Fidelity National Information Services Inc (FIS) 2007 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the FNF first quarter earnings 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 to Ms. Mary Waggoner, Senior Vice President, Investor Relations. Please go ahead.

Thank you Paul, and good morning, everyone. Joining me today to review our first quarter results are Bill Foley, Chairman; Lee Kennedy, President and Chief Executive Officer; Jeff Carbiener, Chief Financial Officer, and [Al Stenson], 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 be available on our website, FidelityInfoServices.com. Our discussion 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 2006 and 2007 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 web site. The reconciling items include restatements to reflect the Certegy and FIS combination as if the merger had occurred on January 1, 2006, and the exclusion of merger acquisition and integration costs, certain stock compensation charges, and debt restructuring charges.

Before we continue, I would like to remind you that some of the comments made on today's call will contain forward-looking comments. 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'll turn the call over to our Executive Chairman, Bill Foley.

Thanks, Mary, good morning, everyone and thanks for joining us today. FIS continues to generate excellent financial results. The strong first quarter performance exceeded even our own expectations with each business unit producing solid results. With our strong first quarter performance, we are solidly positioned to achieve our previously-communicated guidance for 2007.

Our organic growth rate, which is adjusted for acquisitions and divestitures was 13%, which is higher than any of our peers. Our sales team is doing an outstanding job of identifying new opportunities and closing transactions. As we mentioned at our Investor Day last month, subprime is really a nonissue for our company, which further demonstrates the value of our balanced and well diversified portfolio. In other words, while our revenue from some origination-based activities has been impacted by a softening real estate market, this has been more than offset by our wide-ranging default-based products.

A number of you have asked questions about our use of operating cash. We have approximately $200 million in repurchase authority and we expect to repurchase shares at some point this year. However, we are also looking at several acquisition situations and want to make sure that we have the flexibility to respond. By now, most of you have seen yesterday's announcement regarding CFC's plans to acquire Covansys. FIS owns approximately 29% of Covansys, including 11 million shares of common stock, plus warrants to acquire an additional 4 million shares. The total value of our investment based upon the $34 purchase price is approximately $433 million, resulting in a pretax gain of $312 million. We currently estimate net after-tax proceeds of approximately $318 million will be available to our company, which we can use to repurchase shares for acquisitions and/or pay down debt.

We want to thank you again for your strong participation at our investor day. I'll now turn the call over to Lee for a review of our first quarter results.

Thank you, Bill. Good morning, everyone, and thanks for joining us this morning. I'll begin today's business review with a summary of first quarter operating results, followed by an update on new customer signings and key initiatives. Jeff Carbiener will follow me with a detailed financial report.

First quarter consolidated revenue increased 13.1% over prior year, driven by 14.9% growth in transaction processing services, and 10% growth in lender processing services. Consolidated EBITDA increased 14.1%. Cash earnings came in at $0.54 per share. The strong revenue growth in transaction processing services was driven by 58% growth in our international business and solid results in IFS and EBS.

Lender processing services also generated excellent growth. Overall, LPS grew 10%, and as expected, the decline in tax services and property exchange revenue was more than offset by strong growth in appraisal and default services. Our title and settlement business, which is more cyclical, also produced excellent results, growing 6% over prior year, benefiting from higher refinance activity and continuing market share gains. New sales remain strong across all business units, driven by excellent new customer signings and sales of additional products and services to existing customers. We are pleased with the progress that we are making in the midtier institution market.

During the quarter, we signed a number of significant deals, including a four-year item processing arrangement with West American Bank, the seventh largest commercial bank in California. We also provide a wide range of application management services to West American through EBS, our large banking group. Demand for ancillary products and services in IFS also remains strong. During the quarter, New Jersey-based Provident Bank and SunCoast Schools Federal Credit Union purchased our score card loyalty programs. SunCoast, which is the nation's seventh largest credit union and one of our largest card processing customers also purchased our new checking account verification service, which I will discuss in more detail later in the call.

