Fidelity National Information Services Inc (FIS) 2004 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Fidelity National Financial first quarter earnings conference call. [OPERATOR INSTRUCTIONS]. I would now like to turn the conference over to the Head of Investor Relations, Mr. Dan Murphy. Please go ahead, sir.

Thank you, good morning, everyone and thank you for joining us for our first quarter 2004 earnings conference call. Joining me today are Bill Foley, our Chairman and Chief Executive Officer; Frank Willey, our Vice Chairman, Randy Quirk, our President, Al Stinson, our Chief Financial Officer and Ernie Smith, President of Fidelity Information Services.

We'll follow our usual format. Bill Foley will begin with a brief strategic overview including a review of recent acquisitions. Randy Quirk will provide an update on our title business and current market conditions and Al Stinson will review the financials for the quarter. We'll then open it up for questions and finish with some concluding remarks from Bill. This conference call may contain statements related to future events and expectations and all such constitutes forward-looking statements. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of the company to be different from those expresses or implied during this call.

The company expressly disclaims any duty to update or revise forward-looking statements. The risks and uncertainties which forward looking statements are subjective include but are not limited to the effect of governmental regulation, the economy, competition, and other risks detailed from time to time in the management's discussion and analysis section in the company's Form 10K and other reports and filings with the SEC. This conference call will be available for replay via Web cast at www.fnf.com. It will also be available through phone replay beginning at 12:30 P.M. Eastern Time today through next Thursday May 6. That replay number is 800-475-6701 with an access code of 727668. Let me now turn the call over to Bill Foley, our Chairman and Chief Executive Officer.

Thanks Dan. We continue to make progress on our goal to diversify the revenue and earnings streams of the company during the first quarter. The percentage of revenue from non-title related sources increased to 26% for the first quarter compared with just 13% in the first quarter of 2003. With our Orum Technology's acquisitions that closed in mid March and Sanchez Computer Associates and Bankware closes in April, we are now at a run rate of 30% of our revenue coming from non-title resources. We have had several acquisitions closed in the last 45 days. The acquisition of American Pioneer Title insurance company gives us the number one title insurance market position in the state of Florida, making us number one in all four states, California, Texas, Florida and New York that make up 50% of the real estate volume in the United States.

Orum technologies closed in mid March and we have quickly begun to implement our integration plan. We have a targeted goal of 25 million in run rate cost synergies in the first 12 months of ownership with 7 million in run rate synergies already achieved and another 8 million identified. Sanchez Computer Associates closed on April 14 and both Mike and Frank Sanchez have joined FNF and have in fact relocated Jacksonville. Mike has taken responsibility for the Fidelity Information Services international operation and Frank has taken on our product development and strategy. From a cost synergy standpoint, we expect to achieve cost synergies of approximately to 10 million at Sanchez.

We also recently announced the acquisition of Bankware, a company that provides check-imaging solutions for financial institutions primarily through image care product suite. Bankware's imaging solutions accelerates our ability to serve the growing item cost of the market with both hosted and licensed imaging solutions. We will implement the image care software into our roughly 35 existing item-processing centers. Additionally, Bankware has a track record of both consistent revenue growth and solid profitability and its existing clients provide energy synergy opportunities for other FNF products and services.

Finally, we just announced our strategic investment in a Covansys Corporation, a provider of application management and development in offshore outsourcing. Under the stock purchase agreements, FNF will acquire approximately 11 million shares of Covansys making FNF the largest shareholder of Covansys. We also have the right to appoint three members to Covansys Board of Directors. This is an important strategic investment to FNF. Prior to this investment, FNF's global outsourcing activities consisted of project based contract relationships with several offshore service providers, while the absolute cost savings realized in global outsourcing are compelling, we have been searching for a strategic partnership that also optimizes our technology delivery efforts from a cost, quality and time to market perspective but also improves our competitive advantages in generating incremental revenues from our financial institution customer base.

With this significant investment in Covansys and our representation on the Board of Directors we have found and outstanding U.S. based IT services partner with well-established operations in India that allows FNF to accomplish these objectives. We have also signed five year master services agreement under, which Covansys will become FNF's primary information technology outsourcing partner with a dedicated team of product and development managers. Covansys has six world-class development centers in the U.S. and India and a unique on site, off site and off shore delivery model. FIS has committed to generate $150 million of revenue through Covansys over the five-year term of the MSA through either internal FNF programming and development activities or from external FNF client referrals seeking outsourced information technology solutions and services.

