Fidelity National Information Services Inc (FIS) 2005 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Fidelity National Financial first quarter earnings conference call. [OPERATOR INSTRUCTIONS] As a reminder, this conference call is being recorded. I'd now like to turn the conference over to Dan Murphy. Please go ahead, sir.

Thank you. Good morning, everyone, and thanks for joining us for our first quarter 2005 earnings conference call. Joining me today are Bill Foley, our Chairman and CEO; Frank Willey, our Vice Chairman; Randy Quirk, our President; Peter Sadowski, our General Counsel; and Al Stinson, our CFO.

We will follow our usual format this morning. Bill Foley will begin with a brief strategic overview. 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, 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 those forward-looking statements.

The risks and uncertainties which forward-looking statements are subject to include, but are not limited to, the effect of governmental regulations, the economy, competition and other risks detailed from time to time in the 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 fnf.com. It will also be available through phone replay beginning at 12:30 p.m. Eastern Standard Time today through next Tuesday, May 3rd. The replay number is 800-475-6701 with an access code of 778091.

Let me now turn the call over to Bill Foley, our Chairman and CEO.

Thanks, Dan. During the first quarter we achieved another milestone in the evolution of our company. In March we closed the recapitalization of Fidelity National Information Services or FIS and the minority equity interest sale in FIS to an investment group led by Thomas H. Lee Partners and Texas Pacific Group. We also paid the $10 per share special dividend to FNF shareholders.

We closed the recapitalization of FIS on March 9th through $2.8 billion in borrowings under a new senior credit facility. The minority equity interest sale was also closed on March 9th, through FIS selling an approximately 25% minority equity interest in the common stock of FIS to the investment group led by Tom Lee and TPG. Finally, the $10 per share special cash divided was paid to FNF shareholders on March 28th, 2005.

In the near term we have two major operating goals at FIS. One is to continue to improve the organic growth rate to generate revenue growth of 5%. The other is to utilize excess cash flow at FIS to begin to pay down the recapitalization debt.

Our organic growth rate for the first quarter was 2.5%. We generated 12.5% organic growth in our mortgage processing business as we benefited from an additional 1.7 million loans on the platform over the prior year driven by existing client loan growth and new customer wins.

Enterprise Banking Solutions, our large banking group, had organic growth of 10.4% as we benefited from new customer revenues, including additional conversion services from one large customer, and new implementation services at another large bank, as well as the revenue that EBS from other areas of FNF.

On the negative side, our FIS group experienced negative growth, primarily driven by two large customers who were lost due to acquisition. The Aurum and InterCept acquisitions have been performing well and will contribute to our organic growth numbers in future quarters, with Aurum factoring into the second quarter and InterCept later in 2005.

Additionally, we experienced negative growth on the international side in the first quarter as several large projects that had been generating revenue were completed late in 2004 or early in the first 15. We are, however, very optimistic about several large potential customer contracts in the pipeline for the international business, as well as the performance of Sanchez and Kordoba, both of which will help the organic growth calculation as we hit the one-year anniversary date of each of those acquisitions.

Overall, the pipeline is strong with significant opportunities in enterprise banking, integrated financial solutions, mortgage processing and international sales that could all lead to accelerated organic growth that reaches our 5% goal in the second half of 2005.

Our second major goal at FIS is to begin to repay the debt that we took on in March and our first step was to pay off $150 million of the outstanding $2.8 billion credit facility last Friday.

Another important accomplishment was the year-over-year growth in our information services business. We have often said that we feel that market share opportunities, the life of loan component in flood and tax and the counter cyclical piece of the valuations business and default would allow us to grow that business in a slowing mortgage market. We accomplished that for 2004 and we have continued that trend in the first quarter of 2005, generating more than a 6% organic growth rate in the information services business.

On April 5th, we repurchased 2.25 million shares of common stock from ALLTEL, our large shareholder at the time. We acquired the stock at a price of $31.50, a 3% discount to the closing price of $32.45. We were a participant in a larger transaction in which ALLTEL sold its entire 11.2 million share stake through Goldman Sachs.

This repurchase transaction, which represented 20% of the total-- represented 20% of the total ALLTEL transaction, is consistent with our stated opportunistic buy-back philosophy and we believe that it is a good use of some of the cash that FNF retained through the FIS recapitalization. ALLTEL's sale of their entire stake also removed the perceived potential overhang risk to our stock.

Combined with our purchase of 2.5 million shares from Willis Stein in December, shares they received as partial consideration in the Aurum Technology acquisition, we have repurchased 4.8 million shares or nearly 3% of the outstanding stock in our company in the two transactions in the last 4 months. Additionally, our board of directors approved a stock repurchase program at our board meeting yesterday under which the company is authorized to repurchase up to 10 million shares or nearly 6% of the current outstanding shares over a 3 year period.

We were represented at the April 4th California Department of Insurance hearing on captive reinsurance agreements in the title industry by several FNF executives, including our Vice Chairman, Frank Willey. From our perspective, the hearing was a positive step towards a resolution of this issue. Possibly most importantly, the Department of Insurance indicated early in the hearing that the dollar amounts involved in the captive reinsurance agreements were much smaller than they had originally thought.

