Fidelity National Information Services Inc (FIS) 2006 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the FIS third-quarter earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session; instructions will be given at that time. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Senior Vice President Investor Relations, Ms. Mary Wagner. Please go ahead.

Thank you, Val, and good morning, everyone. Joining me today to review our third-quarter results are Bill Foley, Chairman; Lee Kennedy, President and Chief Executive Officer; Jeff Carbiener, Chief Financial Officer; and Al Stinson, Executive Vice President.

In addition to being recorded this call is being audiocast live over the Internet. Telephone replay information is included in today's press release and a replay will also be available on our website. Our discussion this morning will contain references to non-GAAP and pro forma results in order to provide more meaningful comparisons between the periods presented. Reconciliation between GAAP and non-GAAP results is provided in today's press release which is also available on our website.

We've also included schedules showing historical detail and a reconciliation of non-GAAP measures for the third quarter and first nine months for 2005. Before we begin I would like to remind you that some of the comments made today on today's call may contain forward-looking statements. These statements are subject to the risks and uncertainties described in our earnings release and other filings with the SEC. The Company expressly disclaims any duty to update or revise those forward-looking statements. Now I'd like to turn the call over to our Chairman, Bill Foley.

Thanks, Mary, and good morning, everyone. FIS reported excellent third-quarter results driven by more than 10% growth in revenue and EBITDA. We were very pleased with the strong performance of transaction processing services which generated outstanding results across all major business lines. We are also pleased with the solid revenue growth in lender processing services, particularly given the challenging year-over-year comparable.

Our sales momentum remains strong evidenced by several significant new customer signings in the quarter. We believe that the investments we are making in the businesses today will enable us to continue that momentum into the future, driving higher revenue growth and operating efficiencies.

I'll close with an update on the merger with FNF. We completed the distribution of Fidelity National Title common stock to FNF shareholders on October 24th. FNT is now a stand-alone public company with 100% of its shares held by the public. The next and final step of the transaction will be the merger of FNF with and into FIS on November 9th at which time FNF shareholders will receive approximately 0.5394 shares of FIS common stock for each share of FNF common stock. At that time FNF will cease to exist as a legal entity and FIS will become an independent public company.

Also in conjunction with the merger FIS has completed the repurchase of approximately 1.4 million shares from Fidelity National Title Group and its subsidiaries. This transaction is independent of the $200 million of new share repurchase authority that we announced yesterday. I'll now turn the call over to Lee for the business review.

Thank you, Bill. Good morning, everyone, and thanks for joining us today. I'll begin today's business review by providing a summary of third-quarter operating results followed by a review of the progress that we've made in each of our businesses. I'll conclude with comments on the outlook for the remainder of the year. Now for a summary of third-quarter results.

Overall it was a very strong quarter. Consolidated revenue increased 10.2% over prior year. This strong revenue growth was driven by 14.1% growth in transaction processing services and 4.7% growth in lender processing services. Consolidated EBITDA increased 10.5%. The third-quarter EBITDA margin increased to 26.5% and cash earnings came in at $0.57 per share. The strong performance in transaction processing services was driven by 9.8% revenue growth in Integrated Financial Solutions, our community institution group; 10% growth in enterprise banking services, our large bank group; and 36.8% growth in our international business.

Our lender processing segment performed slightly better than expected, driven by excellent growth in appraisal and default services. Default services recorded its strongest revenue and profit quarter ever. Jeff will provide a more detailed financial report later in the call. I'll now spend a few minutes reviewing the progress that we have made in achieving our strategic business objectives.

Earlier this year we presented three specific long-term objectives for the new FIS. The first objective was to increase our organic growth by improving the effectiveness of our sales organizations, cross selling existing customers, developing new products and services which leverage our core processing capabilities, and putting our best and most valuable resources behind new large targeted customer opportunities. The second objective was to become a leaner, faster and more efficient organization. In other words, get the cost out and accelerate the integration of our core businesses. The third objective was to improve the use of capital throughout FIS.

Over the past eight months we've made excellent progress in achieving each of these objectives. We have generated strong new sales across all business channels. All merger related cost synergies are on schedule. We will achieve our in-year cost synergy target of $30 million and annualized target of $50 million. Two of the most complex cost initiatives remain on schedule. We will complete the consolidation of our Madison operating center into our Little Rock facility in the fourth quarter and we will close our St. Petersburg data center in early 2007 and consolidate it into our Little Rock operation.

We are pleased with the seamless timeless manner in which Certegy has been integrated into FIS. Strategic investments in new products, services and systems have strengthened our competitive position, enabling FIS to increase marketshare and serve existing customers more efficiently. I'll provide several specific examples of this later in the call.

While capital expenditures are running slightly higher than originally projected, we expect capital investment to slow as certain development projects near completion. In addition, we are in the process of reviewing all new products and technology initiatives to determine the specific importance of each. Development requests that do not generate an acceptable rate of return will not be pursued.

