Fidelity National Information Services Inc (FIS) 2008 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the FIS 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 over to our host, Ms. Mary Waggoner. Please go ahead.

Thank you, and good afternoon. Joining me today to review our first quarter results 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 will also be available on our website. Today's discussion will contain references to non-GAAP and pro forma results in order to provide more meaningful comparisons between the periods presented. Reconciliations between GAAP and non-GAAP results and schedules showing historical detail are provided in today's press release which is also available on our website. We have included a PowerPoint presentation to supplement today's review of our first quarter results. The slides which are posted on our website are available in both HTML and PDF format.

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 had 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 including quarterly and annual guidance. Now I will turn the call over to our Executive Chairman, Bill Foley.

Thanks, Mary. Good afternoon, everyone, and thank you for joining us today. FIS generated solid organic revenue growth of 7.3% in the quarter driven by a powerful 12.6% growth in the linder processing services division. Consolidated earnings came in at the lower end of our guidance range primarily due to lower than expected high margin software licenses and professional services revenue.

March was a difficult month for the financial markets, and towards the end of the more some large banks delayed technology purchases. We also noted some softening in consumer spending in our payments businesses. In late of these factors and the ongoing uncertainty regarding the near-term economic conditions, our management team took immediate actions to offset any potential negative impact on 2008 earnings. While we are taking a slightly more cautious view towards revenue growth in 2008, our full-year earnings guidance remains in tact. Lee and Jeff will provide additional details regarding our first quarter performance and outlook for the remainder of 2008 later in the call.

I am please to do announce that on April 17, our Board of Directors authorized the repurchase of up to 250 million of FIS common stock. This translates into approximately 6.5 million shares of at the current market price which we think represents a great value. The new authority replaces the previous authorization of which approximately 117 million was outstanding.

Next I will provide update on a strategic initiative including the sale of nonstrategic assets and conclude with the current statuses of the spin off of LPS. During the quarter FIS completed the sale of two nonstrategic businesses, FIS Credit Services and Certegy Gaming Services. We also completed plans for the wind down of HFN which is a small unprofitable origination and fulfillment business serving residential home builders. The sale of these assets will improve our growth rates, free up capital, and enable management to better focus on core operations.

During the quarter we made significant progress towards completing the spin off of LPS. We remain on schedule to launch LPS as an independent publicly traded company by the end of June. We filed the preliminary Form 10 on March 27, and we expect to file an amended version within the next few weeks. On April 14, we received a formal private letter ruling from the Internal Revenue Service approving the tax free distribution of LPS, and we are working with our primary lenders to finalize the capital structure of FIS and LPS. We remain very excited about the future of FIS and LPS as separate public entities. The two companies have excellent management teams with proven track records, and both have built strong competitive positions. We look forward to seeing you at our upcoming Investor Day which is scheduled for Wednesday, May 28, in Jacksonville, Florida.

Now I will turn the call over to Lee who will review our first quarter and full-year results. Lee.

Thanks, Bill. Good afternoon, everyone, and thanks for joining us today. I will begin today's call with the review of first quarter results including update on key business initiatives. Jeff will follow with a detailed financial report and our outlook for the remainder of 2008. First quarter consolidated revenue increased 20.5% over prior year excluding eFunds, revenue increased 7.3% driven by 12.6% growth in lender processing services and 4.5% growth in transaction processing services. EBITDA increased 14.8%, and the EBITDA margin was 24.2% compared to 25.4% in the prior year quarter. Adjusted net earnings came in at $0.57 per diluted share. Although we were pleased with first quarter revenue growth, the challenging economic environment drove first quarter earnings to the lower end of our guidance range. Earnings were impacted by a lower mix of high margin license and professional service revenue.

During the fourth quarter earnings call we discussed our outlook for 2008 bank technology spending. We indicated that the majority of the services that we provide to financial institutions are not discretionary and historically have not been influenced by the weakness of an economy. In general, our view of this has not changed. Banks continue to invest in the maintenance and development of core processing and support systems and continue to move forward with new system implementations and scheduled conversions. However, late in the first quarter certain high margin technology service purchases by a limited number of large banks were delayed which impacted revenue and segment margins. In addition, some of our payment services businesses were also marginally impacted by the slowdown in consumer spending which occurred in March. It is too early to determine whether these recent trends will remain isolated to the first quarter or whether they will continue throughout the remainder of the year.

In order to make sure that we achieve the earnings guidance communicated in our fourth quarter call, we decided to act aggressively as if the trends would continue to impact our business throughout the remainder of 2008. Much of this decision was based on the current and anticipated weakness in the financial services sector, and input from our key customers. The cost reduction initiatives include the elimination of several hundred full time positions, and the restructuring and consolidation of technology, back office, and sales operations worldwide. These actions should generate over $30 million in end year savings which will enable us to meet our original EPS guidance range of $2.73 to $2.83 in spite of taking a slightly more cautious view of 2008 revenue growth. I want to emphasize that even with the short-term market challenges that we are facing, our 2008 revenue and earnings outlook remain solid. We continue to successfully execute on our business plans and are making good progress in completing the strategic development initiatives and new customer implementations covered in our fourth quarter earnings call. Although the sales cycle has marginally increased in some of our businesses, we remain encouraged with the quality and quantity of our sales pipelines.