We hope to utilize further discussions with the Department as a means to help them better understand the significant differences between the economics of the title insurance industry and the property and casualty insurance industry, an industry to which we are often compared. The hearing ended with Commissioner Garamendi stating that he would seek more information to better understand the captive reinsurance agreements.

We will continue to cooperate with the California Department of Insurance and seek a conclusion to the captive reinsurance issue. We also continue to work with other departments of insurance, seeking a conclusion to their investigation of captive reinsurance in the title industry.

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

Thank you, Bill. Title insurance rates became a topic of discussion in the first quarter as First American announced an average 30% discount on existing title insurance rates for refinance transactions in California. We have done significant analysis on both the original filing and subsequent amended filing that First American has submitted to the California Department of Insurance.

Our position has always been, and continues to be, that we will be competitive when it comes to pricing in the market. Competitive, however, does not necessarily mean that our rates will be the exact same rates that our competition files or charges.

Based on our analysis of the First American filings, we do not anticipate any widespread or across-the-board reduction in our refinance rates in California as our analysis indicates that there are many counties in California or specific loan ranges within those counties where the refinance rates we charge today are actually lower than those proposed by First American in their filings. In some instances, we believe that the First American filings only made their refinance rates more competitive with the rates that we already charge.

Our analysis also indicates that there are some counties or specific loan ranges within those counties where the rates that we charge will be higher than those proposed by First American. We are currently analyzing those specific situations to determine whether we feel that the magnitude of the refinance price difference would necessitate a price reduction in order for us to remain competitive.

If we do decide to reduce some refinance rates for competitive reasons, we do not anticipate any material positive or negative financial impact. It is important to remember that competition in the title insurance industry has always been driven by relationships and customer service. Our clients rely on those relationships and customer service to ensure their customers' satisfaction in their real estate and mortgage transactions. Price has never been the overriding decision-making factor for the title insurance industry.

Order volumes remain solid by historical standards and roughly followed a typical season pattern in the first quarter. As expected, open orders were lowest in January at about 13,000 open orders per day. Following the seasonal pattern, and aided by the decline in interest rates through mid February, open orders picked up to about 15,000 open orders per day in February. Higher mortgage rates in late February and the month of March slowed the pickup in orders slightly as we averaged just over 14,000 open orders per day in March. Open orders have remained stable at just over 14,000 for the first three weeks of April.

We began the year with about 15,300 employees in the title operations. We reduced that by about 100 people in January and then added about 300 employees in February and March to end the quarter at 15,500 employees on the title side.

The staffing increases were necessary to handle the increased open order counts in February and March and the increased closings in March. However, the timing of the increased staffing had a negative impact on our margin for the quarter, particularly in the month of February, as we will recognize revenue on most of those orders opened in late February and March during the second quarter.

The month of March was clearly the strongest month of the quarter and we started to see some of the benefit from an increase in closing and, therefore, revenue. In short, while the first quarter may have suffered from the timing of the staffing increases, the second quarter will benefit as the revenue is earned.

We will continue to monitor our operating metrics, but we feel we are in a stable position from the staffing perspective and will not need to increase staffing as a we enter the normally seasonally stronger second and third quarters.

Another way of assessing the trend in order volumes is the closing percentage, which is simply closed orders divided by open orders. Our closing percentage for the first quarter was 64% versus 61% in the first quarter of 2004. Both of those figures indicate a building of inventory, which should benefit the next quarter's results.

Our fee per file gives quantitative evidence of the mix between purchase and refinance business in the quarter. The market continues to be driven by the more stable purchase transactions, more so than by the refinance volumes. Our fee per file for the first quarter was $1,269 versus $1,101 in the first quarter of 2004. Remember that the premium on the resale transaction is about twice that of the refinance transaction.

On the commercial title side, we opened nearly 14,500 commercial orders and closed approximately 8700 commercial orders during the first quarter of 2005, generating more than $50 million in revenue. This translates into 11% of total direct title premiums for the first quarter.

The open orders were a 4% increase over the first quarter of 2004. Revenue of $52 million was a $7 million or 16% increase over the first quarter of 2004.

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

Thank you, Randy. Net earnings were $445 million or $2.51 per share in the quarter. This included the $318 million non-operating gain on the sale of the minority equity interest in FIS. Cash flow from operations was $121 million for the first quarter.

Title premiums of $989 million decreased 8% over the first quarter of 2004. Direct title premiums of $478 million increased by 3% while title agency premiums decreased by 16%.

The direction title premiums include $19 million of revenue from LSI, our centralized loan facilitation services group for national lenders. If you have seen our earnings release, you have probably noticed that, as in the past, our segment reporting includes that LSI revenue in the LOS segment, while the income statement includes that revenue in title premiums.

If you exclude LSI revenue from title premiums, direct title premiums were $459 million versus $431 million in the prior year quarter, an increase of 6%, and agent title premiums were $512 million versus $599 million in the first quarter of 2004, a 15% decline.

Agency remittances operate on a lag of as much as 6 to 9 months. The first quarter of 2004 benefited from the agency volumes of 2003, which were at an all-time high while this first quarter is realizing revenue from agency volumes at 2004, which were lower, given the drop in refinance volumes in 2004 versus 2003.

