Fidelity National Information Services Inc (FIS) 2006 Q4 法說會逐字稿

Welcome to the fourth quarter FIS earnings conference call. [OPERATOR INSTRUCTIONS]

I'd now like to turn the conference over to Senior Vice President of Investor Relations, Mary Waggoner, please go ahead.

Thank you, Marla, and good morning, everyone. Joining me today to review our fourth quarter results are Bill Foley, Executive 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 audio cast live over the internet. Telephone replay information is included in today's press release and a replay will also be available on our website, fidelityinfoservices.com. 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. As in the previous quarters, the 2005 and 2006 GAAP results presented in today's press release have been adjusted to improve comparability.

Reconciliations between GAAP and non-GAAP results and schedules showing historical detail are provided in today's press release, which is also available on our website. The reconciling items include restatements to reflect the Certegy and FIS combination and the first quarter 2005 recapitalization of FIS as if both events had occurred on January 1, 2005, and the eliminate of merger acquisition and joint venture development costs consistent with disclosures in our previous SEC filings. Before we continue, I would like to remind you that some of the comments made on today's call will contain forward-looking statements. These statements are subject to the risk and uncertainties described in our earnings release and other filings. The Company expressly disclaims any duty to update or revise this forward-looking statement. Now I will turn the call over to our Executive Chairman, Bill Foley.

Thanks, Mary. Good morning, everyone. FIS delivered another strong quarter with revenue growth of 12.5% and EBITDA growth of 11%. For the full year, revenue grew 8.8% and EBITDA increased to 10.6%. We are very pleased with the performance of FIS in its first year of operation as a new public Company. We accomplished our goal of 30 million of in-year cost savings related to the Certegy merger and achieved excellent new sales results, which will generate over 3 billion in new revenue over the next 10 years. In November, FIS was recognized as the number one bank service provider by American Banker and Financial Insights . And claimed the number two spot in the FinTech 100 rankings. On November 9th, FIS became a wholly independent operating entity with the completion of the merger between FIS and the former FNF. The new operating structure provides FIS with more flexibility with respect to potential M&A transactions and increased stock liquidity.

Also on November 9th, FIS was added to the S & P 500 index. During the fourth quarter FIS acquired Watterson Prime, a leading provider of due diligence services to the secondary real estate market. Watterson is a great addition to our product suite and will be integrated with other FIS service offerings, including our collateral risk and valuation services. In January, we completed the refinancing of our principal credit facilities, our borrowing rate was reduced by approximately 55 basis points, which will result in significant savings compared to the prior arrangement. Our strong performance in 2006 and the initiatives underway for 2007 provide a great foundation for the continued growth and success of FIS. Lee and Jeff will provide additional details regarding our outlook for 2007 and you will have an opportunity to meet our senior management team at our upcoming investor day, which is scheduled for March 27th. We look forward to seeing you there. I'll now turn the call over to Lee for the business review. Lee?

Thank you, Bill. Good morning, everyone, and thanks for joining us today. I'll begin today's business review by providing a summary of fourth quarter operating results followed by an update on our key business initiatives. I'll conclude with an overview of our key priorities for the new year. Jeff Carbiener will follow me with a detailed financial report, including guidance for 2007. Now for a summary of fourth quarter results. It was another strong quarter for our Company. Consolidated revenue increased 12.5% over prior year, driven by 16.1% growth in transaction processing services and 7.9% growth in lender processing services. Overall, organic revenue grew 11.5%. Consolidated EBITDA increased 11%. And cash earnings came in at $0.58 per share. The strong performance in TPS was driven by 8.6% growth in IFS, our community institution group, 8.9% growth in EBS, and 55% growth in our international business. We are pleased with the 7.9% revenue growth in lender processing services, which was driven by continued strength in appraisal and default services and a modest increase in refinance activity.

The full year growth rate for LPS was 7.5%, which is a significant accomplishment considering it was achieved in a year when the refinance index declined by more than 20%. Throughout 2006, we communicated plans to increase organic growth by selling more products to our existing customers and strengthening and realigning our sales organizations. The majority of our sales organizations are now selling a complete range of compatible products and services to perspective customers. We achieved excellent cross sales results in our community institution and international businesses throughout 2006. And we are beginning to realize similar results in our mortgage processing and information services business. IFS produced record new sales in 2006. Fourth quarter new sales were excellent, more than doubling over prior year. Full year new sales were 35% over prior year. Sales of ancillary products and services were strong across all product lines. Significant accounts signed in the fourth quarter included the new seven year core processing agreement with California Credit Union and a six year item processing agreement with Ohio Savings Bank. These were both competitive wins.

I'll now address enterprise banking solutions which focuses on the large institution market. In the fourth quarter, we announced a renewal of a five year core processing agreement with Harris Bank and a renewal of a four year application management services contract with West America Bank. Over 70 of the top 100 banks in the country are now running our core processing applications. These relationships, coupled with our strong domain expertise, puts us in a good position to provide channel and integration services, which enable institutions to reduce processing costs, better integrate customer data, and provide a higher level of service to its customer base. Our new sales pipeline for channel solutions and integration services remains very strong. As we discussed in the past, we have made significant investments in these areas and are currently engaged in discussions with several of the nation's largest financial institutions, including one which is in an early stage of implementation. Interest in our commercial and syndicated loan products has also increased over the past year.