Now I will cover the business segments starting with transaction processing services first. CPS revenue increased 26.1% compared to prior year. EBITDA increased 22.3%, and the margin was 23.6%. Excluding eFunds revenue increased 4.5%. While overall revenue growth was in line with our expectations, the margin segment was negatively impacted by a change in revenue mix as well as lower margins in our risk management check business. International revenue increased 17.1% driven by solid growth in our Brazilian and Australian card and European core banking businesses. In Brazil which is one of our fastest growing markets, we completed a conversion of ABN's 5 million card account portfolio to our base 2000 processing platform. The conversion was completed in late March with a high degree of quality and the feedback from the bank has been very positive. The conversion of ABN AMRO Bank Royal, was closely watched by other Brazilian card issuers and we remain optimistic that we'll secure additional Brazilian card processing customers in the future. Bradesco remains on schedule to converge it's in-source 10 million account card portfolio in late 2008. We're also pleased with the continued strong demand for our payment and risk management products including loyalty, prepaid card, E banking, bill payments and risk management services.

During the quarter we finalized a new internet banking and bill payment agreement with Provident Bank of New Jersey. As previously discussed, one of our primary objectives this year is to more effectively sell our payment services products into the mid-and upper tier markets. This highly competitive win is an important first step in achieving this objective. During the quarter we also signed a new TouchPoint agreement with First Commonwealth Bank. We continue to make good progress with the integration of eFunds, and we're on target to achieve $35 million in cost savings in 2008. And at least $65 million by the end of 2009. Overall we are pleased with the progress that we are making in TPS, especially when taken into consideration the extraordinary challenges that financial institutions are facing today.

I will now cover lender processing services. LPS continues to generate outstanding growth in a very difficult environment. First quarter revenue increased 12.6% over prior year driven by strong growth in appraisal, default services, and workflow automation technologies. LPS EBITDA increased 12% over prior year, and the EBITDA margin remained steady at 32%. March was another record month for default services driven by excellent growth in foreclosure activity. Although origination and refinancing activity had moderated somewhat from higher January and early February levels, overall title and settlement services revenue declined less than 2% versus prior year compared to a 9.7% decline in the overall market. We continue to win market share across all product lines. We are particularly pleased with the progress that we're making in our flood certification business.

During the quarter we became the nation's leading provider of flood certification services demonstrating the power of our integrated processing and product platforms which have generated a strong competitive advantage. Our appraisal business also produced excellent results driven by higher refinance activity and strong market share gains. Although the outcome of recently proposed regulatory changes affecting appraisal providers continues to remain uncertain, we are encouraged by the recent public positions taken by the controller of the currency and the office of thrift supervision which we believe supports the continuation of bank and third-party appraisal providers such as FIS. We are fully aware that many of you have voiced concern over the uncertainty surrounding our appraisal business.

Now, I want you to know that although we do not believe that our current operation will have to change, if this is not the case, we have identified several alternatives that will preserve FIS shareholder interest and value. As we discussed in previous calls, the challenges in the mortgage industry continue to drive significant opportunities for LPS. We remain on track to convert Chase's subprime mortgage portfolio in the second quarter. Chase's prime portfolio and Wachovia's home equity portfolio remain on schedule to convert in 2009. Before I turn the call over to Jeff, I want to emphasize our 2008 revenue and earnings outlook remained solid. Although we have slightly modified the low end of our revenue outlook to compensate for the increased risk of continued economic weakness, we are maintaining our original EPS guidance. We now expect 2008 revenue growth of approximately 13 to 16% and 5 to 8% excluding eFunds.

Overall, we are pleased with the progress we were making in each of our businesses, and in the strong competitive positions we have built. We look forward to seeing you at our upcoming Invest or Day. I will now turn the call over to Jeff who will provide a more detailed financial review of first quarter results and our outlook and guidance for 2008. Jeff.

Thanks, Lee, and good afternoon. Before I get into the discussion and analysis of the results, I would like to take a moment to walk you through some of the changes we've made in our earnings release and related exhibits As you'll notice we moved all the quantitative detail into the exhibits that accompany the earnings release and provided more historical information to facilitate your analysis. Exhibit A, is the usual consolidated income statement. Exhibits B and C, which are new, include the balance sheet and cash flow statements. Exhibit D, includes supplemental financial information with current and trailing four quarters for revenue with and without eFunds, depreciation and amortization, capital expenditures, long-term debt, and stock compensation expense. Exhibit E, provides non-GAAP financial information along with financial bridges back to GAAP results for EBITDA, net earnings, and free cash flow. Exhibit F, which includes segment level financial details. We have also added slides that I will refer to as I go through my comments. These slides have been posted to our website for easy reference. We hope this expanded disclosure and new format and presentation helps with not only understanding the FIS story better, but more easily.