Net agency title premiums, which are simply agency title premiums less agent commissions, were $119 million versus $132 million in the first quarter of 2004, a 10% decline. If you exclude LOS agent premiums for segment purposes, net agency title premiums were $120 million versus $125 million in the prior year, a 4% decline.

Escrow and other title-related fees of $242 million increased by 11% from the prior year, driven by the 3% increase in direct title premiums and the 15% increase in fee per file because of the mix shift towards more resale versus refinance transactions. Combined direct title premiums, excluding LSI in escrow and other title-related fees, increased by 8% in the first quarter of 2005 versus the first quarter of 2004.

Specialty insurance contributed $76 million of revenue for the first quarter with flood insurance generating $31 million, homeowners insurance $24 million and home warranty $19 million.

FISS contributed $396 million in gross revenue and $381 million in external revenue for the first quarter versus gross revenue of $254 million and external of $243 million in the first quarter of 2004. The gross organic growth rate was 2.5%.

Our large bank group, EBS, contributed $127 million in revenue and a 10% gross organic growth rate over the prior year quarter.

Our community bank group, IFS, generated $120 million in revenue but experienced negative organic growth due to the loss of several large customers due to acquisitions.

The mortgage processing business contributed $77 million in revenue and a 12% organic growth rate over the prior year quarter.

The lender outsourcing solutions segment, including the title premiums from LSI, generated $90 million in revenue for the first quarter.

Default management services contributed $55 million in revenue for the quarter, versus $47 million in the first quarter of 2004, as our default business continues to grow, despite the record low in delinquencies.

LSI generated $32 million in revenue for the first quarter versus $55 million in the first quarter of 2004, a 42% decrease, driven by the decline in refinance volumes in the first quarter of 2005 versus the first quarter of 2004.

Information services generated $166 million in gross revenue and $155 million in external revenue for the first quarter, compared to $152 million in gross revenue and $142 million in external revenue in the first quarter of 2004.

Excluding some small acquisitions, we generated more than a 6% organic revenue growth rate. Property data, which is primarily flood, tax, credit, property insight and IDM, accounted for $64 million in revenue, while real estate related services, which includes valuations and appraisals, 1031 exchange and multiple listing services, contributed revenue of $91 million.

Interest and investment income was $26 million, an increase of $12 million from the first quarter of 2004 due to the larger fixed income portfolio in the first quarter of 2005 versus the prior year, some of which was driven by a timing difference between the FIS recapitalization closing on March 9th and the $10 special cash dividend not being paid until March the 28th. The 150 basis point increase in short to intermediate term Treasury rates from the first quarter of 2004 to the first quarter of 2005 also positively impacted interest income.

Net realized gains were $4 million in the quarter, an $8 million decrease from the $12.5 million in gains in the first quarter of 2004.

Personnel costs of $747 million were 17% higher in the first quarter of 2005 versus the first quarter of 2004. Title and escrow personnel costs were $418 million, a $39 million or 10% increase from the first quarter of 2004 title and escrow personnel costs of $379 million. This increase was primarily driven by an 11% increase in salaries and related payroll taxes and a 10% increase in commissions.

As Randy mentioned, head count increased in February and March because of increased order volumes. Additionally, the accrual for commissions was increased in the quarter, particularly in March, as stronger order volumes will drive commissions for sales people. Another factor in the increase is the additional salary expense related to the American Pioneer acquisition that occurred late in the first quarter of 2004.

On a sequential basis, first quarter title and escrow personnel costs were $10 million or 3% higher than in the fourth quarter of 2004. The largest contributor to this increase was a payroll tax increase of $15 million due to the start of the new year of FICA withholding and the 401(k) match increase of $4 million due to the start of the new year of 401(k) contributions.

Offsetting these increases was an 18% seasonal decrease in commissions from the fourth quarter. FISS personnel costs were $226 million, an increase of $77 million, primarily driven by the Aurum, Sanchez and InterCept acquisitions in 2004. FISS personnel costs grew by 52% from the first quarter of 2004 while revenue grew by 56%.

LOS personnel costs of $34 million were a 6%-- $6 million decrease from the first quarter of 2004. Information services personnel cost of $44 million and specialty insurance cost of $8 million were both just $2 million increases over the first quarter of 2004.

Other operating expenses of $401 million were 16% higher than in the first quarter of 2004. In title and escrow, other operating expenses were $207 million, a $28 million or 16% increase over the first quarter of 2004.

A portion of the increase is consistent with the 8% increase in direct title premiums, excluding LSI in escrow and other title-related fees combined. Additionally, legal costs increased by $16 million in the first quarter of 2005 versus the first quarter of 2004. This increase is driven by various regulatory accruals made in the first quarter, including accruals related to any potential future settlement with the California Department of Insurance from the captive reinsurance investigation, the civil penalty from the Chicago Title settlement services investigation announced in February and other outstanding legal actions.

FISS other operating expenses were $60 million versus $30 million in the first quarter, again driven by the significant acquisition activity in 2004.

LOS other operating expenses of $43 million were $1 million lower than in the first quarter of 2004. Information services other operating expenses were $68 million, a $2 million decline from the first quarter of 2004 and specialty insurance other operating expenses were $38 million in the first quarter, $7 million higher than in the first quarter of 2004.