FIS has built a strong competitive position in the community and top-tier financial institution markets and we believe we are well positioned to gain market share. We also believe that the mid-tier U.S. banking market is an attractive growth opportunity for our Company, as our penetration in this segment is relatively low. One of our most important initiatives this year focuses on strengthening and realigning our mid market sales and operating organizations to compete more effectively in this large underpenetrated market. Internationally, the demand for core processing services, channel solutions, and card issuer services continues to generate significant growth for our organization. Our newly formed Brazilian card and item processing businesses are expected to generate approximately $75 million in incremental revenue in 2007. We believe that there is significant opportunities to add new customers and volumes once we convert the card portfolios of ABN Amro and Bradesco and complete the installation of our new image-based item processing platform.

In addition to Brazil, we have strong sales prospects in Europe, Asia Pacific and Latin America. Significant customer wins in the fourth quarter include HSBC Argentina, which purchased our installment loan processing system, and Tokyo Star Bank, which will outsource its core processing to us. We also signed a letter of intent with St. George Bank in Australia for card processing services. We are also pleased with the new sales results in LPS, which more than offset general industry declines and generated stronger than expected growth in the fourth quarter and full year 2006. Lenders are showing increased interest in outsourcing back office processes such as appraisal and default services. This trend contributed to the strong growth in 2006. We expect this trend towards outsource to continue and believe that our integrated products and services, along with our strong leadership position and mortgage processing, will enable us to generate long-term growth in our lender services business.

Interest in our MSP platforms was also strong from lenders who have traditionally processed home equity loans on consumer loan platforms. MSP provides lenders with better reporting and analysis, stronger regulatory compliance, full security functionality, and stronger risk management and collections. In 2006, PHH, EverHome, and Cenlar, the nation's leading mortgage subservicer, converted their home equity loans to our MSP platform. We expect other institutions to follow in 2007. Our share of the HELOC market is low and it represents a significant opportunity for our Company. In the fourth quarter we announced the renewal of mortgage processing agreements with a number of our top-tier accounts, including National City, PHH, and EMC Mortgage, which is a subsidiary of Bear Stearns. Each of these organizations use multiple FIS products and services. Last week, we announced a significant new multi-year agreement to provide tax services to EMC. In the fourth quarter, we sold additional products and services to several leading lenders, including Country Wide, Wachovia, U.S. Bank and Washington Mutual.

We have made good progress in integrating the delivery and management reporting of ancillary products and services into our core processing platforms. This capability enables customers to reduce operating costs, manage risks more efficiently, and better integrate customer data. Product integration has been completed in several businesses, including IFS, where our base 2000 card processing platform has been linked to our core banking platform, and EBS, where our expressed middleware now provides connectivity between touch point applications and an institution's core processing system. This technology enables banks to modify and add products and operating a reporting applications without changing the core system, which reduces overall project risk and the cost of implementing new technologies. In lender processing, we have integrated our mortgage processing platform with default, flood, and tax services. This integrated process management system reduces redundant data input and servicing costs and is the first of its kind in the market.

In 2007, we will continue to focus on generating higher revenue growth by selling deeper into our customer base, increasing penetration in the mid-tier bank and lender markets, and successfully implementing Chase, BB&T and the two Brazilian contracts signed in 2006. We will also launch a series of initiatives which will lower our expense base and drive future margin expansion. These initiatives include reducing procurement costs, lowering technology expense by maximizing mainframe and server utilization, consolidating additional processing centers into our Little Rock processing facility and better leveraging domestic and offshore development resources across business unit lines. We will also consolidate operating platforms where practical, including ATM, debit card processing, as well as internal systems, such as HR and financial reporting. All in all, it was a very good quarter and first year for our Company. I'll now turn it over to Jeff for the financial report and 2007 guidance. Jeff?

Thanks, Lee, and good morning. Today I'll focus on the key performance drivers and metrics for the quarter beginning with revenue growth. I'll close with additional details regarding our outlook for 2007. As Lee mentioned, fourth quarter consolidated revenue increased 12.5% over prior year driven by 16.1% growth in TPS and 7.9% growth in LPS. Organic revenue growth was 11.5% after adjusting for the fourth quarter acquisitions of Watterson Prime and FNF Capital and the acquired portion of revenues from our Brazilian item processing operation. The 16.1% increase in TPS revenue was fueled by strong growth in IFS, EBS and international. International revenues increased 55% to 141 million during the quarter, with strong revenue growth contributions from each region, including Europe, South America, and Asia Pacific. Additionally, within each region we are experiencing strength from sales to both new and existing customers leveraging all product lines, including our core banking and touch point platforms, item processing, card processing, and check risk management. The 8.6% growth in IFS to 285 million was also driven by increased revenue across all product lines.

