Fidelity National Information Services Inc (FIS) 2007 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the FIS third quarter earnings conference call. At this time, all participants are in a listen only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded today, Thursday, October 25, 2007.

I would like to turn the conference over to Ms. Mary Waggoner, head of Investor Relations. Please, go ahead, ma'am.

Thank you, Nicole. Good morning, everyone. Joining me today to review our third quarter results and this morning's announcement regarding the proposed spinoff of Lender Processing Services, are Bill Foley, Executive Chairman, Lee Kennedy, President and Chief Executive Officer, and Jeff Carbiener, Chief Financial Officer. 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 web site.

Today's discussion will contain references to nonGAAP and pro forma results in order to provide more meaningful comparisons between the periods presented. As in the previous quarter, the 2006 and 2007 GAAP results presented in today's press release have been adjusted to improve comparability. Reconciliations between GAAP and nonGAAP results and schedules showing historical detail are provided in today's press release which is also available on our web site.

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 risks and uncertainties described in our earnings release and other filings with the SEC. The Company expressly disclaims any duty to update or revise their forward-looking statements.

Now I will turn the call over to our Executive Chairman, Bill Foley.

Thanks, Mary, and good morning. Thanks for joining us today. FIS delivered another strong quarter of solid operating results in spite of unprecedented turmoil throughout the real estate industry, which also impacted the broader capital markets. We are very pleased with the results of all of FIS' business units, and we remain confident in our ability to generate solid financial results well into the future. Lee and Jeff will provide additional details on the third quarter operating performance and I will focus on our strategic initiatives.

On August 31st, FIS finalized the sale of Property Insights to FNF. Property Insight, which markets aggregated title and property information to title agencies, insurers and other organizations, fits better with the FNF title business. On September 12th, FIS completed the acquisition of eFunds, which adds scale and product capability to our transaction processing and risk management businesses. We believe that eFunds will be an excellent addition to FIS and will strengthen our overall competitive position. As Lee will cover shortly we're making good progress in innovating eFunds and FIS.

Now I would like to take a few minutes to discuss this morning's announcements regarding plans to evaluate a spinoff of our Lender Services Division -- businesses. Our transaction processing and lender services businesses, each has strong competitive positions and excellent potential for future growth. LPS serves a broad and diversified group of core and payment processing clients worldwide and continues to gain scale and market share. LPS has evolved into a market leading multifaceted business that provides a broad range of integrated data, servicing and technology solutions to large scale mortgage lenders. From an operational point of view, the ability to leverage technology, operations and product development initiatives across our lender and transaction processing businesses has been limited.

Additionally, the businesses have competing investment and resource needs. We believe that the businesses have distinct characteristics that may attract a different investor base. The perceived exposure to the mortgage market has caused volatility in our stock price and investor base despite the excellent financial performance of LPS which has exceeded our peers. We believe that the value of the two separate businesses should be greater than the combined business, and that two separate pure play entities should significantly enhance shareholder value. An independent TPS will be well positioned as a high performing core bank and payment processing company, while an independent LPS will be well positioned as the leading provider of uniquely integrated data, technology and servicing solutions for the lender and real estate industries. As separate companies, each will be able to invest independently in their respective businesses and pursue their own operational, financial and strategic initiatives. Shareholders would have the ability to optimize their holdings in the company which best fits their investment criteria.

We expect to structure the proposed transaction as a leveraged spin. As currently contemplated, the Company will contribute the assets of LPS into a newly formed subsidiary in exchange for new LPS debt, securities and common stock. FIS plans to retire a portion of its existing credit facilities through a debt for debt exchange of new LPS debt for FIS debt that is currently outstanding. Subsequently, FIS shareholders will receive new LPS shares on a pro rata basis in a tax-free spin off. The transaction is contingent upon receiving a tax-free ruling by the IRS, accomplishment of the aforementioned debt swap and will also be subject to review by the SEC. We are in the process of determining the optimal debt allocation and capital structure and will provide additional details in the future.

Now, I will turn the call over to Lee for a review of third quarter results.

Thanks, Bill, good morning everyone and thank you for joining us today. I will begin today's business review with a summary of third quarter results including an update on our progress in integrating eFunds in FIS. Jeff Carbiener will follow me with a detailed financial report and outlook for the remainder of the year.

Overall it was a good quarter. We successfully managed through one of the most challenging real estate markets in the past 25 years, demonstrating the strength and diversity of our customer base, integrated product offerings and management teams. Third quarter consolidated revenue increased 10.4%. EBITDA increased 14.4%. Cash earnings per share came in at $0.63, which is a 10.5% increase over prior year. Excluding eFunds, revenue increased 7.9% driven by 6.5% growth in transaction processing services, and 8.5 growth in lender processing services. EBITDA increased 12.1%. And the EBITDA margin increased 100 basis points to 27.4%.

The increase in transaction processing services revenue was driven by strong growth in the international and integrated financial solutions business. International revenue increased 19.5% over prior year, fuelled by stronger core systems sales, and excellent growth in our Brazilian card processing business.

Consistent with our second quarter call we remain on schedule to convert both Brazilian card portfolios in 2008, beginning with ABN AMRO in March, followed by Bradesco in June. We are entering the final phase of conversion testing with ADF, and we do not expect the sale of ABN to impact the conversion of the bank's card portfolio to our Brazilian card processing platform. ABN remains highly committed to this project, which it views as critical to acquiring the product functionality and cost efficiencies necessary to remain competitive in the Brazilian market place. Additionally, as a partner of the joint venture, ABN has a strong vested financial interest in the success of the new card processing business.

