Fidelity National Information Services Inc (FIS) 2004 Q2 法說會逐字稿

Welcome to the second-quarter earnings conference call. At this time, all participants are in a listen-only mode. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Mr. Dan Murphy. Please go ahead.

Thank you. Good morning, everyone, and thanks for joining us for our second-quarter earnings conference call. Joining me today are Bill Foley, our Chairman and Chief Executive Officer; Frank Willey, our Vice Chairman; Randy Quirk, our President; and Al Stinson, our CFO.

We will follow a somewhat abbreviated format this morning. Bill Foley will begin with a brief strategic overview, Randy Quirk will provide an update on our title business, and Al Stinson will review the financials for the quarter. We will not be conducting a Q&A session due to the SEC mandated quiet period surrounding our proposed Initial Public Offering of Fidelity National Information Services.

This conference call contains statements related to future events and expectations that constitute forward-looking statements. These forward-looking statements are subject to known an unknown risks, uncertainties and other factors that may cause actual events, results, performance or achievements to be different from those expressed or implied in this call. FNF expressly disclaim any duty to update or revise those forward-looking statements. The risks and uncertainties which forward-looking statements are subject to include, but not limited to -- the effect of governmental regulations; the economy; changes in the market for equity securities; competition; and other risks, including those detailed from time to time in the Management's Discussion and Analysis section of FNF's Form 10-K, and other reports and filings with the SEC.

This conference call will be available for replay via webcast at FNF.com. It will also be available through phone replay beginning at 4:30 PM Eastern Time today through next Thursday, July 29th. The replay number is 800-475-6701 with an access code of 732142.

Let me now turn the call over to Bill Foley, our Chairman and Chief Executive Officer.

Thanks, Dan. This was another strong quarter for FNF. Total revenue was 2.2 billion for the quarter and more than 4 billion for the first six months of the year. Net earnings were more than $222 million for the quarter and $372 million for the first six months of the year. Earnings per share of $1.26 were 12.5 percent above the First Call consensus of $1.12 per share. Cash flow from operations equaled $402 million for the second quarter.

Because of the proposed Initial Public Offering of Fidelity National Information Services, or FIS, we are in a quiet period with the SEC and are restricted in our ability to speak about that transaction, or any of the businesses that will comprise the new FIS. Additionally, we cannot engage in any more detailed financial discussions than will be available in the next amendment to the S1 registration statement. As a result, we will not be taking any questions on today's conference call. However, we can give you an update on what has happened concerning the FIS Initial Public Offering.

We filed the initial registration statement with the SEC on May 26 for the proposed Initial Public Offering. We received initial comments on that registration statement in a letter from the SEC on June 25, and we have responded to those comments in both a letter to the SEC and an amended filing of the registration statement on July 6. We are now waiting to hear back from the SEC. Their timetable and the magnitude of any additional comments they may have will determine the ultimate timing of the roadshow and subsequent pricing of the IPO. We plan to proceed as quickly as the SEC and capital market conditions will allow.

We have changed our segment reporting to be consistent with the current operating structure of the Company. After the completion of its Initial Public Offering, FIS will consist of Financial Institution Software and Services, Lender Outsourcing Solutions, and Information Services. After the completion of the FIS Initial Public Offering and the spin-off of FNF's remaining ownership in FIS, FNF will consist of Title and Escrow and Specialty Insurance.

The Financial Institution and Software Services segment consists of our financial institution and mortgage processing businesses. Lender Outsourcing Solutions primarily consists of two businesses. LSI provides loan facilitation services consisting of centralized customized title agency and closing services to the first mortgage, refinance, home equity and subprime lenders. Default management services allows our customers to outsource the business processes necessary to take a loan and the underlying real estate securing that loan through the default and foreclosure process.

Our LOS segment performed extremely well during the quarter. LSI's revenue grew sequentially from the first quarter and continues to operate above our revenue and profit expectations. Default continues to capitalize on revenue synergy with our mortgage servicing platform.