The provision for claims was $80 million for the first quarter. The provision for claims for the title business was $64 million as we provided for title claims at 6.5% of gross title premiums in the first quarter. This is 1.2% higher than in the first quarter of 2004 when we provided for title claims at 5.3%. We have increased the provision as total claims as a percent of total title premiums have been running near 6% for the last two quarters. The absolute dollar amount of claims paid declined by 9% sequentially from the fourth quarter of 2004. We expect the title claims provision to remain at 6.5% for the next several quarters.

The provision for claims in specialty insurance was $15 million in the fourth quarter. This is primarily related to the significant growth in the homeowners insurance business. While the homeowners insurance provision increased during the quarter, the increase in the pretax margin to 17.6% more than compensated for the increased provision and reflected a solid combined ratio of nearly 83%.

Total claims paid in the quarter were $77 million, $3 million less than the total provision.

Interest expense was $25 million during the quarter. It consisted primarily of $250 million in bonds at 5.25%, $250 million in bonds at 7.3% and a partial month's interest expense on the $2.8 billion credit facility at FIS. The LIBOR-based setting on the FIS credit facility during March was 4.51%. It also included the interest expense related to $400 million drawn under the FNF credit facility and $410 million drawn under a separate FIS credit facility that was utilized in the InterCept acquisition, all of which was repaid on March 9th.

Additionally, we entered into two interest rate swaps related to the FIS credit facilities in early April. We swapped a total of $700 million into an all-in fixed rate of 6.03% for an average term of 2.5 years. The remaining $2.1 billion will continue to float with LIBOR. Our first interest rate setting on the FIS facility for the second quarter, set in early April, was 4.66% based on one-month LIBOR.

The tax rate was 15% for the first quarter because there was no taxes associated with the non-operating gain on the sale of the minority interest in FIS. Excluding the gain, the tax rate was 38% and we expect the operating tax rate to be 38% to 39% for the remainder of 2005.

With a minority equity interest sale in FIS, we are now filing a separate tax return for FIS. This will actually force the consolidated FNS tax rate to increase as FIS generates higher earnings.

Minority interest is primarily related to the 25% minority equity interest in FIS and the roughly 25% minority interest in Kordoba.

Our investment portfolio was nearly $4.4 billion, an increase of $1 billion from the end of the first quarter of 2004, and $700 million from December 31, 2004. The increase was primarily driven by the cash retained from the recapitalization of FIS. There are certain legal and regulatory restrictions on some of those investments, including secured trust deposits of approximately $800 million, statutory premium reserves for underwriters of nearly $1.2 billion and cash at international subsidiaries of $240 million.

Of the $4.4 billion, $2.1 billion was theoretically available for corporate use, with about $850 million in non-regulated entities and nearly $1.2 billion held through regulated underwriters. We did utilize about $70 million of that $850 million to repurchase the ALLTEL shares in early April.

Consolidated book value per share was $19.28 at March 31. Let me turn the call back to our operator to allow for questions.

Thank you. [OPERATOR INSTRUCTIONS] Mike Vinciquerra, Raymond James.

Thanks. Good mornings, guys, while my hand's resting here for a second with all the statistics, I'll ask a couple other detail questions.

First of all, I wanted to get an understanding on the interest side of things, Al. Can you give us an idea what we might expect as a kind of a run rate for the second quarter on both interest expense and interest income? It seems that we have a lot of moving pieces here toward the end of the quarter with your debt issuance and so forth.

Yes, I can, Michael. Just a minute, let me get to my page that has that.

I'm surprised, Mike, he didn't already have that, because he had 8 pages of narrative.

You give me too much credit, Bill.

Sorry for all the detail, Mike. OK. On a run rate basis, including the senior debt and the $2.8 billion facility, which has been reduced to $2.65, we're at a little over $41 million of interest cost on a quarterly basis.

OK, thank you. And then on the interest income side you actually ended up paying out the dividend. That was a benefit, to some degree, in the quarter. Any thought on how much that actually boosted your for Q1?

I'm not following--

Al, we had funds on deposit for a period of time in the month of March until the dividend was paid.

Mike, I don't--

That's a very-- I mean, the interest was-- the rate we were earning on that money, on $1.7 billion, was probably 1.5%.

Yes, pretty small, Mike. I don't think it made a whole lot of difference. You can probably calculate it at about 1.5% or something like that.

Mike, it's probably about $2 million for the 20 day-- 21 day period.

OK. I appreciate that. I don't want to get to nitty-gritty on the details.

But also help me understand what's going on in the title business as far as the provision rising like it is or you've obviously seen higher loss experience. What's going on there. Has there been any sort of change in the way you're underwriting or is there some losses with some agents, something like that?

Well, both Al and I will try to answer this question for you, Mike, but the one thing that has happened is that claims generally are generated within about 2 years of closing date of a particular policy and, as you recall, in 2003-2004 they were heavy refi years and so now we're starting to hit in the middle to latter part of when the rolling claims should hit from those refinances.

So we've had the benefit of high volumes in 2003 and into 2004 and now we're paying some claims associated with some of those refinance transactions. Additionally, we had one particular group of agents in the State of Georgia that have had significant claims and have long since been canceled but unfortunately the recoupment possibilities from those particular agents is almost nil and that relates to two major customers of ours that have either been paid or are in the process of being paid.