Moving onto the results, for comparative purposes, Property Insight which was sold in the third quarter of 2007 and three businesses -- three business lines sold or discontinued during the current quarter credit, game cash, and home financial network or HFN are now all reported as discontinued operations. As you can see on the revenue slide on page 4, first quarter 2008 consolidated revenue increased 20.5% compared to the prior year quarter. eFunds revenues of approximately 141 million were in line with our expectations and drove 13.2% of total revenue growth in the quarter. Excluding eFunds from consolidated and segment revenues, overall first quarter revenues increased 7.3% to 1.15 billion driven by 4.5% growth in TPS and a strong 12.6% growth in LPS. The 4.5% increase in TPS first quarter revenue to 685 million was driven by 17% growth in international, and 4.9% growth in integrated financial solutions or IFS partially offset by a 3.4% decline in Enterprise Solutions or EBS.

For the first quarter the 17% increase in international revenue to 161.7 million was fueled by strong growth in our payment services businesses, particularly our card operation in Brazil, and increased revenues in our European core banking operations. Payments services revenues now represent approximately 56% of total international revenue. The 4.9% increase in IFS first quarter revenue to 297.6 million was driven by solid growth in our e-business and core banking product lines. These gains more than offset the impact of nonrecurring items in the first quarter of 2007 associated with higher termination fees and revenues from a special card reissuance project. EBS revenue of 226.6 million decreased by 3.4% compared to the first quarter of 2007 as current quarter new sales activity was more than offset by $6 million license fee recognized in the first quarter of 2007 and lower retail volumes in our check risk management services business. Excluding check services which remains under strategic review, first quarter EBS revenue decreased approximately 1.5%. As we have noted in previous discussions, we expect more difficult year-over-year comparisons for EBS in the first half of this year.

Lender processing revenue increased 12.6% to 464.1 million driven by 18.3% growth in information services, partially offset by a 7.4% decline in mortgage processing revenues. Information services growth of 18.3% to 380 million was driven by strong demand for appraisal and default services which once again more than offset the declines in origination oriented products such as tax, 1031 exchange, and title and closing services. Market share gains and the ongoing trend to outsource generated a 19% increase in traditional appraisal services while a combination of new customer signings continued high level of foreclosure activity and strong demand for our workflow automation services drove an increase of more than 71% in default and related technology services. We continue to benefit from the significant volume increases in foreclosure activity where we currently have more than 40% market share as well as increasing demand for back end REO asset management services where we have historically had low penetration. Based on our current projections, demand for our outsource default services expected to remain robust for the foreseeable future.

Mortgage processing revenues of 84.3 million decreased 7.4% compared to the first quarter of 2007. The average number of loans processed declined to 27 million compared to 28.2 million in the prior year quarter. As we discussed on the fourth quarter call, the decline was primarily driven by Citibank's conversion of ABN's 1.5 million loan portfolio in the fourth quarter of 2007. Also, we generate a small percentage of revenue from software and related services sales which were down year-over-year and represent additional examples of the slowing high margin technology purchases that Lee discussed earlier.

Although we expect mortgage processing revenue to say decline modestly in 2008, market share gains by existing processing customers, a strong pipeline of home equity loan prospects, and the conversion of 6 million loans for chase and Wachovia are expected to drive strong growth in the number of average loans processed in 2009 and beyond. Also, it is important to note that much of the growth in our information services businesses continues to be driven by the strong margin processing relationships we have with most of the nation's top lenders.

Moving onto the EBITDA slide on page five. Overall, EBITDA increased 14.8% to 312.3 million, and the margin was 24.2% compared to 25.4% in the prior year quarter. The decline was due to lower margins in TPS and higher corporate expenses. Transactions processing EBITDA increased 22.3% to 195.5 million the EBITDA margin was 23.6% compared to 24.4% in the first quarter of 2007. Margins were lower in the current quarter primarily due to a greater mix of high margin revenues in the prior year quarter such as the license fees noted earlier and the Banc of America TouchPoint implementation revenues. Additionally, lower retail volumes in our checks services business impacted TPS margins by approximately 20 basis points. Lender processing EBITDA of 148.3 million increased 12% compared to the first quarter of 2007 and EBITDA margin was 32%, essentially flat compared to the prior year quarter. Strong revenue growth and margin expansion and default somewhat offset by lower margins and appraisal and other origination related services helped keep the robust margins steady year-over-year. Corporate expense, net of one-time adjustments totaled 35.3 million compared to 29.5 million in the first quarter of 2007. The increase was primarily due to the higher stock compensation expense that was discussed on the last call and eFunds Corporate expense. Depreciation and amortization for the first quarter came in at 122.7 million and was in line with our expectations. It was down compared to the fourth quarter of 2007 primarily due to lower purchase amortization on acquired customer contracts, and lower amortization on acquired software. We expect depreciation and amortization to ramp up beginning in the second quarter due to the impact of customer conversions in the Brazilian Card JV. As you know, investments in the Brazilian Card JV have been one of the major drivers of capital expenditures over the last few years, years, and we'll begin amortizing these investments as ABN AMRO went operational in April. Given the tough market conditions we plan to focus on efficiency and greater expense control in order to reach our target margins for full year 2008.