Fidelity Information Services had another solid quarter with more than 12% growth in the first quarter of 2004 versus the first quarter of 2003. We should note that we did not own FIS in the first quarter of 2003 but are providing a year over year comparison for your benefit. Year over year organic growth was 3.7% for the first quarter of 2004. As we mentioned on the fourth quarter conference call, we expect some quarterly variability in these organic growth figures as there are is some lumpiness due to the timing and magnitude of signed contracts and conversions. Overall growth was led by enterprise banking solutions our big bank group with an organic growth rate of 9% driven by the large conversions of First Tennessee, Riggs Bank and Bank of Oklahoma in late 2003. Additionally, Webtone, which sells the touch, point solution of branch and teller systems generated 9.4 million in revenue in the first quarter, a sequential 18% increase from the 8 million it generated in the fourth quarter of 2003.

Residential lending solutions are mortgage-processing group had flat organic growth as the prior year comparison was impacted by Washington Mutual's decision to take loans off the MSP platform during 2003. Washington Mutual's decision to return to our MSP platform should help the group in future quarters although we do not expect a mortgage group to grow as quickly as the banking business auto finances revenue was down year-over-year as absolute processing volume was other finance clients were down from the prior year period. Late in 2003 we developed a three-year modernization program for our mortgage-servicing platform after soliciting input from almost all of our clients.

We have already invested more than $16 million as part of this plan to re-architect our mortgage-servicing platform to position it to support the current and future needs of our mortgage-servicing clients. First we increased the capacity and scalability of the system by 40%. We committed to our clients that we would be able to process 8 million loans for a single client by December 2004 and we have already achieved that goal. The plan also calls for the modernization to take place in phases by modules and mortgage processing system. The initial prototype is built around the collections module. One client has seen this prototype in both the top technology executive and the top business user, have given extremely positive feedback.

We plan to demonstrate this prototype to our entire user community at a client conference in may with a target to rule out the collections model in beta in the first quarter of 2005. Our real estate information services division has also been performing extremely well. Despite closed orders and title premiums declining sequentially in the first quarter of 2004 from the fourth quarter of 2003 our mortgage data products revenue grew to 105 million, a 12% sequential increase. We had increases across the board in flood, tax, credit, appraisal, valuations and property data. Our revenue increased despite the decrease in title revenue indicating that our cross-selling efforts are gaining the foothold and that we are gaining market share through the customer revenue synergies with our FIS division. It is the first indication to the market that we can grow our information services revenue despite a slow in mortgage market. Let me ask Randy Quirk to comment on business conditions in the title industry.

Thank you, Bill. First quarter order volumes gained momentum as the quarter progressed as we averaged more than 17,000 open orders per day for the entire first quarter peaking in March at 19,500 open orders per day. And the first three weeks of April, we are still averaging a robust 16,000 open orders per day. Another way of assessing the trend in order volumes is the closing percentage, which is simply closed orders divided by open orders. Our closing percentage for the first quarter was 61% versus 60% in the first quarter of 2003 and 77% in the fourth quarter of 2003.

As mortgage volumes rose throughout the first quarter, open orders increased and we began to build inventory as the quarter progressed. This is good news for the second quarter results, as we will close the majority of the transaction opened in March during the second quarter. A closing percentage of 75% to 80% is what we expect in a normal environment. A level below that indicates we are building inventory to close in the future. We have always said that the challenge we face in the title side of our business is reacting quickly to changes in the market both stronger and weaker. We have experienced both of these scenarios in a very short period of time in the last two months.

In a somewhat unusual way, 2004 has been a difficult environment for our title operation for just that reason. When rates moved up in the summer of 2003, we began to aggressively manage our staffing levels throughout our direct operations reducing head count by more than 4,000 jobs or 20% from August 2003 through January 2004. Interest rates declined modestly in January and February and then fell significantly in the first week of March prompting an increase in open orders per day from 16,300 in February to 19,500 in March. This increase put orders -- this increase in orders put a strain on our operations as we had been aggressively reducing head count for six months and now volumes increased 20% from February to March.

We allowed our managers to add personnel during March to handle the increased volume levels. As we entered April, a ten year treasury had spiked up by more than 75 basis points from the March low in order volumes while still strong have fallen nearly 20% from March levels and are back to where they were in February. The swift changes in interest rates and order volumes between February, March and April make it more challenging to manage the head count and order metrics that are the hallmark of our operational disciplines. Our fee profile gives the quantitative evidence of the mix of our business between purchase and refinance transactions. Our fee profile for the first quarter was $1,101 versus $963 in the first quarter of 2003 and $1,094 from the fourth quarter of 2003.

Re-finance premiums are usually about half that of a re-sale. So, as the mix has shifted from pre-dominantly refinanced transactions to a 50/50 re-sale to re-finance mix, the fee profile has increased. With that, several question about our commercial operations in the last few conference calls. We open to nearly 14,000 commercial orders and closed 8,000 commercial orders during the first quarter of 2004, generating $44 million in revenue.

