Fidelity National Information Services Inc (FIS) 2004 Q3 法說會逐字稿

Welcome to the third quarter earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session. Instructions will be given at that time. If you should require assistance during the call please press star zero. I would now like to turn the conference over to our host, Mr. Dan Murphy. Please go ahead, sir.

Thank you, good morning everyone. Thank you for joining us for Fidelity National Financial's third quarter 2004 earnings conference call. Joining me today are are Bill Foley, Chairman and Chief Executive Officer, Frank Willey, Vice Chairman, Randy Quirk, our President, and Al Stinson, our Chief Financial Officer. We will follow our usual format this morning. 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 your questions and finish with some concluding remarks from Bill Foley.

This conference call may contain statements related to future events and expectations and as such constitute forward-looking statements. These forward-looking statements are subject to known and unknown, uncertainties and other factors that may cause actual results, performance or achievements of the company to be different from those expressed or implied during this call. The company expresses disclaims any duties to update or revise these forward-looking statements. The risks and uncertainties which forward-looking statements are subject to include but are not limited to the effect of governmental regulation, the economy, competition, and other risks detailed from time to time in a management's discussion and analysis section of the company's Form 10-K and other reports and filings with the SEC. The conference will be available for replay via webcast at www.fnf.com. It will also be available through phone replay beginning today at 12:30 eastern time through next Thursday October the 28th. The replay number is 800-475-6701. And the access code is 750078. Let me now turn the call over to Bill Foley our Chairman and Chief Executive Officer.

Thanks Dan.

This was another excellent quarter for FNF. Total revenue was nearly 2.2 billion for the quarter and more than 6.2 billion for the first nine months of the year as we are on track to exceed 2003's record full year revenue of $7.7 billion. 30% of our revenue came from our nontitle operations, primarily the financial processing, outsourcing, and information segments. In addition to continued organic growth, the Cordova acquisition that closed on September 30th and pending InterCept acquisition should move that percentage higher in the fourth quarter and into 2005. We closed three acquisitions during the quarter and announced a fourth that we expect to close in November. The first to close was our acquisition of GeoTrack, the nations third largest provider of flood determination and life of loan monitoring services. GeoTrack provides flood information services to more than 2,000 customers with particularly strong penetration in the Midwest region of the country. The combination of FNF and GeoTrack fully solidifies FNF's position as the nation's second largest provider of flood determination and life of loan monitoring services. Additionally, the addition of GeoTrack's digitized flood plain maps allows us to continue to increase the percentage of automatic determinations and reduce manual expectation processing providing the opportunity for even greater operating margins in our flood business.

We also closed our investment in Covansys, a publicly held provider of application management and development in offshore outsourcing. We purchased 11 million shares or 29% of the common stock of Covansys for a total purchase price of $121 million. Prior to this investment, FNF's global outsourcing activities consisted of project based contractual relationships with several offshore service providers. We currently have 300 dedicated offshore resources at Covansys working on more than 30 FIS development projects. On September 30th we closed our acquisition of 75% of Cordova, a provider of core processing software and outsourcing solutions to the German banking markets with approximately $100 million in revenue. This acquisition positions FNF to benefit from the growth opportunity in the German core processing market and provides FNF a significant foundation in this key European economy to assist in the realization of our overall expansion plans throughout Europe.

Finally we announced the acquisition of InterCept during the quarter. We will pay $18.90 in cash for each share of InterCept for a total purchase price of approximately $410 million. Heart Scott Rodina (ph) was filed on October 4th and the proxy was mailed to shareholders last week in preparation for InterCept's shareholders meeting on November 8th. The acquisition of InterCept continues our strategy of building more significant critical mass in our technology solutions for the domestic community banking and credit union market places and provides FNF with an incremental 425 core processing customers and more than 700 additional item processing customers. We are also confident in our ability to realize at least 25 million in cost synergies through our integration efforts of InterCept into FNF. The synergies will primarily be personnel related and corporate overhead, core operations and item processing. For example, there are about 10 instances of overlap in item capture centers locations between FNF and InterCept that will yield synergies. Additionally we will implement our item processing software that was acquired in the Bankware acquisition into the InterCept capture centers.

Both our Orem and Sanchez acquisitions have been integrated into our operations. Orem has been integrated into our integrated financial solutions division and it's platforms Misor and Mercury are now marked under the fidelity name. We have exceeded our target of 25 million in cost synergies from Orem as we have recognize 27 million in run rate synergies to date with an additional 6 million identified but not yet realized. We have renewed 14 core Orem customers since the acquisition and have benn successful in migrating 12 additional Orem customers from either the Orem banking system or Bemus (ph) platforms to our horizon platform. We have only seen one competitive situation where we have lost a customer since the acquisition. With the addition of Orem and InterCept to our integrated financial solutions group, we now have nearly a $500 million revenue base in that division alone and platforms to cover the needs of the entire credit union thrift and community bank markets. Well have the core bank pack platform for Denoval (ph) Community Bank's from the InterCept acquisition. We have premier for small community banks. The horizon platform for larger community banks, Mercury for small credit unions. Misor for mid-sized credit unions and thrifts, and profile for larger thrifts.