We are also making good progress in automating and streamlining our Brazilian item processing business. During the quarter we made substantial headway in rolling out our new imaging technology platform and in consolidating regional processing centers. Continued strong new sales drove a 7% increase in integrated financial solutions third quarter revenue. New sales increased 31% over prior year. With solid improvement across all product lines, including core processing, debit, credit, item processing, loyalty, and institution merchant processing services.

As we have discussed in the past, the majority of new sales were generated by selling additional products and services to existing customers, as well as new customers. The Banker's Bank which provides correspondent services to more than 1400 community institutions recently expanded its long-term relationship with FIS. It will remarket our commercial capture and remittance processing services to member institutions. In addition, we are pleased to be selected as the exclusive provider of credit-card processing services for the Banker's Bank.

We are also making great progress in consolidating our U.S.-based item processing platforms and in streamlining operations. Over the past year we have reduced the number of banks running on the ABS and Venus platforms by 50%. We will convert all remaining institutions by year end 2008. This is an important step in reducing operating and support costs in our item processing business. Customer satisfaction and retention in all core IFS businesses remains high.

Now, I will turn to EBS. Over the past several quarters we have discussed a strong interest in our TouchPoint channel solution products. We are also encouraged by the increased level of interest in our next generation profile core processing platforms. We believe that large and mid-tier banks will start replacing core processing systems within the next five years. Most large banks are currently operating multiple core systems driven by outdated, 30-year-old technology, which is very expensive to operate and lacks flexibility. We have excellent customer relationships with many of the nation's top tier banks, the majority of which are running on our core processing systems. This puts us in an excellent position to receive strong consideration when the banks move towards new core processing system replacement. Over the past few months, several of the nation's leading financial institutions have launched exploratory core system initiatives with FIS.

Next, I will provide an update on eFunds. As Bill mentioned, we completed the acquisition of eFunds on September 12th. The combination has been well-received by customers and employees and we're off to a strong start. We are impressed with the overall quality of eFunds's product offerings, and believe that EFT, risk-management and prepaid card service and businesses will generate strong growth for our company. Consistent with the integration of Certegy, eFunds will be consolidated immediately into existing FIS business units which will enable us to generate cost and revenue synergies more quickly. The U.S. payment business, which includes eFunds, EFT, ACH, prepaid card, and government services, will be merged into integrated financial solutions.

eFunds' risk-management business will become a part of Enterprise Banking Solutions, and all International businesses will be merged into our existing International organizations. We're confident that we will achieve the targeted $65 million in annual cost savings by reducing corporate overhead, eliminating redundant processing platforms, consolidating data centers, and reducing general support and operating expense. Jeff will provide additional details on the timing of these cost savings and the expected accretion later in the call.

Now I'll move on to lender processing services, which has naturally generated a great deal of interest and discussion over the past couple of months. Record delinquencies, falling home sales, declining portfolio values, and a severe lack of liquidity drove unprecedented market volatility during the quarter. The excellent growth in LPS achieved when the overall market declined approximately 25%, was driven by our strong competitive positions, a broad range of integrated products and services, reputation for high-quality service, and our focused and experienced management team. Third quarter lender services revenue increased 8.5% over prior year. EBITDA increased 6.2%. The margin improved on a sequential basis to 33.9%. Customer share gains and strong demand for our integrated data and technology solutions generated excellent growth in default and appraisal services.

I think it's important to note that the severity of the market decline in the third quarter went well beyond normal real estate cycles. Over the past several quarters, FIS has consistently outperformed the market and our industry peers, outpacing the decline of the overall mortgage market. Lender services revenue growth has remained strong, increasing 7.5% in 2006, and 10.6% in the first nine months of 2007. This strong revenue growth was achieved through the successful execution of key strategic initiatives.

First, our business model is built on providing the industry's most comprehensive range of data, products and outsourcing solutions to large lenders with centralized operations. These lenders rely on FIS to provide solutions which reduce origination and servicing costs and provide their customers with a higher level of customer service. This large institution direct lender base has been more stable and dominant over the past few months. It will continue to strengthen in the future. Second, we have successfully integrated the delivery and processing of our core and ancillary products, which reduces cost and provides superior flexibility to our customers. The technology supporting our mortgage servicing platform and desktop process management systems is unmatched and provides FIS with a significant competitive advantage.

In short, the investments that we have made to develop scalable and flexible delivery and processing systems is paying off and translating directly into market share gains and strong revenue growth. We believe future market trends will continue to work to our advantage. In the past, more than 60% of new loan origination was generated through indirect wholesale and correspondent channels. Many of these independent mortgage brokers have either ceased operations or have significantly scaled back loan production.

The changing market conditions have resulted in a flight to quality to large lenders with strong balance sheets and alternative funding sources. These large lenders require best in class technology solutions. A recent article in the American Banker predicts that the five largest U.S. banking companies, all of which I'll add are FIS clients, will increase their share of the mortgage origination and servicing market from 31% to 50% over the next few years. We've already started to see strong evidence of the shift. The top tier banks and lenders are generating a larger percentage of the overall volume in the declining origination and refinance market.

Before I turn the call over to Jeff, I would like to reiterate a few of the points that Bill made earlier regarding the proposed spinoff of our lender services business. LPS is a great business and we intend to continue to strengthen our market leadership position. Home lending is an important part of the overall economic growth of this country, it's an industry that is here to stay. Over the past several years we have built very strong competitive positions. Our integrated technology and product capabilities are unmatched. And we expect to benefit from the changing market dynamics which will continue to drive higher volumes to our customers. LPS has done a good job building strong integrated products and services that increase customer operating efficiencies and improve the level of service provided to their consumers.

