Fidelity National Information Services Inc (FIS) 2008 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the FIS/LPS second 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, August 5, 2008. I would now like to turn the conference over to our host, Ms. Mary Waggoner, Senior Vice President, Investor Relations of FIS. Please go ahead, ma'am.

Thank you, and good afternoon. Joining me today are Executive Chairman, Bill Foley, and executives from the FIS and LPS managements teams. To facilitate our discussion of second quarter results and the outlook of the remainder of the year, today's call will be divided into three components. Consolidated FIS, FIS on a stand-alone or a post spend basis, and LPS on a stand alone or post-spend basis.

Bill Foley will begin with a overview of FIS's consolidated second quarter results on a historical basis. Lee Kennedy, President and CEO of FIS and George [Scanland], Chief Financial Officer will follow with the discussion on FIS on a segment and stand alone basis. Then we will open up the lines for approximately 15 minutes to address your questions related to FIS.

Next we will shift to Lender Processing Services. Jeff Carbiener, CEO and Francis Chan, Chief Financial Officer will then discuss LPS second quarter results and full-year outlook. We'll conclude with a Q&A session to cover LPS.

Our comments today 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 the FIS and LPS press releases and are posted on their respective websites.

Both companies have included PowerPoint presentations to supplement today's discussions. The presentations are also available on the websites. To facilitate your understanding of the FIS financial report, I will provide a quick overview of the information provided in the consolidated release. Similar to last quarter, we are providing supplemental information to provide additional clarity.

The historical or pre-spend FIS's consolidated income statement, balance sheets, and cash-flow statements are presented on exhibits A,B,and C. Exhibit D includes additional detail for revenue, depreciation and amortization and stock-composition expense. Exhibit E provides non-GAAP information along with the financial bridges to GAAP results for EBITDA, EBIT, net earnings and cash flow. Exhibit F reports results for FIS assuming LPS has been discontinued in second quarter of 2008 in the same format we used for the 8-K filed last Friday covering the prior five quarters.

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 such forward-looking including annual and quarterly guidance.

In addition, to being recorded, this call is being webcast live over the Internet. Telephone replay information is included in today's press release, and a replay will also be available on the FIS and LPS websites.

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. I'll keep my remarks brief as we have a lot of information to cover and want to leave adequate time for questions and answers. FIS delivered another solid revenue and earnings growth quarter despite continued economic volatility.

Consolidated revenue increased 19% to 1.3 billion, organic revenue, which excluding E-funds increased 6.8% driven by 8.2% growth in the lender processing services segment, and 6.6% growth in transaction processing services. Adjusted EBITDA increased 13%, and the EBITDA margin was 24.8%. Adjusted net earnings from continuing operations was $0.66 per diluted share, an increase of 15.89%.

The strong performance of both businesses demonstrates the strength of our operating models, and the advantage that come from having diverse revenue streams and a broadly distributed customer base. We are particularly pleased with revenue growth in the quarter and remain encouraged with new sales and renewals and a healthy sales pipeline.

While the margin was negatively impacted by revenue mix, declines in certain mortgage origination services and higher corporate expense, we expected profitability to improve, as we continue to build scale and focus on reducing our cost structure. Lee and Jeff will provide more specific details regarding the second quarter performance and the outlook for each of the businesses later in the call.

In the quarter, we repurchased 5.8 million shares for a total cost of 226 million. The remaining authority under the current authorization is $24 million. Before I turn the call over to Lee, I will provide a review of our strategic initiatives. FIS completed the sale of Game Cash on April 1, and on July 14, we announced the sale of the Australia check business which we expect to complete in the fourth quarter. Lee will provide an update regarding the domestic retail risk management business later in the call.

Recently we successfully launched the Lender Processing Services as a new public company and we're off to a great start. LPS recently announced the acquisition of [McCash Analytics] which compliments our existing portfolio of data and analytics services. Both FIS and LPS are performing well in this very challenging environment, and we expect that trend to continue having reaffirmed guidance for the remainder of the year.

Now I will turn the call over to Lee for review of FIS's second quarter results. Lee?

Thanks, Bill. Good afternoon, everyone. And thanks for joining us today. I'll begin today's FIS business review with a summary of second quarter results, continue with an update on key business initiatives, and finish with comments on our outlook for the remainder of 2008. George [Scanland] will follow me with the second quarter FIS financial report.

Jeff Carbiener and Francis Chan will conclude today's prepared remarks with a review of LPS operating results and the outlook for the remainder of 0008. TPS second quarter revenue increased 26.6% over prior year. Excluding E-funds organic revenue increased 6.6%. EBITDA increased 26%. And the EBITDA margin was 24.9%.