Now onto adjusted net earnings which we previously referred to as cash earnings and the slide on page six. Overall first quarter adjusted net earnings defined as adjusted net income plus after tax purchase amortization totaled 111.3 million or $0.57 per diluted share compared to $0.54 in the prior year. During the quarter we incurred after tax merger and integration costs of 11.3 million driven primarily by the acceleration of eFunds stock options. First quarter 2008 after tax purchase amortization of 29.5 million compared to 25.6 million in the prior year quarter driven primarily by the acquisition of eFunds. Additionally, the businesses that were sold or discontinued during the quarter are expected to have a neutral impact on adjusted net earnings and EPS going forward. Also, as you can see on the slide on page seven, the gross proceeds from these businesses were 31 million excluding operating cash resulting in a nominal gain when netted against a small impairment loss on our equity investment in [FNRES].

Moving onto the free cash flow slide on page eight. Free cash flow which we now define as operating cash flow minus capital expenditures was 78.6 million for the first quarter. Capital expenditures totaled 89.6 million and included additional investments in Brazil for the conversion of the card portfolio and for equipment to drive increased efficiency in our item processing operations. First quarter capital expenditures were in line with our expectations, and we expect much lower levels in the second half of the year as our Brazilian investments ramp down. As shown on the slide, excluding the 48.6 million in after tax merger, acquisition, and integration costs and the settlement of acquisition related liabilities, net free cash flow was 127.2 million for the quarter. Uses of free cash flow during the quarter included 9.7 million in shareholder dividends, and net debt repayment of 98 million.

At the end of the first quarter we had approximately 328 million in cash and 4.2 billion in outstanding debt. Currently 3.2 billion of our debt is covered by swaps carrying an average fixed LIBOR rate of 4.5% plus spreads ranging from 100 to 175 basis points. The weighted average effective rate on the outstanding debt at quarter end was 5.8% including amortization of up front debt costs.

Now I would like to review our outlook for full year 2008 starting with revenues. As you can see on the guidance slide on page nine, based on current trends, we are widening our full year revenue guidance to 13 to 16% or 5 to 8% excluding eFunds. This guidance assume that is TPS revenues excluding eFunds will grow 4 to 6% for full year 2008. This is down 2% from prior guidance to reflect the increased risk of continued economic weakness that Lee described. Full year LPS growth will remain at the high-end of the 6 to 8% range previously disclosed. Note this is lower than the current run rate due to the annualization of certain large appraisal contracts and known volume declines at customers such as [WaMu].

Moving onto adjusted earnings, as noted earlier, we have taken specific cost reduction actions which we expect will contribute 30 million in savings and will enable us to meet our adjusted earnings guidance of $2.73 to $2.83 per diluted share which represents an increase of 12 to 16% compared to 2007. For free cash flow we are projecting a range of 555 to 620 million in 2008 based on the current earnings guidance, estimated capital expenditures of 280 to 300 million, which is more heavily weighted towards the first half of the year, working capital and other adjustments to reconcile net earnings to net cash of 75 to 100 million and total depreciation and amortization of approximately 530 million, which as I noted earlier is expected to ramp up beginning in the second quarter due to the Brazilian card implementations going live in April and in the fourth quarter. Also, as noted on the last call, we comp approximately 35 million in cost synergies from the eFunds integration in 2008, the primary contributors of which are the consolidation of corporate functions, business unit integration, and technology infrastructure savings.

Finally, our guidance excludes 25 million of estimated nonrecurring integration costs associated with the eFunds acquisition of which 14 million were incurred in first quarter 2008, and approximately 25 million in one-time integration capital which has not yet been spent. Also, 15 to 20 million in pretax restructuring charges associated with the cost reduction initiatives Lee discussed earlier, and finally any one-time costs related to the LPS spend and any incremental operating costs associated with operating LPS as a stand alone company for which we'll provide additional details at our Investor Day scheduled for Wednesday, May 28, here in Jacksonville.

Now I will turn the call back to Mary.

Operator, we're now ready to take questions.

Thank you. (OPERATOR INSTRUCTIONS) First we'll go to the line of Bryan Keane with Credit Suisse. Please go ahead.

Hi. I guess I am just curious about the consumer spending in the payment business that slowed. I guess what exactly are you guys referring to there?

Talking about average usage on the card side of our business or the number of times that a consumer uses their credit card or was slightly off from recent trends, so that affected it somewhat, and also on the payment side of the business number of items processed through our payment and check processing shops tailed off somewhat, though, also during the quarter.

Okay. No change in bill payment volumes?

Bill payment was pretty strong. Bill payment historically doesn't vary that much, and we haven't seen a lot of variation in that business. It is growing very rapidly, but on a per-account basis per-consumer usage basis, not a lot of variation.