So those were two-- those were really the two primary sources for our increased-- increased level of claims. We don't believe that we're doing business any differently, however we were getting maximum production out of our employees in 2003-2004. They were processing a lot of orders and mistakes happen.

And we've-- as Al and I have been reviewing it, we think-- we believe we have another 6 months or so of working our way through these refinance claims and if at the end of 6 months we haven't seen some improvement, then we're going to-- we're going to really have to further investigate this. But we really feel it's more-- it's more normalized-- we're now in a more normalized market and we're-- we should start seeing improvement, but we want to be conservative and we want to-- we want to put up an appropriate reserve rate.

OK. I appreciate that explanation. Then just one last thing. Al, you mentioned that with FIS now having a separate tax filings, that's going to increase the overall corporate tax rate. Can you help me understand why that is?

Well, FIS has-- will do their own separate return and then we don't get the 100% dividend exclusion or elimination on the FNF side. So you end up with a slightly higher tax provision when you put the two together.

No change in cash flow, though?

No. No, not at all.

Geoffrey Dunn, KBW.

First of all, one of the things that jumped out for me was the margin in IS. It looks like you continue to gain market share, build to scale there. Is that margin sustainable? And as you build more scale, where do we think that that could level out?

Well, we'd hate to say we can keep on moving the margin. I think you're talking about the 27% margin and that's a pretty good rate. What we'd like to do is maintain that margin as we go forward, as we continue to garner customers. And I just-- I would hate to say that we could do better than that 27% in that particular piece of business.

OK. And then, one of the things I think we saw was we finally come back to a true seasonal pattern that we haven't seen in a couple of years. It looks like there's a lot of buildup in the quarter for a very strong rebound in title for the second quarter. Can you just review again how you expect the seasonality to play out?

Randy, do you want to handle that?

Sure. You're correct. We are now more a traditional pattern. We've seen the orders, open orders, increase, actually starting back in December of '04 increase in January over December, February over January, leveled off a bit in March, but as the orders leveled off, open orders leveled off in March we had a buildup in momentum with additional-- with additional closings.

Typically the second quarter is better than the first quarter, the third quarter is stronger than the second quarter and the fourth quarter you get the benefit of year-end commercial closings, which typically is high revenue. As we go into the second quarter, we also see a mix more towards the resale transaction, which will increase our fee per file. So the second quarter, typically a stronger quarter, leveling off with good-- good open orders.

OK. And then just two number questions. Do you have an estimate for the equity that's backing up FIS? And within FIS, what do you estimate kind of the quarterly ability to pay down debt?

Well, Geoff, on the equity, we are currently at about $556 million of equity in FIS. In terms of the debt paydown--

You might just explain that a bit in that the dividend zeroed out--

Right. When we took the dividend up from FIS to FNF, obviously, that reduces the equity significantly and so you end up with $556 million.

And, in effect, Geoff, what we did, if you recall, we basically paid a dividend amount up to FNF from FIS that equalled our basis in the company. So that-- FNF's basis in this common stock is basically-- was basically 0 at the time of the recapitalization and so the equities and such is a reflection of the investment by T.H. Lee and TPG, plus the earnings for the one month, as I take your equity number, Al.

Correct. That's right. That's right.

Now we'll have to monitor our cash flow. We're a little new to the game at FIS. We did pay off $150 million last Friday. We will continue to reduce the debt. I hate to make a projection at this point as to what we would do for the year, but we will make significant debt repayments.

But it does look like your cash margin in that-- and just in the FIS segment alone is north of 20% and if we assume that's sustainable, then it looks like a solid amount of cash flow each quarter to pay down debt?

That's exactly right.

And that's our goal, Geoff. We've-- as you know, historically in terms of our business we've taken-- we've bought a company, taken on debt, worked hard to repay that debt and bought another company or group of companies and paid off that debt and if you also notice, we haven't-- we haven't announced, really, any significant acquisitions since the InterCept acquisition last fall and that's really the operating mode that we're in right now is to demonstrate that we can run this FIS business very efficiently, have organic growth and pay down debt.

And so that's the-- we're now in an operating mode and I would say the last 2 years with FIS and FNF, to some extent, in our title group we've been in an acquisition mode. And so we've just sort of-- we've just taken a little bit of a left turn on the road and now we're going to be running our business very, very efficiently.

And, really, part of the performance in the first quarter may have been related to the fact that we were digesting a lot of acquisitions over the last 12 months and now the management group is very, very focused on margin and increasing earnings.

Julio Quinteros, Goldman Sachs.

I was wondering if I could just focus in on the Fidelity Information Services business real quick and get a-- just sort of a little bit more detail, specifically on the competitive landscape. One of your competitors posted a 5% organic growth rate total. I'm just wondering if something has changed on the margin in terms of pricing dynamics. Obviously, there's M&A consolidation always happening in the small community market place. So I'm just wondering if maybe you could provide a little bit more color just in terms of the competitive landscape today?

Sure. Really, the competitive landscape has not changed much, other than a number of providers have been taken out of-- taken out of business. Specifically, of course, we've acquired Aurum and InterCept and, as we start rolling over those acquisition dates, we'll start showing a bit more organic growth because those two businesses continue to do well.

