Fidelity National Information Services Inc (FIS) 2003 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. And welcome to the Certegy Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, there’ll be an opportunity for your questions with instructions given at that time. If you should need assistance during the call please press star, then zero. As a reminder, today’s conference is being recorded.

I would now like to turn the conference over to your host, Mary Waggoner, Vice President of Investor Relations. Please go ahead.

Thank you, Gail. Good morning, everyone.

Joining me today to review our second quarter results are Lee Kennedy, Chairman and Chief Executive Officer, Larry Towe, Chief Operating Officer, Mike Vollkommer, Chief Financial Officer, and [Mike Saks] [ph], Treasurer.

In addition to being recorded, this call is being audio cast live over the Internet. A replay will be available on our web site, and the Operator will provide telephone replay information at the end of the call.

The statements made during this call will include forward-looking comments, and we ask you to refer to the Safe Harbor legend at the end of our press release.

I will now turn the call over to Lee Kennedy.

Thank you, Mary. Good morning, and welcome to our Second Quarter Earnings call. I’ll begin today by summarizing the operating and financial results of the second quarter. Larry Towe will follow me with an update on our key business initiatives, and Mike Vollkommer will conclude today’s call with a detailed financial report. I’ll start with second quarter consolidated results.

As we reported in this morning’s release earnings came in at 35 cents per share which was at the high end of consensus estimates, and a 6.1 percent increase over the second quarter of 2002. Overall second quarter revenue declined by 3.1 percent, and operating income declined 2.4 recent. The consolidated second quarter growth rates reflect the impact of the loss of [Bank of Riale] [ph] and a large merchant processing account. We have covered both of these factors in detail in previous calls, and both will continue to influence results through the first quarter of next year.

Net of South America and merchant processing total revenue increased 8.1 percent versus the same period in 2002. In addition to the two events which I have covered weak domestic consumer spending which directly impacts our check business also affected second quarter growth.

I’ll now cover the results of each of the business segments, starting with card. Total card revenue declined 7.1 percent during the quarter. Outside of South America and merchant processing card services revenue grew a strong 10.6 percent. Consolidated card operating income increased by 2.3 percent on a year-over-year basis, and margins expanded by 180 basis points reflecting strong operating results of North America and improved profitability in our Australian and U.K. card operations. This continued solid performance is being driven by new revenue generated from selling additional products and services to existing customers, and strong new account issuance.

As of June 30th we were processing 45.1m cards globally, and during the quarter we added 1.6m new cards. In the second quarter North American card revenue increased 9.3 percent which was stronger than expected when factoring in the annualization of the new product revenue that started in the second quarter of last year. We discussed this annualization in our first quarter call.

During the quarter 261,000 new cards were added, bringing the total domestic base to over 23m cards. Cards transactions which generate more than one-half of all domestic card issuing revenue remains strong, increasing 9.8 percent over the prior year quarter. This strong growth was driven primarily by debit, where transactions grew over 18 percent.

As expected, overall international card revenue declined due to the loss of Bank of Riale. This will continue to negatively impact revenue and profit comparisons through February 2004. Our Australia and U.K. card businesses posted double digit revenue growth and improved profitability. International new card issuance also remains solid, and as of June 30th we were processing 22.1m cards outside of North America.

I am pleased to report that in early July [Reginald Saro] [ph] joined our company to head our Brazilian card operation. Reggie is a proven, seasoned payment executive with a long track record of achievements. He is well-known and highly regarded in the Brazilian financial services community. We believe that his leadership will enable us to resume the strong growth rates that we have historically produced in this market.

Next, I’ll move onto our check business, where revenue grew 5.1 percent. In the second quarter weak consumer spending and continued zero percent financing offers impacted check volumes in the electronic, automotive, and furniture industry segments. Over the past six weeks we have seen some improvement in these check volumes. However, we believe that it’s too soon to predict whether this positive trend will continue throughout the remainder of the year. As we discussed in our first quarter call, we continue to remain cautious regarding consumer spending for the remainder of 2003.

In the second quarter new sales remain strong, particularly in the regional mid market, and in penetrating new markets with new service offerings. Our recent announcement with Wal-Mart Dot Com where we will provide check guarantee and electronic check settlement services is a good example of this.

Check services operating income declined $2.2m primarily due to the $650,000 in incremental check cashing startup costs associated with the accelerated rollout of 7-Eleven [key ops] [ph] and startup costs associated with the implementation of our recent Safeway Store contract. In addition, operating income was impacted by the one-time write-off of an $850,000 receivable in our core check business. Approximately one-third of the decline in check profitability can be attributed to weak retail sales.

Comparable year-over-year fraud losses remained stable during the quarter, driven by improvements in our risk management models. These enhancements have enabled us to identify fraud more accurately and more quickly, improving the quality and collectibility of our returned checks. In addition, we have successfully completed the integration of Accu-Chek into our core check business, which has also improved our check collection rates and salvage. These factors should have a positive impact on second half profitability.

We continue to be encouraged with the overall performance of our check cashing business. We expect check cashing to achieve profitability in the fourth quarter. All three of our major check cashing initiatives remain on schedule for 2003. The rollout of machines at 7-Eleven stores has accelerated, and a total number of 1,000 key ops were operational as of June 30th, which is approximately six months ahead of the schedule that we recently communicated to you. The implementation of Wal-Mart and Safeway are also on-track, and interest in our check cashing services remains very, very strong. Larry will provide a more detailed report on the status of these initiatives during his report.

Last quarter we announced that we had signed an agreement with IBM, which replaced EDS as our computer service provider in North America. I am pleased to report that the conversion to IBM is on schedule for a September cutover. Annual savings will approximate three cents per share beginning in 2004.