On April 3, we announced a new five-year agreement with New Alliance Bank for merchant processing services, which include authorization, capture, and online debit services. New Alliance, with $8 billion in assets, will become one of our largest merchant processing customers. The signing of New Alliance follows our recently announced card processing deal with BB&T, demonstrating our ability to sell our card products to mid- and top tier institutions. During the quarter, we also signed new core processing agreements with Collegiate Peaks Bank, Pacific Premier Bank, and First United Bank. In addition to core processing, First United Bank is an item processing, imaging, E-banking, and EFT customer.

I'll now cover enterprise banking solutions, which provides core processing in channel solution services to large financial institutions. During the quarter we renewed a multiyear agreement with Toronto Dominion Bank North to provide a wide range of outsourced technology services. In late March, we signed a long-term agreement with Capital One, the 11th largest bank in the U.S. to provide channel and outsourced core processing services. This is a large, multiyear deal and it's a great competitive win for our company. There are strong interests in channel solution products, which enables institutions to implement new services quickly and efficiently, better integrate customer data, and provide a higher level of customer service.

In last quarter's call, we mentioned the growing demand for our commercial lending solutions which provide processing and operational support services for complex commercial loans, including syndications and loan trading. In the first quarter, we signed a global agreement with Standard Bank to provide a comprehensive range of commercial lending products and services to its global branch network, with initial implementation starting in London. The sales pipeline for these products is strong and we expect to announce additional new sales in the very near future.

As discussed at our recent investor day, one of our most important priorities this year focuses on generating new revenue sources by migrating existing products and services to new vertical markets. Our fraud and risk management tools, which are used by many of the nation's leading retailers are also highly effective in reducing financial institution check fraud losses. In the first quarter, we launched a new deposit verification service, which will enable institutions to detect check deposit fraud, which is a rapidly growing problem for banks and credit unions. Our first customer installation, Sun Coast Schools, will be completed by the end of the second quarter. In late 2007, we will launch additional fraud detection products, including new account opening services and online fraud monitoring. We are encouraged with the strong interest in our modeling and analytic products.

Our international businesses continue to generate excellent growth and the demand for core processing, channel solutions, and card processing services is strong. In Brazil, we are making good progress with our item and card processing businesses and the development work for both remains on schedule. We are pleased with the organic growth rate of our existing Brazil card business. During the quarter, revenue grew 40% over prior year, reflecting strong new account growth. We are also making good progress in expanding our presence in Europe.

In the first quarter, we signed a significant new ten-year agreement with a large German bank to provide outsource core processing services for its cross-border operations. In addition, we signed an agreement with Halifax Bank of Scotland to provide a broad range of debit card processing services, including transaction processing, authorization, and item-switching services in Ireland.

Now I'll cover Lender Processing Services. The strong performance in Lender Processing Services is being driven by solid new customer sales across all product lines and excellent growth in default, appraisal, and title services. Our appraisal and default businesses are benefiting from the accelerating trend towards outsourcing due to increased regulatory scrutiny and the need to reduce servicing costs. We also benefited from strong sales of ancillary products to existing customers. During the quarter, First Franklin, EMC, Bank of America, SunTrust and Citibank purchased additional products from FIS. We believe our industry-leading mortgage processing platform and integrated work flow management system gives us a significant competitive advantage. We are encouraged with the strong new sales results in our Lender Services business.

In summary, it was an outstanding quarter for our company. We are making good progress in increasing the organic growth rate and profitability of our businesses and we remain confident that we will achieve the revenue and earnings guidance previously communicated. Our strategies are simple and straight forward. They are the same initiatives that we communicated to you at our first investor day in February of 2006. We will focus on generating higher revenue growth through the integration of ancillary products and services into our core processing platforms, leverage existing relationships ti cross sell additional products and services, and aggressively pursue product and market opportunities throughout regions in the world.

In addition, we'll reduce operating costs through the consolidation and integration of technology platforms and development resources, offshore more backoffice and technical resources, exercise rigid procurement costs management, and finally and most importantly, maintain an aggressive, seasoned results-driven management team. Thank you for your attention this morning and I'll now turn it over to Jeff for the financial report.

Thanks, Lee, and good morning.