Our-- the only area where we really got hurt on organic growth was down in the community banking area and that was a result of Integrated Financial Solutions, that division, losing a couple of fairly significant customers due to acquisitions during the quarter. The one thing that we noticed when we began moving through our list of companies that we were interested in acquiring over the last year or year and a half is that we didn't feel we had a large enough base in the community banking market and we were going to be subject to losing more customers than we would gain through acquisition.

With the Aurum and InterCept acquisitions and other-- and item-processing business that we've picked up over the last-- last 12 months, through those acquisitions and our base business, we now have relationships with over 3500 financial institutions as opposed to relationships with about 700 or 800 financial institutions. It puts us in a much better-- a much better position to be competitive in terms of retaining customers as we go forward.

So the competitive landscape is-- is always difficult. We're going after our competitors with-- it's full speed and they're coming-- they're coming after us. There is pricing pressure, but there's been pricing pressure for years in this business. And we believe we are-- we're equipped to deal with the competitive pressures very effectively with our array of product offerings.

I hope I haven't talked around it too much, that I'm answering your questions.

No, that's very helpful and I guess just in terms of the pricing commentary that you've made, if you were to delineate between sort of the international market place and the domestic market place, is there any-- any differences in terms of the pricing environment that you're seeing?

I'd say it's less competitive internationally than it is domestically and, of course, we're reselling products that have been on-- that were created and we have been-- we've had within our portfolio for a number of years, particularly the Systematics product which we recently made a-- we're at least in the process of making a worldwide transaction with a very large lender-- a very large bank.

And we have a number of large transactions that are in the pipeline internationally. So we've gone after-- we've gone elephant hunting internationally as opposed to trying to pick up the smaller-- the smaller customers.

We have an excellent sales staff in Europe, which frankly didn't exist a year ago and it's going to take them time to gear up, because as you know, the lead time in these kind of sales is 18 months or so. And so we're just now hitting that 1 year point with most of these sales people. Actually, we're not even there yet. It's another-- another month or so before they started being hired.

So I would think, pricing wise, international is more favorable than domestic and there's more opportunity for us to penetrate because some of our domestic customers are not-- are no longer in the international-- not the customers, the competitors are no longer in the international market. So we have a little easier way to go internationally.

Nik Fisken, Stephens, Inc.

Bill, on the use of cash on a go-forward basis, the roughly $800 million that Al spoke about, can you kind of walk us through your thought process on how and when we're going to allocate that?

Well, I could tell you, but I don't want to tell you. I'm being facetious, but we are looking at a number of different ideas and transactions at the holding company level and we believe that we're going to be able to effectively deploy a good piece of that cash to the benefit of our shareholders, including repurchasing stock on an opportunistic basis from time to time and also including, always looking at the dividend rate and what the dividend should be-- what rate of dividend we should be paying to our shareholders. But we are-- we have got a pretty active agenda with regard to acquisitions.

And, obviously, you bought back over 2 million shares at $31.50. Is it safe to say that at current levels you're a buyer, once you can be?

Opportunistically. Exactly, exactly, Nik. When we make a difference or we can take down a large block, then that's what we're going to be interested to doing as opposed to just kind of a daily repurchase program of 10,000 shares a day. That sounds nice but it really does move the-- move the needle. Our goal is to reduce outstanding shares, to take shares off the-- to take shares off the-- out of the market place that were issued for various acquisitions over the last-- over the last several years and reduce our overall share count. It'll be very accretive to our shareholders.

And then what are the factors that you're looking at that determine the timing of the FIS IPO and give us an update on the schedule?

We don't-- we have to-- Market conditions, of course, are a driving factor. We need to-- we feel we need to demonstrate solid management-- solid management of our FIS businesses once we have rolled over acquisition dates and demonstrated organic growth and at some time here in the near future we'll start communicating with our-- with various investment banks about their thoughts relative to an IPO. But it's really a pending transaction at this point rather than a planned transaction.

OK. And then for Al, can you give us the breakout of the $49 million loss in corporate?

$49? Nik, I'm not sure where you're getting-- getting the $49--

Well, if take the $10 of rev and then I back out the--

Maybe we ought to--

We can follow--

Why don't we follow up that offline, Nik, and we can go through it. I think that'll be a bit of an exercise.

And then the last question is on-- on LSI, do you think we've bottomed yet? And then on item contracts, can you give us an idea of what your backlog looks like from the sales pipeline?

On item processing our backlog is excellent. We're now starting to penetrate with a cross-sales effort from our IFS Group into our Enterprise Banking Group and what we're finding is something we believed we-- would happen when we first got into this business seriously about a year ago, or with the Aurum acquisition and that is, more mid-size banks are finding that there's a diminution in the number of checks that they're processing and, therefore, they cannot do it quite as efficiently as they had been able to do it in the past and, therefore, they are looking at outsourcing item processing.

And we have-- the item processing contracts that are coming up for us to take a hard look at are-- are significant. And we're in the middle of bidding-- bidding on those contracts. We have a-- now we have a nationwide presence with over 50 capture centers and we have a couple of large customers, in particular Sovereign Bank, that we use as examples-- as an example of how we can process this-- process that business very, very efficiently.

So we're very optimistic about item processing. Even though it's in a declining mode nationally, it's in an increasing mode for us as a provider.