To summarize, overall we are pleased with the progress that we have made in developing new growth opportunities and in improving the efficiencies in our two core businesses. During the second quarter consolidated revenue and operating income grew in the upper single digits, netting out North America and merchant processing.

And looking forward, as always, we will continue to focus on developing new sales channels for existing products and services, developing new products and services overall, and entering new markets that leverage our core competencies. Check cashing, internet banking, and mail order, and Internet check risk management services are examples of these.

I will now turn it over to Larry who will discuss the progress that we are making in developing these new markets and product opportunities. Larry.

Thank you, Lee. And good morning, everyone.

Today I will discuss some of the initiatives underway in our North American card business, including our recently introduced stored value products. I’ll also provide an update on international contract renewals and new signings, followed by a report on the status of check cashing and other check products.

Last Fall we began processing stored value cards. We recently introduced Visa branded gift cards and will roll out [team] [ph] cards and payroll cards in August. These initial product offerings have been well received by our 6,000 credit unions and community banks, and represent great opportunity to create new transaction growth and increase overall per institution average billing rates.

Turning to international card, I am pleased to report that we recently extended contracts with GE Capital and Bank Boston in Brazil. We also signed a new full service customer, Mercantile [New Brazil] [ph] which represents approximately 100,000 cards and strong future growth potential.

Now for an update on our check business starting with check cashing. 7-Eleven added approximately 300 locations during the quarter, bringing the current total to 1,000 machines which meets the target we set for this year. The rollout of Wal-Mart check cashing program remains on schedule, and we are encouraged by the results thus far. The installation of check cashing at Safeway Stores has begun, and Safeway will be offering check cashing services in 600 locations next month, and all 1,500 locations by the end of the year.

It is important to note that by the end of 2003 we will have over 6,000 Certegy supported check cashing locations nationwide. We believe our partnership with these highly successful retailers gives us significant presence in premiere locations throughout the U.S. And remember, this has all been accomplished in the last two years.

Sales of our internet and telephone order products which fall under the [PayNet] [ph] label have been gaining traction. Just recently we announced agreements with Wal-Mart Dot Com and [Shop at Home] [ph]. Our PayNet platform allows retailers to accept check payments online or over the telephone, convert the payment into an ACH transaction, and ship the goods immediately. This is critical to ensuring that customers will complete the order.

I’ll conclude my discussions on two issues, Check 21 and the Check Truncation Act. These new rules will allow most types of checks, including business checks, to be imaged or truncated and settled electronically. Check truncation and electronic settlement will not eliminate fraud and the need for check guarantee. They will reduce the handling of paper checks and will provide alternative methods for retailers to settle payments which will improve efficiencies and reduce their bank fees.

Check truncation or electronic check settlement will generate additional revenue opportunities for Certegy in that we provide ACH services to retailers. Our back office operation will be enhanced significantly, and our risk models will be updated on a more timely basis which will reduce fraud losses and improve check elections. Therefore, these Acts will not detract from our core check business, they will create new revenue opportunities and improve efficiencies.

Now I’ll turn the call over to Mike.

Thanks, Larry. And good morning. First, I’ll review the consolidated results, then provide more detailed information on our check and card businesses.

Overall, second quarter revenue of 247.4m decreased 3.1 percent compared to the second quarter of 2002. Consolidated revenue was up 8.1 percent outside of South America and merchant processing. Currency increased total revenue by $1.9m or 76 basis points. Operating income of 37.4m declined by 916,000, or 2.4 percent versus the prior year quarter, driven by decreased profits in check services and our Brazilian card business. Consolidated margins approximated the 2002 quarter.

Interest expense during the quarter totaled $1.6m. Debt now stands at $175m, down from $185m at quarter end. Since March we’ve applied our free cash flow to the reduction of debt.

No shares were repurchased in the quarter, and approximately $6m of repurchase authority remains available to us.

Net income increased slightly to $23m and diluted earnings per share increased by 6.1 percent to 35 cents per share.

I’ll now cover some additional details of the segment results. Total card revenue declined by 7.1 percent in U.S. dollars and 7.4 percent on a local currency basis. We remain on pace to meet our original full year guidance for a one percent to three percent decline in total card revenue. We will anniversary out of the Pay Pal contract at the end of August, and the Bank of Riale de-conversion in March 2004, and so the year-over-year revenue comparisons will remain difficult for the next three quarters.

Our North American card issuing business continues to produce solid results. Year-over-year revenue increased 9.3 percent fueled by strong transaction growth and new product and service offerings. Our previous guidance called for eight to 10 percent revenue growth in 2003 for the North American issuing business. We now expect nine to 11 percent growth in that business.

International card revenue declined 30.9 percent in U.S. dollars and 32.5 percent in local currency, marking the first full quarterly impact of the Bank of Riale de-conversion. Outside of South America international card revenue increased by 19.1 percent.

Merchant processing revenue declined by $10.6m. As this decline was largely related to last year’s loss of Pay Pal, and as we’ve previously discussed Pay Pal was a very low margin account and the loss of this revenue has had an insignificant impact upon merchant profits.

Total card operating income grew by 2.3 percent with margins increasing by 180 basis points. Strong top line growth outside of South America and merchant processing coupled with cost efficiencies drove the margin expansion.

Check services revenue grew by 5.1 percent in U.S. dollars and 3.4 percent in local currency. The current trend in consumer spending is driving lower than historical top line growth within check. And as Lee has mentioned, we have seen a pick-up in volumes during July, however, at this time it is too soon to factor any sustained positive trend into our guidance.

We remain cautious with regard to the strength of the consumer spending for the rest of 2003. In fact, if the first half 2003 volumes persist we project full year 2003 revenue growth for the entire check segment to be in the eight percent to 10 percent range.