Today, I'll focus on the key performance drivers and metrics for the quarter, beginning with revenue growth. As Lee mentioned, first quarter consolidated revenue increased 13.1% over prior year driven by 14.9% growth in TPS and 10% growth in LPS. The 14.9% increase in TPS revenue was fueled by exceptionally strong growth in international and solid expansion in EPS and IFS. International revenues increased 58.4% to $138.2 million compared to the prior year quarter, driven by strong performance across all regions, including EMEA, South America, and Asia-Pacific. International revenue increased 38.4%, excluding revenue from the Brazilian item processing operation, driven by strong card growth in Brazil and significant core banking sales in EMEA and Asia-Pacific.

ISF revenues increased 5.1% to $283.7 million in the quarter, driven by strong growth in the payment and eBusiness product lines. The normalized growth rate was approximately 6.7% when adjusted for the higher than average equipment sales as we disclosed in our 2006 first quarter earnings call. New sales momentum continues as the total value of contracts signed in the quarter was 5% higher than the strong first quarter in 2006. EBS revenue increased 8.6% to $259.1 million, driven by new customer signings and higher professional services revenue, generated from current customers. Much of the new revenues came from our TouchPoint product line, including TouchPoint license revenue, which was signed earlier than we originally expected. We are very pleased with the overall growth in TPS during the quarter and the contributions from each of our customer channels.

Lender Processing revenues increased 10% to $440.4 million in the first quarter driven by 16.7% growth in Information Services and 2% growth in Mortgage Processing services. The $11 million decline in LPS other revenue reflects a divestiture of a majority interest in [Fineres] which was reclassed from Information Services. Similar to the fourth quarter of 2006, strong double digit growth in appraisal and default more than offset the expected decline in our tax and property exchange product lines. Additionally, revenue from our title and settlement services business increased 6% over the prior year quarter, driven by a shift in product mix back to our traditional title services.

As discussed in our investor day presentation, taxes the product line most heavily impacted by developments from subprime, but those impacts are easily offset by the increasing volumes we're seeing across our appraisal customer base, along with the 50% plus increases we're seeing in foreclosure and bankruptcy referrals and in new orders into our real estate owned, or REO, default services. Mortgage processing revenue was $94.1 million in the first quarter of 2007, which was a 2% increase over prior year. The number of loans processed increased 4.3% to $28.2 million. Implementation work on recent large customer signings continues to impact current growth rates.

Moving on to EBITDA. Consolidated EBITDA increased 14.1% to $279 million during the quarter, driven by continued margin expansion in TPS and a $2.4 million decline in corporate expense. The consolidated EBITDA margin was 24.8%, a 20-basis point increase over the prior-year quarter. TPS EBITDA grew 20.8%, driven by strong leverage in IFS, a number of higher margin deals in our EBS and international businesses, and improving financial results in our operation. The TPS EBITDA margin was 23.6%, which is a 120-basis point increase compared to the first quarter of 2006. Lender processing services EBITDA increased 3.3% compared to the first quarter of 2006. The EBITDA margin was 31.5% compared to 33.5% in the first quarter of 2006, and 31.7% in the fourth quarter. As we discussed last quarter, the decline in margin is the result of lower volumes in tax and property exchange services.

We have implemented several cost reduction initiatives during the first quarter and expect the margins to improve starting in the second quarter. Corporate expense totalled $20.3 million, a $2.4 million decline compared to the first quarter of 2006. A decline in corporate expense was driven by the consolidation of duplicate administrative functions and a positive EBITDA contribution from our leasing company, which is now classified in corporate. These amounts were partially offset by a $4.7 million increase in stock option expense to $8.5 million.

Turning to cash earnings, cash earnings, which we define as net income plus after-tax purchase amortization totalled $105.3 million, or $0.54 per diluted share, which is a 20% increase over the prior-year quarter. The increase was driven primarily by the strong growth in operating profits and the lower effective tax rate, partially offset by $2.7 million decrease in after tax purchase amortization. Pretax non-cash charges during the first quarter of 2007 included approximately $27.2 million in debt restructuring costs and $5 million in integration costs related to the migration of the data center to Little Rock. The migration of the center occurred at the end of March and the last of the integration costs will be incurred in the second quarter as we expect to spend approximately $3 million to finalize the move.