Sanchez's domestic operations have been integrated into our large bank group, Enterprise Banking Solutions. While its international operations have been combined with our existing international business under the leadership of Mike Sanchez. We have recognized $9 million in cost synergies from the Sanchez acquisition and are confident of obtaining our original goal of $10 million in cost synergies. We are very excited about the growth protects for our international business. We announced a contract with Webster Bank in September. Webster, the largest independent bank in souther New England with more than 17 billion in assets signed a 10 years information technology and services agreement for an enterprise wide integrated suite of loan processing solutions, including, deposits, retail to consumer loans, mortgages, mortgages originations, commercial loan origination and servicing, and customer management and interaction. This contract highlights the power and breath of processing services that FNF can offer a financial institution. Webster realizes that leveraging a single vendor with integrated seamless systems for its financial services needs will enable it to realize significant efficiencies and focus on it's core business while enhancing it's ability to serve customers and increase the value it delivers to it's shareholders. Significant relationships like this allow us to provide the other services that FNF offers, such as default management, centralized title and closing services and information for the mortgage underwriting process like flood, tax, credit and valuations. Finally, on September 9th. We announce the postponement of the proposed IPO of FIS until at least the first quarter of 2005 due primarily to the relatively weak and unpredictable equity market conditions at that time and the announced acquisition of InterCept. Once we are confident we have successfully integrated InterCept into FNF and market conditions for and IPO are more favorable, we will reconsider the idea of an IPO for FIS. We do not anticipate that occurring until at least the first quarter of 2005.

Let me now ask Randy Quirk to comment on business conditions in the title industry.

Thank you, Bill.

Third quarter daily order volumes picked up momentum as the quarter progressed increasing from 280,100 in July to 295,500 in August to 298,300 in September. On a daily basis we opened up 13,400 orders in July, 13,500 orders in August, and 14,200 in September. For the first half of October we are averaging more than 13,600 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 third quarter was 69% versus 105% in the third quarter of 2003, and 83% in the second quarter of this year. The closing percentage for the quarter indicates that we are in a relatively stable environment with a solid increase in inventory that should provide good closed order volume until the fourth quarter. A closing percentage of 75 to 80% is what we expect in a normal environment. Below that indicates an increasing inventory of orders. The recent weekly NBA (ph) surveys indicate that purchase market originations remain very strong while the refinance volumes picked up with the decline in mortgage rates in the third quarter. It is also further note that there is normally a seasonal slowdown in the purchase open orders in the latter part of the fourth quarter especially between the Thanksgiving and Christmas holidays.

Our fee for file is quantitative evidence of the mix between purchase and refinance business in the quarter. Our fee for file for the third quarter was $1,300 versus $1,177 in the second quarter and $940 in the third quarter of 2003. The premium on the resale transactions is about twice that of a refinance transaction which obviously benefits us as we have transitions from the refinance driven market of 2003 to the purchase driven market of 2004. The challenges we now are facing is to reduce the operating costs of our title operations despite the continued strength in order volumes. We monitor order and personnel metrics every single week for all of our operations focusing on open order counts and head count.

During the third quarter we reduced our staffing levels by nearly 320 positions and in the quarter with approximately 15,600 employees. We eliminated another 160 positions in the first half of October and our title head count now stands at 15,400. We will continue to monitor our operating metrics, and you should expect to see a continued reduction in the number of employees in our title operations. On the commercial title side, we opened 14,000 commercial title orders and closed more than 9,000 commercial orders during the third quarter of 2004 generating nearly $59 million in revenue. This translates into 11% of total direct title premiums for the third quarter. The open orders were about equal with the third quarter of 2003 and down slightly from second quarter of this year. Revenue of 59 million, however, was a 13 million or 28% increase over the prior year and a $9 million or 17% sequential increase from the second quarter of this year. As the average fee in our commercial business was significantly higher in third quarter of 2004.

Finally, we now have 24 operations functioning on NGS as of September 30th. We are scheduled for an additional eight installations in the fourth quarter, which will give us 32 installation by the end of the year. We are currently focused on our larger operations in the Bay Area of northern California. Our deployment schedule calls for all of our northern California operations to be installed with NGS by mid 2005. Southern California implementations to begin in the second quarter of 2005.

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

Thank you Randy.

Net earning were 194 million in the quarter, a 30% decline from the record third quarter 2003 net earnings of 277 million. For the nine months net earnings from 566 million. Cash flow from operations was 402 million for the third quarter of 2004, and 925 million for the first nine months of 2004. Our overall pretax margin was 13.9% for the third quarter and 14.6% for the nine months ended September 30th. Title premiums of 1.25 billion increased 2% over the third quarter of 2003. Direct premiums of 508 million declined by 20% indicative of the decline from peek refi volumes in the third quarter of 2003. While agency premiums increased by 27%. Escrow and other title related fees of 263 million decreased by 16% from the prior year. Consistent with the decline in direct premiums. As Randy mention fee for file was $1300 for the third quarter. As compared to $940 in the third quarter of 2003. Direct orders closed decline by 49% while the fee for file increased 38% for the third quarter of 2004, versus the third quarter of 2003.

