Fidelity National Information Services Inc (FIS) 2004 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the fourth quarter earnings conference call.

[Operator instructions].

I'd now like to turn the conference over to our host Mr. Dan Murphy. Please go ahead sir.

Thank you. Good morning everyone and thank you for joining us for our fourth 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 and Al Stinson, our Chief Financial Officer.

We will follow our usual format. Bill Foley will begin with a brief strategic review of 2004, Randy Quirk will provide an update on our title business and Al Stinson will review the financials for the quarter. We will 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 statements and expectations and as 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 expressed or implied during this call. The company expressly disclaims any duty to update or revise forward-looking unaudited statements.

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

This conference call will be available for replay via webcast at our website at www.fnf.com. It will also be available through phone replay beginning at 12:30 p.m. Eastern time today through next Tuesday February 22. And the replay number is 800-475-6701 and the access code is 766004. Let me now turn the call over to Bill Foley, our Chairman and Chief Executive Officer.

Thanks Dan. 2004 was another year of milestones for FNF. We achieved record revenue of 8.3 billion, net earnings of over 740 million, and cash flow from operations of nearly 1.2 billion, the second straight year that cash flow from operations exceed $1 billion.

During 2004, FNF accelerated the transformation from being a primarily known as the nation's largest title insurance underwriter into a provider of products and outsourced services and solutions to financial institutions and the real estate industry. To highlight this transformation, we refined the way in which we present ourselves to the investment communities, focusing on five major operating segments.

The first two, title and escrow and specialty insurance comp to our traditional insurance based product and services while financial institutions software and services, lender outsourcing solutions, and information services make up Fidelity National Information Services or FIS, our financial processing technology information businesses. We believe this reporting structure provides more transparency for investors in both understanding all that FNF does and in their ultimate efforts of assessing(ph) value in our company.

Acquisitions on the financial processing side of business were an important part of our strategy in 2004. Chronologically, the first major processing acquisition was Aurum Technology. Aurum was a leading provider of outsourced and in-house information technology solutions for the community bank and credit union markets. At the time, the Aurum acquisition more than double the revenue of our community bank and credit union division.

Consistent with our track record, we quickly went to work on integrating the Aurum operations into our existing business, exceeding our stated goal of $25 million in cost synergies. Today, Aurum is completely integrated and its MISER and Mercury platforms are actively marketed to financial institutions through our integrated financial solutions business.

The next major acquisition was Sanchez Computer Associates in May. Sanchez was the leader in developing and marketing scalable and integrated software and services that provide banking, customer integration, outsourcing, and wealth management solutions to approximately 400 financial institutions in 22 countries. Again, Sanchez has been integrated into FNF with the domestic operation becoming part of our large bank processing group enterprise banking solution and the international operations, which combined with existing international business. The two founders, Mike and Frank Sanchez joined FNF after the acquisition, with Mike now leading our international business and Frank overseeing leverage product development.

The final major acquisition was the November deal for Intercept Inc. Intercept provided both outsourced and in-house fully integrated core banking solutions for approximately 425 community banks including loan and deposit processing and general ledger and financial accounting operations. Intercept also operates significant item processing and check imaging operations providing imaging for customer statements, clearing and settlement, reconciliation and automated exception processing in both outsourced and in-house relationships for approximately 720 customers.

Combining the Intercept and Aurum acquisitions with our existing integrated financial solutions business, we now have a $500 million revenue business and are the number two outsourcer to community banks, credit unions, and other smaller financial institutions and the number two processor in the United States -- item processor.

We were also successful on the organic growth front as well in 2004. We have the broadest and most diversified customer base of any of our processing competitors. We have the deepest customer penetration in the largest US bank with 47 of the top 135 banks by asset size as our customers. Our closest competitor has one-third of that number of relationships. We are in a unique position to potentially benefit from the consolidation in the US banking market with our clear market leading position with the largest US banks. As I mentioned, we are the number two outsourcer of processing solutions to community banks, credit unions, thrifts, and other smaller financial institutions and the number two item and check processor in the United States.

We are far and away the number one mortgage loan processor in the country with a 50% market share. Again, we are uniquely positioned to benefit from the consolidation of the mortgage origination and servicing businesses that many have forecast. Another point of competitive differentiation for FIS is that the breath of our top product offering to financial institution is unmatched by any of our competitors. Our multi-year contract with Webster Bank is a great example of how we can provide a financial institution with a single vendor that can meet all of their various processing, outsourcing, and technology needs.