This translates into 10% of our total direct title premiums for the first quarter. The open orders were an increase of about 3% over the first quarter of 2003 and revenue was an 8 million or 22% increase over the prior year. There is definitely positive momentum in the commercial market in the early months of 2004. Finally, we completed four NGS installations in northern California during the first quarter giving us a total of five implementations. We are scheduled for an additional eight installation in the second quarter, which will give us 13 installations and 500 total users by the end of the second quarter. Our deployment schedule calls for all of our California operations to be installed with NGS in 2005, which would include nearly 5,700 users. Let me now turn the call over to Al Stinson to discuss the first quarter financials in more detail.

Thank you, Randy. Net earnings were $150 million in the quarter, a 5% increase over first quarter 2003 net earnings of $144 million. Diluted EPS of 88 cents decreased 16% from the first quarter 2003, diluted EPS of a $1.05. Due primarily to the larger share base that resulted from the stock issued in 2003 and 2004 for the FIS, FNIS and by Aurum acquisitions. Cash flow from operations was $122 million for the first quarter of 2004. Cash flows from operation are typically the weakest during the first quarter due to annual bonus obligations, various tax obligations and other liabilities that accrue during the previous year. Our overall pretax margin was 13.4%, down from 16.7% for the first quarter of 2003. The decline primarily came in the title operation as the first quarter 2004 margin of 13.2% was done from 17% in the first quarter of 2003. Title premiums of $1.1 billion increased 11% over the 2003. Direct premiums declined by 2% while agency premiums increased by 23% indicative of the lag in agency remittance. Escrow and other title related fees of $256 million decreased by 1% over the prior year consistent with the slight direct premium decrease.

Financial institution processing and outsourcing includes the revenue of FIS, our Default Management Business, Eastern Software's Empower Loan Origination System and Soft-pros Power Production System. Financial institution processing and outsourcing revenue was $288 million for the first quarter versus $41 million in the first quarter of 2003 and represented 16% of total revenue. FIS contributed $237 million in revenue, an increase of 12% over the first quarter of 2003. Remember that we did not own FIS until April 1 of 2003. The organic growth rate was 3.7%. Default Management contributed $42 million in revenue compared to $33 million in the first quarter of 2003, a 28% increase driven through internal organic growth. Eastern's loan origination system revenue was $6 million and Soft-pro Title Production revenue was $3 million for the first quarter.

Real estate information services generated $143 million or 8% of total revenue for the quarter. The mortgage data products primarily flood, tax, credit, appraisal and valuations accounted for $105 million in revenue, a 34% increase over the first quarter of 2003. Other significant components of this line item were MLS services with $9 million of revenue, 1031 exchange services with revenue of $8 million, relocation services with revenue of $7 million of revenue and mortgage fulfillment revenue of $4 million.

Specialty insurance which includes flood insurance, home warranty and homeowners insurance contributed $49 million of revenue for the first quarter, with flood insurance generating $24 million, home warranty nearly $15 million and home owners insurance $10 million. Interest in investment income was $15 million, a decline of $2.5 million from the first quarter of 2003. Net realized gains were $12 million in the quarter.

On the expense side, agent commissions were $474 million, a 23% increase over the first quarter of 2003, consistent with the 23% increase in agency title premiums, as agent commissions remained 78% of total agency premiums. Personnel costs with $637 million and other operating expenses of $416 million were 44% and 32% higher than in the first quarter of 2003. The largest contributor to the increase was the FIS acquisition on April 1, 2003. Excluding FIS, personnel cost increased $48 million or 11% and other operating expenses increased $36 million or 12% for the first quarter of 2004 versus first quarter 2003. Sequentially personnel costs increased by $1.5 million and other operating costs declined by $20 million from the fourth quarter of 2003. The provision for claims was $59 million as we are providing for claim loss at 5.5% of gross title premiums. Actual claims paid during the quarter were $50 million resulting in a $9 million increase to our reserve for claim losses.

Additionally, the American Pioneer acquisition add $29 million in reserves giving a total increase in reserves of $38 million and a reserve balance of $978 million at March 31. Interest expense was $8 million during the first quarter. It consists primarily of $250 million in bonds at 5.25%, $250 million in bonds at 7.3% and 325 million drawn under our credit facility at elabor (ph) based rate near 2%. Our debt to total cap ratio was 18% at March 31. The tax rate remained at 38% and we expect the rate for all of 2004 to be no more than 38%. Our investment portfolio was $3.3 billion and an increase of $160 million in December 31, 2003. There are certain legal and regulatory restrictions on some of those investments including secure trust deposits of more than $800 million and statutory premium reserves for underwriters of more than $1 billion. Of the $3.3 billion, more than $1.4 billion was theoretically available for corporate use with about $165 million in non-regulated entities and nearly $1.3 billion held through regulated underwriters. Book value per share was $24.49 at March 31. Let me now turn the call over to our operator to open it up for any questions.