As Lee mentioned, 2006 was a record sales year for IFS. The total value of contracts signed during 2006 exceeded 600 million in projected revenue with approximately 60% coming from new sales wins. The projected revenues from these new customers represent a balanced mix among our core credit card item processing and ebusiness product lines, which further illustrates the success of our multi-product and cross sales strategy. Revenues in EBS, our large bank group, increased 8.9% to 270 million during the quarter, driven by several customer signings in 2005 and 2006 that have now begun to generate revenue, as well as new project work from existing customers. These customers include Webster Bank, RBC [Cincura], Etrade, GMAC, Capital One, Banknorth and Sedgwick. Strong demand for our commercial lending products also contributed to EBS revenue growth in the quarter. We are extremely pleased with the overall growth in TPS during the quarter and are encouraged by the strong contributions from each of our customer channels.

Lender processing revenues increased 7.9% to 437 million in the fourth quarter, driven by 10.6% growth in information services, which more than offset the 1.6% decline in mortgage processing services. We were especially pleased with this strong performance in lender processing given the 24% growth experienced in the fourth quarter of 2005. The increase in information services was driven by more than 40% growth in both our default and appraisal product lines. Additionally, revenue from our title and settlement services increased 2% over the prior quarter and 7.7% over the third quarter of 2006, driven by an increase in refinancing activity. The significant gains in default were driven by increases in both market share and delinquency rates, while the growth in appraisal services was generated by the new WAMU contract and increasing volumes from other key clients. The gains were partially offset by declines in section 10-31 exchange services and tax. The decline in section 10-31 exchange revenue was driven by reduced activity, while the decline in tax services revenue is primarily attributal to a decrease in volumes within our sub-prime client base.

Although this decline in sub-prime volumes will likely continue in 2007, our strong pipeline of new customers, such as EMC Mortgage, and perspective customers should enable us to continue to drive revenue growth in the information services segment. Mortgage processing revenue was 92.5 million in the fourth quarter of 2006 compared to 94 million in the fourth quarter of 2005. The 1.5 million or 1.6% decline is attributable to the deferral of revenue associated with large customer implementation projects, including Chase, which began in the fourth quarter of 2006, and higher licensed and professional services revenues in the prior year quarter. We will begin recognizing the deferred revenue when the customers start on service in 2007. The normalized growth rate for mortgage processing would have been approximately 5.2%, which is in line with the 5.5% increase in the number of loans processed. Moving on to EBITDA. Consolidated EBITDA increased 11% to 295 million during the quarter, driven by continued margin expansion in TPS and a 4.5 million decline in corporate expenses.

The consolidated pro forma EBITDA margin in the fourth quarter was 26.1% compared to 26.5% in the prior year quarter. Excluding the impact of the Brazilian item processing operation, consolidated EBITDA increased 13.4% and EBITDA margin increased to 27.1%. This was a 60 basis point increase compared to the fourth quarter of 2005. Incremental profit contributions from all channels drove 16.6% growth in the TPS EBITDA. The TPS EBITDA margin was 25.8%, which is comparable to the prior year quarter and 160 basis points higher than the third quarter of 2006. Excluding the Brazilian item processing cost, the third and fourth quarter margins would have been 25.2% and 27.4% respectively, which is a sequential improvement over the first and second quarter margins of 22.4% and 24.1%. With respect to the Brazilian item processing operation, we have made a strategic decision to implement more comprehensive draft capture and imaging technology and to further consolidate the number of processing sites.

Although these initiatives will drive higher costs in the short-term, they will enable us to process additional volumes more efficiently and cost effectively once fully implemented. We now expect the Brazilian item processing operation to reach breakeven in the second quarter of 2007 and to approach a mid-teen run rate margin by year-end 2007. Lender processing services EBITDA decreased approximately 1% from fourth quarter of 2005 and the margin was 31.7% compared to 34.4% in the prior year quarter. The decline in margin was the result of revenue growth being driven by lower margin, high variable costs services, like appraisal and certain of the default product lines, while revenues declined in higher margin services such as tax and section 10-31 exchange. Also the impact of the decrease in sub-prime volumes occurred during the height of the tax escrow processing season, making it difficult to reduce staffing levels. We have made significant efforts to reduce the cost base in both of these businesses and expect margins to improve within the next few months.

Corporate expenses totaled 23.3 million, a 4.5 million decline compared to the fourth quarter of 2005. The decrease was largely attributal to stringent cost controls and the consolidation of many of the former Certegy corporate functions. Cash earnings, which we define as net income plus after-tax purchase amortization, totalled 111.9 million or $0.58 per diluted share, which is an increase of 10.9% over the prior year quarter. The increase in cash earnings was driven primarily by the strong growth in operating profits and the lower effective tax rate, partially offset by a 8.2 million increase in after-tax interest expense, the 50.8 million, and a 1.6 million decrease in after-tax purchase amortization to 27.6 million. As Bill mentioned, we completed the refinancing on our principal credit facilities in January. The new facilities include a 900 million five year unsecured revolver and a 2.1 billion five year unsecured amortizing term loan facility. The initial interest rate is LIBOR plus 100 basis points in accordance with our current leverage ratio and lowers our current borrowing cost from 6.9% to approximately 6.35%. This translates into a 15 million in annual pretax savings, or $0.05 per share, based on the current balance of 2.7 billion.