And when you guys talk about the software license sales in professional service revenues, being part of the reason for the little bit lighter on the revenue, is there a way to quantify how big that is on both the software and the professional services side?

It involved a small number of institutions where we had planned to bring in contracts during the quarter. There were well advanced contracts. They've been not eliminated. They've just been pushed back. I think you should look at it in the terms of a handful of institutions that fell into that category. On the software side. Really split between our core EBS business and also our commercial lending business where typically we pick up contracts on the lending side that are software based.

And do the decisions remain delayed or did they start to close in April?

Some of them are gaining momentum, but I think it is too early to tell. I think at this point in time we were cautious. We wanted to make sure that we wait until we understood exactly what the trend was and whether it was going to hold, so there is a little bit of uptick, but not enough to make us feel comfortable that the concern is going away.

Just last question. The guidance, the 2.73 to 2.83, is that using I just want to be clear, 56 or $0.57 in 1Q and any guidance on 2Q EBS?

That's using the $0.57 we just disclosed for Q1. At this point we're not planning on providing specific quarterly guidance for Q2 or forward.

No, but it takes into account the $0.01 shortfall to consensus in Q1.

Okay. Thank you very much.

You're welcome.

Thank you. And next we'll go to the line of Greg Smith with Merrill Lynch. Please go ahead.

Hi, guys.

Hi, Greg.

You mentioned on the appraisal business you have potential alternatives. Are you prepared to discuss any of those in more detail?

Greg, I think I can say this. I can say worse comes to worse we can always keep that business at FIS because FIS will not have settlement services, so long story short to our shareholders, there is a couple of different alternatives that we've investigated very thoroughly. We think we're going to be able to protect that business in one way or another. However, as we stated in the call, we don't believe we're going to have a problem with that business to begin with. We think we're going to be able to continue to offer that service, and it is a valuable service to the marketplace, and there are more and more organizations throughout the country coming forth saying that it would not be the right decision to exclude certain third parties and even some banks from providing that service, so we'll see how it shakes out.

And if it does turn out that way, it could be an incremental positive above and beyond where the business stands?

I will tell you this that one way or the other we're going to see some real uptick in that business. We have a great product availability. The pricing is far more leveraged and better than what an institution can provide internally, so we see that as a real clear upside.

Excellent. Can you give us any update on what may happen with Banc of America and Countrywide merging and how that might affect LPS?

On that one, Greg, it is still too early to really say anything different than what we've already said. We still feel pretty positive about securing additional business from B of A. We think we have a cost advantage on the processing side that we'll see how they rate it and how they view it, but even if it goes the other way, there is a lot of additional business that we have currently with Countrywide that we don't have with B of A or the other way around that we believe we're going to be able to pick up, so we think we're pretty much protected on that account.

I think so that's the good way to look at it. The fact is both B of A and Countrywide are top five customers within our LPS businesses, and we have good product penetration into each, so we see it as being an upside regardless of say which direction the mortgage (inaudible - multiple speakers)

Either way I think we're pretty well protected.

And then just lastly, last quarter you kind of gave a preliminary look into 2009 given your visibility and specific conversions that were scheduled. Other than the economic environment and some of the impact you highlighted, any reason to back away from any of those comments about '09?

No. The conversions at this point in time are still on schedule to happen. A number of them in early part of 2009, and then obviously we're going to get the benefit of converting Bradesco and later on this year we'll have that account for the full year of 2009, so 2009 still looks very positive. We think we feel pretty good about it.

Great. Thanks a lot, guys.

You're welcome.

Thank you. Next we'll go to the line of Julio Quinteros with Goldman Sachs. Please go ahead.

All right. I know that the question was asked, but I don't think I actually heard you size the software and professional services exposure in both the TPS and the lending processing business. Can you actually provide us a range in terms of exposure for both those pieces?

Yes. I think you should look somewhere in the neighborhood of 10 to $15 million.

For each segment.

No, for the overall business.

10 to 15 total. Okay. And then going back to the improvement or the visibility just in terms of when we should expect it to improve, maybe if you can just talk about trends for the month of April over the month of March at this point, and either the TPS or the LPS side?

It is still too early to really to pinpoint that. We've seen some indication of a little bit of change and maybe a little bit of improvement on the TPS side, but still too early, so I don't want to get too far ahead of ourselves until we actually get the record count and whatever the case, very stable on the LPS side, the trends that you've seen throughout the last couple of quarters where we're gaining additional market share and momentum in that business continues from what we've seen so far, and in the TPS side we'll have to wait until we get the books close to do see where it trends.

The one thing I caution the LPS side as I mentioned in my comments a few minutes ago, we will have annualization in Q2 of fairly large contracts. We signed or expanded I should say a fairly large appraisal contract in Q2 of last year, so we'll start to see the impact of that as well as the ramp downs in volumes with the moves made with WaMu and shutting down their wholesale business.

And can you give us an update on any progress or what the current status of any efforts towards the cross-selling of eFunds platform?