FISS contributed 329 million in gross revenue and 310 million in external revenue for the third quarter versus 226 million in the third quarter of 2003. A 37% increase. The gross organic growth rate was 10.5% and the net organic growth rate was 4.2%. Our large bank group, EBS contributed 115 million in revenue, a 55% increase over the prior year quarter. Our community bank group, IFS contributed 70 million in revenue a 33% increase over the prior year. The mortgage processing business contributed 75 million in revenue, a 6% increase over the prior year quarter. The lender outsourcing solutions segment generated 103 million in revenue for the quarter. Default management services contributed 58 million in revenue for the quarter versus 45 million in the third quarter of 2003. A 29% increase. Primarily resulting from the revenue synergy between our mortgage servicing platform and our default management services. LSI generated 34 million in revenue for the third quarter.

Information services generated 155 million in gross revenue, and 141 million in external revenue for the third quarter compared to 155 million in the third quarter of 2003 and 144 million in the second quarter of this year. Property data, primarily flood, tax, credit, property insite and IDM accounted for 52 million in revenue, while real estate related services, which includes evaluations and appraisals, 1031 exchanges and multiple listing services contributed revenue of 89 million. Specialty insurance contributed 64 million of revenue for the third quarter with flood insurance generating 33 million, home warranty 16 million, and homeowners insurance 15 million. Interest and investment income was 19 million an increase of 5 million from the third quarter of 2003, due to the larger fixed income for portfolio in the third quarter of 2004 versus the prior year. Net realized losses were 2 million in the quarter. On the expense side agent commissions were 580 million. A 26% increase from the third quarter of 2003. Consistent with the 27% increase in agency title premiums. As agent commission remained approximately 78% of total agency premiums. Personnel cost of 700 million and other operating expense of 493 million were 2% and 4% lower than in the third quarter of 2003. More specifically, personnel cost in the title business declined by 53 million or 11%. For the third quarter versus the third quarter of 2003. And other operating expenses declined by 15 million or 6% from the prior year.

The provision for claims for the title business was 70 million (ph) as we provided for title claim losses at 5.5% of gross title premiums. The provision for the homeowners claims was 5 million and was included in the provision line item rather than in other operating expenses as we had been doing in the past. Actual claims paid during the quarter were 65 million. The reserve balance grew by 12 million in the third quarter due to the reserve being 6 million greater than claims paid and the reclassification of the homeowners reserve from other accrued liabilities. Our reserve for claim losses was 997 million at September 30th. Interest expense was 11 million during the third quarter. It consists primarily of 250 million in bonds at 5.25%. 250 million in bonds at 7.3% and 435 million drawn under our credit facility as a LIBOR based rate near 3%. Our debt to total cap ratio was 18% at September 30. The tax rate was 35% for the third quarter as we now expect the full year tax rate to be 37%. Largely impacted by favorable legislation in the state of California.

Our investment portfolio was 3.8 billion an increase of more than 172 million from June 30, 2004. There are certain legal and regulatory restrictions on some of those investments, including secured trust deposits of 883 million and statutory premium reserves for underwriter of more than 1.1 billion. Of the 3.8 billion, 1.6 billion was theoretically available for corporate use with about 150 million in nonregulated MDs and more than 1.4 billion held through regulated underwriters. Book value per share was $26.55 at September 30.

Let me now turn the call back to our operator to allow for questions.

Thank you, Mr. Stinson. Ladies and gentlemen, at this time well begin our question and answer session. If you wish to ask a question, please press the star followed by the one on your touch-tone phone. You will hear a tone indicating you have been placed in queue. If you press star one prior to this announcement. We ask you please do so again at this time. You may remove yourself from queue at anytime by pressing star two. Questions will be polled in the order they are received. If you are using a speakerphone, please remember to lift the handset before pressing the numbers. Once again, if you have a question, please press star one at this time. One moment please, for our first question. Our first question comes from the line of Jeff Dunn with Keefe, Bruyette & Woods. Please go ahead with your question, sir.

Thanks, good morning, guys.

Good morning.

First, little bit more color, I don't want to focus on the negative. But, on Orem you said you loose one customer since the acquisition, but it definitely looks like you are having a lot of success on retention. Why did that customer leave and in general how do you approach the cost savings in consideration for trying to retain your customer base as well. It seems like that's been a major consideration in the marketplace lately.

The one customer that left was actually lost before we acquired Orem but the contract actually ran out after we acquired the business. So it was sort of a predisposed, preconditioned customer loss. The primary areas for synergies are really corporate overhead, corporate staffing and that's a significant piece of the synergies we've attained both in Sanchez and in Orem, and we will achieve with InterCept. Additionally, Orem had a number of item capture centers that overlapped with our own item capture centers, and so we consolidated those centers. Orem had a data center in California which we consolidated, actually our data center into their data center. It is those kind of facilities of consolidation that really are the facilities consolidations, personnel consolidations that we can really be more efficient and do more single centers as opposed to having two centers located fairly close to each other.

On the -- in terms of customer facing personnel, that really isn't an area of synergies. There maybe sales people or people that are dealing with the customers who are migrated out of our employee base but that's more of an issue of the quality of the individual as opposed to just cutting staff to be cutting staff. Orem also had a couple of platforms that are being sundown (ph). One is called Orem business systems which was going to be the platform they migrated to Misor (ph) and Bemus (ph) customers to, and, actually, that platform was never really completed in a manner that would allow for that kind of migration. So, we are moving people off that platform to the horizon platform or leaving people on Misor (ph). So those are the -- that's where the synergies are really coming from. It is generally corporate staffing, it is HR, it is finance accounting , legal, maybe consolidation of data centers or item capture centers or locations that can be consolidated into existing location that we already have an existing in another part of the country. And, it is a continuing process, we have a lot of leased space and relet that space and push it out the door and we've -- a lot of these businesses we are buying is not quite as efficient as our own business and we need to make sure we are running our metric in their business.