Moving on to free cash flow. Free cash flow, which we define as net income plus depreciation and amortization less capital expenditures was $119.5 million during the quarter, compared to $92.1 million in the first quarter of 2006. . Capital expenditures totalled $70 million in the first quarter, which was in-line with our expectations. As we have discussed, we are working on a number of initiatives to lower technology costs and reduce capital spend across the company. For uses of free cash flow during the quarter included $9.6 million in shareholder dividends and acquisition totaling $21 million.

We also had a net use of working capital during the quarter, largely driven by a number of factors, including strong growth in our REO default product service lines, when we are paid for our services when the subject property is sold, large EBS and international customer contracts that were completed late in the quarter and payment hasn't been received at quarter end, the payment of 2006 annual employee bonuses that occurred during March, and finally prepayments made during the quarter to lock in favorable long-term technology license agreements. We should begin to see net working capital inflows for the remainder of the year as many of the first quarter uses begin to reverse starting in the second quarter. At the end of the first quarter, we had approximately $222 million in cash and $2.937 billion in nonrecourse debt.

Additionally in April, $350 million of interest rate swaps expired. We have instituted $850 million in new swaps, which have a three-year term and an interest rate of 5.92%. This now fixes $1.4 billion of our total debt at rates below 6%. I'll conclude with a few comments about our outlook for the remainder of the year. Our strong first quarter performance exceeded our own expectations and was driven in part by new business wins within our EBS and international businesses that were finalized earlier than we originally anticipated. Given the strong start to the year and a solid new business pipeline, we now expect revenue and EBITDA to approach the high end of our previously-announced guidance of 7 to 9% revenue growth and 10 to 12% EBITDA growth on a pro forma basis. In addition, we are well-positioned to achieve our full-year cash earnings guidance of $247 to $253 per share which assumes we repurchase at least $100 million in stock during the year.

Now I'll turn it back to Lee.

Thanks, Jeff. That now concludes our prepared remarks. Operator, we're now ready for Q&A.

(OPERATOR INSTRUCTIONS). Our first question comes from Paul Bartolai, please go ahead.

Thanks, good morning, guys. Good job on the quarter. First question, just on the lender side. Jeff, you mentioned margins starting to improve in Q2. Was that meaning sequentially? And also, are you still comfortable that margins will be up for the year in lender with some of the things you've talked about in the past with the offshore services and some of the new business in default?

Yes. We do expect for the full year that our margins in LPS will be up slightly on a year-over-year basis. The improvement that we expect to see, I think we had talked in a few prior discussions that we expected really tax and Ipex to have an impact on us in Q1. We had disclosed that tax and Ipex would affect full-year margin by 20 basis points with most of that impact occurring in Q1, and that indeed was the case. But with the cost reduction initiatives that we have put in place specifically in those businesses, we've got head counts coming out and the profitability improving, that coupled with other expense reduction initiatives, the leverage we're getting on our other revenue growth and the expectations that we have that we're going the see increased volumes through cross sell efforts and tax, those the main thing that are going to drive us to increase margins as we move forward in LPS.

Great. Lee, now that we're just over a year past the merger, curious to get an update on your thoughts in cross sell and what kind of benefits you've been seeing?

I think the incremental revenue growth that we've seen over the last several quarters, and keep in mind, as you know, it's built every single quarter, is directly related to the sales organization, the professionalism of them, the accountability. We put a lot of effort into strengthening them up-front before we initiated cross sell initiatives or activities. Very, very successful. In fact, more successful than what I had thought early on. I know there was untapped potential, I knew there was a lot of revenue on the table, but I didn't think we'd be able to generate as much new revenue as quickly as we have over the last 12 months. So in every single business starting with IFS and circling all the way back to our lender businesses, our sales organizations are working together the right way, they're aggressive, they're making good money, which is really the name of the game. If they don't make money, you're not selling products and I'm very pleased with where we are, Paul, So ahead of where we thought we would be.