[OPERATOR INSTRUCTIONS]. First we'll go to the line of Geoffrey Dunn (ph) with KBW, please go ahead.

Hello good morning. First, on the title side with the head count management, can you give an idea, I think you went off about 20%, 25% head count coming into the end of year. How much did you hire back? What have you done recently? And what position that leave you in as you look at a potential slowing over the next three quarters?

Sure. As you know, as we went through the latter half of 2003, we did reduce staff aggressively. In fact we reduced staff 22 weeks in a row moving into the first quarter of 2004. So we continue to reduce staff through January 31st. In the first quarter, which we really, actually February and March, our orders per day increased by 23%, our staffing levels only increased by 5.3%. So in the first quarter we added an additional 790 employees. In March, the volume on the production and on the closing side, increase we had another 350. So we had a total of about 1100 additional employees in the first 3.5 months of April. So that's where we sit today. In very close contact with our managers throughout this process and our staffing was made up primary, temporary and part-time employees as we anticipated this would be a short run with the movement in the interest rates. So our managers today are already prepare and actually beginning to do they're downsizing once again. The productivity side is where we are beginning. On the closing side, we need to be a bit more sensitive in that through the months of April and may we'll have significant closing activity. This will, however, affect margins as we move on throughout the remainder of the year. But, once again, we're prepared to move very quickly as we did through 2003 on staffing adjustments.

Okay. So if we take the numbers, I think at the end of the year, you indicated another maybe 5 to 7% capacity for head count reduction. You added about 8%. So we're looking somewhere at another potential mid teen reduction in head count when things start slowing?

I would say that's pretty accurate. Because as we were coming through the back end of the year going into the first quarter we truly did anticipate additional staff reductions would be needed. However, coming into January, the orders began to pick up. So we weren't able to really accomplish what we were looking to accomplish. So I think your information, your numbers would be accurate.

Bill, can you talk a little bit about the margin in the FIPO segment? I think some of the recent acquisitions pulled that margin down this quarter. You gave us some idea of expense savings over the next 12 months. Do we go back to that 16 1/2 plus margin? Can we go a little higher? What will your efforts ultimately translate into?

Our goal would be 18 to 20% margins in our processing businesses. And the Orum (ph) Mac acquisition although we've only owned it for about three weeks in the first quarter was really not making a profit once you allocate purchase accounting adjustments to the income line on the income statement. And so that's why we're very aggressive about taking costs out of Orum and there are about 7 or 8 million of costs already out, about another 8 million dent find we Mead to get to 25 million really by December 31 of this year of total cost reductions.

That will bring Orum in line with the kind of margins that we need to hit the 18% number. Sanchez is a similar story, but if we take out 8 to 10 million we're talking about at Sanchez and we got about 2.1 million out already in just about two weeks. Again, we'll hit that 18% margin line. Now the other thing that's happening is that as we bring in Frank Sanchez and we bring in some of the Orum assets it allows us then to be more efficient in both our innovative financial solutions division and also our enterprise banking division in terms of development sales activity and in terms of cross selling products and selling the touch point product and selling the Bankware product. So it's going to take us about three months to really get back into that little higher margin position but we're very confident we'll get there.

The other issue is, the other point is that during the first quarter of each year in the processing business, trend to find that there's a big push in the fourth quarter to sign license agreements and to close transactions. So sometimes there's an income, revenue spike in the fourth quarter that then tails off in the first quarter and that's what we really saw in the first quarter of this year. So we have an excellent pipeline of new customers Coming on line. We're being very very successful in terms of gaining new customers and losing very few existing customers. So that's our goal. 18 to 20%. That's where we need to be.

And just a clarification. That 18-20% is X the purchase price amortization, correct?

I didn't say that.

Thanks.

It's actually after purchase price allocation or purchase accounting adjustments.

Thanks.

Next on the line we have Mike Vince Sequera (ph) with Raymond James. Please go ahead.

Ah, thank you, good morning. I've got several things but I'll jump back in queue for the other ones. But, just a first couple. How much in revenues did American Pioneer add in the quarter versus Q4 where you guys were substantially ahead of us in terms of title revenues this quarter.

We actually closed I believe March 31. So it was almost no revenue at all for American Pioneer.

A few days of revenue I believe is what we ended up with.