One of our most significant achievements to date is the successful leveraging and cross selling of our existing customer base. During the past few weeks we've announced large new contracts with Chase, BB&T, and WAMU. Our newly formed Brazilian item and card processing businesses are expected to generate over $3 billion in total contract revenue over the next 12 years. Both of these projects are proceeding on plan and each clearly demonstrates the value of leveraging customer relationships, sales organizations and business operations.

Integrated financial solutions also continues to generate excellent new sales wins. This was our strongest quarter ever. Year-to-date new sales are running 19% above prior year driven by over $60 million in merger-related sales. Sales have been strong across all product lines including core processing, e-banking, loyalty and card and item processing.

In particular we are pleased with the success that we are having selling core processing services to de novo banks. Over the past 20 months we have signed more than 80 de novo institutions which clearly leads the industry. We're also pleased with the progress that we are making in penetrating new market segments by cross selling existing customers.

In September we announced a new five-year card processing agreement with BB&T, the nation's ninth largest financial institution. We will provide a broad range of card processing services through BB&T including transaction processing, statement processing and embossing services. BB&T will be our single largest domestic card processing customer and is a long-term mortgage and consumer loan processing customer of our company.

Barksdale Federal credit union is another good example of the power of maintaining strong customer relationships. Barksdale, a longtime Certegy card processing client, will convert its core processing system to our MISER platform in 2007. We will provide Barksdale with a fully integrated core and card processing system which will enable Barksdale and its customers to view and access a consumer's entire account relationship, including credit and debit card information. Until now this functionality has not been available to community institutions and we believe it will be a very important system capability in the relatively near future.

We are also gaining momentum in our international business. In the third quarter we expanded our relationship with the National Australia Group in Europe to include Internet banking services. The bank selected FIS following an extensive review of potential software and outsourcing providers and the development of a proprietary in-house system. National Australia Bank has been a card processing customers since 2001 and a core processing customer since 1996. In the third quarter we sold additional products and services to several existing customers including Bancredico du Peru (sic - see press release) which purchased TouchPoint and ING which will use our application management and system support services.

As the leading provider of core banking solutions to large domestic financial institutions we are focused on providing processing and support solutions that enable institutions to improve operating efficiencies and generate new growth. On previous calls we've discussed the accelerating demand for channel and integration solutions. Most of the demand is focused in the areas of branch renewal and transformation which will enable institutions to better retain and leverage customer relationships and gain a greater share of a consumer's customers, banking and financial services business.

In order to accomplish this bank's need to implement systems which enable them to integrate and access products and services across all delivery channels. Over the past few years we have invested over $200 million to develop sophisticated and scalable middleware with plug and play capability. We believe these unique system capabilities coupled with our strong core processing presence and expertise will give us a significant competitive advantage in the future.

While the sales and implementation timelines for large bank projects can be long, we are very encouraged that a number of our key prospects are beginning to fund and dedicate resources towards channel and integration solutions initiatives. There were a number of factors driving this including increasing competition, acquisitions, and the need to quickly develop new products and services to meet customer needs and to meet competitive challenges.

We are also pleased with the strong interest in our newly enhanced mortgage processing platform. On October 4th we announced a new long-term mortgage processing contract with Chase. Chase will process more than 4 million mortgage loans on our MSP platform in Jacksonville. Chase is the nation's fourth-largest mortgage servicer with a portfolio of more than $600 billion. We believe that our MSP mortgage platform, scale advantage and strong domain expertise will enable Chase to reduce costs and provide a higher level of service to its customer base.

This was a very important competitive win for our company. Including Chase, over 60% of the nation's mortgages will be processed out of our Jacksonville, Florida data center. We have made substantial enhancements to our mortgage processing platform since acquiring Alltel in 2003. While some of the initial enhancements were necessary to retain existing customers, many of the newer enhancements have enabled us to cross sell a broader range of integrated mortgage products and services to existing customers and also, importantly, to sign new ones.

Our MSP processing system also improves an institution's operating efficiencies, profitability and control of the portfolios they process and service. Our mortgage processing customer base now includes three of the top four, seven of the top 10 and 20 of the top 25 mortgage lenders and servicers in the country. These important relationships put us in a good position to cross sell default, flood, tax and appraisal services. We have significant scale in all of these productlines and strong capabilities which will enable us to provide services more cost-effectively and with a higher level of quality than most institutions can achieve in-house or through other service providers.

This is important to lenders who are focused on improving operating efficiencies and providing a higher level of customer service to the clients that they serve. Our recent outsourcing agreement with WAMU is a good example of the growing trend toward outsourcing and the advantages of strong multiproduct capability. Washington Mutual, the second-largest residential mortgage servicer in the country, recently announced plans to outsource its entire residential appraisal operation. WAMU began using our appraisal services in August and we expect volumes to steadily increase over the next few months as the conversion to third-party appraisal providers is completed.