We will incur a pre-tax non-cash charge of approximately 27.3 million in the first quarter of 2007 in conjunction with the unamortized costs associated with the prior facility. Capital expenditures of 84 million in the fourth quarter slightly exceeded our expectations. The primary driver of the variance was our recent acquisition of FNF Capital, as the former operating lease between FIS and the Capital Company must be now accounted for as a capital addition. We do not anticipate similar capital requirements for the leasing operation going forward. As Lee mentioned, we continue to move forward with initiatives to lower technology costs and reduce capital spending across the Company. Free cash flow, which we define as net income plus depreciation and amortization, less capital expenditures, was 116 million during the quarter and 435 million for the full year, which was slightly below our expectation due to the higher than expected capital expenditures during the fourth quarter. Working capital changes produced the net use of cash in the fourth quarter, as would be expected, due to the seasonal impact on trade receivables as well as cash usage from high growth channels, such as default services.

The uses of free cash flow during the quarter included payment of the 9.5 million cash dividend, 14.2 million for the acquisition of Watterson Prime and FNF Capital, and the repurchase of 1.4 million shares of FIS stock at the total cost of approximately 59 million. I'll close with a few comments on our outlook for 2007. This guidance excludes the remaining integration costs associated with the second quarter migration of St Petersburg data center, estimated at approximately 7.7 million pretax, and the first quarter 2000 non-cash charge of 27.3 million pretax incurred in conjunction with the credit facility refinance. With that in mind, we expect pro forma revenue growth of approximately 7% to 9%, driven by high single-digit growth in TPS and mid single-digit growth in LPS. Revenue growth in the first half of 2007 will exceed growth in the second half of the year as we anniversary the incremental revenue associated with WAMU appraisal volumes and the Brazil item processing operation. Revenue growth should accelerate again as we enter 2008 once we complete the Chase Mortgage and Bradesco card conversions.

EBITDA growth will approximate 10% to 12%, driven by margin expansion in both TPS and LPS as well as lower corporate expenses. We do expect greater margin expansion to incur in the second half of the year as we complete work on the Brazilian item processing operation, implement new customer contracts, and successfully implement expense reduction initiatives. We expect full year earnings per diluted share of $1.97 to $2.03 and diluted cash EPS of $2.47 to $2.53, which represents an increase of 17% to 20% compared to full-year 2006. The factors driving our 2007 cash EPS include the projected growth in EBITDA, the 9.4 million or $0.05 per diluted share decrease in after-tax interest expense and the 9.3 million or $0.05 per diluted share increase in after-tax stock option expense. Our guidance assumes a 37.1% effective tax rate and approximately 194.4 million in average fully diluted shares outstanding. After-tax purchase amortization will approximate 97 million in 2007, which is a 16 million decline compared to 2006. Finally, we are projecting free cash flow of 530 million to 560 million, which assumes approximately 300 million in capital expenditures and approximately 460 million in total depreciation and amortization. Now I'll turn it back to Lee.

Thanks, Jeff. We also want to thank everyone for joining us this morning. Operator, we're now ready to take questions.

[OPERATOR INSTRUCTIONS] And we do have a question from the line of. Please go ahead.

Good morning. Jeff, you talked about the margins out of the Brazilian item processing improving in the second half to mid-teens. Can you talk about maybe the margin improvement opportunity or the margin opportunity for the card business out of the Brazilian operations and what the ramp-up there might be as we go forward?

Yes, absolutely. With our card venture in Brazil, we're still anticipating that we'll complete the ABN Amro conversion a little bit later than we'd initially guided. I think in the third quarter is when we are currently projecting. But offsetting that little shift-out in the ABN conversion is the fact that we've had stronger organic growth within our existing customer base. We expect to start seeing improved margins as we hit the second half of the year on the card side as well. But when we really should see the real ramp-up in margins is in early 2008 when we convert over to the -- when we convert the Bradesco portfolio over.

So from a 2007 segment standpoint, all the Brazilian revenue will go in the transaction processing segment. Right? So that will have, obviously, greater growth than the lending services side of the business.

Right, I think we're still comfortable saying that the contribution to revenues from the card processing venture in Brazil should be somewhere around 0.5%, north of 0.05% incremental revenue in 2007.

And Lee, maybe a question on the enterprise solutions. That seems -- that had really strong growth this quarter and considering that those are large banks, I was surprised by the growth. Can you talk about maybe the drivers of -- for that business and maybe your outlook going forward?

Absolutely, the drivers are really across the board and very widespread. We had incremental revenue left from channel solutions, from some of the integration work that we've been doing for some of the institutions, from upgrading their core processing platforms and adding additional functionality into those platforms. So it wasn't really isolated in any one given area. The good news is is that we believe that growth will continue on into the future. The demand for channel solutions, as we said, is very, very strong. We have a number of projects underway that we hope to sign contracts on in the relatively new future that will add good margin lift and good revenue lift throughout 2007. So across the board, EBS has done a good job in going after the market aggressively and signing new business that we're going to start seeing the benefits from as we move through 2007 and into 2008.

Thank you very much.

You're welcome.

And our next question will come from Paul Bartolai . Please go ahead.