As a follow-up on the customers that you have transitioned over from some of the old Orem forms are those customers going out to the market and looking for our fees or are you getting them to move over without having to have them go out and maybe search out other bids.

Depends on how that customers feels about the business unit they were dealing with. In the case of Orem, generally speaking we are able to move them to -- migrate them to horizon on without an RFP going out. The longer we own a particular business unit and the more completely integrated within or own business units the more successful we are in achieving that. In the Orem situation, we are attempting to migrate the ABS customers to horizon, and we really are, as we go forward are not going to be supporting development of the Orem business systems platform. So, you know, it is all different situations, Jeff. Sometimes it is RFPs. If that happens we are probably in trouble. Sometimes it is simply migration because we have gone to them and said we are going to do a very low cost conversion or a no cost conversion for you to move to this particular platform and we are going to support you with these other activities and other items, other services. So it is the whole gamot. Orem is now -- it has been six months, seven months since we acquired Orem and it really has been completely integrated into IFS, and Gary Norcross (ph) is doing a great job with that business. We had to make sure he had Orem integrated and collapsed with an IFS before we could take on InterCept. And now he is ready to take on InterCept, and we will go through the same process with InterCept. There are item capture centers that need to be consolidated with capture centers we already have. They have a product similar to our bank wear (ph) product, and we are going to move to bank wear (ph) in all the capture centers. They have corporate staff and corporate overhead and that's going to be consolidated an reduced significantly. They have additional sales people that overlap our sales people, so we don't need to keep 100% of sales people on both sides, on IFS and InterCept side. So, we've got -- I believe that we are proving that we can achieve synergies not only in the title business when we acquire another underwriter of title related business, but we are also showing that we can get the same sort of synergies when we acquire these processing business.

Okay. Thank you.

Our next question comes from the line of Mike Vinciquerra with Raymond James. Please go ahead with you question, sir.

Thank you good morning, guys.

Morning.

First on the title side. New order volume coming into Q4 can we assume that it is going to be more heavily weighted toward the refi side, and maybe Randy, could you give us a feel for where you think the average fee per file might head in the fourth quarter, obviously we are going to have an impact of a stronger commercial side with the big closings in Q4, but I am trying to get my hands around that piece.

Well, Mike, we did see in the third quarter the mix of business leaning towards the refinance side with moving up our mix-up towards the 55/58% mark. We believe the refis are, obviously leveling off a bit, resales are strong, so going into the fourth quarter, it will probably dip down slightly from that on the side of the refi mix. In terms of the fee per file, obviously, the more refis we close the lower the fee per file. So there should be some reduction in the fee per file in that regard. We do anticipate a strong commercial finish to the year, which should help us with our fee per file but there will be slight pressure based moving off the refis.

Actually you will increase your fee per file.

Right.

Based upon moving away from refis because you have more resale business in commercial business.

Right.

Your fee for file will go up, not go down.

Correct.

So, we are assuming it is going to be -- I am confused you are assuming it is going to be slightly up or slightly down based on what you are seeing taking shape right now, versus Q3?

It will go slightly up coming into the fourth quarter.

Very good. Moving over to the FIS side, two questions there on the FISS business, Al, can you clarify what you mean with the interest segment what happens with the interest segment revenues you have a 10.5% organic growth rate with those at 4.2% without. Can you just give us a little more color on how that works.

Sure, what is going on we have more inter company revenue today than we did in the past, because FIS has taken over some of these inner company services. That's causing the growth rate to be somewhat high if you look at it compared to the prior year. So what Dan and I are trying to do is give you two numbers, a gross number and net number the gross being, I believe Dan is 10.5, and the net being 4.2%. I think if you want to look at it pure nonFNF business it is 4.2% internal growth. The reason we also want to include that external business is because you and others wanted to see what FIS -- FINS (ph) would look like if and when we did an IPO.

That makes sense. Thank you. One other question on the LOS side revenue is down 20% pretax down almost by half and obviously this is one of the cyclical components of the proposed spin out company, two things number one should we see a boost in, at all during Q4, it sounds like you are saying the refi percentage is actually coming down and have you had any success so far, you talked a little bit about potentially signing some new customers in that automated title space and I am curious if you have had any success in that area?

We have. There is two major components in LOS one is LSI, two is default. Default continues the increase nicely in revenue primarily due to the synergies off of the mortgage platforms. So that's going to continue to increase in the fourth quarter. I think LSI is probably fairly stable right now. I don't think you are going to see much decline. So, net we are going to have an increase in all likelihood in that reporting segment in the fourth quarter.

The LSI processing side I think you were looking to add some additional customers besides, I think Wells (ph) is the main one right now.

We've added a number of them. I think there is five to six the problem is they just aren't doing that much volume. You may very well have the customer, which is a good thing but the volumes that they are contributing aren't that much. But if refis tick up a bit in the fourth quarter, that would help that unit.