Webster signed a 10-year information technology services arrangement for our enterprise-wide integrated suite of loan processing solutions including customer management and interaction deposits, retail, and consumer loan servicing, mortgage servicing, and commercial lending origination and servicing. Jim Smith, Chairman and CEO of Webster said that leveraging a single vendor with integrated CMOS systems for all of its financial services needs would enable to Webster to realize significant efficiencies and focus on its core business, while enhancing the ability of its - to service customers and increase the value it delivers to its shareholders.

We believe that support Webster's information technology needs across the company's entire loan and deposit portfolio further demonstrates our ability to provide a comprehensive banking solution across the enterprise. Something no other company can offer.

The last major milestone of 2004 was the announcement of the re-capitalization of FIS. The majority equity interest sale in FIS to Thomas H. Lee Partners and the Texas Pacific Group and the $10 special cash dividend to FNF shareholders. The re-capitalization of FIS will be funded through $3.2 billion in senior credit facilities for which we have received commitments.

On the syndication front, commitments from managing agents for the term AP's were due yesterday and we have a retail investor meeting for the term BPs this afternoon. We expect to close and fund the senior credit facilities in early March. The minority equity interest sales should close at approximately the same time as the senior credit facilities. We hope to be in a position to declare the dividends and set the record date and payable date in the next few weeks. We anticipate that the record date and the payable date will be before the end of the first quarter.

While most of the headline news concerned FIS in 2004, we continue to fortify our position as the nation's largest title insurance underwriter and achieved strong growth in our specialty insurance businesses. We closed the acquisition of American Pioneer Title Insurance Company in March 2004. The American Pioneer acquisition gave FNF the number one market share in our home state of Florida and we now own the number one market share position in each of the four leading title insurance states of California, Texas, Florida, and New York. Those states produced nearly 50% of all title insurance premiums in the country. According to the most recent Demotech Performance of Title Insurance Companies, our third quarter 2004 national market share based upon title insurance premiums written has grown to nearly 32%.

We are very proud of the fact that we have enabled to accomplish so much in FIS during 2004 while also continuing to strengthen our number one market share position in the title insurance industry.

We have had tremendous success in growing our specialty insurance business in 2004, with an annual fourth quarter revenue run rate of nearly $275 million. The largest component of Specialty Insurance and flood insurance and we are the nation's largest flood insurance provider, acting as the processor of policies, renewals, and claims as the federal government acts as the underwriter for all flood insurance through the National Flood Insurance Program.

We continue to utilize the information we gather in the escrow closing process to grow our homeowners and personal lines of insurance and we are committed to extending the reach of home warranty insurance operations. Let me now ask Randy Quirk to comment on the business conditions in the title insurance industry.

Thank you, Bill. Order volumes remained strong by historical standards and followed a typical season pattern in the fourth quarter. As expected, open orders slowed significantly during the holiday season from late November through December, which will impact closing volumes in the first quarter of 2005. Open orders averaged nearly 14,000 per day in October and November to climb into approximately a 11,600 per day in December.

For the month of January, open orders have already improved to more than 13,000 open orders per day. Closings per day gained momentum as the quarter progressed, increasing from about 9,600 per day in October to nearly 10,000 per day in November and December.

Another way of assessing the trend in order volumes is the closing percentage, which is simply close orders divided by open orders. Our closing percentage for the fourth quarter was 75%, versus 95% in the fourth quarter of 2003, and 69% in the third quarter of this year. The closing percentage for the quarter indicates that we are in a relatively stable environment with a seasonal holiday slowdown in open orders causing an increase in the closing percentage in December. A closing percentage of 75% to 80% is what we expect in somewhat normalized operating environments with percentages below that indicating an increasing inventory environment. The closing percentage for January was approximately 65%.

Our fee per file gives quantitative evidence of the mix between purchase and refinance business in the quarter. Our fee per file for the fourth quarter was $1,287 versus $1,300 in the third quarter and $1,094 in the fourth quarter of 2003. The premium on a resale transaction is about twice that of a refinance transaction, which obviously benefits us as we have transitioned from a refinanced driven market in 2003 to the purchase driven market of 2004 and 2005. For full-year 2004, our fee per file averaged $1,212 versus $980 in the heavy refinance year of 2003.

As we head into 2005, we are operating in a strong and stable market. Purchase transactions continue to show strength, interest rates remain at historically low levels, and refinance transactions continued to make up about 40% of the total mortgage volumes. In fact, on January 24 the Mortgage Bankers Association increased their forecast for total mortgage originations for 2005 to $2.54 trillion with refinance transaction making up 39% of that total. This $2.54 trillion was an 8% increase from the December forecast of $2.35 trillion.

We continue to monitor our personnel and order metrics each and every week. We began the year with about 15,300 employees on the title side and reduced that modestly by about 100 people in January, as strength in order volumes does not dictate any severe reductions in our title employee base.