As is typical with large service providers, WAMU's appraisals will be divided between FIS and another vendor under a champion/challenger arrangement and we believe that we are in an excellent position to win a significant share of WAMU's appraisal volume. WAMU also utilizes FIS' mortgage processing, default and settlement services.

In summary, we're pleased with our results today. We believe the merger and successful execution of our strategic initiatives have significantly improved our competitive position by generating greater scale, stronger product capabilities and broader geographical reach. We will continue to focus on driving higher revenue growth, increasing operating leverage and generating strong cash flow.

I'll conclude with an update on our guidance for the remainder of the year. Given the strong sales results and new contract signings, we now expect revenue growth of 7% to 8% for full year 2006 and cash earnings per share of $2.08 to $2.12. I'll now turn the call over to Jeff who will provide a more detailed financial report. Jeff?

Thanks, Lee and good morning. Similar to the second quarter the 2005 and 2006 GAAP results presented in today's press release have been adjusted to improve comparability. The primary reconciling items are detailed in the release (technical difficulty) 2005 can be grouped into two categories. First, restatements to reflect the Certegy and FIS combination and the 2005 FIS recapitalization as if both events had occurred on January 1, 2005; and second, the elimination of merger acquisition and JV development costs consistent with disclosures in the Certegy 2005 filings.

The primary adjustments for the third quarter of 2006 represent integration expenses resulting from the closure of the Madison, Wisconsin facility which will be completed in the fourth quarter and the additional data center consolidations discussed in prior quarters. These costs totaled approximately $6 million pretax in the third quarter. I'll now move to the financial report.

Lee has already discussed the consolidated financial results, so I'll concentrate on the key metrics of the business starting with revenue growth and then provide additional details regarding our outlook for the remainder of the year. Consolidated revenue increased 10.2% over the prior year driven by 14.1% growth in transaction processing services and 4.7% growth in lender processing services.

The 14.1% increase in transaction processing services was fueled by strong growth in all channels including international, integrated financial solutions and enterprise solutions. The 36.8% increase in international revenues to $119 million was driven by strong growth in core banking, payment services and the new Brazilian item processing operation which began service in July. New customer signings were again strong with over $25 million in total contract values signed during the quarter.

The 9.8% growth in integrated financial solutions, the $281 million, was driven by increased revenues in core banking, item processing, debit and ebanking. The strong sales momentum continued as the total value of new contracts signed during the quarter was the highest in history exceeding second-quarter sales by 26%. Revenues in our enterprise solutions productline increased 10% from prior year to $254 million. Now that we have cycled through the difficult first-half 2005 comparisons the impact of new customers signed during the past 12 months, such as Sedgwick and Webster Bank and specific project work completed during the quarter is much more apparent.

We continue to have a strong sales pipeline in enterprise solutions, particularly for our TouchPoint channel and express integration solutions. The overall growth -- we're extremely pleased with the overall growth in CPS during the quarter, especially with the balance contribution from each of our channels. Blender processing revenues increased 4.7% to $433 million in the third quarter. The 2.7% increase in mortgage processing revenue to $94 million was driven by a 5.5% increase in the average number of loans processed. Information services revenues increased 5.5% to $339 million.

We were very pleased with this solid performance, especially given the strong 20% growth rates in the third and fourth quarters of 2005. This quarter's increase was driven by double-digit growth in all productlines within our default services product set and double-digit growth in appraisal services. Although recent industry statistics show overall delinquency rates as being fairly stable, we are starting to benefit from the substantial industry reported increases in sub prime delinquencies as well as our continued marketshare gains.

They new WAMU appraisal volumes which began ramping up in August contributed to the growth in appraisal services. The significant gains in default and appraisal services helped offset the impact of the American West reorganization which reduced volumes in our valuation and tax services products as well as the impact of a longer deferral period for our life of long tack services which increased to 16 months from 14 months in the prior year quarter.

Moving onto EBITDA. Consolidated EBITDA increased 10.5% to $286 million driven by continued margin expansion in TPS and substantially lower corporate expenses. The consolidated pro forma EBITDA margin in the third quarter was 26.5%, a 10 basis point increase over the third-quarter of 2005. A 10 basis point increase over the third-quarter of 2005. The third-quarter margin was also sequentially higher in the margins in the first and second quarters of 2006.

As we discussed last quarter, our new Brazilian item processing operation is expected to begin generating profits in 2007. Excluding the third-quarter impact of this operation the EBITDA margin would have been approximately 27% or 70 basis points higher than both the prior year quarter and the second quarter of 2006. On a segment basis, the third-quarter transaction processing services EBITDA margin was 24.2% which was a 20 basis point improvement over the prior year.

Again adjusting for the Brazilian item processing operation, the margin would have increased to approximately 25% or 100 basis points over both the prior year and the second quarter of 2006. The improvement in margin was driven by strong revenue growth in all channels and cost improvement initiatives implemented throughout the year. The EBITDA margin for lender processing services was 34.5% compared to 37.2% in the 2005 quarter. The third-quarter 2005 margin was positively impacted by a number of nonrecurring factors and returned to a more sustainable level of 34.4% in the fourth quarter of 2005.