That's the primary driver for that business, correct.

That is correct.

Great, thank you guys.

Our next question is Nick Fiskin with Stephens Incorporated. Please go ahead with your question Mr. Fiskin.

Good morning, everybody.

Morning.

On the Bill, on the Webster win that's a pretty big flagship win for you guys. Can you give us the idea what the revenue was prior to this broad reached agreement and what the new revenue is on an annual basis?

The revenue prior to this was they were on the Misor (ph) platform, there was a license situation and it was diminumus, I mean, you are talking less than $1 million a year coming out of Webster. Our customer win it ends up being $10 million plus, I think it is about $12 million over the life of the contract not including an item processing contract which we are bidding very aggressively on. With the InterCept acquisition because they have the large -- Sovern (ph) Bank as a large item processing customer, it validates our ability to do item processing for larger customers. So we're hopeful we'll be successful with Webster in connection with our item processing contracting which currently is in the negotiation stage. If we were to achieve that contract, it would significantly increase our annual revenue. Incidently on the item processing business, it ends up being a very big opportunity for us because as overall check volumes decline, banks that have been doing item processing for themselves find that the cost per item processed or check processed is increasing because they are doing less checks and have that infrastructure. It creates an opportunity to go to those banks and do is a very strong financial equation for those banks to show them how we can save them money if we do the item processing for them. We believe item processing for us is a growth business where as on a national basis check volumes are declining. So, for 10 years or so we should be increasing our item processing business significantly. With Orem and InterCept we now have the capture centers necessary to do item processing anywhere in the country and do it very, very efficiently. With our bank wear (ph) acquisition we have the software to be even more efficient. We have a real growth business in item processing. It is a very exciting business in a declining market business , declining check volume business.

And then on the M&A pipeline, can you give us an idea of the bank technology companies in the pipeline versus the payment processing. How would you weigh those two categories?

We are really focusing on core deposit systems and acquiring those and rounding out our product offerings. And that's why you saw the Cordova acquisition. Its really why you saw InterCept in terms of the community bank space Orem. Right now we really put our major acquisitions are basically on hold pending acquisition of Orem and integrating Orem -- I'm sorry, acquisition of InterCept and integrating InterCept into our IFS business. That's going to take us three or four months to really get our arms completely around it. We are already working hard on it, and we've already identified a number of synergies within InterCept, and we anticipate closing sometime between the 9th and 15th of November. That really is our major acquisition for the next several months.

Okay. And the last question, a couple quarters ago you guys were asked a question about should we expect '05 EPS to be greater or equal to or less than '04 EPS. Have you guys run through that analysis yet.

Nick, this is Al. I think that is tending toward guidance. We are not giving guidance at this point.

I thought I'd ask. Thank you.

Nice try.

In our next question is Timothy Mullin with Virginia National Bank. Mr. Mullin, please go ahead with your question.

Thank you, good morning. Did you -- I had to put you on hold a second ago. The fee per file on refis versus purchases is roughly what?

The refi fee per file is versus purchases is about 50% so you have an average purchase price or premium and closing services of about 1,800 and the average fee per file on the refi is about 900.

Okay. Regarding the potential IPO and spinoff, on the remaining company, I assume the entire dividend was going to stay there. Is there any reason to think that would not be the case going forward? Meaning, if you do the IPO and spinoff at some point next year is there any reason you wouldn't keep the $1 dividend on the old company?

There is no reason why we wouldn't keep it. In fact, the cash flow of the remaining insurance business would be enhanced, because at the present time we are allocating a significant portion of our cash flow for acquisitions in the processing space and using very little common stock because as you know our price earnings ratio and our evaluation of our common stock is in the 7 to 8 PE ratio, and so, it just hasn't made sense for us to use stock as a general rule for acquisitions, so we've been using cash and that cash would then stay at the insurance company.

Uh-huh. Two last things. I'm informed we are an actually an InterCept user somewhere within this organization at some point well actually be a customer of yours as well. The other thing was did the investment bankers basically tell you you couldn't get a deal done at any time or did they ask you to skinny it down to a small level that you didn't think it was worth while. And, if that is the case, if all you wanted to do was get a currency out there, why wouldn't you just do a much smaller offering and have it done anyway.

In terms of the IPO?

Exactly.

The valuations that we were receiving from our investment bankers really ,-- the increase in the valuation over and above our present PE ratio was not adequate to support the IPO at the time under the market conditions that existed in August and September. As you may also recall, we made our filing, I believe, in May , or S1 in May. We got a 30-day turn on the first round of comments and the next round of comments didn't come back until late July and we turned thouse, and the next round of comments rally was delayed. So, it got to the point that he IPO was being delayed into the post August 10th time frame when it is very difficult to undertake an offering. That coupled with the valuation we were -- valuation guidance we were receiving from our investment bankers, coupled with the InterCept acquisitions really that was to delay IPO. We new that InterCept because of the size of the acquisition would be confusing to the investor base that would be acquired, that we acquired stock in the IPO and we felt it was more appropriate to acquire InterCept and get our synergies in hand and demonstrate that we had a very profitable business and at that point then reevaluate the IPO.

Thank you.

You bet.