On the commercial title side, we opened nearly 15,000 commercial orders and closed more than 9,700 orders during the fourth quarter of 2004 generating nearly $70 million in revenue. This translates into 13% of total direct title premiums for the fourth quarter. The open orders were about 6% sequential increase from the third quarter and about a 10% increase over the fourth quarter of 2003. Revenue of 70 million was an $11 million or 19% sequential increase from the third quarter and a $16 million or 30% increase over the fourth quarter. The commercial market continues to show strong momentum.

Finally, we now have 32 operations with 1800 users functioning on NGS. We're scheduled for an additional seven installations in the first quarter of 2005, which would give us 39 operations by the end of the first quarter. We're currently focused on our larger operations in northern and central California, in the central valley regions of California. Our deployment scheduled costs for all of our northern California operations to be installed with NGS by mid-2005 and central and southern California implementations to begin in the second and third quarters of 2005. Let me now turn the call over to Al Stinson to discuss the fourth quarter financials.

Thank you, Randy. Net earnings were 175 million in the quarter. As we mentioned in our earnings press release, these results were net of 16.8 million or $0.09 per diluted share in non- recurring, after-tax expenses reported in the fourth quarter. On an operating basis, net earnings were 192 million or $1.08 per share. Those non-recurring expenses included the cost associated with postponed initial public offering of FIS, the write-off of some software and our real estate technology division, and the shutdown costs of the Canadian print operations in our MLS division.

For the full year 2004, net earnings were 741 million and 758 million on an operating basis. Cash flow from operations was 243 million for the fourth quarter and nearly 1.2 billion for the full year of 2004.

Title premiums of 1.1 billion decreased 11% over the fourth quarter of 2003. Direct premiums of 538 million increased by 2% while agency premiums decreased by 20%. The direct title premiums include 23 million of revenue from LSI, our centralized loan facilitation services group for national lenders. Excluding that LSI revenue from direct title premiums results in a total title premium decrease of 8%.

Escrow and other title related fees of 263 million, increased by 11% from the prior year, consistent with the increase in direct premiums and the mix shift of more resell versus refinance transactions.

As Randy mentioned, fee per file was $1,287 for the fourth quarter as compared to $1,094 in the fourth quarter of 2003. Specialty insurance contributed 68 million of revenue for the fourth quarter, flood insurance generating 29 million, homeowners insurance 22 million, and home warranty 17 million.

FISS contributed 377million in gross revenue and 361 million in external revenue for the fourth quarter, versus gross revenue of 255 million and external revenue of 243 million in the fourth quarter of 2003, a 48% gross and 49% net increase. The gross organic growth rate was 0.9% and the net organic growth rate was 0.2%. For full year 2004, the gross organic growth rate was 7.2% and the net organic growth rate was 2%.

Our large bank group, EBS contributed 129 million revenue at a 25% increase over the prior year quarter. Our committee bank group, IFS, generated 100 million in revenue, a 396% increase over the prior year. The mortgage processing business contributed 78 million in revenue, a 11% increase over the prior year quarter.

The lender outsourcing solutions segment including the title premiums from LSI generated 104 million in revenue for the fourth quarter. Default management services contributed 62 million in revenue for the quarter versus 50 million in the fourth quarter of 2003, a 22% increase primarily resulting from the continued revenue synergy between our mortgage servicing platform and our default management services.

LSI generated 38 million in revenue for the fourth quarter. Information services generated 164 million in gross revenue and 155 million in external revenue for the fourth quarter, compared to 136 million in the fourth quarter of 2003 and 144 million in the third quarter of this year.

Property data, primarily flood, tax, credit, property in site, and IBM, accounted for 57 million in revenue, while real estate related services which includes evaluation and appraisals, 1031 exchange, and multiple listing services contributed revenue of 98 million.

Interest and investment income was 21 million, an increase of 6 million from the fourth quarter of 2003 due to the larger fixed income portfolio in the fourth quarter of 2004 versus the prior year. Net realized gains were nearly 18 million in the quarter equal to the fourth quarter of 2003.

On the expense side, agent commissions were 444 million, a 22% decrease from the fourth quarter of 2003 consistent with the 20% decrease in the agency title premiums as agent commissions declined slight to approximate 77% of total agency premiums.

Personnel costs of 728 million and other operating expenses of 552 million were 15%, and 20% higher respectively then in the fourth quarter of 2003. More specifically, personnel costs in the title business increased by 24 million or only 6% for the fourth quarter versus the fourth quarter of 2003. The largest increase in personnel costs came in the FISS segment, primarily due to the acquisitions of Aurum, Sanchez, and Intercept in 2004.