Our transaction processing and lender services business have generated strong organic growth. Each have experienced management teams and both are leaders in their respective markets. However, each business is unique and distinct, serving different customers and markets, and potentially investors. The opportunities to leverage technology, product development and operations between the two businesses are limited. Each segment is well positioned to competitively stand on its own. We believe the separation will provide more flexible product development and capital allocation, driving higher value to our customers and shareholders. We believe the separation of FIS into two independent public companies will drive strong benefits to our customers, our employees and the organizations that invest in our company.

I will now turn the call over to Jeff for a detailed financial review. Jeff?

Thanks, Lee, and good morning. Consolidated revenues grew 10.4% during the third quarter and consolidated EBITDA grew 14.4%. These results were impacted by the sale of Property Insight, which has been reclassified as discontinued operations for all periods presented and by eFunds which was included in the FIS operating results after the acquisition was completed on September 12th. Because the acquisition was completed so near the end of the quarter, my comments today on revenue and EBITDA will focus on FIS on a stand-alone basis excluding eFunds results. In future periods the three primary eFunds business units will be included in TPS subsegments that we described earlier. Also within the next few weeks we will provide quarterly pro forma financials for 2006 and 2007, to assist you in modeling the combined entity.

Consolidated third quarter revenue excluding eFunds increased 7.9%, TPS revenue increasing by 6.5% to $692.9 million, and LPS revenues increasing 8.5% to $444.2 million. The 6.5% increase in TPS revenue was driven by a 7% increase in IFS revenues and a 19.5% increase in international revenues. The 19.5% increase in international revenue to $142.1 million, was driven by strong growth in our card operations in Brazil and Australia, along with growth in core bank processing in EMEA and favorable currency impacts.

IFS revenues increased 7% to $296.1 million in the quarter, fueled by double digit growth in item processing and e-business and solid growth in our credit card operations.

EBS revenue of $255.5 million was comparable to the prior year quarter. Increases in processing revenues and implementation services driven by new customer installations were offset by higher project specific revenues in the third quarter of 2006, and difficult year over year comparisons in [share]. As guided in the past quarters, when revenue growth was extremely strong, this is a channel most subject to variability in quarter to quarter results. Our pipeline remains strong especially in demand for TouchPoint applications, and we expect solid annual growth in this segment.

Lender processing revenues increased 8.5% to $442.2 million driven by 16.1% growth in information services which more than offset a small decline in mortgage processing revenue. Information Services, strong growth in default and appraisal services more than offset the declines in origination oriented products such as tax, property exchange, and title and closing services. A combination of new customer signings and increased foreclosure activity drove accelerated growth in default in the third quarter, while market share gains and the ongoing trend to outsource drove strong double-digit growth in valuation services. We expect the trends in default to continue as we are seeing increased volumes in our front end foreclosure services, as well as sizable volume increases in our back end REO asset management services.

Also, as Lee has mentioned, as large scale lenders continue to gain market share there is increasing demand for our centralized automated end-to-end solutions, especially in the areas of title, closing and appraisal services. These factors, combined with our broad mix of products and services, have driven solid growth in lender processing over the past 18 months, even though the origination of refund markets have been steadily declining and will likely continue to do so.

Mortgage processing revenues of $92.4 million were $1.2 million, or 1.3%, below the third quarter of 2006. Higher professional services revenue in the prior year quarter combined with substantial deferred conversion services work for Chase and Wachovia in the current year quarter impacted the year over year growth rate. The average number of loans processed increased 2.3% to 28.3 million compared to the third quarter of 2006. While FIS typically benefits from consolidation in the mortgage industry due to our strong market share, we are anticipating a decline in average loan count in the fourth quarter driven by the acquisition of ABN's 1.5 million mortgage loan portfolio by Citibank. Looking ahead we would expect total loans to increase as our large processing clients continue to gain share. In addition, Chase and Wachovia will add more than 6 million loans to our mortgage servicing platform once fully converted. And as we've discussed in previous calls, the pipeline of home-equity prospects continues to grow as lenders seek to consolidate mortgage processing platforms to achieve better risk mitigation and securitization functionality.

Moving to EBITDA, consolidated EBITDA, excluding eFunds, increased 12.1% to $312.7 million, with an EBITDA margin of 27.4%, a 100 basis point improvement compared to the prior year quarter. Given the difficult market conditions faced during the quarter, we focused on efficiency and expense control. These initiatives included head count reductions, reduction in management incentive compensation, consolidation of operating centers and decreases in other discretionary spending.

TPS EBITDA increased 14% to $179.1 million driven by leverage on new sales and targeted expense reductions. The TPS EBITDA margin was 25.9% compared to 24.2% in the third quarter of 2006. Adjusting for the historical Brazil BPO operating losses in the prior year, TPS still experienced margin improvement, which further demonstrates the benefits we are seeing from increasing scale and effective expense management.

Lender processing EBITDA of $150.8 million increased 6.2% compared to the third quarter of 2006, and EBITDA margin was 33.9% compared to 34.7% in the prior year. On a sequential basis the margin improved 150 basis points driven by continued expansion in default services margins and rigorous cost management. Excluding eFunds, corporate expense totaled $17.3 million compared to $20.3 million in the third quarter of 2006. The decrease is attributable to reduced compensation and benefits expenses.

