taking this -- this is -- aqua -- this is a product again that does not have Freddy and Fannie sign off on, but it's a product in which we issue the policy very, very quickly. It has some limitations on its coverage. And it's done with large lenders that are portfolioing a lot of loans or if they're selling the loans, they're giving Fannie and Freddy an indemnity. So the aqua product is $375 per transaction.

You're seeing an increase in the aqua product from your customers?

It's in great demand from our customers. It's in demand from customers that are not getting a full title policy at this time. They're actually spending more money with us than less. It's similar to what the Radian products is going to do for us. It's going to give us access to customers that we presently are not selling them as an expensive -- as expensive a product.

Thank you.

Our next question comes from the line of Audrey Snell, Brean Murray.

Hi. A few short questions for you. There's a perception out there that you missed the quarter and part of that perhaps is due to, you know, being in a market where interest rates and demand for housing seems to be very changeable. So I was curious on whether you think that this year your earnings will be up above last year.

Well, Audrey, on the performance in the quarter, as you know, and you try and get it out of us just as the other analysts do, what are we going to do and how much money are we going to make and what are our margins going to be? And under the new restrictions that we have, we've really -- we really just don't give guidance. At times it benefits us because sometimes the analysts under -- don't expect quite how well we're doing, and then other times, the expectations move a little bit on the high side, which they did in this case, in our view. Because we felt we had a very, very strong quarter.

The quarter would have been significantly better if you just put a pencil to your paper, had we had a 65% closing ratio instead of a 60% closing ratio, you would have seen a significantly better quarter. We had the benefit of having a large number of orders flow through our books, particularly in the month of March and late February, and that dropped our closing ratio significantly, and those orders will close. And you will see a lot of revenue in the second and third quarter from those orders that were opened in late February and March.

We are -- we just don't want to talk about the full year. We'll talk about components of our financial statement. I've given you some pretty good insight, I believe, into what we expect from the FIS acquisition in terms of revenues for this year and margins, and those, of course, are not in a lot of estimates, a lot of estimates that the analysts have, and it's going to be significant for the balance of the year. And we have started off this year at $1.44 a share, significantly above last year, and we earned $5.36 or so this year. So our board yesterday determined that they were confident enough that we would do well enough that we announced a five for four split, and we further announced an acceleration of our dividend by about 60 days.

And if I could just clarify one thing, and I believe I misspoke it, our dividend is going to drop to 12 cents a share, but that's the equivalent of 15 cents per share on the old stock. I think I might have misstated that. So that's kind of my answer, Audrey. You can -- maybe you can -- maybe Al or Dan could tell you more. You know, we just don't want to get into any trouble.

Okay. On a different topic, you mentioned that the lien protection type of insurance is not accepted for pools at Fannie Mae or Freddy Mac. Why don't they approve that kind of usage for their pools?

The underwriting associated with the product, I believe, doesn't adhere to their standards, currently, the type of protection afforded by the product isn't currently acceptable by Fannie and Freddy.

Will your protection or coverage differ in a way where it might be usable by Fannie or Freddy?

You know, I don't believe so, Audrey, and there are -- I don't know if Bill knows the answer. There has been conversations with Freddy and Fannie. I personally haven't been privy to those. Under the information I currently have -- I have knowledge of, the answer is no.

Okay. One last question on a separate topic. Could you go through briefly the benefits that you see in dollars and cents in terms of moving to Jacksonville and the hands-on close proximity to the FIS division and other benefits?

Well, the first thing, Audrey, is our title insurance operations are operating well. We have strong metrics, strong regional and county managers, strong regional operators, and they continue to bring us -- that are far in excess of what our competitors can achieve. The FIS business is very important to us. As we've stated over the last several years, we have been looking for an acquisition that could give us a recurring revenue stream and recurring earnings stream to help balance the impact of interest rate fluctuations.

It's our board's view, and I agree with the view, that if we're going to execute completely against FIS, it's going to take senior management being present to work with the FIS senior management and to be close to the customers so we can effectively cross-sell products and services that we have in the FNF family with FIS's products and services. And further, where FIS is not a service provider, take our large customers we do have a good relationship with and sell their products.

For example, Frank Willey is going to be very involved in the high-level sales arena with the community banking division to ensure that those banks between $500m and $5b are aware of everything that FNF can bring to the table, and I'm going to assume that role, along with Ernest Smith on the retail and mortgage side.