So American Pioneer last year did about 250 million of revenue. Most of it was agency. So their net revenue, their net revenue was because most of it is in agency in Florida is a 30 retention rate by the underwriter. So net revenue is about was about 60 or 65 million for American Pioneer last year. We actually anticipate American Pioneer's revenue will be less under our ownership than it was under PMI's ownership because American Pioneer was fairly aggressive in terms of agent acquisition, not only in Florida but also outside the state of Florida and there will be some culling of agents on the American Pioneer system. So I wouldn't be surprised to see American pioneer's revenue during first 12 months of ownership decline by say 20% . But in terms of first quarter impact, it was almost, it was just not, it was just an asterisk.

Okay. Thank you for the clarification. Just back on the processing side, Bill, you mentioned the seasonality effect of the contracts at the end of the year but my understanding is the contracts are signed and it's essentially relatively smooth in terms of processing earnings on a per transaction or per account basis per month, per quarter, whatever it. So I'm still a little confused why there would be a spike at the year end and then a slight dip or flat numbers in the first quarter.

I really misspoke myself, Mike. What I'm really referring to is licensing revenues. For example, China construction bank has a large licensing deal on December 29 or December 31 of 2003 and it was what, 3 1/2 million, 3 1/2 million licensing transaction, so we had several of those kind of transactions that hit at the end of 2003 and they won't be re-created -- they just aren't repeated in the first quarter. So the sales, as you might imagine, the sales people are all very, very aggressive any of terms of getting their licensing deals done in a calendar year and then they start cranking up the following year. So it really is a primarily licensing that I was referring to.

So on licensing, you guys don't take that over the course of time, you take that fee right up front and you don't amortize it into income over the course of the year?

No, it's taken in when it's earned.

Okay. Thanks for the clarification. I'll hop back in queue. Thanks.

Next to the line of Bob Napoli with Piper Jaffray. Please go ahead.

I thought it might be helpful if you reiterated your goals for a mix of revenue and profitability between title and escrow and your diversification businesses and the time frame and if there's been any change in your thoughts in that regard?

Well, first, if I could, I just want to clarify the licensing acquisition of income- --

On licensing revenue you have to -- there are different ways of doing it. Depend upon the nature of the contract. It just so happened in the fourth quarter a couple of them were the type license agreement where is you do record all the revenue. But in many such cases you don't you're going to amortize it over the expected period where the services are delivered. It just depends. We gist had a couple in the fourth quarter that didn't meet the earned revenue recognition criteria.

But back directly to your question, we really have not changed our goal of within three years of acquisition of Alltel information services of being a 50/50 mix company and achieving more pretax income from our processing and data and real estate related services revenue and income or income from that side -- from that side of the house. We really feel like we're ahead of schedule. And the title revenue in the first quarter was higher than we otherwise might have expected because we had the little decrease in interest rates and increase in orders so we ended up with a pretty good March coming out of the title business. But had there not been that decrease in interest rates, you would be anticipating in the second quarter and third quarter going forward that really well north of 30% would be coming from processing businesses, because we expected the title business to -- the title premium business to decline. And so we're still on our two-year target. That would be two years from last April 1 now. It was three years from April 1, 2003 to be 50/50 in revenue and 55 to 60 earnings from the processing business versus the title business. It won't be consistent because if there's a drop in rates, then the title, the title revenue will increase sharply and the pretax margins will increase and net income from the title business will increase so it's a little bit of a moving target, but we want to at least get to that 50/50.

That's assuming kind of a normal market to marker, if there is such a thing.

There is such a thing and it's a market that's probably not quite the market we're facing today.

Now as far as getting to that goal and I mean your organic growth I believe goal is 8 to 10%?

8 to 10%.

8 to 10%. And you know, that goal hasn't changed. You still feel comfortable with that 8 to 10% goal.

That's our goal. We didn't hit it in the first quarter of this year. We did hit it in a couple of our key divisions. Actually it exceeded in one of our key divisions, but didn't hit in the first quarter. But that's still our goal for the second quarter and pipeline looks good and customer acquisition net acquisition situation is very, very good. And we're finding with the Orum acquisition that we're actually re-signing and signing agreements with new customers on some of their platforms and the rise of business continues to do well and we're very aggressive in the enterprise banking business in terms of signing contracts for major conversion.

Last question, as far as acquisition looking to fill product lines, opportunities, are you still bitter for the nice transaction, you're rumored bitter for that. And what else are you looking --what other types of situations are attractive to you or would you be pursuing?

Well, we were interested in nice and we had on interesting partnership arrangement with another network that we were going to combine with the nice acquisition however we're no longer bitter. We're not a finalist in the nice transaction. We are continuing to focus on core deposit system acquisitions that will allow us to expand our customer base in the community bank space the credit union space, the thrift space, because what we're finding is that those particular institutions as they grow they migrate to our, we can migrate them to our enterprise banking platform or if they are acquired, we have a good opportunity to go in and bid on providing services to the acquirer. So that is our primary focus at this point. Our core deposit systems.