Overall we were pleased that we were able to maintain a strong 35% margin given the full quarter impact of the decline in Ameriquest volume, the longer deferral period for life of long tack services and strong growth coming in our lower margin default and appraisal services. Corporate expense totaled $20 million, a $12 million decline compared to the third quarter of 2005. The decrease was largely attributable to the consolidation of many of the former Certegy corporate functions and other cost improvement efforts that were implemented in the second half of 2005.

Moving on to cash earnings. Cash earnings, which we define as net income plus after-tax purchase amortization, totaled $110.9 million or $0.57 per diluted share. After-tax purchased amortization was $28.7 million compared to $29.2 million in the third quarter of 2005. The 8% increase in year-over-year cash earnings was driven by increased operating profits due to the margin expansion and transaction processing services and lower corporate expenses. Diluted cash earnings per share of $0.57 was also driven primarily by the growth in operating profits during the quarter.

The decrease in the third-quarter tax rate, which was driven by the formation of a more efficient foreign tax structure, was more than offset by higher-than-expected interest expense caused by lower debt repayment. The lower debt repayment was tied to higher than anticipated share repurchases during the quarter.

Moving on to free cash flow. Free cash flow, which we define as net income plus depreciation and amortization less capital expenditures totaled $126 million during the quarter. This does not include approximately $14 million in working capital changes associated with a number of strategic contracts currently being executed. Certain implementation costs on these contracts, which we are initially funding, will be recovered through a future processing fee. Additionally operating cash flows will be impacted by certain liabilities assumed with our Brazilian item processing acquisition.

The third-quarter capital spend was $67 million which is a decrease from the first and second quarters. As Lee discussed, we expect capital investment to slow as certain development projects near completion and as we proceed with the comprehensive review of all new product and technology initiatives.

The uses of free cash flow during the quarter included a $19 million reduction in long-term debt which reduced total debt outstanding to $2.86 billion as of September 30; payments of $9.6 million cash dividend and the repurchase of 1.1 million shares of FIS stock at a total cost of approximately $39 million. Also as Bill mentioned, on October 23rd we completed the repurchase of 1.4 million shares of stock from Fidelity National Title at a cost of approximately $56 million. Year-to-date we have repurchased 4.26 million shares at a cost of approximately $160 million. And yesterday we announced that our Board of Directors authorized an additional $200 million in share repurchase authority.

I'll close with a few comments on our outlook for the remainder of the year. This guidance excludes pretax merger and integration costs associated with the combination of FIS and Certegy, merger and acquisition costs associated with completion of the FNF/FIS merger in November 2006, and pretax expense associated with the accelerated vesting of options in the first and fourth quarters of 2006. In total we anticipate these costs to be 13 to $15 million pretax in the fourth quarter.

With that in mind we now expect pro forma revenue growth of approximately 7 to 8%, EBITDA growth of approximately 10 to 12%, fully diluted cash EPS of $2.08 to $2.12 per share, earnings per diluted share of $1.51 to $1.55 per share, capital expenditures of approximately $300 million and free cash flow of approximately 440 to $470 million. This concludes our prepared remarks. Operator, we're now ready for questions.

(OPERATOR INSTRUCTIONS). Andrew Jeffrey.

Good morning. I'm wondering if you can give me a little color on the competitive state of the card processing market. This BB&T win was obviously a big and competitive win in what has been a market characterized by in sourcing and pretty aggressive competition. I'm wondering if this is a one-off kind of transaction or do you think there are opportunities for other top 10 bank outsourcing deals out there for FIS?

Andrew, I think -- this is Lee -- I think there's a big opportunity especially in market where obviously we've not penetrated and moved up to that segment in the past. Very competitive market. As you know, total systems has a large share in that market, FTC has a large share. I also think that however there's room for our organization, especially if we can leverage existing relationships and blend that debit and core processing system into the core processing capabilities that are in-house and being operated by the institutions.

So we view it as a big opportunity. Are we going to consider it a one-off? Absolutely not. We have salespeople dedicated to that segment, they're actively working accounts. And hopefully in the future we'll bring more of that business in which we've not had in the past.

Okay. And looking at the community bank outsourcing market, it appears that FIS is now growing faster than the market as a whole and faster than your chief competitor. Is this all a function of marketshare gains or cross selling or are you seeing an actual uptick in spending?

It's actually marketshare gains, cross selling and some incremental spending lift. As you know, we've talked in the past about retargeting, refocusing, reorganizing our sales organizations. Right out of that we should put our card team together with our core team under one common leadership. That drive has really produced a lot of benefit. We're getting in front of a lot of customers. We have over 7,000 institutions that only have one of our products and not the full range and we're targeting those.