We're actually making good progress and certain risk management products we've been able to sell those effected actively into some of our customer base. We've been able to take some of the debit card products that they currently have in capabilities and sell them into our credit union and community bank base. On the prepaid card side that platform will become the benchmark and the operating system that we will use for our card processing business which as we talked in the past, that's currently outsourced to a third-party, so so far the momentum that what we picked up is pretty strong. We have also in addition to that we have some professional service potential by using some of the outsource capabilities and off offshore resources we purchased to refunds for some of our core customers, so we're making progress there, too.

I think we were actually pleasantly surprised in Q1 that the eFunds revenue streams if you compare to results for last year you had about 5.3% growth on the product lines, probably the strongest areas we said or the two strongest areas were in the payments business at about 5, and I think so in double-digits the risk management side. Good solid performance.

We were kind of surprised with that because we had factored in a little attrition on the front end, identified the accounts that were at risk, and the 5% growth really was somewhat stronger than what we projected and came across the board from all areas, particularly the risk management side of the business.

Okay. Just lastly, can you comment on the Master Card IPS platform, any potential competition or risk from that?

It is something that we competed with the card associations for the last 20 years. We competed with Visa and their debit card platform for the last six or seven years. They're tough competitors, but we've held our own. We haven't suffered any major losses. We kept our customers on board, so although we respect Master Card and their new technology that they're going to bring out, and their capabilities, it is certainly something that we have not -- that we faced in the past and we've done very well against the other peers, so we think we're going to be in good shape with that. The smaller institution and some of the customers that we actually process for, it is also important to them to have a full range of services and multi-product capabilities, so that factors into it also.

Thanks.

You're welcome.

All right. Thank you. Next we'll go to the James Kissane with Bear Stearns.

A quick question on the mortgage processing margins, Jeff, in terms of how they're holding up given the revenues.

The mortgage process revenue expanded over the prior year by about 70 -- I am sorry.

Margins.

Margins expanded about 70 basis points over prior year even with the lower revenues, so we're holding our margins very well.

Great. Just to confirm the 15 to $20 million charge in the second quarter of this year, that's incremental and that's pretty much in reaction to the softer revenue?

Right. That's in conjunction with the cost reduction initiatives that Lee talked about that are going to drive this $30 million in expenses.

That's a head counted reductions and some of the other charges we're taking associated with that, Jim.

And that will drive 30 million this years of savings.

30 million of end year savings this year.

And how about for '09?

Well, look at it as being an annual number around 50 million.

Up around 50.

And deferred contract costs and capitalized software spiked up year to year. What's driving the increase there?

On the capitalized contract costs, the main thing is Brazil is driving that up as we finish off the ABN conversion and start into more depth in the Bradesco programming to get that work done.

The capitalized software and the deferred contract costs.

That's actually the capitalized software. On the deferred contract costs we have a number of initiatives have been under way. We talked about the National Australia Group, internet banking platform we've been building out. That's pushing up deferred costs as are a couple of other contracts we're working on. Additionally the Chase work that we're working on the mortgage processing side, the Chase Mortgage platform that will go live in the beginning of '09 is also driving deferred costs as is the Wachovia Heloc.

We're doing the development up front on that.

One last question. Generally the performance of eFunds relative to your plan?

eFunds has done very well. Good strong revenue growth, a little bit above where we thought it would be, synergies are good, the expenses are coming out on target and on plan, and I think there is going to be upside as we go forward on that. The quality of the management team that we picked up through the transaction is very good and very solid, so overall, Jim, I would say we're pleased with it.

Great. See you next month.

Thanks.

Thank you. Next we'll go to the line of Tim [Wojes] with Robert W. Baird.

Hi, guys, just a question on IFS and the trends there. Typically these are much smaller banks and more recurring revenue. Are you seeing any change there in terms of (inaudible) expense?

No, really if you look at our performance during quarter 4.9% down somewhat from what we been trending in the past. Lee mentioned we saw a little softness in transactional based revenue which is would impact card but nothing that was really all that meaningful. The real thing that drove the decrease in growth versus prior quarters was really a couple of nonrecurring things. This was actually a good thing. We had lower termination fees in Q1 than we typically have in the quarters in prior quarters, so that helped retain customers, but did impact our revenue growth, and then we mentioned several project back in Q1 of 2007, merchant fraud, we heard about the T.J. Max fraud which drove a lot of cards reissuance, and a lot of our banks had to reissue cards and we gained revenues off of those reissues.

Very good. In terms of the check business can you comment on what's left in that business still and if you are still looking to divest that?

Yes. We successfully sold the Game cash portion of that business which was about 100 million of the revenue stream and actually that sale closed on April 1, so what's left is the North America point-of-sale business, our paycheck cashing business and our international businesses. And also our Australian businesses, our business. We're in the marketing process right now to sell the other pieces, and we expect to have a pretty good indications what we're going to be able to do by the end of the second quarter.

All right. Thanks. Just in terms of eFunds, I didn't see in the press release you have any just talk about maybe the EBITDA and operating income lines there?