Thanks. What do you think your trough margins will be on the title business? And I'm done. Thank you.

I'm going to turn that over to Al.

That's always a difficult question. We're at 13.2% today. I think as Randy mentioned he's going to be aggressively taking out cost. It is difficult to predict. I think you could see some slippage from the 13.2 as we move throughout the year. Rebounding as Randy gets his cost structure back in line with the revenue base. But you're probably margins not too much lower than 13.2, maybe 11, 12% in that range would be trough.

Thank you.

Next question is from the line of Nick Fistin (ph) with Stephens Incorporated. Please go ahead.

Hi. Good morning, everybody. If I look at FIS, you gave some great figures on cost savings of the acquisition you've done so far. But what I wonder is on the Covansys and now you got Mike running international what are the cost savings internally at FIS from those two moves?

Let me take international first. Mike is running the international. We're going to be very aggressive in terms of attempting to penetrate the European market because that's one of Mike's strengths. What we're doing is we're going to take the product development group of international and it is reporting to Frank Sanchez and there is some significant synergies we can achieve in our development group relative to enterprise banking domestic and our international activities. There are very little synergies in Sanchez relative to overlap of sales territories and sales people because Sanchez did reduce the sales force pretty aggressively over the previous 12 months. So we're looking for significant organic growth international over the next 12 months, but it's long lead times as you know. And you're not -- you really won't see much of out of international for 6 months to 12 months. It's just going to take some time to sign the new outsourcing contracts we're working on some of the new customers that we're working on. With regard to Covansys what we have been doing in the past is really contracting with Infosys, Wipro and other third party providers that offer us an (inaudible) backend and Covansys will enable us to have a focused partner that will provide certain outsourcing solutions for us. And we believe that over the term of the five years that savings in terms of our own domestic expenditures that we otherwise would have spent will be close to $100 million.

So, that's about $20 million a year for each of the next five years not really kicking in for the six to nine months because it's going to take that long to get the Covansys people really up to speed. Another side light though is that we also believe that Covansys can benefit from our input relative to efficiencies in terms of their U.S. operation and garnering a larger, better margins from their activities.

And we intend to work very closely with Raj, the Chairman of Covansys to enable to him to see where some of those efficiencies can be realized. The result of that is that as Covansys revenue increases either from our sales from our third parties or their profit margins should also increase and our 29% ownership position should translate into nice earnings for us and nice consolidated earnings on the equity method. It won't be cash, but it will be nice earnings back to FIS.

And then on the China construction bank, you said there was a $3.5 million sale in Q4 that seems a little low relative to their size and the old contract they had with FIS. Is there more license revenue coming and can you quantify on it?

There is more license revenue coming. I don't - - I am not sure we should quantify it at this point. Is it pretty well stacked up earnings?

Yeah, it's stacked up and it's ready -- I believe we may have even gotten that in the first quarter. There's another 3.8 million, yes. 4.25 million, China construction bank in the first quarter.

Okay. Great. And Randy, you made some pretty cautionary commentary about managing through the swings in rates. Was that related to what Al just said on guiding margins down from 13.2?

Well, I don't know if they were cautionary, I mean we are going to be aggressive in our downsizing. We're holding out that the production side, the opening of the orders with the new orders coming in, predominantly in March, we had to increase our staffing. Now we'll be closing those over the next couple of months. So we need to give this a little time to settle down. But we will, after that, move into our downsizing mode aggressively as the orders and the closings drop off.

Neil, I believe that you saw a very strong performance from our title group relative responding to market conditions during the last six months of 2003 and therefore we were able to maintain our margins at a fairly high level at 13.2% in the first quarter. We're just trying not to oversell or over promise because because we know the orders have dropped off, we know that there's a lag time between when orders start falling and when you can actually begin downsizing.

It's not an immediate layoff of 2,000 people. It's a gradual program that we institute throughout our counties and each profit center to take staff down. And we just don't want to have expectations set too high and then not deliver in the second and third and fourth quarters. We would be very happy with a 13.2% margin and title going forward in the second and third quarter and it's achievable but we don't, we aren't guaranteeing it.

Great. Thank you.

Next we'll go to the line of Audrey Snell with Brean Murray. Please go ahead.

Hi. Most of my questions are answered. But just a couple of questions on the strategic rationale with regard to Covansys you touched on that a little bit, Bill, just curious will you be making at some future date joint sales calls with them? Will you use them as sub contractors on bids for various entities for processing? Can you give us a flavor of that sort of thing?