Other operating expenses in the title segment increased by 80 million or 8% for the fourth quarter, versus the prior period. The largest increase in other operating expenses came in FISS, due primarily to the previously mentioned acquisitions.

The total provision for claims was 73 million in the fourth quarter. The provision for claims for the title business was 65 million as we provided for title claim losses at 5.8% of gross title premiums in the fourth quarter to keep the full year 2004 title provision at 5.5%. The provision for homeowners' claims was 8 million in the fourth quarter.

Interest expense was 17 million during the fourth quarter. It consists primarily of 250 million in bonds at 5.25%, 250 million in bonds at 7.3%, 400 million drawn under the FNF credit facility, and 415 million (ph) drawn under the separate FIS credit facility that was utilized in the Intercept acquisition. Our debt to total cap ratio was 22.5% at December 31, 2001. The tax rate was 37% for the fourth quarter and we expect to maintain that rate in 2005.

Our investment portfolio was 3.7 billion, a decrease of 153 million from September 30, primarily driven by lower security trust deposits. There's certain legal and regulatory restrictions on some of those investments including secured trust deposits of approximately 735 million, statutory premium reserves for underwriters of nearly 1.2 million, and cash at international subsidiaries of 286 million. Of the 3.7 billion, 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 $27.24 at December 31. Let me turn the call back to our operator to allow for any questions.

[Operator instructions].

Our first question comes from the line of Geoffrey Dunn from KBW. Please go ahead.

Thank you, good morning. A lot of the projections for the origination estimates next year have become more positive. Your margin this quarter looked incrementally better than we have seen in prior fourth quarters, yet you're a little cautious on the first quarter. Can you review for us again all the seasonal factors that tend to make the first quarters a little lighter than normal and then how should we expect the year to progress, that's number one.

And then number two, can you comment on the plans for the cash that are going to be held at FNF corporate after all the debt restructuring is done? Are you still as committed to using all those funds for buyback or are you now leaning towards more acquisitions? I think you commented that you wanted to build up your home warranty business?

Thanks Geff. The first part of your question on seasonality is comprised really of two components. The first that are agency commissions and what our agency revenues and what we normally do towards the end of every calendar year is put on a full-court press to collect premiums from our agents and they respond fairly well to that because they then tearn their way into our various agency subscriptions and incentive programs. This year, in particular, the agency premiums were more forthcoming because we've worked our way through the refinance doubled that occurred about a year ago and so those agency premiums are generally delayed. So the first thing that happens is our agency premiums are generally skewed upward in the fourth quarter.

The second thing that happens is due to seasonality, our openings in the month of November and December are generally lower and start picking up after about 10 days in January, as people either begin a refinance transaction or they start contemplating the sale of their house and they buildup through the balance of the year as then people sell their houses and relocate to other areas of the country, as they are being transferred. As you know, that normally happens during the summer, so we have heavy closing months in May, June, July, August, and even partially into September.

So what we're really seeing in the first quarter and why we are always conservative about the first quarter is that the agency premiums will be somewhat affected by virtue of the heavy collection rate in the fourth quarter and our closing rate in the first quarter is based on openings in the fourth quarter of the previous year, which are generally lower as you saw Randy mention, roughly about 11,000 orders per day or 10,600 orders per day in December already spiking up to over 13,000 orders per day in January and spiking up further now into February as the rates have moved down. So there really is the seasonality factor. We are back to a more traditional title market and its actually is good. We like it. We can adjust staffing, we can adjust to the marketplace much more readily in a steady market than we can in a market that has surges and baubles and so on.

With regard to the cash on hand -- the cash that will be have at FNF, approximately 2.7 billion will be paid as a dividend up to FNF from FIS and that is it recovery of our basis in the FIS subsidiaries. Of that, 1.75 billion give-or-take is going to be paid to our shareholders in a form of $10 cash dividend with the remaining 950 million plus or minus being available as cash on hand at the holding company. We're going to pay down our credit facility of 400 million with that 950 million, leaving us about $550 million in cash.

We're interested in expanding our specialty lines of insurance at the holding company. We feel there is some opportunities developing in the insurance brokerage market. And we have other opportunities that we are looking at from a holding company standpoint in the insurance processing areas that would not necessarily be competitive with FIS. So we will continue to examine opportunities to repurchase shares, but we want to ensure that we have a fully loaded revolver in terms of being able to execute acquisition opportunities as they may develop at the holding company. Have I answered your question?

Just a follow-up quickly on the specialty insurance, should we expect it to stay within a home warranty and homeowners -- I'm trying to get a better feel of what's your risk appetite in that area because it doesn't necessarily seem like it's as an attractive area to go into as maybe some other title related operations.