Check operating income declined by 2.2m in the second quarter due to $650,000 in incremental check cashing startup costs, an $850,000 receivable write-off, and a $700,000 decline in core business profitability due to the soft retail sales. Now the incremental check cashing startup costs are necessary to support the rapid growth that we’re having in that business.

Corporate expense decreased by $590,000 to 3.5m in the quarter, largely driven by the $437,000 market value recovery of the company’s collateral assignment of life insurance policies and the remainder of that is just timing of administrative expenses.

Now I’d like to take a minute to reference an accounting change that we had disclosed in the first quarter 10-Q, and our current estimate of the impact that it will have on our third quarter results. FIN 46 which is effective in Q3, impacts the accounting for the synthetic lease we have on our St. Petersburg Facility. The new rule requires us to consolidate the land and buildings as well as the underlying guarantee obligation. The building will be amortized over its useful life, beginning as of January 1, 2000, which was the inception of this lease period.

Now upon adoption of this new accounting standard in the third quarter we will record a cumulative affect going back to January of 2000 of the accounting change, and that will reduce third quarter EPS by two cents per share. This will be reported as required below normal EPS and labeled at the cumulative affect of an accounting change. Now going forward this new accounting will increase annual run rate expense by less than one cent per diluted share, and so it’s not going to be significant to the run rate costs going forward.

I’ll conclude my comments with our outlook for 2003 diluted earnings per share which remain at [$1.52 to $1.55] excluding the year-to-date charges of 12 cents per share and the third quarter cumulative affect of accounting change.

In the third quarter we expect diluted earnings per share to be in the 38 cent to 40 cent range also excluding the cumulative affect of accounting change.

Now thank you, and now I’ll turn things back to Lee.

Thanks, Mike.

I’d like to reiterate that overall we are pleased with our progress to date. We remain confident that our global sales efforts, emphasis on the introduction of new products and services, and the entry into new markets, and our continuing success in driving efficiencies throughout our businesses will position us well for accelerated growth in the future.

Thank you, this morning, and thank you for your interest and attention.

Operator, we would now like to open up the floor to questions.

(Caller Instructions.)

And our first question comes from Jim Kissane with Bear Stearns. Please go ahead.

Thanks. Mike, can you elaborate on what caused the core profitability in check to decline year-to-year? I know you said that soft retail sales impacted it, but could it be a little mix as well?

You know, mix does have an impact, but Jim, what you have to realize when you have, you know, the soft retail sales and you have, you know, people spending less. Honest check writers are nearly all margin to us. And so when you have that top layer of very high profitability, and our revenue growth in the core check has been in double digit, you know, historically. Over the last few quarters we’ve seen that slide down. Well, it may be there and is some impact on mix. What’s driving the result there is the contraction of that honest check writing, you know, pulling back in this economic period.

Yeah, Jim, I will add, when you look at the numbers overall, the 19.8 percent, and you can jot these down – about 6.2 percent was volume driven, about 7.7 percent was the write-off that we talked about on the receivable that we had from a check collection agency, and there was about 5.9 percent associated and attributed to the higher startup costs with check cashing, primarily the accelerated rollout of the 7-Eleven key ops which are way ahead of schedule and it takes volume time to ramp-up, and the startup of the initial 1,500 stores and installation with Safeway. And so adding that up about 6.2 percent volume driven directly impacted on the profitability side by the good check writers, although lost check writers not shopping in the stores.

Now even if volumes stay as we had mentioned at this level which is what our forecast, our guidance is based on, check will be profitable. You know, year-over-year growth in profits in the second half, largely because of the success we’re having in identifying fraud more efficiently with all of the investments we’ve put into our fraud models and the paper that we get back is becoming, you know, much more collectible than what we’ve seen in the past. And so our net losses will be improving as the year goes on.

Jim, you talked about mix, and actually the mix is improving. With the fraud models the mix is improving by the fact that we’re getting more NSF checks than we are fraud checks, and certainly the non-sufficient funds checks are collectible where the fraud checks are not collectible. And that percentage has been moving up for the, you know, for the past six months and continues to move for us.

Excellent. Yeah, and Larry, can I just get a quick question to you? The pricing environment in the international card market, and the pricing on renewals that you’re doing? Thanks.

Not a lot of pressure, Jim, on the pricing internationally. If you remember, we’ve talked about this. We’ve got competition in Europe, certainly FDC and Total Systems are in Europe, and so there’s some competition there. But when you look in South America, Australia, and Asia-Pacific, on which we’re working very hard, there’s not the competition out there. And so the pricing pressures are not there. Of course, the customer works hard at you to get the best price possible.

Okay, thank you.

You’re welcome.

We’ll go to the line of Jeff Baker with US Bancorp Piper Jaffray. Please go ahead.

Hi, guys. Can you elaborate a little bit more on the $850,00 receivable write-off? And then I’ll ask a couple of other questions after that.

Sure, what that is, you know, is as our paper ages beyond the period where we have our success in collecting, we sell that paper. And what we had was one of the organizations that we sold that to, which is a collection agency, they still owed us some of that purchase price. And they went out of business. And, you know, there was nothing there for us to collect, and so that was the write-off. It wasn’t, it was, you know, in other receivables, it was not accounts receivables.

Okay, and then do you get that back in bankruptcy court, and then have a chance to collect on it or is it gone?

Well, we get the uncollected checks, we’ve got the uncollected checks back, but we haven’t put any sort of value on that [due to the age].

There will be some value on it as we go forward. Certainly not at the original value but there will be some salvage on that as we move forward.

Okay. And then you mentioned in the quarter that you guys saw some good cross-selling in the international card business. Can you talk about exactly what kind of products you’re selling there?