Turning to cash earnings and free cash flow, we will now speak to consolidated operating results which include eFunds. Cash earnings, which we define as net income, for after tax purchase amortization, totaled $124.3 million or $0.63 per diluted share compared to $0.57 in the third quarter of 2006. After tax purchase amortization declined to $26.6 million compared to $29 million in the prior year quarter. These results exclude after-tax gains of $159.4 million which are primarily related to the sale of [Probanca] stock and Property Insight, also excluded are restructuring and other charges of $12.9 million. These charges were primarily the result of a write-down, which is included in D&A, related to our agreement to provide customized software, application management and on-site support for certain CFC core banking platforms. CFC's recent purchase of [Fantus] substantially altered our view on the future value of the arrangement.

Moving to free cash flow, which also includes eFunds -- which also includes eFunds' results for the partial month of September. Free cash flow, which we define as net income plus depreciation and amortization, less capital expenditures were $129 million. Capital expenditures totaled $90.7 million and were somewhat above our expectations, due to new enterprise [like] software license agreements negotiated during the quarter and higher than expected new product enhancements. The new software agreements will result in reduced future operating expenses and the product enhancements will drive future revenue growth opportunities. We expect capital expenditures to return to more normalized levels in the fourth quarter and we now expect the year to finish at approximately $325 million which does include eFunds.

The uses of free cash flow during the quarter included $9.7 million in shareholder dividend, $80 million in share repurchases, debt repayment of $335 million and acquisitions, net of cash acquired, totaling $1.7 billion. We experienced net uses of working capitol during the quarter of approximately $20 million, driven by strong revenue growth in our default services products which have longer collection cycles tied to the ultimate sale of defaulted property. Additionally, changes in deferred cost and revenues and cash needs for our gaming division within check services impacted working capitol during the quarter. Based on our projections we expect a similar use of working capital in the fourth quarter. At quarter end we had approximately $279 million in cash and total debt outstanding of $4.3 billion. This includes the new $1.6 billion Term B loans related to our purchase of eFunds which is priced at LIBOR plus 175.

We also instituted $1 billion in new interest rate swaps which have a 2-year term at a fixed LIBOR rate of 4.73%. Included in these new swaps, approximately $2.2 billion of our total debt has LIBOR rates fixed at an average rate of approximately 4.7% and we also have another $300 million in fixed-rate debt with an average interest rate of less than 5%.

I will conclude with a few comments about our outlook for the remainder of the year and a preliminary look at the expected contribution by eFunds to cash earnings per share in 2008.

As stated in our press release we now expect full-year 2007 adjusted net earnings of approximately $1.90 per diluted share, which has been adjusted to reflect the $0.03 impact from the sale of Property Insight, and a $0.04 impact for purchase amortization associated with the acquisition of eFunds. We expect cash earnings to be at the low end of our previously announced guidance of $2.44 to $2.50 per diluted share, which reflects the impact of the sale of Property Insight. eFunds is expected to be neutral for 2007 cash earnings per diluted share. On an FIS stand-alone basis, we are maintaining our previous revenue guidance of 9 to 11% and EBITDA guidance of 10 to 12%. Including eFunds, we now expect full-year revenue and EBITDA growth of approximately 14 to 16%. Based on our preliminary projections, eFunds is expected to add between $0.05, and $0.10 to cash earnings per diluted share in 2008, assuming $35 million to $50 million in 2008 cost savings. We expect to begin achieving the targeted annual run rate savings of $65 million by the end of 2009. Again, these are preliminary estimates which we will be firming up throughout the budgeting process.

Now I'll turn it back to Lee.

Thanks, Jeff. Operator, that concludes our prepared remarks this morning, and we're now ready to take questions.

(OPERATOR INSTRUCTIONS) One moment please for our first question. Our first question comes from the line of Dave Koning with Baird.

Hi, guys, nice quarter.

Thank you.

I guess, first of all, when we look at the lender business and we think about defaults accelerating during Q3, did it continue to accelerate into September and October? And I guess on a similar note when we come up with the purchase and refi sensitive businesses, how do trends in terms of accelerating and decelerating trends kind of work through Q3 into the early part of Q4?

It continues to accelerate on the default side. And we've only seen really some of the early stages of what is likely to happen. That business is going to exhibit really strong growth characteristics, I think well and beyond next year. So we are in very, very good shape there.

If you look at the amount of volumes that are flowing into our foreclosure and bankruptcy referral services which are really the front end start -- it is really the start of the foreclosure process, we saw volume increasing 60, I think it was 63% in Q3. That was consistent throughout the quarter.

Yes, I think one upside and one plus in addition to what Jeff just covered is, we have a very, very full pipeline of large institutions that traditionally have operated their default programs in-house. And as they are experiencing increasing volumes, they started to talk to us about handling some of the overflow and some of the business they normally would do within their own institutions. That business is really a very, very good business for us and it's going to continue to be so well into the future.

Great. I guess, just on the purchase and refi sensitive businesses, did those experience decelerating growth through Q3 into Q4 so far?

The origination sensitive businesses that I mentioned, such as the title and closing services and property exchange, in fact, yes, they did show decreases in volume during the quarter. The decrease in volume no where -- in no way matched the market declines on it. So, some of the reasons we talked about the fact that we have the relationships with the big banks that are still making the loans. So when activity is occurring, we're seeing the advantages of that. So, yes, we did see declines but no where near market [level].