So the results so far have been very, very strong. The real key to it is an aggressive sales force that is absolutely focused on going after the incremental potential and we're going to continue to do that.

Great, thank you very much.

James Kissane.

Jeff, can you give us a little bit more color on the margin differential between your default business and your mortgage processing business?

Yes, if you look at the default business, that's a more labor intense business; you do things like field inspections, so you have to maintain the cost of those field inspectors. We maintain national attorney networks for our referral business; you have to maintain the cost of that referral network. If you look at our margins, historically in the fall they've probably been closer to the midteens. Although I'll tell you, as the volumes have been picking up those margins have been increasing.

And Lee, can you give us a little insight in terms of the default trends during the quarter? Because I remember June was very strong at the end of the second quarter?

I can simply say it this way, if you look at almost every single month this year on a sequential basis we've shown improvement. And that's coming from picking up additional share and winning accounts in the marketplace and also the first stages of an uptick in delinquency which as it continues on is going to drive I think really strong benefit to our company. So truly the two factors.

Okay, great. If I can get one last one. Do you think the Brazilian ramp expense peaked in the third quarter at about a 70 basis point hit? Or should we assume that goes for the next couple quarters?

Our expectation right now -- and you're talking about the Brazilian item processing operation?

Yes.

Our expectation right now is that we'll be close to breakeven for the remainder of the year on the BPL and then start to pick up margins as we move into 2007, implement our new system, so on and so forth.

Great, thank you.

Paul Bartolai.

Good morning, everyone. Good job on the quarter. On Brazil, can you give us some sense of the revenue contribution we saw in the quarter? It seems like international was still strong even outside that, but just curious.

Let me say it this way, if you take a look at our overall growth rate of about 10.2%, about four tenths of a point was nonorganic; all the rest was pure organic growth. We'll just say it that way.

Okay. And maybe if you could just talk a little about the trends internationally. It seems like think are going pretty well there and that's obviously the big growth opportunity. So I'm just curious, any thoughts you have there?

Trends are very strong, much of the lift in revenue that we saw in this quarter from our international business, some of it (indiscernible), but we've had strong sales in all channels and on all productlines including fee banking, TouchPoint, systems and support, our card business is doing well in certain geographies so it's not only been all products but it's been across all geographies with really strong results in the European region.

Okay, great. And then on the tax rate, Jeff, is that a permanent decline in the tax rate or what should we expect in going forward there?

The effective tax rate, if you blend out the first nine months I think it comes out to around 37.2. We are comfortable saying that that should continue forward.

And then last one if I can. Just on the cash flow it looks like you took the high end of the guidance down a little bit. Is that just reflecting maybe you'll probably be at the higher end of your CapEx expectations or what else should we look into that?

Yes, it's factoring in our most current guidance, our most current forecast on net income, CapEx and, yes, we're expecting to come in still around that $300 million level. If you look back to our initial guidance, we had guided to around half $1 billion in free cash flow with CapEx of about $250 million. We've pushed that up to $300 million last quarter primarily because of our two Brazilian investments, the card processing venture and the BPO. So logically we're coming down at the lower end of the old guidance and we've adjusted and tightened our range.

Great, thank you.

Wayne Johnson.

Good morning. Just a couple of questions on check guarantee business. Late, can you give us an update on how you see that tracking and any news or prospects for winning more supermarkets or national retailers for that service?

Wayne, the pipeline in that business is absolutely full. We're making good progress in selling additional services into our existing base and also securing additional new customers. Our gaming business is producing very, very strong results. Very strong pipeline. Very significant wins that we've been putting on board. We feel very good about the future of that business overall especially as it relates to payroll check cashing, casino operations, ATM cash withdrawal services.

That's great. And when you're saying that you're selling additional services into existing client can give us some examples of what those are?

Collection services to some of our risk management clients where we do authorization services only. On the gaming side of the business where we've had only check cashing relationships in the past. We've been successful over the last several months in selling into that same customer base cash advance services, merchant processing services, new risk management services to help them improve their profitability so it's really coming, Wayne, from several different product capabilities. And again, it goes back to the common theme and the common point that we've been talking about is leverage in that existing relationship to drive more revenue and we've done a good job in all businesses doing that.

The one thing I'd add to that would be that we are still seeing that trend toward the shift from verification to guarantee which obviously bumps our revenues up.

Okay, great. And just as a housekeeping item, could you remind us again or remind me -- and I apologize if I missed this earlier -- what's the year-to-date dollar value of the cross selling wins?

$[60] million in our FIS business or small bank IFS business, small community bank and credit union business. In addition to that you could really say that the Brazilian win on item processing was leveraging an existing relationship. You can say that the TouchPoint or the Internet banking win that we had with National Australia, which is several million dollars, was a direct result of leveraging the card relationship that we had in place.