Well, Jeff, in the Europe environment we have a lot of interest in stored value products. If you remember, one of our biggest customers in the U.K. is a private label issuer who supports, you know, an array of 35 retailers in that country. And they have a tremendous interest in the stored value products that we’re taking there. Falcon, which is a fraud model, we have a lot of interest in South America on Falcon. And in the U.K., excuse me, in Australia on Falcon. And so we’re taking those product mixes and moving those outside of the U.S., the ones that we developed here domestically.

We also saw increased activity in sales on call center handling, customer service, collections throughout Brazil. American Express products also integrating into our core platform. And so they’re buying more, buying deeper, and raising the average annual billing per account.

Now, and we’re finally getting a little traction. As you know, we provide full service processing in Europe and South America. But we do have customers that are transaction processing only, meaning that we’re turning the cycles every month, producing the cards, but they do their own collection, their own customer service and back room operations.

We’re seeing several of those customers that have come to us and asked us to participate with them in looking at the cost structure, and seeing if we could perhaps take over those operations for them. And, of course, that falls right into our sweet spot of what we do around the globe.

Sure. And last question, can – or actually, two more questions – can you give us a breakout between domestic and international checks?

Yeah, I could do that real quick. Well, I’ll give you the growth rate, and so if you want to break them down that way. On North America, 1.8 percent, and so you can see the impact on revenue. When you look at international, very, very strong quarter, about 19 percent. And then, obviously, you had check cashing which showed a big spike on that, too.

International was just under 15m in revenue on check for the quarter. So a total of 87m, about 14.9 was international.

14.9, okay, great. And then the last question, Mike, can you give us an idea of the level of G&A going forward? I’m – based on your comments it sounds like maybe flat versus first quarter?

Well, G&A is up year-over-year, the corporate will remain, you know, flat year-over-year for the year. Total G&A, the growth you saw in the quarter was largely, was almost entirely related to the G&A that we acquired in connection with the [Net Z] [ph] acquisition. And so we’re holding the line on G&A across the board.

Okay, all right great. Thank you very much.

You’re welcome.

We’ll go to the line of David Togut with Morgan Stanley. Please go ahead.

Hi, this is Charlie Murphy calling in for David. Could you just review your outlook for the new sales pipeline in the domestic card issuer services business in the second half of 03? Thanks.

Charlie, we generally are looking at adding 300 to 400 credit unions and community banks every year. That’s just our normal growth patterns. What we’ve seen pick-up and spikes is in debit opportunity, to sell outside of the credit, traditional credit card world and do the debit processing for financial institutions.

And we’re seeing a pick-up in e-banking sales to credit unions. If you remember, when we entered that e-banking arena we were primarily working with the community banks. The acquisition of Net Z gave us a very good credit union product, and we’re seeing some very good pick-up on e-banking services to credit unions now.

When you look at our revenue projections overall for North America, if you figure an average of take six percent, we’re still holding very true to two percent of that coming from transactions [lift], more people using plastic for more applications and more products and services. Two percent which is driven by new account issuance and signing up new institutions. And two percent which is coming out of the new product development arena where we’re broadening the range of services that we provide to our current customers. And so it’s two, two, and two, and that’s held pretty true for a number of quarters.

Yeah, we’ll be adding well over a million cards to our domestic card base this year, so that’s pretty good growth if you look at what we’ve been doing in past years.

Great, thanks a lot.

You’re welcome.

We’ll go to the line of Dirk Godsey with JP Morgan. Please go ahead.

Good morning, guys. Nice to see the installation plans ahead of schedule here in the check cashing. Can you also comment on whether these new locations are meeting the financial targets in terms of usage, cost per install, and that type of thing?

On the thousand locations at 7-Eleven it’s too early. If you think about how rapidly those have gone out. What’s happening now is the marketing and advertising campaigns are following those installations, and where we have run those campaigns in Orlando, and I want to say Denver, and I may be wrong there, but we ran two of those advertising campaigns. We’ve seen tremendous pickup in the transactions where the ads and marketing campaigns have been run. And we expect to run those throughout the summer, and so we’re going to see by the end of the summer we’ll see those transactions start picking up.

Okay, earlier I think you’d commented you expected about $15m in revenues this year from check cashing. Is there any way to put a number or a range on the revenue opportunity that you see, you know, embedded in 2004 relative to the 6,000 locations that you’ll have going into 2004?

Dirk, we haven’t really formally agreed internally and finished that computation, but I will tell you that there still is enormous potential. The $15m in check cashing revenue this year expands dramatically, and that number I think with a preliminary look ought to be at least doubled if not more where it’s trending right now. And that’s with not, without incremental lift from additional check cashing customers, and our pipeline is very, very full at this time.

Okay, just one last thing here. Obviously, the fourth quarter you’re looking, you know, actually for better than expected performance, or relative to what you’ve had earlier in the year, because the third quarter numbers look like they’re a little bit lower than the Street had going in. So I just wondered in terms of seasonality and variability there that can oftentimes be a tough quarter, and so what are the factors that, you know, you’re looking at to drive your confidence in this kind of rebound in the fourth quarter?

You know, again, Bank of Riale has some seasonality. You know, the international card business seasonality in the third quarter which, you know, with Bank of Riale gone we won’t benefit from some of that this year. Last year’s fourth quarter we saw – that’s where we saw the check volume start to slide-off. And so from a year-over-year comparative basis for check, the fourth quarter will be the easiest quarterly comparison this year.

Again, we do have a lot of momentum on our, you know, the methodology for collecting, you know, checks and our services fees, and we’re going to get lift from that beyond what we’ve had earlier in the year.

And check cashing also, keep in mind, profitability which it was a pretty major drain in the fourth quarter of last year. And so there’s – we’ve gone through these numbers, and gone through the factors, and we still remain comfortable with those estimates rolling up all the factors that Mike cited, and then actually not putting into the forecast the improved volumes with check. We think it’s still too early, and if the volumes that we’ve seen over the last three weeks hold true then that’s incremental to what we’ve talked about.