Thanks, good morning. Lee, just a follow up on enterprise. You talked a little bit about the mid-tier opportunity. Just curious if you could give a little bit more color on that, what you think you need to do to accomplish that goal of further penetrating that market.

It has kind of been a market segment that really overlaps between our community bank group and our large institution group. And because of that, we've never really had a consistent dedicated effort, sales force effort in place to target institutions and to go after those institutions aggressively. So what we'll do in the very near future is finalize a new sales structure and organization where we'll have specific account responsibility assigned and we'll know who is responsible for a given institution and they'll go after that institution in an aggressive manner. That market is really an underpenetrated market for us. If you go below the top 50 institutions and you stretch down and hit number 150, once you hit number 150, that has an asset range in the neighborhood of about $5 billion. So we have literally about 100 institutions that have great needs that we haven't really serviced the right way and we're going to go after that and we're going to do that. So good opportunity and good potential there. Great.

Jeff, did you quantify how much CapEx in '07 will be from Brazil?

The CapEx that we expect from Brazil right now is around 50 million.

And is that a little bit higher than originally expected with some of the additional stuff you are doing?

No, it's fairly close, fairly close to what we originally expected. I think we've been talking all along that with the Brazilian CapEx in late '06 and rolling into '07 that we would carry a $300 million capital expenditure rate through '07. And where we really expect to see the benefits is once we roll off of those projects, roll into 2008 and we will see the capital expense levels come down quite substantially in '08.

Yes, we expect Cap -- just as a guideline and where our thinking is currently, we expect CapEx to be in the 250 if not below range once we roll into 2008 as these project mature. So we'll make good progress in getting that CapEx down. There's 4 or 5 projects that will end up and wind up during 2007. So as we roll into 2008, we'll be in good shape.

I think once you get out of the big projects, a good guide is probably 5% of revenue which would lead you to that 250 that Lee's talking about.

Great. That's helpful. And then, Jeff, did you give any color on the margin expectations for '07 by segment?

Yes. What we said in the script just a second ago is we expect to see overall margin expansion. If you look at our guidance that we gave, you'd be looking at overall Company margin expansion of somewhere between 50 and 100 basis points. And what drives that is continued decreases in corporate expenses as well as some margin expansion in both TPS and LPS with more margin expansion probably coming from the TPS sector.

Okay, great. And then just final question. With the debt refinancing you guys just did, does this change your use of capital expectations more towards share repurchases versus debt paydowns or any additional color on that?

It doesn't really alter it at this point in time. And if we do alter it, we'll certainly let you know.

Okay, great. Thanks.

and our next question will come from the line of Julio Quinteros. Please go ahead.

Hey, guys. Good morning. Wanted to check real quickly on competition in the LFI space,the large financial institutions space. One of your competitors has talked now about organizing and going after this marketplace. Can you talk a little bit about some of the competitive barriers that you guys will conceivably have in this space and critical success factors for really sort of sustaining your current presence in this space, first of all?

The competitive barriers are really relatively high, if you kind of go back and take a look at the market that we serve. We serve over 70 of the top 100 financial institutions in the country. They operate our core processing platforms. To convert off of those platforms is a very, very difficult thing to do. The market potential really is on the channel side and when you look at product capability within FIS, it's as strong as you're going to find anywhere in the industry. We spent an enormous amount of time developing new channel solutions that are plug and play. We understand, obviously, and know very well the core processing platforms that our customers are running on because we've installed them over a period of time.

And to integrate those new capabilities into the core, we think we have a strong competitive advantage in doing that because it is our core and much of the work that we've done with channel has been directed towards making sure that the plug and play capability is very, very strong. We also have very strong relationships within the institutions that we've cultivated over a long period of time. So if you add product capability, if you add penetration, if you add specific relationships where we understand what the banks are really looking for and what they need and we're able to help them, those are pretty strong competitive barriers. We don't discount any new competition, we take them very seriously, but we also don't go to sleep at the wheel. And we understand what I think we've got to do to maintain that leading position and we intend to do that.

Okay, great. And kind of keeping the spirit of the fact that I'm actually calling in from India today, can one of you address specifically what you guys are doing on the offshore strategy side? In particular, when we look at the mortgage business and some of the opportunities that you might happen to have there, what can we expect to see sort of incrementally in terms of cost opportunities from possibly moving more of the servicing part of the work to places like India or any other sort of offshore location? Can you just kind of walk us through that, especially as it relates to the Covance relationship that you guys have, as well.

Well, we're not going to talk specific numbers surrounding that. I'll talk about the opportunity overall and what we have done to lower our expense base. In each and every budget that was presented and approved this year, we have quotas removing positions to international facilities and offshore so that we reduce our expense associated with development efforts and maintenance of our current system. So we think we're really in a good strong position to reduce that expense overall. There's lots of opportunity to offshore additional, not only technical jobs or positions, but also some of the back office support functions and services that we provide captive in the U.S. to lower our cost base. Good plan in place, strong accountability attached to it, and you'll see significant progress as we move forward this year.

It's one of the principal factors that's allowing us to project some margin expansion in LPS is the fact that we're going to push a lot of the jobs that are associated with data entry functions offshore and get the cost benefits.