So we see significant benefits on enterprise wide solutions for community banking lenders of doing business with FNF. But it's going to take -- the FNF side of the house to fully execute against that business plan. That's why we're going -- that's why we're going to Jacksonville. We do believe that the benefits associated with being in Jacksonville in terms of lower tax rates, tax abatement situations that Jacksonville and the state of Florida are going to provide for us, the lower corporate tax rate, lower sales tax rate, the availability of a large airport, availability of an educated white collar work force that is very familiar with the type of business that we do, will enable us to grow our business very, very effectively and aggressively, operating out of Jacksonville. And it's a beautiful city. We just have to get used to the fact we're not going to have a pretty day every day like we do in Santa Barbara.

Thank you.

Thank you. We have a follow-up question from the line of Jennifer Childe of Bear Stearns.

Thanks. Can you update us on your capital spending plans for the AIS businesses in '03 and '04?

Our CAPEX is going to roughly equate to what it has been the last several years. It's how much now?

About $90m.

It's about $90m. The EBITDA was running last year about $230m, spent about $90m in CAPEX, leaving them about $140m or $150m pre-tax, and they had after-tax of around $100m. That CAPEX is going to be fairly consistent. What we are going to do, though, in terms of acquisitions, the funding for those acquisitions will probably come out of the FNF pool of funds. So we won't be inhibiting their cash flow with acquisitions. We will be reinvesting in their business. And we have already identified a number of candidates that are, from large to small, that will either help round out product offerings or give us greater penetration in our core markets.

Okay. Thanks.

You have another follow-up call from the line of Robert Napoli, U.S. Bancorp Piper Jaffray.

Could you remind me what your margin goals are on AIS, pre-tax margins?

They're -- right now they're running about 19%. Certainly our minimum goal is to maintain a 19% margin. That's pretty much industry standard for the type of outsourcing business that, FIS is involved in. -- FIS is off the record in. Obviously we like to extend the benchmarks extended to the competition, and we would look to be doing better than that. That's our current goal.

I wonder if you could elaborate a little bit. What are the kind of customers that are attracted to the pool insurance-type product, the aqua type product, versus the full product? You say you're expanding your customer base. I'd just like to understand a little bit more how that is.

Well, the aqua type product is generally used for REFIs with a lender where they already have a loan in place. That's true with the two major lenders that are now rolling with the aqua product, and they're doing a lot of business. It's REFIs for existing in portfolio loans.

The -- so we have limited that product to, what you call low-risk situations, because, again, we're doing abbreviated searching and it's not a -- it's not a full title policy in the sense of a ALTA title policy. The Radian product is particularly valuable in terms of home equity loans. And presently, we provide a lot of home equity lenders is not a full policy of title insurance, but an evaluation. They get a credit report. They get the loan based upon a FICO score and based upon the evaluation of properties within the neighborhood, and they will get an abbreviated title product. And those products all-in might be $125 or $150 per file. Many of those lenders are portfolioing their home equity loans and a Radian product at $275, with not a lot of work associated with it, ends up being a big win for us. There are a lot of lenders that will want to use the Radian product -- I want to call it master lien protection policy product.

The only other thing, Bob, as I said, it is more public relations, semantics, than it is reality. In many situations, our currently existing products and services are cheaper alternatives than the Radian product that has been put on hold as a result of various regulatory decisions in numerous States, as Bill had mentioned. So, as I said, there's a lot more sensationalism that's going on than what's really deserving in marketplace dynamics. Our alternatives are cheaper than the Radian product that isn't currently available as a result, as I said, of regulatory -- various State's regulatory rulings.

Okay. Thanks.

You have no further questions at this time. Please continue.

Thank you, everybody. We have a lot going on at FNF right now, and we are very excited about our future. The title business includes to perform extremely well with open order momentum actually picking up in the first quarter of the year.

Fidelity Information Services became part of our financial statements on April 1st, so you will see the results of that operation beginning with our second quarter earnings release, as you will see the results from American National Financial. We are really excited about that business, about both businesses, and we believe it has the potential to change the investment community's perception of our company and approve the multiple that the market applies to FNF.

Thank you for joining us and we look forward to continually updating you on the financial future of FNF throughout 2003.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and thank you for using AT&T executive teleconference. You may now disconnect.