Understood. Thank you. Good luck.

You’re welcome.

And our next question comes from the line of Craig Peckham with Jefferies and Company. Please go ahead.

Good morning. A question about check. You’ve been talking for a few quarters about the impact of some of the economic factors. How do you distinguish between what would be sort of the cyclical issue versus more of a structural shift in the migration to electronic payments in the check business?

You know, we have tracked historically the conversion, and you’re really talking about conversion to debit. And what we’ve said publicly for a number of quarters stretching into last year, that when we talk to our retailers and picked up their numbers and their [stickers] we saw about a one to two percent shift on an annual basis. We now believe that that shift is in the neighborhood of three to four percent, and it’s likely to continue on. We don’t see an acceleration in that, but we do believe that it is now higher than what we experienced in prior years. And so figure three to four percent, somewhere in that range. These numbers are balanced with our retailers. We have access to their full records to understand their forms of payments, and how they take in payments, and we balance back on that basis.

And Craig, we’ve also seen some from the zero percent financing, and of course, with rates moving up a little bit now it would be interesting to see, you know, how long they’ll stay out there. But we’re certainly seeing some impact from that.

And historically, one last comment on that – historically, we’ve seen the inflationary pressures on average ticket offset that debit migration. When you get, you know, inflationary factors of three to four percent, you know, while check has a smaller piece of the overall entire point of sales the pie is getting bigger. And so, you know, the dollars of checks written at point of sale were not shrinking. In this low inflationary environment where retailers are under pressure and are discounting at the retailers that obviously is impacting that, as well.

We’ve also had pretty good comprehensive access into how many zero percent financing deals were really accomplished by the major retailers that we process for. And that’s, it’s considerable, and keep in mind that it’s the higher ticket items. It’s the computers that are going out the door at $1,500 that are zero percent financed. And so the impact on volume is relatively dramatic. We do not believe, and I am sure I think most of the market will agree, that that will continue on. Obviously, as interest rates move up there will be less of an incentive for the consumer or for the lender, actually, to offer that type of product.

Okay, and if I may follow-up again on the check side. 7-Eleven at 1,000 locations right now, is the plan to increase that from here? Or are we sort of at quota for 2003?

Well, I believe we’re sort of at quota for 2003. Again, we’ve got the marketing and advertising campaigns to complete. I know 7-Eleven and we are working at looking at what the next stage will be. But I think in 2003 now that the machines are there we’re going to concentrate heavily on driving transaction usage into those machines.

We will re-deploy some of them. I mean we’ve found in our experience that we go into a location and you cannot build the volume there, then we take that machine, re-deploy it to a better location. And so we’ll have some of that to do this summer, as well.

And so our concentration right now is to build transaction volume through ad campaigns, advertising, marketing, and consumer giveaway campaigns.

Yeah, once we get through that phase we’ll be able to more accurately gauge revenue per location. We’ve had, you know, very rapid growth in our footprint out there. We’ve got a very big footprint now, and I think as we go into next year and have some experience over the next six months we’ll be able to give you more accurate forecasts as to what we think that total revenue will be next year.

Okay, last question. You know, continuing favorable sort of shift in mix between guaranteeing and verification, but I guess it looked to me like an accelerated decline in verification volumes. What is sort of driving that?

What’s really driving that for the retailer is clearly the fraud that they’re facing. They don’t want the risk, they don’t want the liability, and having to collect the checks on the back end. They don’t want the risk associated with looking at individuals at the point of sale and arbitrarily making decisions on whether they will accept them or not accept them for check purchases. It’s just a trend that it’s become much more efficient, much more cost effective, and a lot safer for the retailer to purchase guarantee services, versus running an authorization system or just buying authorization services only.

Does the retailer who switches from verification to guarantee normally sort of put it out for bid? Or do you have a high success rate converting from the verification?

You know, it depends on the retailer. What we’ve tried to do in the marketplace is to encourage the retailer to put it out for bid and also to allow us to test versus the competition. We think if we can get ourselves in that position that our models and our systems will prove superior and we’ll pick-up those accounts. But they’re – it’s kind of a mixed bag, with most of the retailers I would say leaning towards the competitive bids today and the competitive testing.

Thanks, Lee.

You’re welcome.

And we’ll go to the line of Greg Gould with Goldman Sachs. Please go ahead.

Thanks. First, a clarification. The revenue was up 8.1 percent without South America and merchant services, but if we were to include the weakness in merchant services and exclude the two lost contracts what would the organic growth be?

I don’t have that calculation in front of me, but let’s just say that if we took interchange only out we’d probably get to your question.

Okay .

We would have instead of seven percent decline in total card, if you took out interchange it would be about two percent decline in total card segment revenue. So interchange has a big factor in that, and so the delta between the two and the eight is largely what’s going on in South America.

And if you looked at card issuer services only being down 1.6 percent, if you excluded the Bank of Riale it would have been up about six percent.

Okay. And are there any contingencies for the IBM cutover in the current quarter? How significant a transition should this be?

As far as work to be accomplished it’s significant. We’re on-track for that. As far as any type of contingencies or liabilities, or potential …

I don’t know what you mean by contingencies, but you know, there will be some, you know one-time costs associated with that but we’ve factored that into the guidance. Because, you know, we are doing the cutover, you know, at the beginning of September. And so there will be some save this year, but we’re not …

Our forecast is offset by, those startup type of costs.

The actual savings will commence and start in 2004. We’ll pick-up some on the contract to the end of the year. Incur some additional expense in making this conversion and doing it the right way. And so it will be neutral this year, accretive next year, about three cents a share.

Yes, it’s a big conversion, but you know, we do that as part of our business, we do it all of the time, so.