You could also point to a number of different relationships we've had on the mortgage processing side where we sold incremental products in the past quarter. So across the board we're going to tell you 60 because we disclosed that. We're not going to get into the specifics of the other ones, but it's building and it's becoming stronger as we go on so we're really happy with the progress.

Terrific. Good quarter.

Phil Mickelson.

Just wondering, it seems like you announced some significant domestic U.S. deals, but given this is lumpy (indiscernible) large deals what's the current pipeline I guess for large outsourcing contracts right now and what's your visibility and maybe give us a comparison where you were earlier in the year?

Each business has at least four large deals assigned to them where they've dedicated resources to those deals and they're working through those deals. Over the last quarter we signed a number of the large deals that we've been working on for the last several months, but by no means is a pipeline depleted. It's as strong as ever. When one drops out we bring another one in. The international pipeline is very, very strong and that, again, is in all geographies as is the domestic EBS pipeline for larger processing deals. Lots of activity, lots of potential, now we just have to drive them home and get them closed.

Beyond the card processing and the mortgage processing are there other opportunities that Fidelity has for large outsourcing contracts? Are there areas that you can expand with within that existing customer base?

I think really what you might be looking at is some of those mortgage products and services where we have a very, very small marketshare that we're now fully integrated into the mortgage servicing platform, specifically some of the data aggregation pieces, tax information, flood certifications. In all those businesses our national market share is really de minimus compared to our major competitor.

And so as those contracts come up, and we recently had one very successful win that will be coming on board shortly in terms of lender. As we continue to cross sell those products, then you're going to see a significant increase in some of those ancillary products such as tax and data aggregation, data information, appraisals and flow certifications.

Okay, thank you. And then -- sorry, there's a lot of numbers in the call, but could you just go through the share repurchase activity and then clarify again the 1.4 million shares that came from FNT or that you bought back? Was that reflected in the third-quarter share count or is that a more recent transaction?

That's not reflected in the third-quarter share count. If you want it by quarter, we purchased about 1.7 million shares in Q2 for about $65 million; we repurchased about 1.1 million shares in Q3 for about $39 million; and then we just completed the purchased from FNT, 1.4 million shares at $56 million and then that's what totals up to the 4.26 million shares at a total cost of 160.

And before the $200 million reauthorization was there, was that program exhausted or was there still (indiscernible) left on that buyback?

It was pretty much exhausted.

Okay, thank you.

Pete Heckmann.

Good morning. And I apologize if I missed it; there were a lot of pretty quick dissemination of information there. The termination fees from M&A in the quarter and year-to-date, could you give those figures?

There are no significant termination fees. We have ongoing termination fees particularly in our IFS business, but they don't generally get above 2 to $3 million and they're consistent quarter to quarter; nothing unusual.

Nothing unusual this year at all. So the numbers you're looking at are pretty clean.

Okay, great. And then, can you talk about your weighted average debt cost in the quarter and your expectations for the fourth?

Yes. Our weighted average debt cost I believe was around 6.75% during the quarter and we'd expect it to be fairly consistent throughout the remainder of the year.

Okay. And your 37.2 tax rate, I guess that was for the fourth quarter. Can we roll that into 2007?

At this point we're not going to give specific guidance on 2007.

We'll give you that in next call; we're working through that now and we'll give you a better feel of where it's going.

Okay, I appreciate it.

Cannon Carr.

Jeff, you talked about improved capital efficiency and I know you don't want to get into '07 guidance yet, but does that translate into saying CapEx comes down for '07 from the $300 million this year or could you give us some thoughts there?

At this point in time we still have to finish off some of our large international projects such as our Brazil [new co], our Brazil card processing joint venture as well as the Brazilian item processing venture. So we are still going to have some larger capital spend rolling in. Right now I think we said it would probably be consistent with what we're at.

Yes. And one objective, and probably one of the biggest objectives we have going into the budgeting process and looking at next year is to get that rate down. So we're not going to give you a number in this call, but I'll tell you, our objective is to knock it down. We believe that there's money that could be saved which will generate good benefit to the shareholders and that's what we're concentrated on.

Okay, and no swings in working capital or anything significantly for next year?

Again, we're not really getting into specifics on the 2007 guidance. We'll go fully into 2007 guidance when we do the fourth-quarter '06 call in January.

That's fine, okay. And then just one other question too. Organic growth really was great, it hit roughly 9 or 10%. Were there any big or abnormally large conversions that happened in the quarter? I know you said there are no real termination fees so it's pretty clean.

There were a few things, smaller things, things that you would say are not standard in a couple of businesses that didn't amount to very much but they're normal in nature and there was nothing that really came in on a large basis that really skewed that number.

Okay, well that's great. Thank you.

Nik Fisken.

This is Brett calling them for Nik. Two quick questions. Number one, I wanted to make sure that the $60 million in cross sales that you were talking about, is that equivalent to the $12 million number that you gave for the last quarter?

That is correct.

Okay. And then the other stuff that you mentioned on top of the $60 million but didn't really quantify that would be in addition to that?