One area that we saw which was very, very strong, which actually surprised us a little bit during the quarter was our appraisal business, that we still exhibited strong growth characteristics. We are gaining a lot of share from in-house providers, and that business is kind of going counter cyclical to what we would think would have happened, so it will continue on also.

Great. Thank you.

Thank you. Our next question comes from the line of Geoff Dunn with KBW.

Thanks, good morning. With respect to the spin, if I remember correctly, the old (inaudible) was brought in with Alltel for technological efficiency opportunities. Is there any challenge in spinning that out? Or are most of those efficiencies built into the mortgaging processing platform?

Yes, Jeff, it's Bill. The IT base, the infrastructure is really separate between the two businesses, TPS and LPS. Their primary -- the technology that is key to LPS is based upon the mortgage servicing platform and that platform has been significantly expanded over the last three years in terms of enhancements, [but relative] to be able to offer additional products and services that directly tied in and integrated into that platform. The two businesses really are separate. One of the things that we originally thought, say three years ago was, there would be more cross selling to mortgage lenders of various TPS products and services. That really hasn't happened. Further, LPS is more transactionally oriented as opposed to recurring revenue and long-term contracts -- long-term contract revenue based. We really felt this would give our investors a chance to pick and choose between two very different businesses. It turns our -- the remaining FIS into a business that looks a lot more like Jack Henry, with a big bank aspect to it and a more robust payments piece. Anything to add to that Lee?

No, I think that covers it well.

This may be too early but touching on what you said about the cross-sell, I think most of the cross-sell success has probably been through the mortgaging processing client base, but do you perceive having enough scale in these businesses to generate your own organic growth? Or would you look, maybe, to find a strategic partner that has complementary businesses for additional cross-sell in the future?

I think these businesses are strong enough to stand on their own. If you just take a look at the sales progress we made over the last two years it has been phenomenal. Very, very good, strong sales efforts and results, and they are clearly strong enough. They have a lot of capability, a lot of product diversity, a lot of good technology that is available to the market. The answer is yes.

Great. Thank you. It looks like a good spin.

Thanks.

Next question is from Tien-Tsin Huang with JPMorgan. Please go ahead.

Any update on the check services strategic review?

Yes. We're making progress. More than likely the businesses, the bank business, will be separated into three distinct sections. One, a business that we operate out of Australia, that's [check country]. We have another business that -- and that will now go with our POS business, our U.S. based POS business. We have a gaming business that will be separated also. We will take a look at it on that basis. A lot of interest, or interest on at least two of the segments and we are making good progress. We will let you know as we move forward.

In the disclosures you gave at the strategic review there is quite a bit of decline in the check service operating income. Is that client attrition, pricing?

It's not client attrition at all, in fact, we still are gaining market share. It all relates to a certain portion of check writers converting to plastic instruments. The check erosion has accelerated. That is one of the reasons why we want to move that business out and find alternatives for it. That did impact the TPS growth rate this quarter. That was one of the major factors that drove that softening. It had nothing to do with our core business. The core business remains strong. But that factor it demonstrates on why we want to find an alternative for check.

If we were to exclude the impact of check, what did the TPS growth look like?

It would have been in the low single digits, from a growth standpoint. Remember, the reason it has more of an impact on profitability is that --.

That was the opposite. I think his question was, was what would TPS look like?

Oh, EBS was (inaudible), I am sorry. It has a much smaller impact on the overall TPS. A few percentage points on the check side. That is what the impact was.

On the EBS business.

Yes. And then there was one other factor, keep in mind in the last quarter, the same quarter of last year, we had a very strong quarter. We had over a 10% growth in that business. We pointed out at that time that some of the revenue we got in was non repetitive, it was project related, professional service related, and that also impacted this quarter. If you cull both of those out and look at our TPS business or EBS business, it still remains very strong, it is a good business and there shouldn't be any reason to be concerned with decelerating growth in that business.

Got it. And then eFunds, in terms of the outlook, I think eFund itself gave some long-term guidance in their last 10-Q. Any reason why we can't rely upon those figures as a target longer term for [multiple speakers]?

When we purchased that company we took into account expected attrition. And there are some accounts that will likely move away from eFunds and we want to get the base correct and get the numbers correct before we disclose that to the marketplace. We have got a little bit of more work to do on that. Once we get it, we will get it to you as quickly as possible.

A good thing to point to in the outlook is, if you look at the last quarter that eFunds announced, they are actually a few cents below what consensus was. But our projections, when we were doing due diligence, matched up with their actual results. We have adjusted our (inaudible).

The good news is, we haven't had any surprises relative to the eFunds acquisition. We are in good shape with the numbers that we used as a base and we're working towards getting you more information.

You have done very well with the acquisition. Just the last question, how much cash do you need to run each of the businesses between LPS and TPS, roughly?

At this point in time you need more on the TPS side because you have more cash intense businesses, such as the gaming business within check services division where we sell ATM services. In a lot of cases when we sell ATM services we take responsibility for funding the cash into those ATMs.

Okay, so you are seeing a little bit more cash then in distribution between TPS and --?

You're more weighted on the TPS side. On the LPS side the real user is accounts receivable, and that's all related to our default service business. So, it's both businesses but slanted and leaning towards TPS. And keep in mind, some of that goes away. If we are successful in divesting or finding another alternative for our gaming business, we're not going to be using cash to fund ATMs and also the cash checking kiosks that we have within the casinos, so that will cut cash usage down quite a bit.