And from an operational point of view we have the authorization files and all the data processing backed up so that we will not lose any efficiencies or cause any customer dissatisfaction at all.

Great. So this conversion is transparent to the customer?

Very transparent. It’s just, you know, it’s just picking all the software up from one box and putting it on another box. Remember, we do, we are our own developer of software and all of those things. That doesn’t change. It’s just the box and the people that run the boxes, the only thing we’re changing. And we’ve done that a number of times around the world.

Yeah, most recently actually in the U.K. where we actually picked the box up, moved it off to the Equifax System, set it up under a separate operating system, and that’s pretty much what we’re going to do in the U.S.

Okay, thank you.

Our next question comes from the line of Dris Upitus with Credit Suisse First Boston. Please go ahead.

Thank you. This is Paul filling in for Dris. Looking at the margins on the card side, you showed some nice improvement there, a lot of it from pruning unprofitable merchants. Just curious if you could talk to how much room there is still to go, and what kind of margin improvements we could maybe see in the second half on that business?

Well, you know, with the merchant processing, you know, revenue down and interchange always had a drag on margins. Since a lot of that Pay Pal revenue was interchange that’s a big part of that margin expansion.

And so as we anniversary, get past the anniversary of the Pay Pal we won’t be getting that margin and lift. We, obviously, have the efficiencies and the top line growth, and that’s going to help. But we had guided early on full year expansion for the card segment to be, you know, 50 basis points or so over last year. You know, we expect that to happen for the full year.

Okay, and then to follow-up, could you just talk to free cash flow during the quarter and your outlook for the full year?

Free cash flow is, you know, the first six months of the year, the cash flow statement you could see is attached to the press release is very strong. We went into the year expecting 85m to 95m in free cash flow, and that’s what we anticipate for the year. The second half of the year free cash flow will be lower than the first half for a couple of reasons. We’ll have a little bit higher capex spending in the second half, and then, you know, we’ve been able to manage our liabilities in the first half which will be, you know, we’ll drain some of our, you know, cash flow in the second half. And so full year will be 85 to 95.

Yeah, our tax payments and also the EDS termination fees, most of those get paid in the second half of the year, as well as insurance premiums.

Okay, and then lastly, can you talk quickly about your agreement with [Concord] [ph], how that’s progressing? And how that may change given their potential deal with FDC? Thanks.

Yes, we – when we look at – we did two deals with Concord. One was that they would be a reseller of our check products. And two, that we would use them for terminal point of sale deployment and front end authorizations on our merchant business. But we fully expect that they will not push our check products if they’re a part of FDC. FDC owns Telecheck, and so we’re not going into this blind. We don’t think that that will come to pass. In the meantime, we’re working very hard with NPC and their 200 to 300 salespeople to offset what we thought we would gain under that Concord sales agreement.

As far as the terminals and point of sale we’re looking very hard at that as we speak. And we have reached no decision at this point but we will continue to look very hard at that particular piece of business.

And keep in mind the Concord merchant relationship we had on check was in the very early stages, so the dollars being generated and the revenue generated were very insignificant. Although they do have a good sales force, and so long, long term it represented some potential for us. What our strategy has changed to now is to find other third party distribution sources, such as NPC, and there are others that we’re working through currently to replace that potential as you look out into the future. And we believe we’ll be able to do that.

Great, thank you very much.

You’re welcome.

Our next question is from [Tony Mionokio] [ph] with Midwest Research. Please go ahead.

Good morning. Just a couple of questions. Number one on the check side, I haven’t heard this and I’m not sure if I have missed any of it, but I’d like to know you talked about check volume overall, can you please give me some color as to how that would look on a comp store basis, if possible?

Yeah, on a comp store basis I think you’ve probably seen what a lot of the retailers said and the overall sales were mixed to slightly down. Of course, check volumes would be down slightly more than that just because of the migration that Lee talked about, and the zero percent financing deals. And so ‘yes,’ slightly down on a same store basis.

Well, I heard you mention before to beat a four percent you feel overall on a check decline would be volume be a little bit more than that?

The overall volume for the store would not, a three to four percent that we’re talking about is more looking at the migration. And so.

The number of checks written, that is?

The number and the volume of checks written.

Maybe a way to get at what you’re trying to get at is we expect to have new sales for the year in the 50 to 60m range. And we’re looking at, you know, total segment growth now, you know, for these retail trends continue at eight to 10 percent growth. And so you can do the math there and back-out what is, you know, the same store decline from the consumer behavior, either staying at home or the zero percent finance.

Or migration in the debt, and so those three roll-up into the sum total.

Yeah, and those factors are really pushing some of the retailers that haven’t outsourced yet to outsource. And so that’s, you know, helping us on another side.

Have you guys taken a look, is it possible to take a look at how many customers once they’re in the store actually take advantage? I imagine a zero percent of some other card offers offered to them when they’re at the checkout …

We’ve actually -- are working with some of our major accounts. We know what those numbers are. We know what the average ticket is, and we know what type of merchandise is being purchased and financed through those zero coupon programs. So, and they’re very significantly high average tickets, the top end has a dramatic impact on our check business. That will come back, that will not continue, but we have seen those numbers in detail. And it is a major factor.

Okay, is there anything there you can share to help us …

Well, our customers allow us to get that information kind of under confidentiality, and so I mean it’s better to go the retailer to try to get that information.

You know, and there even has been even fueling it a little bit, something that we learned is there is an incentive to the retailer to push that type of financing because they get fees on it. And so that’s, you know, that’s an additional factor.

But all of, I think it’s safe to say that all retailers that we have dealt with and talked to don’t forecast this continuing. It won’t continue once the rates move-up, just like it won’t in the auto industry. And so it will be temporary, and it’s a question of time before that dissipates and slows-down.