The LSI-- are we at the bottom on LSI?

Yes, we actually feel-- we feel like we are. We are at the bottom on LSI, because we've really rolled over that refinance business and LSI is moving more toward a-- more toward a model whereby they're doing more resale transactions that are being referred into it.

So not-- if a large increase in interest rates does not occur, then LSI should-- LSI should continue to improve because we should continue to take market share away from our competitors with our product offerings.

Bob Napoli, Piper Jaffray.

I think there were two issues that I think that people were focusing on with our California regulator and possibly-- on the pricing side I think he had made statements about his feeling that pricing in the industry was too high and I just wondered what your thoughts were on that issue, coming out of specifically California and then any pricing concerns nationally, possibly, coming out of that?

We've always felt that we were-- that we were priced appropriately and we file rates and we conform to those filed rates. We haven't had a price increase in the title insurance business for years and years and years and years and what's really happened is technology has allowed the price of title insurance to remain-- to remain constant for, really, about the last 10 or 12 years.

And whatever inflation has occurred over that timeframe, has really been eaten by the-- eaten by the various title insurance underwriters and our-- all the prices are fairly consistent among underwriters. They're filed independently, but the prices are fairly similar, with some variations at various dollar-- dollar levels.

And, really, our-- the title insurance rate includes a closing function that is not fully reflected in our escrow fees. So there's a lot of work that goes into closing a real estate transaction. It's really not the-- as you know, it's not the pure-- title insurance is not pure insurance. We're insuring against past events, not future-- future possible effects from adverse weather conditions. And so it's a closing function.

While there-- while the rhetoric from various states-- you hear the rhetoric, we try and go to those states and we demonstrate to them why our pricing is appropriate and you can see in our claims reserve that we've increased our loss reserve by 1.2% over the last-- over the last 12 months. So we're having pricing pressure because we're paying out more in claims and we're having to put up more in reserves.

That's about the best answer I can give you. We think we're appropriately priced and we're-- and we've eaten a lot of-- over the last 10 or 12 years, we have maintained those prices rather than increasing the-- increasing prices as we've gone through that time period.

Are you more concerned today that some of this rhetoric will turn out to pressure prices, or not? What do you think is going to be the outcome of this rhetoric out of these insurance-- out of these different states?

I don't believe it's going to have an impact at the end of the day. I don't believe we're going to be modifying our pricing.

The one thing with regard to the captive reinsurance agreements, we're happy they're done with. That was just-- that was just a competitive pressure that we caved in to from other companies and we're glad they're gone. That actually is an improvement in our pricing structure.

So I don't-- I don't see it, but then I'd be speculating on the future.

Last question, I guess, just on the legal expenses. You pointed out $16 million of incremental, I guess, legal expenses this quarter due to some of these regulatory issues and how-- what-- is that going to continue at that $16 million incremental level or do you see-- where do you see that tailing off?

We believe that we have-- that we have adequately and appropriately reserved for these various regulatory issues. The legal fees that we're paying are significant and in the fourth quarter and the first quarter of this year, we've-- things-- issues developed that we felt we needed to put up reserves. And we believe we've gotten it done, but we just-- we can never predict-- again, never predict the future.

So we would-- we would hope that those legal expenses would start trending down beginning in the second quarter and the third quarter and the fourth quarter this year.

We're suffering a little bit of a-- a little bit of hangover from the heavy refinance business and the benefit we garnered from those refinance transactions over the last several years and now as-- now as the business has slowed down somewhat, we-- we're in the position of paying some claims from those refinance transactions and dealing with some of these regulatory issues.

We really believe that the title insurance industries have been inappropriately picked as a-- as a potential target or violator and confused with the property/casualty business. I mean, we're kind of a simple closing business and insurance is a component of our overall revenues, but it's not a significant component as it is with property and casualty and with mortgage insurance, for example.

So we believe we're working our way through it. Peter, do you have anything to add to that?

No, I agree, Bill. I believe we are adequately reserved for the various matters that we have pending and, as Al stated, the increase in the legal costs of $16 million in the first quarter of 2005 is primarily composed of provisions and related legal fees for the concluded settlement of the Chicago Title settlement services investigation in Texas and the captive reinsurance investigations that you mentioned and various other matters.

Chris Trencher (ph), Benton Capital (ph).

I wanted to say a few things and this is somewhat a question and somewhat of a comment. I think we've been investors and we, like a substantial portion of the other investors in the company, are involved because we want to participate in the growth of the FNIS business and the process by which the company has reallocated capital from the title business to that business and we were very pleased with the portfolio actions that were taken last year since not only did the recapitalization and the $10 dividend raise the overall return on capital profile of the company but the FIS equity investment by T.H. Lee provided some valuation by an outside investment house that had a pretty good overall track record.

Yet, as I look at the stock price now and attempt to value the title business, looking at various metrics that are commonly used in that space, by my calculation it appears that FNIS is actually trading at a level that is below, perhaps substantially below, where THL invested in. So we have a situation where, in our opinion management's made all the right moves and the execution has, for the most part, been there, but we're not getting the recognition we deserve in the market place.

And I know it's your policy-- probably your policy not to comment on the stock price directly but I'm wondering if you guys are satisfied with the response in the market place. And then after that, I'd like to just follow that up with a comment.