Bill, you mentioned something about acquisitions. Just curious if you guys take a step back, where you stand today, are there any gaps that you see in your product offering, or are you still mostly focused on selling what you have to your existing customers?

I believe there are -- number one, we need to become bigger in the core, so we need more core processing and number two in bill pay, we're not where we need to be. Lee, do you have anything to add to that?

No, I think those are the two areas, Bill. If we can pick up some companies there to build scale and capability, it will help us quite a bit.

Great. Last question, any idea how the CFC agreement or acquisition impacts your Covansys deal and any comments on the offshore initiatives? Thanks.

In terms of the sale of Covansys, we're very pleased we're able to realize that type of gain on our interest in Covansys, it's not been closed, but the contract has been signed, released, and announced. Independently of Covansys, we've been engaged in a program in India and China and in the Philippines of offshoring. We've made a number of acquisitions over the last six or eight months and our intention was to work with Covansys toward a build operate transfer mode for most of our activities with Covansys and we remain on track to do that. So our Covansys relationship, while it's been a strong one and they've done a great job for us, they're maturing in the manner in which we dealt with our offshore resources and we really wanted to have had 100% control of those resources. This is just -- the Covansys sale is just icing on the cake. Wouldn't you agree?

Absolutely. It's been a great relationship. We still have a large number of resources placed with them, but as we bring up our capabilities and strengthen those, we'll migrate those under our control and it's kind of a win-win, because we have it from both angles now and it's a great relationship.

Great. Thank you.

You're welcome.

We have a question from Julio Quinteros. Please go ahead.

Just real quickly, following up on that Covansys situation, with CFC being also a -- having a presence in the Financial Services sector, I think through the their Hogan platform, if I'm not mistaken, does that put you at any competitive risk in terms of keeping that relationship and not unwinding faster than a two-year process?

We have a pretty solid agreement with them, an arrangement for their Hogan system today, so we don't expect that to affect that at all. So nothing at this point in time that we're really concerned about. I think reciprocally, there might be some things we might be able to do with the new organization to strengthen our position. A lot of things are on the table and we'll have to sort it out as we spend more time with the acquiring company.

Okay, great. For Jeff, on the financial performance EBITDA growth of 14% is obviously above the high end of the 12% target, can you walk us through how you expect EBITDA growth to trend over the next couple of quarters? In other words, is the 14% sustainable and if not how do we think about the quarterly progression on EBITDA growth.

First of all, you have to take into account that when we've reiterated our full-year guidance, we're saying that we expect revenue growth at the high end of the 7 to 9% range, which is obviously lower than the 13% revenue growth. So directionally, as the revenue growth comes down to closer to that 9% level, EBITDA growth is going to follow that as well, although not to the same extent, because we do expect to get some leverage off of our revenue growth. Talking about EBITDA moving forward. Looking specifically at things that would impact EBITDA margins, we've got some puts and takes. We've got the positive from the standpoint that we expect to solve our Ipex and tax situation as we talked about with our cost reduction efforts. We are going to continue to see improvement in the Brazil operation, but we've got some takes as well. We had significant TPS margin expansion especially in the IFS and EBS in the tail end of next year -- of last year, which makes the comps more difficult and our margins in Q1 did benefit from the fact that we had high margin deals that fell into Q1, especially in EBS and international. I guess the bottom line is, our margin expansion -- our EBITDA margin expansion in Q1 was about 20 basis points and we're still comfortable with our full-year guidance of EBITDA margin expansion of 50 to 100 basis points, which means that we have to do significantly better in the second half of the year.

Got it. One just follow-up question. Jeff, the sequential revenue number on the international business was down a little bit from the December quarter. Given the way this thing is ramping up, how does that translate in terms of the numbers? I wasn't expecting it to be down, not in a very material situation, just trying to understand why that actually would be down given that you guys are in the middle of a ramp-up?