And plus they only have so much capacity to finance these purchases.

Yeah, they’re looking at their delinquency rates, as well, and they’re watching that very closely. And I’m sure you’ve seen some of the private label issuers who have had some issues with delinquency rates.

So that will move away from us as interest rates rebound without question.

Okay. And just to touch on this First Data, Concord situation again. You know, assuming that they go ahead and are able to complete their deal, First Data from time to time has discussed a little bit their card program. And you know, is it something going forward that they keep, or in the past they’ve talked about maybe moving away from that. Should they decide in some fashion depending on how they would do it that card is no longer something they would like to deal with do you see any opportunities in that portfolio?

You know, we – I think that’s a question that remains to be seen on whether that’s going to happen or not happen. What would, I guess would we be interested in looking at it? I would think we’d be safe to say ‘absolutely.’ It’s a different segment than we’re involved in today, domestically anyway. Not internationally, we know that business well internationally, but it would certainly be something that would be of interest to us.

Okay, would you feel confident in an ability, if there were an opportunity but it would require you to move a little bit upstream in the institution you serve here in the domestic market, would you feel confident that you would be able to make a transition along those lines?

Well, I think the way to answer that is that we’ve moved upstream significantly internationally. Where it’s a very difficult market that requires a lot of customization, and we’ve done that extremely well. In fact, when you look at the numbers over the last four years in total cards processed outside of North America we still lead the pack.

And so we – and also, in addition to it, our business on the software side has exposed us to very large issuers across the globe, and so we know that business well. And whether it’s small or large we believe that we’d be able to handle that. However, our strategy that we have domestically does not involve that, it involves concentrating on the lower end of the market where there are good strong margin capabilities and we can leverage our full service offerings.

Very well. Thank you.

Thank you.

Our next question comes from Wayne Johnson with Robinson Humphrey. Please go ahead.

Yes. I was wondering on the payroll check cashing, you mentioned that there were going to be 6,000 payroll check cashing locations going into ’04. How many locations are you in right now? Because I come up with 500 short, and so I was just wondering if you could just give me a little bit more color on that?

Well, let’s try to add them up. We have about 1,000 on 7-Eleven. We have, we’re in the process of rolling out 1,500 through Safeway and that is on-track and on-target to be completed by the end of the year. And in addition to it we have roughly 3,000 some odd locations that we will be adding in with Wal-Mart, and that remains on-track to be implemented. Then we have a wide variety and a wide range, and pretty diverse across the country of check cashing locations that are fully operational and supporting casinos that we’ve had for some time.

Okay.

So if we add all those up you get very close to that approximate number.

Okay, good. And as a follow-up to that what about ’04 for 7-Eleven? What would be your goal, do you think, or range of how many additional stores you plan on adding?

Wayne, it’s still too early to predict that. Their goal, as you know, and as we’ve communicated was to put a terminal in all of their main key stores throughout the country. They have roughly 5,000 locations. We know it will be less than that because some of the locations will not produce enough volume to warrant the investment in the machine. But we’ll get a better indication of that after they complete their national advertising program for the implementation of the most recently installed machines. And that’s going to happen within the next 90 days. And so we’ll give you guidance as we get a firmer indication of where they’re headed.

And what about marketing expense for these machines, do you guys participate in any of that?

No, we haven’t in the past, but I will tell you that we’re looking at trying to provide additional research support and partnership with 7-Eleven to better understand the demographics and certain locations so that these placements come up and running on a faster basis. But that will be the extent of it. Support on the intelligence investigation side, research side, but not advertising.

Okay. And just so I’m clear again, so for the remainder of the year you don’t plan on adding any more 7-Elevens?

The way we’re looking at it right now is that first priority is to get these locations operational, get the transaction volumes up. But that’s not to say that once completed with that, and that’s in process now, that if 7-Eleven decides to rollout additional machines in the right markets that we wouldn’t be right with them on it. And so it still remains on a conservative basis, figure the 1,000 machines. However, is there a chance that they’ll start rolling out again? Absolutely.

Okay, great. Thank you very much.

You’re welcome.

And one last point on Wayne’s question, we’ll exit this year with a very significant footprint with these check cashing locations. We will cover every State including Alaska and Hawaii. We’ll be in all 50 States.

And I think that’s a real key point to record on this thing. Keep in mind that some of the – even our competition, some of the largest service providers that have been in this business for years only have 1,000 or so locations across the country.

And this particular approach that we’ve taken it’s a different type of location. It’s a location that has a lot of consumer traffic already coming into the stores, where we can leverage check cashing on those customer visits. And so it’s a different type of situation, and the key is once we get it well known, or make it well known to the consumer we expect that these locations will produce a real home run for us and some significant volume in revenue.

We’ll now go to the line of [Dan Perlin] [ph] with Legg Mason. Please go ahead.

Thanks. How much of card revenue comes from the U.K. and Australian operations?

Total, it’s about 80m on an annual basis. But let me just verify that. Well, let’s see.

Whatever number you want to give me is fine, quarter, annual, I’ll take them all!

Accurate ones.

Well, it’s about 65m, we’re just shy of 50m, you know, say 45 plus in the U.K., and close to 20m in Australia on an annual basis.

Okay, great. And one of the things I was trying to figure out with respect to the check cashing business, and really more specifically with Wal-Mart is that, you know, your goal is to be at 6,000 and we understand that. But last year you kind of ran into a problem where they weren’t rolled out in time for the holiday season. And so it would seem to me that all of Wal-Mart would need to be kind of rolled out by the next quarter. Are you on plan to be at that point?

We are on plan as we speak, to be at that point. The reception in the marketplace has been outstanding. They just came in with a whole new wave of implementations. I can’t disclose where they are on their stores, because obviously we’re not allowed to do that, and we wouldn’t do that. That’s their information. But we feel comfortable at this point in time that we will make that.