Our approach to any acquisition is to immediately break up the product sets within the acquired companies and place them under the appropriate business unit within TPS and/or LPS as is applicable. That's what we've done here. It is really difficult for us to call out specific profitability after we've done that conversion because we've migrated their head count into our payroll system, put them in the cost centers within the divisions and it really disappears.

I think the safe way is the accretion we expected when we communicated to the marketplace when we purchased with our guidance is still in place and still holds.

I think that we're on target to hit the $0.05. If you look at Q1 specifically for eFunds, we didn't really get much -- I would say we didn't get much contribution to EPS in Q1 because it is a lower revenue quarter. It is a lower margin quarter because it is a transactional seasonal business in Q1 is the lowest margin quarter, and from a synergy standpoint, Q1 is when we have the smallest amount of synergies of that 35 million that will build over time, so those factors kept it fairly neutral from an EPS standpoint in Q1. We should see the benefit as we move forward.

Thanks for the color.

Thank you. Next we'll go to the line of Shan Shan Wong with JPMorgan. Please go ahead.

Sorry. Thanks. Just had a follow-up question on the payments weakness that you described. Is that just related to card volume or are you seeing card attrition or maybe less marketing from your clients as well? I thought the bulk of the revenues were account based.

The bulk of the revenues are transaction based, about 65% of our billing is derived on a transaction fee basis, so that's where the slowdown has taken play place, and again th a slight slowdown. It isn't significant. It was enough to take notice of, but it is isolated to our card processing business primarily.

Right. The card processing is primarily the Community Bank and Credit Union side.

Community bank and credit union. We haven't seen any major drop off or increase in attrition or drop off on new account issuance. They're still very conservative issuers and it is pretty predictable on the revenue side.

Good to know. On the software side question on seasonality there both enter quarter and throughout the year, didn't know if Q1 was heavier or unusual in terms of contribution?

No, it actually isn't. It was pretty consistently spread throughout the year, so the answer is no.

Okay. Good. I just have a higher level question given all that's going on. Obviously the spend is coming up, the appraisal regulation and the eFunds integration. Given all that's going on, how comfortable are you with the EPS guidance that you laid out or that you are affirming?

We are very comfortable with that. In fact, we have taken pretty strong actions and pretty strong steps based on preliminary information that we had and trends that we noticed at the latter part of the first quarter to make sure that we were protected on EPS for the year, so we believe that we have EPS -- we're going to achieve that, and we're very comfortable with the guidance range we originally issued.

I think the other thing to say when we talk about driving these cost reduction initiatives, we didn't start the cost reduction initiatives because we saw weakness in revenue. It was just a natural evolution. Lee talked last quarter about the restructure of TPS to basically consolidate the large and small bank sectors and international into one business unit, create singular sales forces so we could get better product sales through all of our banks no matter what the size. As part of that process we looked at places to gain efficiencies any time we restructure. Additionally the LPS we had to go through and figure out how do we break the technology organizations apart. There weren't that many ties but through that process we naturally look for way to say gain efficiencies there as well. A lot of the things we're doing and things we're working on they're just natural outcomes of some of the reorganization efforts.

The process of separating the two companies has been a very, very thorough process and as we've gone through it as Jeff said it exposed areas quite frankly I think we were spending too much on, and we're able to isolate the resources, put them into a bucket and say let's get them out of here. I think if anything the trend that results towards the end of the quarter accelerated our actions, so we feel pretty comfortable where this is going to come out. Most of the reductions are there already in process. A significant number have already taken place, and I think the preliminary read on this is that in most cases we're going to come out much more efficient and with a higher level of service in most of the areas that were affected.

Okay. Very good. Thanks. See you next month.

Thank you. Next we'll go to the line of Nick Fisken with Stephens Inc.

The only thing I have left is what are you assuming for a share count for the year now?

Right now we haven't changed our share count assumptions. We're still at about 197.5 million as our estimates.

How quickly should we be looking for the 250.

Bill and I talked about that today. We're not going to give you the exact daily purchase. You should consider the majority that far hopefully being completed prior to the actual spend taking place.

What I would say is right now the guidance still assumes purchase of -- repurchases of about 100 million end year. I know it will accelerate if you look at it from an EPS standpoint it should be neutral EPS for the remainder of this year regardless of how much we repurchase.

Thanks.

You're welcome.

Thank you. And next we'll go to the line of Shamina Bhaidjy with Lotus Partners. Please go ahead.

Hi. Can you talk about in your TPS segment how much of the revenue do you think is effectively either contracted or recurring and how much of the revenue is discretionary in some way or form on an annual basis?

Well lets talk about EBS first, if you have any volatility centered around that group we said about $50 million of new sales had to takes place on an annual basis to show to generate a 4 to 5% growth within that business, so that's what we're talking about on EBS. When you look at the transaction or the businesses on the IFS side, the vast majority of that revenue, well over 75 to 80% of that revenue is recurring in nature if not more.

Okay. And the other question that I had is in terms of the -- in terms of the business as you see it now, the new contracts that you're taking on, how was pricing looking for those contracts? Can you talk about typically house pricing for those contracts? Do you typically see a certain type of increase and how are the increases going for contracts that are now rolling over in this environment?