The Information Services segment consists of our property data services, such as flood certification, real estate tax services, credit reporting, property information, and also other real estate-related services including valuation and appraisal services, 1031 exchange intermediary services and multiple listing services. The Information Services segment also performed well, growing revenue in each sequential quarter of 2004.

We recently announced the acquisition of Geotrac, the nation's third-largest provider of flood determination and life-of-loan monitoring services. Geotrac provides flood information services to more than 2000 customers, with particularly strong penetration in the Midwest portion of the country.

The combination of FNF and Geotrac will further solidify FNF's position as the nation's second-largest provider of flood determination and life-of-loan monitoring services. This acquisition will provide additional critical mass and improved scale to our flood information business and additional strength in the Midwest through additional geographic coverage that augments our current market penetration. Additionally, the addition of Geotrac's digitized floodplain maps will allow us to continue to increase the percentage of automatic determinations and reduce manual exception processing, providing the opportunity for even greater operating margins.

I would like to now ask Randy Quirk to comment on the business conditions in the title industry.

Thank you, Bill. Second-quarter daily order volumes peaked in the month of April and declined slightly in May and June, as we averaged nearly 16,000 open orders per day in April, 14,000 in May and just over 13,000 in June. For the first half of July we are averaging more than 13,500 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 second quarter was 83 percent, versus 62 percent in the second quarter of 2003 and 61 percent in the first quarter of this year. The closing percentage for the quarter indicates that we are closing a significant volume of refinanced transactions that we opened up in the last month of the first quarter, and are returning to a solid purchase-driven market with more modest refinance volumes than we saw in 2003.

A closing percentage of 75 to 80 percent is what we expect in a normal environment. The recent weekly MBA surveys indicate that purchased market originations are at or near all-time highs, while the refinance volumes have slowed with the increase in interest rates in 2004.

Our fee per file gives the quantitative evidence of the shift in business mix between a purchase-driven and a refinance-driven market. Our fee per file for the second quarter was $1177, versus $1101 in the first quarter and $959 for the second quarter of 2003. The premium on resale transactions is about twice that of the refinance transaction, which, obviously, benefits us as we transition from the refinance-driven market of 2003 to a purchase-driven market in mid 2004.

The challenge we are now facing is to reduce the size of our title operations commensurate with the order volumes we are currently experiencing. We monitor order and personnel metrics every week for all of our operations, focusing on open order counts and headcount. During the months of May and June we reduced our staffing levels by nearly 750 positions, ending the quarter with approximately 15,900 employees. That is slightly higher than where we started the year, but we acquired American Pioneer which added about 100 employees in April. We still have more work to do in further reducing headcount, and you can expect further headcount reductions during the third quarter.

On the commercial title side, we opened 15,000 commercial orders and closed 9000 commercial orders during the second quarter of 2004, generating more than $50 million in revenue. This translates into 9 percent of our total direct title premiums for the second quarter. The open orders were an increase of about 7 percent over the second quarter of 2003 and an 8 percent increase over the first quarter of this year.

Revenue was a $10 million or 26 percent increase over the prior year, and a $6 million or 13 percent sequential increase from the first quarter of this year. There is definitely positive momentum in the commercial market in the first half of 2004.

Finally, we completed 7 NGS installations during the quarter, giving us a total of 12 implementations. We are scheduled for an additional 24 installations in the third quarter which will give us 36 installations by the end of the third quarter. By the end of 2004, we expect 23 percent of our direct title revenue to be operating on NGS. Our deployment schedule calls for all of our California operations to be installed with NGS by mid 2005, with Arizona, New Mexico, Hawaii and Nevada scheduled for the second half of 2005.

Let me now turn the call over to Al Stinson to discuss the second-quarter financials.