You're going to have to look at the -- the nature of that business, you've got about 50% of it that's coming from processing services and then you've got -- that would be the item processing, the car processing, the check processing, you've got about 50% that comes from our core bank sales. That is going to be somewhat of a lumpier sales process. Changes from a sequential quarter basis, you're going to have those. What I look at is the fact that you're 50% plus growth in Q4, you're 50% plus growth in Q1. And taking out the Brazil item processing operation, you're 37% growth Q4, and you're 38% growth Q1. You've got consistent, solid growth on a year-over-year basis.

Yes. It's a relatively minor change and I think most of the change you can really attribute to the seasonality of the card businesses that we operate around the globe. Obviously, the Christmas season is a high volume season, so that attributes it, but it's very, very close.

Got it, great. Thank you, guys.

You're welcome.

We have a question from Jim Kissane. Please go ahead.

Thanks. Question for Bill. It seems like with all the private equity money floating around out there, it's a better time to be a seller than a buyer.

Assets are very, very expensive, as you know. Our M&A focus to date has been on smaller assets or less expensive assets in terms of dollars and trying to fill out gaps in our product offerings. We still believe there are opportunities and they may be -- they may be expensive by yesterday's standards. However, we're uniquely positioned with having a public security and large, untapped resources relative to borrowings available to us to make significant acquisitions. So we have to be judicious, we have to be patient, and you're right, there's heavy competition from private -- from the private equity, from the sponsor world. You have to remember one thing, though. We're strategic and when we make an acquisition that might appear to be expensive, we have a lot of synergies inline. That acquisition might not be quite as expensive as it first appears.

Congratulations on Covansys. Lee, can you give us some sense on mortgage processing trends intraquarter?

Mortgage processing has been fairly stable for us with a good increase in front end origination business. If you noticed in the quarter, we grew that business about 6%, which is the first quarter in three or four that we had any growth and we've had some quarters that were close to a 19% decline over prior-year volumes and revenues. So very stable, we're not getting any surprises, strengthening of the front end, obviously picking up a lot of business on the back end through default and through appraisal. So Jim, no surprises there at all. In fact, pleasantly surprised at the growth overall of that business, which was 10%.

Great. Just a quick update on the Chase conversion?

Chase conversion is proceeding on schedule, we're meeting the deliverables, we're on track, and we'll let you know the exact date of the conversion as we come closer to the end of it, the project, and it's going to be driven by a large extent by Chase. We'll keep you updated.

Thank you.

You're welcome.

Our next question is from Geoff Dunn, please go ahead.

Jeff, did I hear you correctly indicating that your default business is up 50%?

Yes, yes, absolutely. If you look, it's north of 50%.

Pretty far north.

So is that one now something that's exceeded 100 million quarterly run rate?

Yes, it has.

Great. When you think about deploying your excess cash flow, obviously there's the share repurchase, but you still have some unfixed debt at plus 6% rates. How are you weighing the economics of repurchasing your stock at these levels versus paying down that debt?

If you look at where our stock price sits versus where our interest costs are at right now, it's almost a push in terms of which more accretive or dilutive, buying back stock or paying down debt, it's a wash, so we're deploying it as we see fit based on the opportunities that are out there.

So there's still an effort to try to get that ratio down to 40% or lower, on the debt side?

If you were to ask us about our priorities, given that if we see an acquisition opportunity that comes up that's attractive, we'll pursue it, but our priorities remain to pay down debt, rebuy shares, and then acquisition.

Thank you.

We have a question from the line of Andrew Jeffrey. Please go ahead.

Hi, good morning.

Good morning.

Lee, you mentioned a lot of pretty impressive international deals, that's clearly a focus in our viewpoint of differentiation. Can you characterize -- I know you're in a lot of different geographies, too, but can you generally characterize the competitive environment, especially on the card side? Are you seeing mostly sort of the expected players, U.S.-based players, or are you seeing more in-house solutions? When you win deals, who are you usually going up against?

It's a combination of both and it really depends on the geography. If we are to take a look at Latin America and Brazil, most of the opportunities surround taking -- converting business away from in-house applications and processing. We do see total systems, we do see FTC in that market, but the vast majority of the opportunities are really ones that you would convert to an outsourcing basis from an in-house basis. If you were to take a look at the -- analyze the European market, clearly when we bid on a deal, Total Systems and FTC are sitting right across the table from us and they're bidding on the same deals.