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

Hi. As far as item processing, Bill, how much outsourcing is done now versus in house?

It is actually very small amount of outsourcing it is mainly with the smaller banks and smaller community banks. The larger mid tier banks, banks that are 5 billion plus in assets generally speaking do their own item processing. Those banks, the banks from the number 40 to number 200 in terms of asset size are our target customer. They are perfect because they are going to find as we go forward during the next several years their cost per item is going to increase as their number of items on a gross basis decreases and we can be a very, very efficient alternative for them.

Would you size that addressable market in the billions, or hundreds of million potentially?

Well, it is in the hundreds of millions, it is in the hundreds of millions.

Okay.

And we have got competition, of course, [inaudible] is a very able competitor, and Jack Henry has an items processing business, and ourselves, and there are some other items processors. But, we are now, with the InterCept acquisition, pretty clearly at least number two in item processing.

Okay. I have a couple questions on staffing for Randy. I am not sure about this, but how does NGS influence personnel levels if at all?

Well, I think NGS will influence personnel levels by our ability to combine some of our back room functions, having our multiple brands on one operating system will allow us to consolidate some of our title functions and some of our accounting functions, so that is one significant impact. In addition to that because of the overall efficiencies of the system, we should be able to start making adjustments within operations and within specific to closing and production functions. So, over time it will continue to effect and move our staffing levels lower. Right now we are in -- we are active in about 30 California operations which spreads out to about 120 individual locations. So, we are moving aggressively into the process, but we are still early in the process.

In the interim, near term, how do you staff amidst strong title volumes, knowing that those might decline in '05.

As you know, as we read earlier hear in the statement that we had been reducing our staffing levels through the third quarter at 320 adjustments in the third quarter, 160 in the first two weeks of October. We have adjusted staff levels downward in 21 out of the last 25 weeks. So, we watch this on a weekly basis, and as we go into the fourth quarter as order levels [inaudible] the seasonal and the traditional year-end of performance, we will continue on with staffing levels, or staffing adjustments. So, we will continue to keep moving in that direction through the end of the year.

Audrey, we also -- we are very metric driven in terms of title operations, our branch operations, and so we -- as we measure openings for employ and closings for employ, when particular operations start having reduced number of openings for employ, then the staffing comes down. So, as Randy is saying, every week is measured, and operations that have not adjusted staffing will get attention from Randy or his divisional or regional managers.

On the other side, are you staffing up at all in commercial title?

We have been successful in terms of the commercial business in terms of hiring individuals from our competitors, and that is throughout Southern California, the state of Washington, Arizona, Chicago. So, there has been an increase in some of the commercial offices. Primarily in terms of sales representatives or closing offices. We haven't opened any commercial office to speak of other than in Arizona and a small office up in the state of Washington, a small office. So, it is really in the commercial business more of a zero sum game and we are just taking business from our competitors.

Okay. One last question on commercial. Bill, can you give us a little color on regional strengths there and market size segment strength. Are you seeing it across the board, are you seeing a comeback in commercial real estate across all regions of the country, or is it kind of spotty?

It is pretty strong across the country. It is very stable. It has been stable for really a couple of years, and we have increased our volume in terms of revenue our of the commercial business pretty significantly by gartering control of higher liability transactions, and also being very disciplined in terms of the rates that we are charging. In other words not getting that competitive spiral. We keep on underbidding our competition. We basically set our rates, and if people want to do business with us, those are the rates that we are going to charge, and they are very competitive rates, but we aren't necessarily undercutting ourselves in terms of rate competition.

Okay, thank you.

Our next question comes from the line of Paul Glazer with Glazer Capital. Mr. Glazer, please go ahead with your question.

Just a question about the liability that you may be assuming on your acquisition of InterCept. There is a lawsuit by the investment bankers. Do you expect us to know what that liability will be before you close the acquisition?

There is a maximum liability associated with that. It was taken into account during our purchase price negotiations, and I believe the maximum liability is something in the order of $5 million, and InterCept is negotiating that as we speak.

Okay, thank you.

We have a followup question from the line of Jeff Dunn with KBW. Please go ahead Mr. Dunn.

Thanks, I should probably know this, but Al, could you give a little more color on what happened in California that effected the tax rate, and does this mean that we should be expecting this quarter's levels to persist in '05. And then second, it seems like we have to ask this for everybody this quarter, and you have probably answered it a lot, but can you address any of the Spitzer (ph) stuff out there that does or does not apply to you or the title industry in general.

Let me tackle the tax rate. What occurred, was that there was some adverse legislation, I believe it was last year about 18 months ago that in effect eliminated our ability to exclude the dividend from taxable income for state tax purposes in California. The dividend being upstream from the insurance companies to the holding company. So, that was very adverse, so we had increased our tax rate to 38%. The governor and the legislature were persuaded that that was not a fair treatment and have reversed that course, and we were able to reduce our tax provision accordingly. I anticipate on an ongoing basis that it will be 37%.

And Jeff, I have Peter Sodowsky (ph) our General Council, and he would like to address the Spitzer (ph), the Marsh (ph) lawsuit that Spitzer (ph) is involved in.