Okay, fair enough.

And I would also add one thing that we’re also in some of the locations that have been rolled out, some of the regions, we’ve seen some very, very strong volumes. And so we’re getting a pickup on some of the volumes that we didn’t anticipate in some of the original projections. And so we feel comfortable that overall at this point in time that the Wal-Mart implementation will produce what we expected.

That’s great. The Safeway check cashing initiative, was that originally included in your $15m full year expectation?

No, that was not.

Okay, so that could potentially be incremental?

But new customers, we expected in year signings of [new] customers. So, you know, Safeway would fall under that new signings. Potentially it could have a positive impact because it’s a bigger signing than we anticipated, but we’ll continue to roll …

What we tried not to do here is to get ahead of ourselves given some of the slow-downs at the merchants, actually put in place last year. I will say that once Safeway is fully installed, and that once the consumer communication is completed then obviously that will be incremental to the numbers that we’re talking about.

The question is when does that happen? And how quickly does it happen given that it’s in most regions in Safeway, it’s a brand-new service offering, it’s in conjunction with some of their other service offerings that they are bringing up, and we just don’t want to get ahead of ourselves.

But presumably you learned something from kind of the delays that you had with Wal-Mart and 7-Eleven originally, so?

Absolutely, we have. We have learned something, but then again this is brand-new water for Safeway, too. And although they lay-out their plans bumps and hiccups happen along the way, and we just don’t want that to …

Yes, we do the best that we can early on to, you know, it’s all in the drawing board, we’re estimating the revenue. It’s like I said earlier, now that we’ve got these locations largely in place, when we get some experience going into next year, we’ll give you a better shot at what we think it can be.

Yes, the good thing is, the good news on Safeway is that to date their responsiveness has been outstanding. They’re very well organized on how they roll these out and how they’re implementing, and so we’re encouraged from that angle.

Okay.

Keep in mind the implementation between the two retailers is different in that Safeway is a courtesy counter where we can place a low cost terminal and do all the things necessary, and cash the check at the courtesy counter. Where Wal-Mart is in [lane], and so there’s programming to be performed at every cash register. And so the rollouts are different, and under different schedules.

Okay, but this – none of these things affect the fourth quarter profitability of check cashing?

Certainly. Check cashing is [inaudible] profitable this year. And so, you know, the momentum we have is, you know, we’re investing now with getting these locations out and getting the infrastructure in place. Well, we’ll start to turn profits …

Yes, and the numbers, when we say that we reaffirm today that we’d be profitable in the fourth quarter we have factored the current status of these programs on a good, prudent basis into that projection so we’re comfortable that we will be there.

Okay. And one other quick question. Was there any sort of termination fee potentially as it relates to your contract with Concord under a change of control?

We can’t talk about the contract specifically. It’s going to be a very neutral transaction.

We anticipate something coming out of that, and we would [inaudible] about it.

Yeah, there’s nothing that you should be concerned about.

Okay, great. Thank you very much.

You’re welcome.

Our next question comes from the line of [Robert Dodd] [ph] with Morgan Keegan. Please go ahead.

Hello, guys. Just a couple of quick questions. Can you give us an indication of what the pricing is on your contracts with Wal-Mart Dot Com and Shop at Home, versus your traditional guarantee services?

I wish we could on that, but probably we have our competitors on the phone. And besides that we really, the merchants won’t let us disclose it, and we wouldn’t. And so, but it’s – those particular service are price based on the services we provide. And there are – keep in mind when we provide services for internet based merchants there’s another piece of it that we don’t have with core guarantee, and that is the ACH settling. And so that’s incremental. But it’s not too far off, let’s put it that way.

Okay. And then the $15m that we’ve talked about for this year for the check cashing business that was kind of based on 1,000 7-Eleven [inaudible] the end of the year, and it includes Safeway. Have you got any kind of update to that number that you could give us?

We’re still holding with the $15m number from check cashing, comes from various sources of check cashing revenue. And we haven’t at this point in time altered that number, and we don’t project and don’t think we will.

Yes, and as you will recall, 7-Eleven, we thought they were going to earlier in the year get more machines out, and in the first quarter we talked about being a little behind on the rollout. And now, you know, we’ve gone aggressively, you know, getting machines out. So the pattern of the rollout has changed. The pattern of their marketing is not what we originally thought. And so that’s what I am saying, you know, when you have a new business on the drawing board you do your best shot at how the rollout is going to be, and that drove the $15m original. We still think that’s a good number for what we have.

Okay, thanks.

You’re welcome.

And our final question comes from the line of [Art ] [ph] with [Merit Research] [ph]. Please go ahead.

Good morning.

Good morning.

As you might guess, most of my questions have been answered already. But I do have one other. The, I guess, it relates to the use of the cash flow. It looks from your public history that you basically have made a handful of opportunistic acquisitions, some opportunistic, very opportunistic stock buybacks, and absent those you have applied it to debt. Is that what we should expect going forward? And I guess given the new legislation and someone has to ask it, how do possible dividends factor in here?

Art, I think you are correct in assuming that’s what we will continue doing. As far as the dividend assessment I don’t think there’s probably very few companies in this country that aren’t looking at that as we speak. And we’re one of them. We’re analyzing it, and when we have additional information we’ll make sure that we communicate that.

And we are working hard at identifying opportunistic [inaudible] type acquisitions. And there’s a number out there that we think would bolster our operations.

The number of two or three that we’re currently looking at, that we think are natural fits with our core business, none of them far enough along to give you any additional guidance on. But that’s the path that we’ll continue to take.

Thank you.

You’re welcome.

And Ms. Waggoner, we have no further questions in queue at this time. Please continue.

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