Actually, the specialty insurance is going to be home warranty, its going to be homeowners insurance and automobile insurance in states that are -- that are not high risk states. We also have a very aggressive program in terms of our underwriting standards because we are a low-cost provider of homeowner's insurance and automotive insurance and we also have strict underwriting guidelines. You can see from the break out that the margins in especially insurance group were really quite good, 13% in the fourth quarter. And those are the kind of acquisitions that you would see coming forward and they are primarily acquisitions that relate to books of business as opposed to operating companies.

So we assume a book of business readjust rates, and the payment to the seller of the book of business normally is received based upon retention by us under the new rates that are posted or that we then apply against our customer base.

So you're going to see a very conservative approach in terms of specialty insurance. We continue to look for opportunities in title insurance areas, primarily agency operations and see if they can help us fill out our marketplace. Frankly, the sales price for most of the agency operations today is skewed on the high side as you come to a very good market and we really feel like we need to be opportunistic but not chase transactions.

Thank you.

Our next question comes from Mike Vinciquerra from Raymond James. Please go ahead.

Al, if I could just -- first just a couple of line item questions. I want to make sure I understand. First thing, the minority interest jump in the quarter, can you remind what that relates to?

Minority interest is principally the 30% that is owned by Siemens in Kordoba. It jumped because the Kordoba acquisition occurred in September of this year.

Okay. Thank you. What was the depreciation and amortization in the quarter?

Hold on, we'll get that 40.

Maybe while you're pulling that up, let me ask more of a strategic question. Over on FIS, obviously you had limited to no organic growth during the quarter in that particular segment. I''m presuming it had as much to do with the integration Intercept as anything else. Can you -- Bill can you comment on your thoughts in terms of your momentum in that particular business and what we might expect looking into 2005?

We are very pleased with the momentum we see building in our various processing business. If you -- we mentioned the three major acquisitions Aurum, Sanchez and Intercept, but we also acquired Kordoba (inaudible), a core bank processor in Germany, Bankware, American Pioneer, a title insurance company, and a number of other smaller companies. So really, 2004 was a year of integrating consolidations of acquisitions and with the recap that is going on, that we're working on right now, you really won't see the acquisition pace during the first six or nine months of this year that you saw last year.

It gives us the opportunity then to really consolidated and integrate these acquisitions. So, for example, we've realized 25 million plus of synergies in Aurum. On Intercept we've realized almost 20 million of run rate synergies with a goal of 32 million within the first 12 months following acquisition on a run rate basis. We significant synergies that have evolved from the Sanchez acquisition, so the focus has been in 2004 on acquiring, integrating, and getting synergies.

We see our core bank customers looking to us for solutions and products. We have a number of contracts that are in the process of being finalized and negotiated and we believe we have a high level of competence that will be executed during the first three of four months of this year and so you should see a significant pickup in organic growth going forward in 2005.

Mike, depreciation and amortization for the quarter was 106 million.

Thank you. I hate to hog the time but one more question. On the reinsurance side, there's obviously some noise coming out of Colorado, I think it also relates to some agreements that might be in California. Could you just comment on reinsurance on the title side and what's going on and what impact that might have on you?

We don't think it has any significant impact. Actually, it puts us back to comparative even playing field because we were boxed into executing and getting involved in the reinsurance programs which by the way had been signed off by independent counsel in terms of RESPA compliance. We have ceased all reinsurance agreements at this time and Colorado we're in the process of -- we may have already settled as of yesterday that particular claim by the Colorado Department of Insurance. We are very cooperative with the various departments of the insurance and so we are happy that the reinsurance programs are going away. It evens the competitive landscape allows us to compete based on our size, our mass, and our referral network as opposed to a straight cost basis. At least one of our major competitors is also ceased reinsurance operations. So we don't see an impact from the insurance other than being positive.

Good news. Thank you very much.

Our next question comes from the line of Bob Napoli from Piper Jaffray. Please go ahead.

These guys hit a couple of my big questions, but just following up on Mike's question of reinsurance, do you feel is any exposure you would have to in Colorado or you getting any feedback from other markets that has been an issue and something that people have looked at?

Exposure is very modest.

Okay. With regards to the dividend, why haven't you given a date? I know you said in March, but when will you give a date on specifically I mean people are asking that all the time?

We are very, very close to setting that date. We hope to have it set within the next-- just in immediate future, the next week or two. The problem has been that in order for LSI to do business in all the states across United States they needed have a title insurance underwriter as part of its -- as one of its assets. And that particular title insurance underwriter is called National Title. And it's not going to be risk taker, in other words, it's going to reinsure with Fidelity. However, National needs to be down at the LSI level with our two financial sponsors being owners of FIS, the Department of Insurance of the State of New York requires that any entity owns more than 9.9% that they sign off on that entity ownership. And so we've been working with New York to arrive at an expeditious and a -- solution to how we can gain their approval regard to the sale of a 25% ownership interest in FIS and that is the single regulatory issue once the debt was put in place, has been the hole]d up. We believe that is been resolved as of today. Therefore, we will be able to have our board meeting and set dividend record date and ex date very, very shortly.