Well, we're not satisfied with the response in the market place. We believe we're still being-- our company is still being confused as a title insurance company and not as a diversified financial services provider. And we're looking-- we're looking-- always looking at various ideas in order to emphasize the fact that FNF is a diversified financial services provider.

And you're right, we're not happy. And-- but we're locked in the mode of being viewed as a title insurance company, despite the fact that 38% of our pretax profits were generated from FIS last quarter.

OK. And then my comment would just be if you said it seems likely or at least possible that at some point there will be an IPO of FIS. One of the things you might want to consider is, although you're not required to give stand-alone P&Ls for the two primary pieces of the business and stand-alone balance sheets, I do think that most people looking at the company now are probably valuing the two pieces of the business separately and summing them up and providing that detail would be helpful to them in that exercise and it might help alleviate this issue.

Well, we do have some segment reporting. It's not specifically under FIS versus FNF, but we have the segment reporting on the title side, the specialty insurance side and the other three pieces of-- other three pieces of business and, frankly, we agree with you. We agree with everything you said.

Cindy Erdley (ph), October Research.

Could you share with us how the loss of the captives might affect project earnings? And also, are there other regulatory initiatives that you're watching that might impact earnings this year?

Well, the loss of the captive reinsurance agreements and the effect on revenue, is that the question?

Yes, thank you.

Well, we think, over time, it should actually-- it could increase revenue to a degree that we're not seeding out reinsurance premiums. But looking-- looking forward, we don't think the effect will be-- will be of any real magnitude. As Bill had mentioned, we're fine not being in that business and we're prepared to move forward in any regard. So we don't think the impact will be substantial to any degree.

Thank you. And are there other regulatory initiatives that you're watching this year that you think might possibly impact income?

No, I don't believe so. I don't think there are any specific regulatory issues that would-- that would affect our income. The captive reinsurance seems to be an issue and we're dealing with it, I believe, appropriately and I think we'll deal with it successfully. We don't see anything on the horizon that would create any additional issues.

Simone Dagbino (ph), Forest Management (ph).

Can you disclose the cash flow from operations, CapEx and the capitalized software for just the FIS business?

Do you have that, Al?

Let me-- let me give you a little glimpse of it. On a quarterly-- you want it on a quarterly basis, I'd guess?

Just comparable to your consolidated numbers here.

All right. We've got-- we're going to run about $70 million a quarter on D&A, depreciation and amortization.

On FIS?

Yes, on FIS. The breakdown of that would be property-- just depreciation of equipment, then you've got intangible-- internally developed software and purchased software would compose probably about two-thirds of that. And also you can get it, really, out of the segment reporting that's in the press release.

Yes, I was-- Sorry, I was--

The rest of it would be the purchase price amortization of customer assets. That would be about a third of it. So probably two thirds what you really traditionally think of as D&A being equipment, internally developed software and purchased software and the remaining third being the customer assets that you acquire in purchase accounting when you make acquisitions.

I'm sorry. I was talking more cash flow statement items. I apologize.

All right.

Kind of like a--

On cash flow from operations what we end up is about $90 million for the quarter in cash flow from operations. Then CapEx was about $42 million for the quarter. So you would be-- free cash flow, I guess, $90 minus about $50 million.

Great. And last question, what is the cash now at FIS, the kind of unrestricted cash.

All right. Let me walk you through that real quickly. We have total cash at March 31 of in excess of $400 million. About $100 million of that is restricted in international operations. We also have an inter-company payable to FNF that we will clear out that would reduce that net cash to $200-- about $200 million, a little more than that. Then we made the debt repayment last Friday of $150. So you would be down to about $57 million, roughly, of unrestricted cash.

Jim Edelman, Highland Capital.

Can you comment just a little bit further on ALLTEL's sale of their stock? Can you tell us specifically when they sold the remainder of their shares that you did not purchase from them?

They actually sold that same day and we had put a bid in. We had 2.5 million shares available under our preexisting repurchase program and we bid for 2.5 million shares and actually the demand was such that we were-- our allocation was reduced to 2.25 million. So it all went within about a 15 minute period on the specific day and I--

I think it was the 5th or 6th of April, Jim.

The 5th or 6th of April, Jim.

But you said-- I believe that they sold all 11 million of their shares?

Yes, all 11.8 million were all sold at that same time.

On that same day?

Same day.

We have no further questions. You may continue.

Well, great.

We achieved another milestone in the first quarter with the recapitalization and minority equity interest sale of FIS. This was a step in the process of attempting to more fully recognize the embedded value of FIS.

We continue to make progress on our diversification efforts as 38% of our pretax income came from non-title insurance operations in the first quarter. We were able to generate more than 6% organic growth and improve pretax margins in our information services businesses, despite the slowing mortgage market. Our default management business continued to grow strongly, despite operating in an historically low mortgage delinquency market.

We achieved 2.5% organic growth in our FISS segment and are optimistic that the existing pipeline will allow us to meet our goal of 5% organic growth in the second half of the year.

We are optimistic as we enter the second quarter with a solid pipeline in FISS, strong organic growth in default management and information services, stability at LSI and a transition into a seasonally stronger month in the title insurance business. Thank you for joining us and we look forward to speaking with you next quarter.

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