That's correct.

And secondly, just wanted to see -- can you guys comment on your gross margins? You came in a little bit lower than we had modeled and I just wanted to get any thoughts on that as well as any thoughts for that going forward?

From a gross margin standpoint I think you'd really have to look again to the LPS groups that were driving more of our revenue through channels that have a higher cost of sale. Again, the labor costs associated. So that's probably the biggest component that drove us down this quarter.

Okay. Those were the only questions I had, thank you.

Julio Quinteros.

Real quickly, can you just give us a sense or characterize your view on just the mortgage environment in particular? This is always something that I think folks worry about. What's happening on the mortgage market side? Are we seeing the bottom, a turnaround or is it getting worse? Just talk a little bit about the mortgage environment, especially on the origination side if possible.

The originations -- originations, Julio, have been fairly consistent over the last three or four months. There's been a slight shift from resale transactions and new home transactions into refinance transactions as rates have stabilized and even moved down a bit. What we are seeing in our particular segment of the business though is something we've been talking about over the last year or more and that simply is that as the mortgage origination volume comes down which is primarily processed by our LSI business group, the default business is now starting to increase significantly, as Lee mentioned earlier.

And frankly the referrals -- and we call an order when it comes into our default business a referral from a lender as opposed to a fully processed order when that referral comes in then the default process is initiated. And those referrals -- the referral level or rate as it has roughly doubled from June to September.

So as Jeff and Lee both mentioned, the default business is increasing significantly and we're holding our own on the mortgage origination side. So we're seeing slight increases in our LSI business from marketshare gains, the significant increases in our default business not only from marketshare gains but also from the volume of referrals that are presently moving through the system.

Okay, great. And Jeff, just in terms of capital prioritization, clearly you guys are using some cash to buy back stock plus I think you also have some issues around debt repayment and then acquisitions. Can you just kind of talk a little bit about where your priorities are right now as you kind of look at the rest of this year and headed into 2007 -- what are going to be sort of the key priorities for the deployment of capital?

I think if we were to rank our priorities our top priority would be to pay down debt. We have done some targeted share repurchases. The additional authority that we got from the Board allows us to continue to do targeted repurchases when we feel it is appropriate. But our priority would be debt paydown first, probably targeted share repurchase second and then I'd say targeted acquisitions third.

Okay, great. And then any update in terms of just your view in terms of what happens with the FNF holders once they get their FIS shares come November 9th?

You probably have a better feel for that than we do. One thing that is happening is that the shares are being distributed to the FNF holders and we believe there's been a fairly significant transition in the share holding base of FNF. The FNT piece has now been distributed to the FNF shareholders. And I believe that there are people probably buying FNF today because there's a slight discount to the FIS price. But everyone on this call except us would have more insight into that question -- the answer to that question than we would have.

Okay, great. Thanks, guys.

(OPERATOR INSTRUCTIONS). Greg Smith.

You guys are clearly exceeding expectations on the sales side. How do we get comfortable that incremental margins in all this business is going to be good?

Greg, we don't bring on any business that doesn't have the right quality of pricing and doesn't generate the right return. And I can point to a couple of examples, the recent Chase deal and others that we -- we kind of waited on those deals, we bought them in at the right return and we're going to continue to do it. So we have very strong controls and a very good understanding of what it takes to get those incremental margins where they've got to be.

We also have some pretty structured processes in place that are relatively new. We have a capital committee that reviews all major acquisitions and projects. We're a stickler to make sure that the returns are right. If it doesn't meet the right hurdle rate we don't do the deal. So you can be assured that the quality that's coming on and the initiatives to take out cost throughout the organization are going to produce good margin expansion as we move forward.

And I think that's been demonstrated this year. I mean, again, I look back to lender processing services and the fact that in a pretty challenging market we've been able to drive revenue growth of 5%, that's great, but we've also been able to maintain a mid 35% margin rate. That is a substantial EBITDA margin rate that we are holding quarter-on-quarter and, again, looking at the fact that we're getting more of that growth from some of the lower margin productline -- that just shows you as to how tight our operations are managing their expenses.

Excellent, thanks. And Jeff, I think you sort of answered this before, but should we think about the incremental CapEx for the Brazilian deals in '06 as about $50 million?

It's a little bit less than the full $50 million. I think it was around 35 of the 50. That's what we disclosed last quarter.

Okay. So it's the same, that was basically (technical difficulty) that hasn't changed?

No.

It has not changed, we're still on track with the original estimates.

Okay. And then, just in the fourth quarter, are there any particular -- the fourth quarter of '06, any particular grow over issues we should be thinking about?

No, there aren't. You shouldn't see anything abnormal on a year-to-year basis. No.

Okay, great. And then can you update us on your latest thinking about online banking and online bill payment products? Do have your own proprietary, sometimes you resell, what's your latest thinking on the strategy in those two products?