So within the next two weeks you will give us the dividend date?

That is-- we're confident we can do that within the next two weeks. That will be the record date, the ex date, and the pay date.

So you're talking about a mid-March you would expect?

That's right. Mid-March to the 20 March, something of that timeframe.

Okay. Then with regards to realized gains and losses this quarter and the same as a year ago what is your strategy and I mean how do you, you mean that's a very difficult line item for us to forecast and we generally forecast it at zero and maybe that's not the right way we have to look at that. I wonder if you could talk about that? Is there anything unusual in that and how would you look at forecasting that line item if you were me?

Well, I mean -- it is difficult and we do have a small equity portfolio, which consists of common stocks, warrants, warrant positions and that runs through the realized gains that Mark was referring. So, we are and when I say a small equity portfolio, it's around $75 million out of $3.9 billion and periodically in a given quarter, we will have appreciation and sell some of those shares and other times we may liquidate various ownership positions.

So, you know it's not something that we realize that the analysts will not give us credit for realized gains and losses, and it's not something that we emphasize. We really hold our portfolio to maturity. We are evaluating whether or not we even need to have any equities all though we do like to take stakehold positions in various companies. And so I -- we try and keep in under, make it modest. You know, in the third quarter of 2003, it was fairly large because we had the investment Lending Tree, which we refer that we had Lending Tree be acquired by USA Interactive and we have been and nearly began by putting those shares. So, I guys that's about all the guidance I can give you.

Bob, this is Al. I think you can just sort of follow the track record and maybe eliminate something like Lending Tree as being somewhat abnormal. That was a 52 million in '03. Other than that, I think you're going to see some of these realized gains flow through quarterly.

Okay. And last question just following up on the growth -- on the organic growth of financial technology, what you know is it your goal in '05 to have you know and longer-term to have mid-single digit organic growth or you know upper single digit organic growth in those businesses and then supplement that growth with acquisitions? Is that kind of the model?

I mean our minimum I mean our goal is to be about a 5% organic growth, and if we can do a good job, we should move to high single digits.

In 2005?

In 2005.

Thank you.

Our next question comes from the line of Dan Sundheim (ph) from Vikings. Please go ahead.

Hi. Can you give us a sense of where run rate EBITDA was in FIS as you end the quarter given all the acquisitions and some of the noise and then also what we should look for in terms of free cash flow kind of FIS for 2005? And could you just break that out between you know CapEx and any other working capital or those environments?

On a run rate basis, if you include for FIS the impact for the full year for the acquisitions that we did in 2004. So that is in effect a pro forma run rate, we are at about 620 million.

Okay and then what about CapEx for the coming year?

And CapEx is about I believe 250, right at 250 million for 2005.

Okay. In the 620, does that include the cost savings; the outline on intercepted in Aurum or is that for the cost savings?

That would include those cost savings that have been achieved in 2004, nothing on a prospective basis.

And can you tell me how much of the cost savings you outlined? How much have been achieved in 2004 versus the coming future.

Our goal there were was sense us to achieve 10 million and we achieved that. Our goals with Aurum were to achieve 25 million and on a run rate business and we were really close to 35 million in Aurum. And our goals with Intercept would achieve 25 million and our new target is 32 million. We have achieved 20 on a run rate basis. One thing you might keep in mind, is that when we acquired these companies there is generally a pretty significant intangible amortization that we have to ,that runs to our P&L and of course it's skewed, it's skewed to the front end because it's covenants, competes, it's customer lists.

Some there's a software --write -- an amortization of software and so the further we get into successive years after initial acquisition years, those intangible and amortization starts dropping off pretty quickly. So, we are looking for in 2007 to have a pretty significant drop off based on the Alltel acquisition and a number of these other acquisitions that we've made. So, it's works to our benefit. We pay the price when we make the acquisitions terms in terms of intangible amortization and we really try and achieve synergies that exceed our tangible amortization based upon the acquisition by at least 50%. And so we are pretty much on track for that.

And you're doing some updates your systems in FIS, the 250 CapEx is that a good number to use going forward after 2005 or do you think it comes down?

It comes down a little bit. I don't have my projection handy, but it's pretty close to about it runs 250, 240 I assume in that range. Because you have got some maintenance CapEx always imbedded you know in the number.

Okay. Thank you.