There is a couple of areas that we said in the past we've seen some price pressure. It is not huge, but it exists, and it centers primarily around contracts re that come up in our core processing business for community banks and credit unions. It's a limited market. There are a number of players that participate in that market segment. The contracts come up every three to five years. The banks are smart. When they do come up they invite all the various processors in even if they don't switch they'll play a price game, so we see some price compression that affects the segment of the business. On the card processing side which is the other major segment within the community banks we see very little price compression because our prices typically are 25 to 30% better than our nearest competitor to begin with, so we just don't see that pushing us down down at all. On the debit card side of the business we do see price compression. That's been something that we dealt with for the last four or five years that's really nothing new.

As far as on the EBS side of the business we're not really seeing a lot of price compression when it comes to selling larger software deals. That's not where the issue is. The banks may be delaying purchases, but they're not making their decisions on whether or not they can get a lower price, what they are more concerned with is the future functionality and capability of the software and what type of efficiency that software will generate internally, so overall, pricing still remains pretty solid and pretty good except in the areas that I covered.

On the LPS side we're not experiencing any price compression when we renegotiating contracts. We're in a very strong competitive position because of the market share that we have, having 35, 36 out of the top 50 institutions on the platform. We have tremendous scale, and there is no competitor that can really step in and pry a competitive price to ours at this point in time. We're not seeing any degradation there. What I would say is the only time we really make any concession from a pricing standpoint or LPS is if we can gain additional services.

The last thing is I am not super familiar with the business and haven't followed it for a long time, so this might be sort of an obvious question, but in terms of where, let's imagine the banking sector your main clients go through another year or two of really tough conditions that we're seeing right now, we're kind of maybe somewhere in a credit cycle and that sort of continues to go and get worse for awhile. How good do you feel about your ability to hold up through that meaning the softness that you're seeing, do you feel like we're kind of in the early stages of that or are we many the mid-stages of that or the late staging of that?

I think we're really in the mid-stages of that. I think the banks have been going through a lot of turmoil for a pretty significant period of time, so I don't think it is anything new to the industry. I don't think it is at the late stage yet, but I certainly don't think it is at the beginning stage, so I think we're relatively good shape. As far as our business in general, the good thing about our business is a lot of our businesses are transaction processing based, so if an institution wants to operate on a day-to-day basis or mortgage lender wants to serve its customers or issue loans or service loans, the services that we provide are not really discretionary. If they don't buy them, they can't operate, they can't open their doors, so it is only a relatively small portion of our business that centers around discretionary purchases by financial institution, and typically they center around software licenses or changes in technology or large outsourcing deals that they might do on the programming side of the business, and those are somewhat limited in size relative to the overall scope and the size of the business.

Lee, also I think you mentioned that when you were giving your prepared remarks, but on the lender side of the business we actually think advantage to us when we're in more difficult times because we see financial institutions actually move more towards outsourcing especially in areas like appraisal and ancillary lending services. That's been one of the things we've really used as an advantage to gain revenues through this time period. That's one of the reasons why we're gaining and have such strong growth rates in light of the difficult economic circumstances.

I think that's true. I think that's true also on the banking side of the business. The banks are under a tremendous amount of pressure to cut costs and improve efficiencies. If they can find an alternative to processing or providing a service in house that's cheaper and more effective, that's where they're headed. That's happening not only domestically but also internationally, so we're pretty well-positioned in this business.

The only other thing I would add is that our guidance is 5 to 8%. That's pretty strong growth in light of the economic period we're in.

We've been living with this environment for some time now, and we kind of kept our heads above water and produced and performed either at or above our peers in terms of revenue growth, so we feel pretty good about it.

Sounds good. Thank you.

Thank you.

Operator, we have time for one more question.

Our final question will come from Tom Zeifang Lucrum Capital. Please go ahead.

Good afternoon, guys. Sorry to beat a dead horse. On the card processing side, did you take into effect the April shift at all? And that maybe April is seeing a significant uptick versus March or is that not in your forecast?

No. It was first of all the delta between what we expected and what came in was not significant. It was a relatively small piece, but it indicated that there was a potential trend that we're going to watch going forward, so, no, we have not said there is going to be a marked change because the decline in that business or the softness of that particular business was not that significant. If you look overall within that whole business segment and I will size it for you, if you look at our IFS Community Bank and Credit Union business, we would have expected somewhere in the neighborhood of another 0.5% to 1% revenue growth. If you look at that overall, we're talking about $3 million or somewhere in that range. It is not that significant. It is enough for us to turn around and say let's watch it because those businesses traditionally have been high highly predictable and rock solid in terms of being able to predict usage on those transactions. We're not saying it is going to continue, but we're watching it.

When you see an Easter shift you typically forecast that so you might have missed it.

No, no, no. When we forecast those businesses, we forecast year-over-year comparisons and use a lot of different factors, and we not have missed that, no.

That's what I was getting at. Thank you very much.

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