And you're going to do that captive or are you going get through the Covance's relationship? How you guys looking at that?

We're going to continue to use the Covance's resources for an indefinite period of time. We have a lot of people in place that are trained, that are skilled, that are working that we've worked with over the years and we're just not going to turn around and dislodge those resources. At the same time, we're looking at a wide range of options where we can potentially get better control over certain resources and become even more efficient. So those options are still open and we'll let you know once we make a firm decision on which way we're going to head.

Okay. And just to go back to the cost synergies on the Certegy piece. The $30 million run rate, that was for calendar year '06, and I think that's what you guys targeted all along. What was the sort of equivalent number now for '07 that we should be thinking about?

50 million flowing into next year, so we will get an incremental [INAUDIBLE].

50 million. Okay. Got it. Great, thanks, guys.

You're welcome.

And our next question will come from the line of Jim Kissane. Please go ahead.

Thanks. Lee or Jeff, can you discuss the operating leverage in the default and appraisal lines? Meaning if you grow the revenues at the same rates that you've been growing, will the margins start to move up from when they are today?

In general you're going to get some operating leverage with any revenue growth, yes. In some product lines it'll be more limited because you have a higher cost of sale. For instance on the appraisal side, when somebody orders an appraisal I've got to pay an appraiser to go out and perform that service. When I'm dealing with certain of the default product lines, like field services where I'm having somebody go out and maintain the house, well I have to be able to pay that service to go out and perform the lawn maintenance or whatever that service is. It tends to have a higher variable mix. But then certain of our other default product lines, like some of our technology solutions, our new track work flow system, we get a lot of leverage off of selling those services. It's really a mix.

What's the relative sizes of the appraisal and default businesses?

I think in grand total we're probably talking about a third of the revenue within LPS comes from those services.

Okay, great. And I think you adjusted the revenue growth for mortgage on the revenue deferral, I guess on the Chase contract. Would there be an adjustment to the operating margins or EBITDA margins for lending services?

When we do a large implementation like that, the way the accounting works is that you defer all the revenues that you would typically earn at a implementation as well as all the costs and start to recognize those once the contract is implemented. So it has no impact on margin.

Just wanted to confirm that. And then, Lee, can you give us a sense on what portion of your growth is coming from existing customers and what portion is coming from new customers if you ex-out Brazil?

Most of our growth, the vast majority of our growth is being generated by selling additional products and services to our current existing customer base. On the IFS side of the business, over 60% of the new sales revenue is generated by selling deeper into that base. And you probably have comparable numbers on the EBS side. Now that will change somewhat as we start gaining momentum in some of the channel solutions applications that we've talked about. But for the time being, figure over 50% of the minimum is from existing customers.

Okay. Thank you very much.

You're welcome.

And our next question will come from the line of Dave Koning. Please go ahead.

Hi, guys. Nice results.

Thank you.

When we look at your '07 EBITDA margin guidance, you mentioned 50 to 100 basis points of improvement. I think we get that much improvement simply from the incremental 20 million of synergies and then some of the benefits from Brazil, both from the item and card processing agreements. So it seems like on a core basis, the EBITDA margin might be flat or even down a bit. And I'm wondering if there's some conservatism built in there or maybe you could just give us a sense of some of the puts and takes in that margin line just from a core standpoint?

You really have to look at it by segment. I think that if you're looking at transaction processing services, that definitely we're factoring in margin growth in that same 50 to 100 basis point range and that's being driven by the fact that we do think we can continue to get leverage off of our revenue growth the same way we have this year. And as well as some cost-cutting initiatives. But we do have Brazil to deal with. We do expect Brazil to be somewhat of a pulldown in Q1 and then rolling into partial Q2 that we have to overcome. That's an offset to what you are talking about. On the lender side, we talked about some of the businesses that had volume declines, like tax and IPECs. We're in the process of getting the expense bases out right now, but that does take some time. Additionally one of the things that offsets the declines in volume in say our tax service is the fact that we're starting to sell new tax services customers such as EMC. But EMC doesn't roll on in January, EMC comes on I think in the second quarter. So you've got to gap those differences in timing.

Okay. Great. That's very helpful. And then just as a follow-up. In reviewing the Q1 numbers, just so as we look at comps for Q1 of '07, looking back at the year ago numbers, I think there was some equipment revenue that helped a little bit in Q1 '06. And I'm just wondering if there are any comparison issues to think about when we look at Q1 of '07?

That's probably the primary one thinking out loud. We did have very strong lender processing revenues in Q1 and that factors into this, as well. I think our growth rate in overall lender was 12.9% in Q1 of last year. We do have some headwinds, a little bit higher comps there as well.

Those are about the only two, though.

And what's the relative size of that equipment revenue grow over? Is that pretty immaterial?

It was material to the IFS revenue stream itself, not the overall.

Great, thank you..

And our next question will come from the line of Greg Smith. Your line is open.

Hi, good morning. Jeff, what's the buyback assumption and debt pay down assumption in your guidance? Is there any in there?