Well, yeah, Audrey, there's several avenues that are open to us, first, of course, is simply using them as our India back end as opposed to using other third parties as we've been doing in the past. And that's pretty significant. We have, or about to engage between 3 and 400 people in India. Through other third parties and those will shift to Covansys. However, what we found particularly in the large bank space is a very cost conscious group.

And larger the bank the more cost conscious they are and concerned about professional services, development support, IT testing, so on. And our goal is to go to those large lenders and either directly as part of the bid process garner new business because we can provide a lower cost structure or in conjunction with some of our very large banking partners, walk in with Covansys as our back end to obtain new development business. So, we're doing it all the way across the board. And frankly we felt like we needed to have an investment in a India back end so that we could get if not control, be very influential with regard to the way they allocated resources and the way they responded to our customers.

So, that was a primary importance to us. We also felt like if we were going to deliver that level of business to one or more third parties that FNF should benefit from that and we should have a piece of the profitability that we are -- piece of the profits that are being transferred to those third parties. So, we picked Covansys after about a nine month search and talking to at least 12 or 13 different companies and we felt they were our best partner because number one, there was the opportunity to take the position of the company and re-structure their capitals, re-structure their capital structure. And we also had confidence in their ability to deliver from the financial institution out-sourcing and development side.

Okay. And are you making or will you make joint sales calls with them?

We will, that's a little bit of a difficult question, we will bring them in on some of our sales calls when we feel we have a need to provide an India back end. So, joint sales calls, probably not. As the sale develops, we'll bring them in at that point. There are customers and we want to protect that customer base for our business. And we don't own 100% of Covansys. So, we won't be making, as you say, joint sales calls, but we'll certainly be bringing them in on sales efforts.

Okay. Other than the traunches of warrants that were disclosed under which you can own an additional 4 million shares, do you have any other potential or agreements in place for additional potential ownership of Covansys.

Well, we're restricted during the initial period of our investment to no more than a 40% ownership including the exercise of various warrants, the warrant traunches that we have in place. So, the warrants don't count against the 40% until they're actually exercised. And what we want to do is we want to take a significant total from Covansys ensure that the partnership and the strategic relationship worked, and then we're keeping our options open for the future.

Okay. A couple of other questions on cost savings, you mentioned that you had hoped to realize 25 million in cost savings on the Orum acquisition by the end of this year and about 20 million on the Sanchez acquisition but you didn't give us a date that you would hope to realize those cost savings on the Sanchez acquisition, can you give us a ball park date there?

Well, Sanchez is actually 8 to 10 million. We hope to hit the 10 million number, but remember, Sanchez only had about 90 million or 92 million of revenue or 95 million of revenue. Sanchez would hope to, Ernie, when? 12 months? We should be able to easily do that. We've already got the programming, the development staff is already starting to be merged in the data center. So most of the project that we have to take that out are already rolling. So I would say 12 months to actually realize it. But much faster than that to identify it and have the process in place.

Okay. Can you tell us how many clients you added on the processing side in the quarter?

That was a good -- we have Gary Norcross here. Do you have any new customers?

I can go through those. If we can talk about the small bank first, I can give you a flavor of a few of the first quarter wins. We did a nice renewal with Allegheny that our competition with FiServ.

(Inaudible)

We had five -- within the integrated financial solutions division, when he five new customers that we signed, not including the Orum acquisition.

The biggest one was Trustco Bank.

And how large was that one?

16 million.

16?

Yes. Okay. I have one question for Al. You may have mentioned this and I might not have heard it. The realized gains in the quarter net basis about 12.5 million, what was your net account?

We have an equity portfolio that's managed in-house, there were a number of sales in that. It's pretty consistent with the performance from quarter to quarter. Plus included in that were sales out of our bond portfolio, so nothing real big. There were four or five of them in a 2 million-gain rate range.

Is it fair to model that level for each of the remaining quarters of this year?

You know, it can fluctuate. I can't predict what the markets are going to do, but we've got a pretty good performance out of that portfolio over the years.

Okay. One last question, I know you don't give guidance, but we do face a number of difficulties in modeling the company's remainder of this year as well as next year only because of the dynamic quality of the changes ongoing and the acquisitions and integrations. Can you at least comment for next year on whether you would hope to have an up earnings year versus '04 or not? Because there does seem to be a lot of change going on and we're not really sure whether it's an up, down or flat year.

Audrey, you're talking about from '04 to '05?

Yes.

Right, I would hate to go there. I think you're getting me into the guidance.

Audrey, when we do our second quarter conference call let us try and be a little more specific.

Okay. Fair enough. Thank you.

We have a follow-up from Mike Vince Sequera (ph), please go ahead.