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

I think some concern has been on the Street about customer attention on specifically in the Intercept transaction? Can you give us an update on there of how many customers migrated out or have you actually seen a net inflow?

Well, actually Geoff we have seen on Intercept we have seen a net inflow. Our biggest customer transition problem occurred in Aurum and it was a previous, they were customers that had previously given notice that they are moving up the platforms and its primarily based upon Aurum trying to move people to what they called the ABS platform from MISER which never really worked very well and not investing in the BMS (ph) platform. And so we are now moving have moved the Aurum customers over to the Horizon platform primarily but on the Intercept business we are seeing a significant increase in business.

I mean we are really seeing, we are retaining our customers and we are now going to those customers and selling them other products and services. So, well, we projected that the Intercept revenues would fall off during 2005 as part of our acquisition analysis, we actually believe we are going to be at the high end of Intercept revenue, which when I say Intercept it really is a fully integrated and it's been fully integrated now into our IFS business. But we had dropped Intercept revenues down to in the 215 to 220 range and we really believe we are going to be 235 and 240 now in Intercept based upon the customer retention success that we've been having.

So you haven't lost a single customer there?

I can't say Geoffrey I don't know specifically as to a single customer, we are planning on adding about 25 customers this year and we have been adding customers on a monthly basis at Intercept. And I don't know the customer loss but I don't want to be held the fact we haven't lost a customer.

Fine. Fair enough. Thanks.

Our next question comes from the line of Nik Fisken from Stephens Incorporated. Please go ahead.

Hi, good morning. Al, what's the $17 million gain in the FISS segment in fourth quarter?

The $17 million gain in FIS is what Bill and I were talking about earlier, some of the equity in warrant positions are in the FIS business. It's Covansys basically, warrants in Covansys.

Okay great. Bill, can you give us an update on the new mortgaging processing product?

Well, I say within every milestone, and the first modules are been on the collection side are being I believe integrated and released in the month of February, this month. Everything is on target, on track. We have now fully integrated in a seamless basis our tax and flood business into our mortgage platform and we are continuing to integrate and provide a seamless solution in terms of the default management and further we have now fully integrated the Empower! loan origination system into the mortgage platform. But the overall technology advancementss that Dan Schlegel (ph) and Hugh Harris have been working on with the mortgage servicing business, it was a three-year program that began about 15 months ago and we are right on target.

Does that coming in at the expected costs?

It's coming in under budget.

That wasn't about 50 million? Is that right.

It was actually about I think all in was about 60 to 63 million we're coming in under budget.

And then if you could point to one thing that led to the internal growth weakness in the fourth quarter? What exactly would point to?

Well, Al do you want to comment on that.

Nik, the problem was that the fourth quarter of '03 was just off the chart. If you go back and look at our earnings release, and I don't have that number with me, but we're comping to such a high number, so we really thought looking at the year-to-date was probably a more appropriate way to assess the organic growth.

The other thing that has happened is that a number of contracts that we expected to get executed in the third and fourth quarter of last year really split over in to the first quarter and the end of the second quarter of 2005. So we expect to have some contracts announcements here coming up in the next 30 to 90 days, which are very good contracts.

Last question. Al, Are we done with the new segment breakout?

Yes. That's the way we're keeping it, correct. Thank you again, this will help you really be able to model FIS very effectively. If you add the three components, FISS, LOS, and ILS, that is what FIS is going to be.

We are going to get historicals going back a couple years?

In the 10-K, yes.

Great. Thank you so much.

Our next question comes from the line of Sumit Saigo (ph) from Credit Suisse First Boston. Please go ahead.

Could you give us the run rate at FISS, net income run rate pro forma for the acquisitions as well the increased leverage?

I commented earlier on FIS, your pro forma run rate -- if you took 2004 and added back in the periods of time for the acquisitions that we didn't own the companies, in effect, recasting the financials and to a pro forma, EBITDA would be about 620 million, as I mentioned earlier. And revenue would be about 2.7 billion. Does that give you some feel for where we're at?

Yes certainly. Thank you.

our next question comes from the line of Dreyfus Neenan from Morningstar. Please go ahead.

Hi, it's Dreyfus Neenan from Morningstar. I like to ask couple of longer horizon questions if I may. If you look at beyond the leveraged rate cap, what comes next? What are the big source of ideas you have to grow the value of the business?

Obviously, we are interested in a public offering at the FIS subsidiary and we filed our S-1 last May. And we really felt like the valuations were not adequate to support that kind of public offering. We also had the opportunity to acquire Intercept, so we deferred that IPO and then with our financial sponsor partners we -- they are clearly motivated to monetize their investments. And so an IPO, if market conditions are good, is definitely works for our business assume we would move to the SEC and get all the proper regulatory approvals. And we do have our accounting -- our five years of accounting history in place and we have separate segment accounting. So it's not a complicated program to develop our IPO.