Asia-Pacific, it's more or less in-house applications. There is not a lot of service capability that's in place throughout Asia-Pacific, so most of the banks that operate card programs operate those programs with in-house software and processing capability. Obviously, there's a great opportunity there because many of the systems that they're operating with are old and they don't have the feature functionality and the cost effectiveness that these banks need in order to compete. It's across the board, it varies by region, but I would say clearly that the one area where you really -- the name of the game is competition among the service providers, it's throughout Europe.

Okay. Is there -- would you characterize sales cycles as having shortened or are they about the same -- is there a great impetus to take somebody's in-house solutions out of house today than there might have been 12 months ago?

The answer to that, it's usually event-driven. If a regional bank is operating in a certain geography and all of a sudden they wake up and there's a new player in town and a global player in town, then it forces the decision and it comes quicker because they need new capabilities in order to compete effectively. On the average, I would say six months to a year, that's how long the sales cycle is. Shortened if there's a situation where the bank has to respond to it more quickly, but the sales cycle hasn't elongated, it's always six months to a year, except in the emergency situations that I've talked about, Andrew.

Thanks. A quick one for Jeff. If I look at the TPS EBIT margin, up nicely year over year. Where do you think that segment profitability can be in the long run? Can that push its way into the high teens on a long-term basis?

You're looking at the operating margin?

Yes, I'm looking at EBIT.

I think we can push obviously higher than where we are today. When you look at the first quarter margins, especially in TPS, you are dealing with the lowest -- you are dealing with seasonality, you're looking at the lowest EBIT margins during the year, you're going to get a natural uplift of 1 to 2% as we move out of first quarter. I think in the 17 to 18% range is definitely achievable.

Is that '08 or beyond '08? You have to look at the different components within TPS, because you've got IFS already at healthy margins from an EBIT standpoint, as is EBS. International is when we'll start to see the real contribution come that will lift up our EBIT margins as we bring in the Brazil card project in '08, that's where we start gaining scale in our international operations and we should see a great contribution towards EBIT margin from that.

Thanks a lot.

We have a question from Peter Heckmann. Please go ahead.

Good morning, everyone. Jeff, can you talk about the affects that default have on life of loan recognition and whether that had any materiality in the first quarter?

Default doesn't have any impact on --

So essentially, if you're recognizing revenue on a life of loan basis and that loan defaults, do you recognize the remaining portion of the revenue immediately?

Do you mean on the tax services business?

Correct.

The places we have the biggest deferral of revenue is on tax and on flood, but on tax and flood if that loan continues to be serviced by us, then we continue to recognize -- or we continue to recognize our -- that continues to count into the total life of loan calculation.

Right.

For us it's really, we evaluate each quarter, our entirely portfolio and say, what are our average loan lives and we adjust our amortization periods accordingly. So it all depends on if the loan actually drops off our system when we quit servicing it, which doesn't necessarily happen just because it goes into default.

I see, okay, okay. How about M&A activity within the mortgage servicers? Are there any pending or completed deals that bear watching in terms of exposure for either opportunities or risks from your perspective?

No. Just as we reported at our investor day, we're pretty well covered. So there isn't anything out there at this point in time that would materially impact the progress we're making in our lender business overall. We'll let you know if that happens, but at this point in time, no.

Okay. Just lastly, Capital One, that's the first time I had heard you talk publicly about Capital One, that's a 65, $70 billion bank. Can you talk about that relationship there, whether it's going to be an in-house, service bureau installation, whether that would meet the threshold of your major contract wins?

It's a major contract win. Keep in mind, addition to the services that we just announced this morning, we also provide a wide range of outsourced core processing services for Hibernia Bank and we provided those for a number of years. What we picked up through this transaction was the Norfolk Bank, so that will now be converted to our systematics platform. We will integrate into that platform a wide range of channel solutions consistent with what we've installed at Hibernia. And then we'll

So that relationship overall is a very large relationship. Some of it was existing, some of it was new one business, they went through a long, elaborate process. They take a look at some of the systems that were out there in the marketplace and chose us for the new acquisition and it will be standard for their whole enterprise going forward. So we're very pleased with it.