I am very comfortable with the way we conduct business in New York and throughout the United States. I am familiar with the allegations in the Marsh (ph)complaint filed by the New York Attorney General. They have no relationship to how we conduct business. First we have no contingent business to brokers. We are not a broker and in fact, there are no brokers in the title business. The Attorney General alleged that clients would come to Marsh (ph) as a broker, and Marsh (ph) was to negotiate on the behalf of the client for best possible rates. The allegation was that instead Marsh (ph) would rid the pricing with some insurance companies and steer the clients to companies that gave fictitious high noncompetitive rates, and Marsh (ph) would then receive so called contingent commissions from such companies. I actually believe this can't happen in the title business because in New York, as well as in several other states, the insurance department reviews and accepts title insurance rates. In New York they are filed by the title insurance rate service association and under New York law those rates are mandatory, they are published in a rate manual, and the companies cannot wave these premiums, they cannot reduce them or increase them. As a result, by law, a client would receive the same quote for the title insurance premium regardless of which insurance company or whos title insurance agent was approached because the rate is effectively set by the state there is no reason, opportunity, or incentive to rig insurance in the title business. Second, across the country title business has been regulated by a Federal statute called RESPA (ph) which prohibits kick backs in real estate closing business. RESPA (ph) applies to title insurance. We have been following it for several decades. It prohibits the type of conduct alleged in New York by the Attorney General in the complaint. A number of states have similar anti-kick back laws applicable to title insurance business under which we conduct our business. We have been cooperating with the Attorney General Office in New York as we always to with our regulators and have been providing information as requested by that office in the civil sopena for information served several months ago as part of it's investigation of the insurance industry and as I said, we are very comfortable with were we stand.

We have another followup question from the line of Mike Vinciquerra. Please go ahead with your question, sir.

Thank you. Al, just a couple of house keeping things. First, with the acquisitions. On the default side and then with GeoTrack, did, I think you had an acquisition that defaulted earlier this year, and I am just curious what impact that had on a year-over-year basis versus last year's revs. And then did GeoTrack impact the 52 million in data services revenue in the current quarter?

GeoTrack was closed I believe in May, wasn't it Al? May or June.

GeoTrack contributed in this quarter, I believe, about 3.8 million of revenue if my memory serves me. I cannot recall a default acquisition that we've done. I am drawing a mental blank on that.

I may be confusing it with something else.

I think you are confusing it with something else. We've talked quite frequently about additional default customers, but not acquisitions.

Okay. I apologize for that. And then on the other title revenue, the escrow revenue, about 263 million. When we look at how to split that between direct and Asian, does it all go to direct or how do we split that up.

It all goes to direct.

Thank you very much.

We have another follow-up question from the line of Nick Fiskin. Please go ahead.

On the default side, how much of that roughly 30% increase that you are seeing higher defaults themselves versus you guys taking market share from others.

It is almost 100% market share gain as opposed to increase and default volumes. The default rate is actually as low as it has been, so it is direct result of transitions some customers from competitors to us, in particular, Washington Mutual and Fair Banks is now moving over and Option One and Aurora Home Loans. And sometimes it just takes longer to get those customers on board than you anticipate. It is almost 100% organic growth from customer gains.

And, Al, what were the realized losses there.

Well, it was a combination, really. The net losses were the net of a number of items. We had some gains of, I think it was about 17 million in gains, we had 14 million in losses in the portfolio, that netted to a gain of 2.8. Then we had about 4.9 million of loss on disposal of some fixed assets which we put in there. So really on pure, what you think of as gains and losses it was about 2.8 gain but we had about 4.9 in other disposals of fixed assets. Some of that was remainder of leasehold improvements in Santa Barbara.

Lastly, the 4.2% net for FISS, do you have that a number going back, or is that something we can get at a later date?

Going back?

Yeah, I think we had it the last -- disclosed it the last quarter.

Last several.

Last several quarters. We can get that to you.

Okay. Thanks.

We have a question now from the line of Andrew Pool with SAC Capital. Go ahead with your question.

Yeah, hi, this is Peter Way from Sack. Just a couple questions. I am wondering, one, why you walked away from the IPO process because of valuation or because some investment bank told you that the valuation was lower when I thought this was really a strategic split of the company and not necessarily a short-term move to enhance value in the stock price over any given quarter?

Well, the original valuations we received from our investment bankers were a lot more optimistic than what the final valuation was in August. The primary reason as to the delay is there were two, first, we elected to go forward with the InterCept acquisition and we felt that because of the size of that acquisition it would be confusing to the analysts and to the individuals buying the stock relative to InterCept and integrating that -- having that acquisition pending prior to the integration with InterCept within our IFS group. Secondly, we got caught in the time bind in that our comments coming back from the SEC were delayed to the point we got into that late August time frame and mid August time frame where we really couldn't effectively accomplish the sales process for the IPO. Those two things combined with each other really caused us to delay the IPO, announce the InterCept acquisition and relook at the IPO sometime in the first two quarters of last year.

I don't mean to beat on you guys about this things. But it just seems to me that, you know, the InterCept acquisition had to be something you were working on for quite some time. Since when does a banker set the price and not the investors. It is -- I am trying to get an sense. I am a owner of your sense and I am trying to get a sense of what your company is going to look like six months from now because the corporate structure, or what I think is going to be the corporate structure seems to be changing. What is the real direction is the strategic direction to split the company up or is it just to do capital transactions depending up on what the capital markets are willing to give, which, you know, hey look, I am okay with either, I just want to know.