One of the things that is probably an important point in modeling going forward if you're trying to break the businesses apart is, when you look at our overall CapEx spending, a lion's share of that spending falls on the TPS side because you are dealing with a technology company that has to continually invest into its platforms. Yes, we have that on the mortgage processing side, but it is no where near the level of spend you have on transaction processing. From a working capital standpoint, we've talked about the uses from a CapEx standpoint, it is much more heavy towards TPS.

That is helpful. Thank you.

Our next question comes from the line of James Kissane. Please state your company followed by your question.

Bear Stearns. I know it's early, but do you have a sense on the incremental public company costs?

Not really, just the audit is going to be split. The management is basically in place for each respective business. It's really pretty minor.

It should be pretty minor. On the technology side we are operating two pretty distinct operations. Basically there is not a lot of additive expense. We'll have, obviously, there are certain positions that will have to be filled in one company where they don't exist today. But, I think, overall, Jim, if you just take a look at what we have done in the past it shouldn't be significant at all.

And can you give us a little insight in terms of the growth in appraisal versus the growth in default, maybe like a color on the differences between those businesses?

On the default side, it's just off the charts. I don't know if we disclosed it this quarter but it is way north of 50%.

It is north of 50%. And if you're looking at the growth in appraisal, you're talking over 20%.

The margin differential on those businesses?

There is margin differential on those businesses.

We've been seeing margin expansion -- quite dramatic margin expansion on the default side. We are starting to see -- our default margins, where in the past we talked about the mid-teens in terms of EBITDA margin, we have expanded up into what are now the mid to high 20% margins on an EBITDA basis. There is leverage in that business. On the appraisal side the margin's pretty much right around 15% from an EBITDA standpoint. You have to pay the appraiser there's a heavy cost of sale and you don't have as much leverage as you can gain in that business on.

What is the leverage point in default? I thought you had to pay people as well to service their foreclosures.

With default you've got a combination of people intense business but you've also got technology service. As we mentioned the foreclosure desktop workflow management. Most of the customers that we [load] that use our front end systems to manage their foreclosure process, they are using our technology, and that' very, very high margin business for us.

We can schedule it better, we can buy the services more cost effectively. There is good leverage as you add additional volume into the mix in certain pieces of that business. The automation clearly has helped us in a major way, Jim.

Thank you.

Next question comes from the line of Greg Smith of Merrill Lynch. Please go ahead.

Just following up on the margins, I can easily back into it but to maybe save me a few minutes, can you just give us the margins in the processing piece of lender and then everything else, I guess, the non-default, non-appraisal?

Our mortgage processing margins run well above our overall LPS margin levels. If you look at kind of the scale, you look at the mortgage processing margins are running on the high end of the margin scale, roughly the 40% range. We talked about default which is now in that mid 20 range. Same thing for our origination services, we're in the mid-20's. And those are, I know we've given you the property valuation, which runs in the mid-teens, that's kind of at the [barn].

The main point is default is now pretty much -- if you want to make the argument default, It's kind of cyclical, it's on par with the margins of the cyclical piece.

Absolutely.

You are -- the cyclical piece is declining but you guys are rapidly taking out cost as that's happening. Are you preserving the margins or are getting reverse operating leverage on that side?

We had been losing margin over the first couple of quarters, we're starting to balance that out now, we think by Q4. We're really starting to see the margin degradation in Q4 last year. Look back at lender processing margins, which dropped down, I think, 31.7%. That was really our low watermark that we've been climbing up from since then. We've expanded our margins by 220 basis points since that low point of 31.7. So it has been a process of getting into those businesses where the volumes have been declining and taking out costs. That's what's allowed us to slowly take away that difference between the prior year. We're down to 80 basis points in differential to prior year where, I think, last quarter we are 250 basis points below. So that's the kind of progress we're making.

Okay. And then on default. Do you have the capacity to take on more clients or are you capacity constrained where you have to tell clients, hey, come back and talk to us in a few months?

We have plenty of capacity. We have vendors and suppliers standing in line to contract with us. That is not a concern.

Okay. Okay. Great. And then, I know it's sort of becoming a moot point with the spin, but can you give us any indication of what CapEx would look like for the overall company for 2008 with eFunds in the mix?

We are still in the process of sizing up eFunds. I think what we will say is, even though we were a little high this quarter we still feel comfortable with the $250 million of CapEx for the FIS standalone business. Right now, you can say the upper end of our CapEx would be at $290 million if we don't reduce any of that eFunds' $40 million in annual spend. We believe we can reduce that as well, but we'll come out with guidance later.

Okay, that's perfect. Then just one last quick one. I think you talked about this Jeff, the sequential declining in mortgage profits and revenues just from 2Q to 3Q, what caused that?

In the prior quarters we had one large conversion project going on, that was the Chase conversion. Now we have added in and we started work on the Wachovia. That has taken additional professional services resources that we are generating revenue and putting them onto these longer-term projects where, based on revenue recognition we have to take the revenues they would have generated, defer them until the point in time we do the implementation of the contract. So it's really the fact that we are working on them. I mean this is kind of the calm before the storm, because we're sitting here working on the conversion efforts that are going to allow us to bring in 6 million new loans on to our systems through Chase and Wachovia. But during this time period where we have the conversion work we have a lot of deferred revenue.

I just wanted -- one more quick one. Am I understanding you correct that Lender will have about $1.6 billion of debt? Is it as simple as that after the spin?