Thank you, I was just looking at the open versus closed. I guess it's probably better for us from the outside looking at closed this quarter versus last quarter I don't know if you think that's a fair way to look at but it went from 65% in Q4 to 84% this quarter. That's the main reason why I was a little low on title revs this quarter and I'm just kind of curious, what was it that pushed so much fourth quarter business into Q1 and enabled you to have such a strong quarter on the title side?

Well, I believe it was actually the openings in January and February and strong closings in March. It wasn't necessarily coming in from the fourth quarter. So I -- that would be the explanation, very, very strong closings as we go through the first quarter.

Actually, Mike, what generally happens is November and December are very weak opening months. So if you went quarter to quarter, a 90-day lag as you were speaking to you might, you would show from first quarter to fourth quarter really a higher percentage that is accurate. Because we're still getting in the first quarter 60, 65% of the transactions clogs were (inaudible) because of the drop in rates an they were quick closes. So what we did, we did close a lot of inventory in the first quarter and it still only represented about 61 or 60% of our openings which really bodes well for April, May and June and the other thing that will start happening in the second and third quarter that the resale volume will start increasing as a percentage and therefore our fee for file will start moving up, both because rates have gone up and Revi's (ph) are a lower percentage but also because you're coming into the summer moving months when people are selling and buying houses in new locations.

Did it surprise you at all that Revi's were higher percentage in Q1 say Q4 that your fee for file actually went up slightly from quarter to quarter?

Yeah, that's again a strong new home construction and strong resale market so it did surprise us a little bit although did he we did know that while the percentage went up slightly, the amount of strong resale transactions is very, very good and it's continuing to be good, I mean it just isn't inventory in a lot of parts of the country, and we would like for our fee for file to start moving back up again.

Okay, thank you. One other question for Al, Al, just on the effective investment portfolio, can you give us any sort of idea what impact you would have on your say a fixed income portfolio if say short-term rates went up 100 basis points do you guys stand to be a net beneficiary of highest rates in that sector and just how is the portfolio positioned to take advantage of that?

We really will be because we keep it very short. We've got an average duration of about a little under three. You know, high quality, AA average. So as rates go up, we can ride the curve up pretty much. It is a little bit of a natural hedge in our business.

Okay. Thank you.

We have a follow-up from Geoffrey Dunn. Please go ahead.

Hi, Al, you said you expect trough title margins to be 11, 12%. Are you still defining trough as a trillion dollar market and if you are can you give an estimate of what the margin would be in a 1.5 market since that seems more realistic with the purchase size.

We go round and round about what trough is. Like somebody said a while ago, I'm not sure what that really is today. I think a trillion trough is unlikely to tell you the truth in all of what we've looked at. So at 1.5 you're probably, that's probably closer to a true trough now in this kind of real estate environment with new homes continuing to sell well and just an overall good demand for homes as homeownership increases in this country. So I'm more thinking trough may be somewhere between 1 and 1.5 when I talk about those margin levels.

And can you update us on the company's appetite for buy back? I think you've been in restriction with Sanchez and at the end of the quarter. Deals are getting smaller, still pumping off good cash flow? Are we at a level where you're going to become more aggressive or are you more focused on the acquisition front?

Well, Dan, what's our buy back on the first 750 we were looking at?

We're up to just about 400.

So we're continuing to work through that 750,000 shares of restricted stock and we're doing that on a daily basis when we're not blocked out. And then following that we'll readdress it, but as you know, we've always been responsive to ways to increase shareholder value and one of the ways you increase shareholder value is by reducing our share account.

Okay, last question. What was the average open order flow per day in the first quarter compared to the 16,000 you cited for April?

The average for the first quarter was pretty close to 18,000 open orders per day.

Okay, thanks.

And we have a follow-up from Audrey Snell. Please go ahead.

You mentioned increasing shareholder value prompted so I'm prompted to ask you about your dividend policy. Any plans to change the dividend?

We just announced just announced an 18-cent dividend. As you know about a year ago, we increased it to 50%. If you look at our history, we've tended to increase the dividend either through a 10% stock dividend by maintaining the dividend or just increasing the dividend. We've done it almost every year that's been a decent year in terms of revenue and net income and so I would guide you to history as being a predictor of future activity.

Okay, thank you.

And there are no further questions. I'll turn it over to Mr. Bill Foley for closing comments.

Thanks to all of you for joining us today. We're very enthusiastic about our prospect for 2004. Our processing business is growing both organically and through acquisition. Special insurance is another growth vehicle for us generating nearly $50 million of revenue in the first quarter. Real estate information products and services are proving to be growth vehicles even in a slowing mortgage market and we continue to dominate our primary industry the title insurance business earning more than our four national competitors combined. Thank you for joining us and we look forward to speaking with you next quarter.