The InterCept acquisition actually came together very, very quickly and we got to the position where it was in process in July and we suddenly moved to the fore front of the process in early August. And coupled with the fact we couldn't get the comment coming from the SEC and we lost the time frame in terms of doing the offering. Had we gotten the comments we would have moved ahead with the IPO and perhaps not done InterCept. The comments just got back late and in fact we just received another set of comments in late September, so, we're continuing to work with the SEC, we're continuing to respond to comments. As you know it is a complicated transaction. We do believe we have invented value within FNF relative to the processing business which is not being fairly valued, and we intend to make sure our shareholders get the value of that invented asset in some fashion at some time. We are working hard on it.

If I could ask one final question as a follow-up. Is the strategy long term to be able to get the processing businesses out at a higher multiple so you can use the currency to buy companies, as opposed to keeping the two companies together where you have to do cash deals.

Our original goal was to create a business 50% noncyclical and try and move it north from that number. We thought the marketplace would start responding to the lack of cyclicality in the good piece of our revenue and earnings space. In realty the marketplace didn't respond to it and FNF continues to be valued as interest rate sensitive cyclical company, that being said, we need to unlock the value of the -- we need to unlock the value of recurring revenue, recurring earnings stream that we have captured within the processing business. InterCept again fit right in that space of being recurring revenue, recurring earnings. It is a good sized acquisition. It adds several hundred million dollars of revenue and some new businesses within our existing processing business and so we're in a deferral mode at this point.

Okay. for the response. Appreciate it.

Next question comes from the line of Bob Napoli with Piper Jaffray.

Good morning. Just -- you mentioned Cordova is an acquisition that closed and I've somehow missed that. I am looking at our announcements of deals and wondering what that is and how much you paid for it and the revenue base is there.

Cordova has about a $100 million revenue base we paid 121 million, I believe, for 75% of the company. Our partner on Cordova, our minority shareholder is Siemens Business Services, you know, the large European GE equivalent. Cordova is a core processing -- core processor for community banks in Germany. They have about 26 or 27 customers. It gives us about 300 resources within Germany to allow us to compete effectively for other German and Scandinavian business. It is a terrific international complement to what we already do and it will enable us to in the sale process for our core bank core processing solution to larger banks because now we have feet on the street in Germany that are Germans. And we further have a terrific business relationship with Siemens, which is very anxious to partner with a U.S. Company of our type, not only in Germany but also in the United States because they are facing competitive pressures from SAP, Extenture (ph), and IBM. It is a terrific acquisition I know Siemens is excited about and we are very excited about.

From other acquisitions, would you expect other sizable acquisitions in the near term or are you going to focus on integrating what you have and having some fill in acquisitions or are there other significant sizable strategic acquisitions that you feel you need to build out your technology business.

Bob, we always have our list of targets. We had a very, very active year this year and it is probably time for us now to integrate InterCept, which has got a lot of different pieces to it and work hard on that for several months and relook at our acquisition pipeline. If you look back historical on how we've acquired these processing businesses, usually they'll come in sperts. We will acquire two or three pretty good size ones, and wait six months and then acquire another one or two and wait another six or seven months. That's how the pipeline works. You've really got to develop the relationships and dealing with the potential sellers of properties and it takes sometimes a year, sometimes six months , sometimes it comes together a little more quickly and right now we are kind of in the light period in terms of acquisition cycle in that we have acquired of a number of businesses over the last six or nine months and we're -- we don't see anything on the horizon right now that is in the immediate term, and when I say immediate term I mean the next 90 or 120 or 150 days.

From our perspective, looking at -- as you've been making all the acquisitions and transforming the company, I think investors are still a little bit trying to get comfortable with what you have, what you bought and the growth rate, the organic growth rate of those businesses, how good the acquisitions were that you made, as you start getting a more history on those businesses, it becomes clearer and I think you'll start getting your valuation. I think what has confused people is people were on board with 2006, this is what we are going to do if we deposit get it we'll look at other opportunities strategically. When you shift back and forth I think that adds a lot of confusion and that actually hurts the ability of this company. Once you start getting half of your earnings from the technology business, people are going to take a lot more notice and when people get comfortable with the quality of the earnings and revenue metrics, you'll get rewarded for it and if you don't then you can spend it out. I think you kind of maybe moving a little bit too fast on the spin outside and driving more confusion and delaying the ultimate recognition of value in your company. Just our viewpoint.

Well, we actually agree with you.

Thanks.

Ladies and gentlemen, if there are any additional questions at this time, please press star one on your touch-tone phone. A reminder if you are using speaker equipment please lift the handset before pressing the numbers. There are no further questions at this time. I will the conference back over to Mr. Bill Foley.

Thank you, remain enthusiastic about the future direction of FNF. We hold a dominant number one market position in the title business and continue to prepare our cost structure for a slower mortgage market in 2005. We now have 30% of our revenue coming from nontitle sources and with two recent acquisitions in the processing business and the organic growth we expect in processing default management and information services in 2005, we are confident that without any further acquisitions, at least 35% of our revenue will come from nontitle insurance business in 2005. Thank you for joining us. We look forward to speaking with you next quarter.

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