Greg, that's kind of the -- our performer right now. That's based upon the fact that we have our three major banks are engaged in discussions with us to swap that $1.6 billion of eFunds debt into a new debt instrument down at LPS. That looks like it is going to be about the number. It is right in that area.

Okay. Perfect. Thanks a lot, guys, I appreciate it.

Thank you. Our next question comes from the line of Wayne Johnson with Raymond James. Please, go ahead.

Hi, good morning. Just a quick follow-up on the debt side. How should we think about just the long-term debt targets over the next two years, and the paydown expectations regarding that metric?

I think from our standpoint, as we said in the past, we generally will lever up and do a large acquisition and then we'll concentrate on making sure that we put the pieces together and concentrate our cash flow for the foreseeable future on paying down debt. That is still our expectations to use the majority of our free cash flow to pay down debt with targeted share repurchases, pretty much designed to offset option dilution.

Okay. And so, is there a specific figure in mind we should have for next year on that?

We haven't given guidance -- I mean, directionally, we are tell you we are going to use our cash flow to pay it down, we haven't given you our 2008 projection.

I think, Wayne, we will be able to do that in the next quarter and get it more precise. If we can hold off on that we'll get it to you as quickly as possible.

Okay, great. Thanks very much.

The one comment I will add in on that is, that we do expect that our leverage ratio based on our debt paydowns next year would drop below [3.0].

Our next question comes from the line of Nick Fisken with Stephens Inc. Please, go ahead.

Jeff, what were the EBITDA for eFunds in the EPS impact in Q3?

The EPS impact was basically neutral. And the EBITDA impact, you had about $26 million in revenue, with about -- a little over 24% EBITDA margin, I think, was about $6 million in actual EBITDA contribution.

Okay. And Bill, when you guys were walking through where each eFunds division was going to go, I didn't hear EBD and I didn't hear about 40 million of debit software, the business in the old Oasis, where those are going to go. Does that mean we are going to sell them?

EBD is actually going into IFS. So that will be there. The software business will be broken out into two segments. The international segment will roll up to the international business and the domestic segment will roll up to our EBS business. That is relatively small. It's a very small piece of the software world. Debit and everything else will be organized by type of customers served and by geography with the domestic business rolling up to IFS and the international business rolling into our international business.

What is our outlook for EBS Enterprise? Sales, specifically.

Sales are very, very strong. Not only strong on the TouchPoint side of the business but also in getting increasing momentum on our core system platforms and the ones that we operate the upgrades. So, that business has a full pipeline. We're in good shape with that business both domestically and internationally. And we don't expect that to soften, in fact we expect the pipeline to strengthen as we move through next year.

I think that gives us a good view in the next couple of years, the way we're seeing the opportunities lay out, because we see the immediate revenue opportunities being in the TouchPoint applications because we've got such a strong pipeline, we've got so many deals in the hopper. But the fact that you're starting to see some of these larger institutions look at core transformation projects. They will start to put some budget money towards that in the next year or so, but the real opportunities will come two and three years down the road. So, TouchPoint gives us good visibility in the growth in the next 12 to 18 months, then it starts to shift into more of these core transformation projects.

I know it's lumpy, but would you think that if you look out '08, '09 that it should fall in that 9 to 11% organic growth rate?

I think it is a little bit early to really peg that number but it ought to be comparable with what we have seen over the last year, year and a half.

Thanks so much.

You're welcome.

Next question comes from the line of Paul Bartolai with Credit Suisse. Please, go ahead.

Thanks, good morning. First, a question clarifying the spin. The way you phrased it, is that you're contemplating it, is the only question getting the tax-free ruling and some of those administrative issues out of the way?

Paul, that is accurate. It appears that the tax ruling is going to be fairly routine. We are not talking about anything that's out of the ordinary in this particular case. The debt swap, we've already engaged in discussions with our three primary lenders. They are receptive to this transaction. It is more a matter of passage of time as opposed to major impediments.

Just trying to make sure I understand the logic and the rationale here, is the biggest issue just kind of the turmoil going on in the mortgage market and the desire to have two separate securities with two separate investors that might be looking at those securities?

That is a big piece of it, but as Lee and I've talked about the two businesses, and as we've looked at them over the last year and eight months that Lee and I have been together, the banking business, the core processing business and the payments business was really our focus in terms of acquisitions. We had not made any significant acquisitions on the lender side. The lender business will have excellent cash flow, great EBITDA, will be easily able to service the debt associated with the swap. It will then be able to engage in its own acquisition programs and be able to add to some of the businesses it presently has. We have a very, very strong platform with that mortgaging servicing business and we have seen how we can sell off that platform in terms of the lender business, very, very effectively. And as lenders consolidate we become a more important player.

But it really allows focus, management focus, and sometimes smaller is better, and focus in particular business lines, and we end up being a more effective company, two companies as we separate out. And it's unlike a lot of spins in that the management groups are already in place. It is not complicated, there is very little crossover. And so, a lot of all those reasons put together, we felt like this is a good time to do it. Why wait? Why not do it now?

One other story, or factor relative to the way the market views that business, is that, the companies together it is a very complex story, it is very difficult to understand it, it is very time-consuming, this will simplify it, make it easier. There will be a bit more peer comps on the transaction processing side so we, hopefully, we trade up on that and gain value on the lender side, because we think that lender business is undervalued as we move forward.

Okay, great. That is helpful. And then just looking back at the core business, you mentioned the revenue impact from [Checkcon] Enterprise, I was just curious if you could maybe quantify the margin impact. I know check has been a drag. You guys still had some pretty good margin expansion even with that. I am just curious if you could maybe help put the numbers around that?