We have factored into our plans right now, I think, about 100 million of share repurchase of our 200 million in authority. And the primary use of our cash other than that is to pay down debt and we're estimating that we'll get our debt paid down to around the $2.5 billion level, excluding any nonrecourse debt we've picked up with this FNF Capital merger.

Okay. And can we get debt in cash at year-end?

the debt balance as of the end of the year, and I have to temper this with fact that with the FNF Capital consolidation, with the transaction that occurred in the October-November time frame, we did pick up about 100 million in nonrecourse debt, which is pushing our debt balances up. So as of the end of the year, our debt balance is right at 3 billion. I think it's 3.009 billion. Cash balance is around 150 million.

Okay. And then as we think about free cash flow in 2008, you talked about CapEx coming down pretty significantly. Is that just going to flow right to the bottom-line from a free cash flow perspective? Are there any other offsets we need to think about?

No.

Okay. That's spectacular. And then on the -- just think about the sub-prime market, some of the weakness there. If that was to deteriorate further, what areas of your business will that hit? And you talked a little bit about adjusting costs, but what can you do and how quickly can you do to avoid any pain?

That primarily hits our tax business. As far as our MSP processing platform, keep in mind that those loans eventually are going to find a home, maybe with another lender as they move downstream or go to another party. We'll more than likely retain that business. The question mark is on the tax side and it's pretty much exclusively isolated to that.

And then just lastly, the Covance's, you still own an equity stake in Covance, correct?

We do, we have about 11 million shares which we acquired at about $11 a share. We have four traunchs of warrants. The first million warrants are $15, the second million are $17.50, the third traunch of 1 million warrants is at $20.00, and the fourth traunch is at 22.50. We've had a nice appreciation in our Covance's investment.

Yes. Okay, great. Thanks a lot, guys.

And our next question will come from the line of Nik Fisken. Please go ahead.

Good morning, everybody.

Good morning.

This is the second quarter in a row where we've done above 7% to 9% top-line internal growth. And if I look out to '08, what's going to cause a reversion from double- digits down to high single.

First, you've got to take a step back and look at the overall business. If you look at Q3 and Q4 where we've been running 10-12%, while looking at Q4 specifically about 3% of that growth was driven by the WAMU contract and the Brazil item processing contract. We'll continue to benefit on those contracts through the first two quarters of next year, but then those will age out. So that has an impact on overall growth rates. Second, the small acquisitions that we did did factor into our revenues in the fourth quarter. I think Lee and I both mentioned that we had about a 1% positive impact from acquisitions. Well we had a -- we sold a majority interest in a small real estate division that we owned and we did that as of 12/31. And that primarily provided services to real estate agents and real estate brokers. And that contributed about 1% of revenues in '06 that will not be present in '07. So that comes right off of our growth rate.

Looking specifically at the fourth quarter and transaction processing services, we talked about international and pushing Brazil BPO off to the side, he had 37% growth in international in Q4. And although we're fired up about the prospect list that's out there, it's not reasonable to assume that that kind of a growth rate can continue forward. And then when you look at the lender processing businesses, the industry stats we're looking at are showing anywhere from a 10% to 15% decline in activity, whether it's origination or re-fi activity, we're still projecting out to get into the mid single-digits growth level, which is continuing to take market share, continuing to drive our non-cyclical businesses, and we think that's a pretty healthy growth rate to stand up to. But, it is somewhat lower than the 7.5% we grew for the full year or the 7.9% that we grew in Q4. So those are some of the main factors.

If I look at the back of the press release, one of the assumptions is 194 million shares. But you just said you are going to -- you assumed $100 million buyback in your guidance, is that right? Yes. And we've also made --we've also made some assumptions regarding option exercises. We've had some option exercises occur over the last month or so. And we expect that to continue because we do have quite a few shares that are in the money. And you said 2.5 million of debt by the -- is that the end of year '07?

Yes.

Okay. That's it. Thank you.

Thank you.

and we have a question from the line of Pete. Please go ahead.

Good morning. Just going back to the sequential decline in the mortgage processing segment. You had said that there was a little bit of a tougher comparison related to some professional services fees in the prior year period, as well as some deferral of revenue. Seasonally, how do you think about the fourth quarter for that business? And then can you remind me, the majority of that business is the true mortgage processing, but what else is in there? If I remember correctly, there's a little bit of origination business in that segment.

Yes, there's very little seasonality in that business. You don't see a lot of fluctuations relative to the number of loans on file that we processed. It's very consistent, it grows on an annual basis in a nice manner. So you're not going to see that to any large extent.

The one thing that we have in this particular segment is you're talking about $90 million in total revenue. So a swing of a couple million bucks is going to hurt you a couple percent. So, yes, we do have a very small amount of revenue that's license driven. We also have a small amount of revenue that is professional services driven, where we're doing specific work for our mortgage clients, customization type of work, anything that they are asking for that drives a little bit of revenue. That causes a little bit of spikiness, but it's really the main thing that hurt us, didn't hurt us here, the main thing that influenced us here was the deferral of revenue associated with Chase, which we view as being a positive thing, because that's what's going to drive solid growth as we finish out '07 and go into '08.

Sure. As regards the -- can you talk about your assumptions for mortgage originations for '07 that are implicit in your guidance?