Latest thinking as we have to do things. We have to increase the market share in our community bank and credit union business. We're working hard on doing that. We still have fewer than 1000 institutions using net service and we think there's an enormous potential by just getting deeper into that base. We are making the progress in doing it. In fact, one of the leading products that we now are executing on on a cross sell basis is the bill payment side of the business so we're getting good traction there.

We've also taken the first steps to migrate that capability into our large bank group. And Greg, we talked about a couple of different structures that we were utilizing to do it. We've settled on one. We're going to hire salespeople out of the business unit that runs that, they're going to move over to the EBS side of the large bank business and they're going to have the responsibility of selling that and we're getting good interest as we talk to larger institutions. That is a business that is growing in the strong double-digit range and it's a business that we have very small or low market penetration on and we think it's a real winner and we're going after it aggressively.

And this is your own proprietary product?

It's our own proprietary system. We picked it up through the NETV acquisition a number of years ago. We spent about a three-year period enhancing the capabilities of it. We've had it reviewed by independent third parties and it's on par with anyone that's out there in capability and we think it's going to be a real winner for us in the future.

Great job, guys. Keep it up.

Thank you.

Dave Koning.

Good morning. Nice results. I was wondering -- within lender services you talked a little bit about default and in the core mortgage businesses being cyclically opposite in the past and offsetting each other. Could we actually be at the front end of a period when both could work together and jointly benefit that segment (multiple speakers)?

We clearly are going to couple those two capabilities and leverage the relationships we have on our mortgage side of the business. And you can kind of think of it this way -- as Bill said, we're on the front end of what is going to happen on the delinquency side and it's going to build as time goes on and we've just seen the very early stages of that. So we have a lot of potential that we think we can pick up down the road just by selling deeper into the base, selling new accounts and then benefiting from that uptick which is clearly going to happen.

We're somewhat seeing that right now because if you look at our revenues from our origination base from our origination businesses, not looking for prior year, but looking on a sequential quarterly basis, we've had steady revenues Q1, Q2, Q3 in our origination businesses while at the same time escalating up our default business revenues.

Great. And then just one follow-up. You mentioned the repurchase activity, I'm wondering what you think the share account will be for Q4?

We're sitting at about $193.6 million for our average for Q3. We've got the $1.4 million share buyback that will help impact us positively this quarter. But the one wildcard is there have been very little option exercise activity thus far this year and there's quite a few options out there that are pretty well in the money. And after we get through November 9th we expect to see that option sale activity pick up, that's the tough one to predict.

We're going to probably have to wait until we get through the fourth quarter to give you better guidance on that. What the ultimately would be on the repurchase, but that's not going to happen all in one quarter. We'll give you better guidance as we go forward.

The one other thing that will impact share counts as we move into the fourth quarter will be the closing of this transaction. Because we are bringing over some or converting some FNF options into FIS options at the same time we are issuing a few new options. There are things that we disclosed in the proxy statement will have a slight impact on share account.

Thank you.

Operator, we have time for one more question.

Kartik Mehta.

Good morning. I wanted to talk to you, Lee and Jeff, about you've said de novo activity has been really strong especially for you. I'm just wondering, how does this benefit near-term sales and what's the real impact moving forward? So I guess the question is -- it's small right now but 12 months from now these are going to be very big accounts and really help organic growth?

They're not going to be large accounts. Think of it this way -- they're kind of factored into our normal sales process and what we post on an annual basis in terms of new sales. So it's nothing that's going to drive significant revenue on a per institution basis, put on a cumulative basis adding them up they produce a pretty good revenue stream and they're very loyal, they're long-term contracts. So you had the repetitive revenue that we're all looking for. So don't think of it as a huge, huge spike, think of it as part of the sales process.

And on cross sales, clearly it looks like you're getting momentum there. Is this more of you've done a great job integrating the salesforce? Is this more product set? What's really helping you drive the cross sales for the business?

It's a number of things. We have good strong sales leadership in our community bank and credit union business across the board. We spent a lot of time making sure we have the right salespeople in place. They were quick to sell the product and they were focused on the right opportunities. So the sales plan itself has been put together extremely well and we've compensated our people well. They're aggressive and they're going after the business in a way that they probably haven't been as aggressive and the past because they were really diverted on converting institutions and integrating acquisitions and now they're out on a full-time basis going after new sales.

The other piece of it is we're leveraging existing relationships. And on the Certegy side of the business we have a large number of very, very strong independent financial institution relationships, long-term relationships, they're at the CEO level and we're taking advantage of that. Obviously the product capability, a full range of product capabilities -- suites and services and products also adds enormous benefit especially when you integrate those products and make it more cost-effective through us for the institution to buy the products and provide more data back to the institution's customer in a higher level of service.

So it's three or four factors that we carefully worked on but we're getting good strong results as a result of it. So we're really happy and pleased with where we are.

Thank you very much.

Thanks, everyone, for joining us this morning. Please remain on the line for the telephone replay information.

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