Okay, I appreciate it.

You're welcome.

We have a question from the line of Wayne Johnson. Please go ahead.

Yes, good morning. Could you just review again real quickly what the expected cost synergies are with the Certegy acquisition for this year, and are you guys going to be at the upper end of that range and is there a possibility that could spill over to next year?

Wayne, what we said is that we would have about $30 million in savings in year, last year in 2006, and exit the year, about a $50 million run rate, a little bit north of that, and we're achieving that. The last major piece was a accomplished about a month ago when we converted the data center out of St. Petersburg into Little Rock. That saved us close to $10 million, $8 million in total savings when that was affected. So we're on track for that run rate and we'll see that throughout the year.

Okay, great. And on the new check services -- new check service that was being mentioned earlier, what's the expected efficacy of that new service compared to current alternatives and what kind of target market are you guys looking at for that?

As far as new deposit verification, there aren't really any -- there isn't a major competitor or viable competitor that operates in the country today, so this will be a brand new capability being introduced into the marketplace and the response that we received to date have been very, very strong. So little or no competition in that regard. There are companies that provide checking account verification services for new customers, generally. And that's -- E-Funds does that and there's a couple other companies that are involved in it also. We view that as a large market opportunity. It's about a 250 to $300 million market. It's a market that we obviously have no penetration in and we think the capabilities that we'll bring to the table, which are online-related, because we'll be able to connect back and pull data from the point of sale as it happens to decision these new account holders will be pretty effective in picking up that business and give us a pretty good strong competitive edge.

I think the key to our success there is taking that product line and integrating into the core banking platforms of both our large bank platforms and our small blank platforms, and just make it a check the box service. Right now, the providers of risk management servers are stand-alone guys who have to get integrated into somebody else's software. The more we can make it just an easy add-on, the more successful we'll be in pushing our products out.

That's helpful. One quick follow-up. On the payroll check cashing, where do you stand on that? Are you adding more supermarkets, more retailers? How is that business going?

We've got good momentum in the paycheck cashing, it's one of our fastest-growing channels within check.

Okay. Any more color than that? Are you expanding to more retailers, how's the pipeline look?

I guess the best way to say it, since we installed that program in the Wal-Mart store, they've become the largest single check cashers in the U.S. They're selling amount of incremental merchandise by having the capability of cashing checks at the point of sale. It's worked out very well for them. There really isn't a lot of competition out there and we're doing very, very well.

Okay, great. Thank you very much.

We have a question from Nik Fisken. Please go ahead.

Good morning, everybody.

Good morning.

Jeff, what was the net use of working cash?

It actually -- what we described used up most of the $120 million in free cash flow, as we define it. the biggest user of cash was the actual 2006 bonus payouts. Similar payout level that we had last year, just harder to see because of the way the financials were stated with Certegy coming in in February, but that was a little under half of the overall use of working capital. The other items contributed about equally, that I described. But as I said, most of those things start to just turn around in Q2 going forward. We gave overall working capital use expectations for '07 of about 50 to $60 million and we'll still come in at that level. You'll see the inflow come back in over the remaining quarters.

Okay. Can you give me that Covansys after-tax number again, please?

$312 million, pretax gain -- I'm sorry, after-tax.

After-tax, okay. Yep. And on the M&A front, this has already been asked, but I want to come at it a little bit differently. The only thing that's traded in core and bill pay has been open. Does that mean that you guys are solely looking at those two areas?

No, it doesn't. We're looking at other capabilities to support and enhance some of our noncore processing and nonpayment processing businesses, so it's not exclusive to those areas, but we are looking at those areas.

Hey, Nik. On the Covansys, transaction, let me give you the specific details. The growth proceeds, when the transaction closes to us will be $433 million, our tax basis is $121 million, the provision for taxes is about $115 million, so our net after-tax gain on our investment is about $197 million, but the net proceeds will be almost $318 million, because we're adding the after-tax gain plus our investment.

Okay, great. Thanks so much.

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