On a general kind of vision review, we view FNF as being a holder of majority interest in a number of different businesses that are in the financial services and processing industries. We recognize that we're going to be a significant large majority owner of FIS, even following the -- an IPO if that were to be successful. And we further look at other investments that are related to that we could cross sell those types of products and services into that banking mortgage lending customer base.

So that's why we're interested in growing our property-casualty business and that's why we have looked at various insurance brokerage businesses that are consumer related. It's really wide, on various times we've expressed an interest in mortgage insurance and it's also why we are looking at insurance processing types of businesses. We really have a kind of open playing field now that the FIS strategy has been implemented. We do see further acquisitions to round out our product offering to FIS, however, at the present time with the level of debt on FIS, the first goal is going to be to pay down that debt and to help our financial partners monetize their investment. We view it as very beneficial to have strong firms such as TH Lee and Texas Pacific Group as our partners because they can supplement our own cash sources in terms of acquisitions that they might bring to us. We're actually very excited about the next three to five years for FNF.

Okay. That's pretty much as you had indicated. If I can ask a question or two on the US title insurance business, do you think it's desirable that the industry consolidates further amongst the top seven largest title insurance and is Fidelity interested in initiating one of those transactions?

The title insurance business should consolidate and it should move down to the traditional oligopoly type model that number one has 50%, number two has 25%, and number three as 12.5% of the market. So there should be consolidations and you can see based upon the competitive landscapes between ourselves and the second, third, and fourth largest underwriters that the number one and two are gapping the smaller underwriters and can provide more products and services and can be more competitive. So logically, you would see more consolidation assuming the management of those companies is interested in pursuing that type of sale. To date, generally speaking, those companies have not been interested in engaging in a sale process. If they were to be a sale of one of those underwriters, Fidelity will be at the forefront. We would be there and we can probably pay more and offer more benefits to existing employees of some of those smaller underwriters then anyone else can in the industry.

If I may ask one last question, if there was to be a merger between First American and Land America, perhaps number three or number four, would that have any adverse consequences for Fidelity?

It would increase their size obviously in terms of market share. We would look at it as an opportunity to further penetrate their respective markets because we would believe there would be number of strong individuals available that we could hire and bring within our three or four brand strategy and we have excellent comp programs and ownership programs available to our employees. We always been very, very successful when competition arises relative to competing for employees. So we feel like we are a winner, no matter what happens.

Thanks.

We have a follow-up question from Mike Vinciquerra from Raymond James. Please go ahead.

I want to make sure what apples-to-apples. On the LOS line segment, you talked about the 23 million was internal or inter-company revenues. If we look back at Q3 the 102 million in revs reported consolidated there, is that with or without inter-company revs versus the 80 million you announced this quarter?

It's not inter-company, though. All you're talking about, this distinction we're making, Mike, is we are putting all of the title premiums on the face of the income statement as title premiums. Then if you go back to the segment information, you've got those title premiums in the LOS segment. That's all we're doing with this little convoluted explanation. And really, if you will focus in terms of what these businesses looked like stand alone, always look at the business segment portion.

Okay. I may follow-up with you after the call, but just finally, under default side, you guys saw a nice increase in revenues year-over-year. But just curious, though you mentioned you are seeing some nice cross, presuming default is one of the areas with Intercept customers that you probably seeing some nice inroads. Could you give us a feel for what is the growth year-over-year in terms of the market expanding for whatever reason more foreclosures or whatever or what is simply from cross selling your better penetration with a new client base?

It's complete penetration. Actually the default rate has dropped again and so the growth on the default business is strictly result of having a fully integrated seamless product offering that goes to some of the very large lenders that we present to the some of the large lenders in the country. We're competitively advantaged in terms of being able to offer that and fully integrate with our servicing platform. Default in gross numbers are continuing to drop, but our penetration of the market is continuing to increase.

Thank you.

There are no further questions. I'd now like to turn the conference over to Mr. Bill Foley. Please go ahead.

Thank you. 2004 was a tremendous year for FNF as we continued to move forward in our efforts to be the leading provider of products and outsourced services and solutions to financial institutions and the real estate industry. We're also committed to strengthening our position as the number one title insurance company in the country and expanding our specialty insurance operations. Most broadly, our goal is to continue to increase shareholder values. The efforts we have undertaken in 2004 have all that dealt with a clear vision to maximize the shareholder value and realizing the value of the assets of FNF. We expect that vision to drive our decisions in 2005 as well. Thanks for joining us and we will look forward to speaking to you after the first quarter.