Yes, our margins, I will talk at TPS level first. Going through the business, if you backed check out of EBS you would be, again, in the low single digits. If you backed check out of the overall TPS results it would have impacted about 2%, and if you backed it out of overall FIS it impacted revenues about 1.4% positively, so that is good. On the margin side, you'd have seen margin lift of about, I think, about 100 basis points, on the FIS side, about 200 basis points on the TPS side.

So, 200 basis excluding checks and TPS?

Yes.

Great. Okay. Great. And then you talked a bit about eFunds cost savings. I was just curious if you could give us any insights on what you think early on, as far as the revenue synergy goes and the opportunity you might see there?

It is really too early for that. We are in the process of organizing the sales forces and getting target accounts identified. I think we're going to have to defer on that as far as the potential. I will say this, have we demonstrated a strong ability to put sales organizations together and leverage existing relationships by cross selling more products and services into that. And we started the initial work that we have done on eFunds indicates to us that there's going to also be strong opportunities with the integration of that company. We are going to be consistent, I think, with what we have achieved on the IFS side, but it is going to take some time to get to specific numbers.

Okay. Then, switching to lender, obviously some good sequential improvement in margins there, is there any seasonality to the margins in that business? Or should, as default continues to scale up and you get benefits, cost benefits out of business, should we continue to expect margins to expand sequentially in LPS?

Normally seasonality -- the seasonality is based upon the second and third quarters as being the strongest quarters during the year. And of course this year there was a complete collapse in the refinance and the title closing side of LPS. Default business is basically doubling year over year. In September, the fall business doubled from September of '06 and the trend is continuing irrespective of timing during the year. There's just really a [tradering] going on in terms of home ownership and defaults.

As far as margins go?

Margins keep on expanding because we keep on getting more leverage. So, default revenues keep EBITDA -- EBITDA margins keep expanding.

Yes, as Bill said, it's a transactional business. What drives the margins is the transaction for the most part. We have upside and we will make that clear in the fourth quarter when we give guidance.

Okay and then this last question, earlier in the year, I think at the analyst day you talked about some real basic assumptions for '08 in terms of revenue growth and margins. I mean, even with everything going on, are we still comfortable, on an organic basis, kind of that 7 to 9% revenue growth in the margin expense you have talked about?

Yes, we are.

Thank you.

Operator, we have time for one more question.

Next question comes from David Togut with First Manhattan. Please, go ahead.

Thank you. Lee and Jeff, what are the most important things you have learned during your due diligence on eFunds over the past couple months? Especially with respect to the quality of products and services? Secondly, how would you characterize the cost take out targets for '08 and '09? Is this sort of low hanging fruit or is there some heavy lifting involved?

Good questions, David. I think the most important thing we have learned is there is probably a little more upside in certain businesses than what we originally thought. I will give you the kind of a nutshell reason for that. eFunds was organized on a very, very matrix basis. There really wasn't a continuous business unit that supported a given product. That lack of having strong accountability, in my opinion, hurt some of the revenue growth and some of the profitability growth that they had in that business. That is the good news. We can get in and we can fix that and get that organized the right way. Consistent with what I covered in my script, the product capability really is very, very good. But when you look at their debit capability and look at their prepaid card capability, we look at their risk-management capability, where they are really dominant in the marketplace in providing that services to the financial institutions, we have found very few cases where that product set needed a lot of work or wasn't really, really strong.

So those are the two good messages. They had a good management team at the middle level and we are moving some of the people up in the organization. They have been integrated into our existing businesses and we expect to produce some really good results with it. Overall, the observations have been very, very good. I think we understand why they have been weak in revenue growth and profitability growth at times, over the last few years. I think we can correct that and we are moving pretty quick in that direction.

I think the matrix organization has made them inefficient, one, but it also pretty much caused them to give pretty poor customer service too because customers didn't have any one point they could go to. I think it's been real important, and what we've recognized it's very important that we get good face time with these customers right away, because FIS -- most of these customers of eFunds are also customers of FIS and we have great reputations with these customers. So, getting in and making sure we get the satisfaction level, that is very important on the front end.

In terms of the cost takeouts, we kind of bucket them into three categories, first being your typical corporate type expenses, corporate functions coming out, the duplicate corporate expenses, public company cost, consolidation of benefits plans, things like that. Those are fairly easy to get. The one thing I would say is that because we are closing this transaction so late in the year we're not going to be moving accounting systems in the fourth quarter when we have to go through stocks and do audit and all that good stuff. We're not going to be moving benefit plans in the fourth quarter. Those things will tail off into the first quarter of year. So you're not going to see a whole lot of synergy fall into Q4, you should see that start to fall -- the low hanging fruit and stuff start to fall into Q1. Then the next layer will be things like facilities consolidations, because as we get the headcounts out, then we go after the facilities and start to push those down and really consolidate and get those facility costs out.

Then the last delay, which is really the tougher one right now to predict the exact timing on is the consolidation of technology platforms and technology centers, because that takes a little more planning, a little more project work and a little more capital on the front end and a lot more analysis just to build the business case. Those are kind of the three levels. Like I said, right now, we are keeping a pretty broad range out there until we get some of these projects really nailed down. The $35 million to $50 million we are comfortable with and the $65 million full-year run rate, once we get into '09, I think that's very achievable.

The first part is, David, to make sure that we get the processing right and get the reliability factors up. Once we are through with that we'll move quickly to get the expense out.

Great. Thank you very much.

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