I think I'd mentioned it before, our guys when they did their budgeting used a starting point of between 10% and 15% declines in either origination or re-fi activity, whichever was the appropriate index for the type of product that was being sold. And again, the fact that we're stepping up and saying we think we can deliver mid single-digits revenues shows, one, our ability to manage through cyclical cycles, and two, the fact that we think we can continue to take market share.

Right. Right. Okay. And then on the TPS side of the business, can -- I don't think you had mentioned any other further progress in terms of cross selling between the payment processing businesses and the bank businesses. Do you expect -- ?

We're still working through that. I think the first hit that you'll see and the first lift you'll see will come from the bill payment side and specifically expedited bill payment that we're working hard on completing the programming necessary to support that product. So that'll be the first piece of it. Also keep in mind that BB&T is an upper tier customer and that was the first tangible progress we made in cross-selling payment capability into that upper tier financial institution base. I think you will see more effort in that area on the core processing side going forward, too.

Okay. Thanks.

You're welcome.

And our next question will come from the line of Geoff Dunn. Your line is open.

Thank you. Good morning.

Morning.

Couple questions on the more on the real estate services side. On your default business, continues -- does do very well, cross-sell success. How much operating leverage can you ultimately get in that business given that it always remains fairly manual? Is that something that could ever break 20% margin if the business really ramped up?

It can. I think the upper side of that, we were talking about that the other day, maybe 25%, but somewhere in that range. 20% to 25% is a good target for that business.

I think that one of the things that sets us apart is that we do a great job of developing a technology backbone and then tagging in additional services, whereas most providers of the various types of default service, whether it be field services or attorney networks, they can sell on their own. We do a great job of tying that back into, in this case I think I mentioned before, the new track system, which is a work flow management system which basically says when you're going through the foreclosure processes in XYZ County, here are the steps that the attorney needs to go through in order to manage it properly. And so by tying those services and technology, we get greater leverage when we sell our services and then also just selling the technology itself, that as a higher margin. Those are some things that help us set us apart from the competition and give us the ability to expand margins.

When we look at this quarter, I think your press release indicated that it was default and traditional valuation and maybe some tax lengthening of amortization that weighed on the margin. Could we regain that over next year or two with the ramp-up in default?

Yes. A couple of things. The ramp-up in default, where we saw a lot of growth this quarter in default was in some of the services that are once the foreclosure occurs and again when things like field services have significant increases, those had the lower margin and the high variable costs. But across the line, again, we think we can expand margins and default through all of our product lines. And then when you look at tax, we're aging out of that whole deferral period issue, so that won't impact us going forward. And that's another reason that we feel comfortable in growing our margins next year in LPS is we don't have to deal with that deferral issue that we've dealt with all year.

Okay, great. Thank you very much.

And our next question will come from the line of Andrew Jeffrey. Please go ahead.

Hi, good morning. Could you talk a little bit about the rationale behind the Watterson Prime acquisition, the competitive environment in outsourcing of some of those mortgage based due diligence services? And then also whether or not the apparent verticalization of some of the big brokers in their mortgage origination businesses is changing the outsourcing environment or the overall demand environment?

In terms of Water -- I didn't catch the first part of your question.

The first part of the question was just regarding the rationale for the Watterson Prime acquisition and what the overall competitive environment is like for outsourced due diligence and other services for day lenders.

I'll talk about the rationale. The rationale is that it expanded our product set that we can sell to the Wall Street firms. We've traditionally provided just the collateral valuation services through our handsome product line. What this gives us the ability to do is also provide the front-end more credit valuation type services where we're looking at the credit quality of the loans on the front-end as well as providing the valuation services and seeing if the value supports the loan. So it's a more rounded product line to sell into the Wall Street firms.

We're actually a distant number two in terms of volume and revenue generated from that business, so there's obviously a lot of upside. It really focuses on leveraging that relationship that we have in place either for core processing or whatever and then selling additional products into it. And we've had good success over the last month or so in doing that.

Has there been any change as the big Wall Street firms begin to get more vertically oriented into origination in terms of demand for those types of services? Does that, do you think, increase demand on an outsource basis or does it prompt them maybe to think about bringing some of that functionality in house?

I think it's leaning towards outsourcing. Clearly what they're looking for is a one-stop solution, an integrated solution so they can take care of that loan relationship from the very early stages to the very late stages. And I think we're in a good position to be able to provide that. But it's not to bring it in house, the trend is to outsource more and more of it.

Okay. And then on the electronic payment side, especially within the community financial institution market, have you seen any change in adoption rates for online banking and bill payment and also any changes in the competitive environment as you try to penetrate your installed base with those services a little more effectively?

the answer to both questions is no. The adoption rates are very solid. They've been predictable, literally quarter upon quarter for a long period of time. As far as competition, the answer there is no also. We're still facing the same competition. We haven't seen any increase by any one single company or whatever that we've had to contend with. So pretty stable in that market.

Great. Thank you very much.

Your welcome.

[OPERATOR INSTRUCTIONS]

Operator, we probably have time for one more question, if there are any.

And there are no further questions at this time.

Great. Thank you for joining us today. And we look forward to taking any additional questions you may have.

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