Thank you, Randy. Net earnings were 222 million in the quarter, an 11 percent decline from second-quarter 2003 net earnings of 248 million and a 48 percent sequential increase from the first quarter of this year. Diluted EPS of $1.26 decreased 22 percent from second-quarter 2003 diluted EPS of $1.62, due primarily to the larger share base that resulted from the stock issued in 2003 and 2004 for the FNI, for the (indiscernible) and by Orem and Sanchez acquisitions.

Earnings per share rose 43 percent sequentially from the first quarter of this year. Cash flow from operations was 402 million for the second quarter of 2004. Our overall pre-tax margin was 16.3 percent for the second quarter compared to 21.4 percent in the prior year period and 13.2 percent in the first quarter of this year.

Title premiums of 1.2 billion increased 12 percent over the second quarter of 2003. Direct premiums declined by 4 percent while agency premiums increased by 30 percent, indicative of the lag in agency remittances. Escrow and other title-related fees of 294 million increased by 3 percent over the prior year, as we earn higher escrow fees on purchase transactions than on refinance transactions. As Randy mentioned, fee per file was $1177 for the second quarter, as compared to $959 in the second quarter of 2003 and $1101 in the first quarter of this year.

FISS contributed 300 million in total revenue for the second quarter versus 220 million in the second quarter of 2003, a 36 percent increase. The organic growth rate was 10.9 percent

In the Lender Outsource Solutions segment, LSI generated 59 million in revenue versus 98 million in the second quarter of 2003, as an increased number of customers utilized our customized loan facility services, but was offset by the slower mortgage market.

Default management services generated 58 million in revenue for the quarter versus 38 million in the second quarter of 2003, an increase of 53 percent -- all of which was organic growth primarily resulting from the revenue synergy between our mortgage servicing platform and our default management services.

Information Services generated 145 million in revenue for the second quarter, compared to 147 million in the second quarter of 2003 and 141 million in the first quarter of this year. Property data -- primarily flood, tax, credit, property insight and IDM accounted for 54 million in revenue, while real estate-related services -- which includes valuation and appraisals, 1031 exchange and multiple listing services -- contributed revenue of 91 million.

Specialty insurance -- which includes flood insurance, home warranty and homeowners insurance -- contributed 58 million of revenue for the second quarter, with flood insurance generating 28 million, home warranty nearly 15 million and homeowners insurance 15 million.

Interest at investment income was 16 million, an increase of 1.4 million from the second quarter of 2003. Net realized gains were $9 million for the quarter.

On the expense side agent commissions were 530 million, a 30 percent increase over the second quarter of 2003, consistent with the 30 percent increase in agent title premiums as agent commissions remained approximately 78 percent of total agency premiums.

Personnel cost of 722 million and other operating expenses of 514 million were 8 percent and 16 percent higher than in the second quarter of 2003. The largest contributor to the increase was the FISS segment, with the Orem, Sanchez, TouchPoint and Bankware acquisitions.

The provision for claims was 67 million as we provided for claim losses at 5.4 percent of gross title premiums. Actual claims paid during the quarter were 60 million, resulting in a $7 million increase to our reserve for claim losses and a reserve balance of 985 million at June 30.

Interest expense was 11 million during the second quarter. It consists primarily of 250 million in bonds at 5.25 percent, 250 million in bonds at 7.3 percent, and 275 million drawn under our credit facility at a LIBOR-based rate which is near 2 percent.

Our debt to total cap ratio was 16 percent at June 30. The tax rate remained at 38 percent and we expect the rate for all of 2004 to be no more than 38 percent.

Our investment portfolio was 3.7 billion, and increase of more than 300 million from March 31, 2004. There are certain legal and regulatory restrictions on some of those investments, including secure trust deposits of more than 1 billion and statutory premium reserves for underwriters of more than 1 billion. Of the 3.7 billion, 1.5 billion was available for corporate use with about 200 million in non-regulated entities and more than 1.3 billion held through regulated underwriters. Book value per share was $25.61 at June 30.

Thank you for joining us and we look forward to speaking with you next quarter.