Second quarter term fees were $9 million below prior year. Excluding term fees, organic revenue grew 8%, and the EBITDA margin increased 90 basis points over prior year. Term fees for the first and second quarters were $2.2 million compared to $14.8 million for the same period last year, demonstrating excellent retention of our customer base. FIS adjusted net earnings came in at $0.36 per diluted share.

A strong organic revenue growth was driven by 34.2% increase in international, and a 4.5% increase in IFS, our community institution business. Partially offset by 7.3% decline in EBS. The strong increase in international revenue was fuelled by excellent new sales in Europe, the Middle East, and Asia-Pacific.

Our Brazilian card processing operation also generated excellent growth. This was the first full quarter of processing for ABN which converted to our base 2000 platform in March. The organic growth rate of the Brazilian card market remains very strong. Bradesco and ABN added over two million new cards during the quarter. This record increase was in part driven by significant increase in new account issuance by ABN following its successful conversion to our new Brazilian card platform. As of the end of the quarter, we are processing for 27 million cards, about 50% of which are active, which is well ahead of plan.

Enterprise banking solutions revenue declined 7.3% compared to prior year, which was in line with our expectations. The decrease was driven primarily by an $11 million year-over-year decline in software and professional services related to the completion of the first phase of the [B of A] touch point project. And lower check risk management volumes.

Net of these two items, EBS core bank processing revenue was neutral to prior year. We expect year-over-year EBS growth rates to improve as comps moderate in the second half of the year. Overall, FIS achieved solid organic growth across all major core and payment processing channels. Our community and international businesses continue to generate solid new sales with long-term contracts.

The vast majority of our core processing and payment services contracts are a multi-year, resulting in over 86% of our total revenue being repetitive and recurring. Our outlook for bank technology spending has not changed from the first quarter. Our sales pipelines are still strong, and with the exception of longer sales cycles for some of our US software products, all product lines are generating excellent solid new sales.

We are encouraged with the strength of our overseas businesses. During the quarter, we signed significant core processing deals with three leading global banks, including Government Savings Bank in Thailand, National Bank of Pakistan, which is Pakistan's largest bank, and [Augsberger Bank] which is one of Germany's oldest and largest direct banks.

Second quarter US sales were also strong. During the quarter we signed comprehensive core processing agreements with Commerce Bank, which has an asset base of $50 billion, and New York Community Bank, which had assesses of $30 billion and is the nation's forth largest thrift institution. New York Community Bank which will convert its three holding company banks to a single FIS core processing solution, is currently operating on three different competitive core processing platforms. All these of the five core processing sales covered today were significant competitive wins for our company.

The integration of E-funds remains on schedule, and we are making good progress in achieving $35 million in cost savings for 2008. We are also on track to achieve $65 million in cost synergies by the end of 2009. Our E-funds prepaid card business is performing well, and is now profitable. We have made good progress in boarding new customers, and we're in the process of converting America Express's prepaid card portfolio to our operating platform. Overall E-funds is meeting our expectations, and we are confident that the acquired new product capability and increased scale has strengthened our competitive position.

We continue to focus on improving overall operating efficiencies and reducing capital usage. The new organization structure implemented earlier this year, has enabled us to better leverage sales, support and develop resources across business unit lines and geographies. It has helped us close sales that we might not have closed in the past, Commerce Bank, and New York Community Bank are good examples of this.

It is also enabled us to reduce and better leverage capital spending. Second quarter capital expenditures totaled $52 million, compared to $75 million in the first quarter. Year to date capital expenditures are tracking in line with our full-year guidance, which was a 10% improvement over prior year.

Before I turn the call over to George, I'll provide an update on the strategic review of our retail check business. The sales of our gaming business was completed on April 1, and as Bill mentioned, we expect to complete the sale of our Australian check risk management business in the fourth quarter.

We have completed the marketing process for our remaining check risk management business. This business generated approximately $275 million in revenue, in 2007, and is expected to generate $260 million in 2008. Although it reduces our overall growth rate, it generates moderate margins, good EBITDA, and requires low capital investment.

While we were encouraged with the strong interest in this business, the offers received were substantially less than what we believed the business is worth. As a result, we have decided that a sale at this time would generate more earnings dilution than we are willing to accept. Therefore, we will continue to operate the business for the foreseeable future, and we will reevaluate our options when market conditions improve.

We are pleased with the progress that we are making in our domestic and international businesses, and especially with the success that we're having increasing the organic growth rate and cash flow of our company.

Although it is clearly a difficult market, the significant new sales wins covered today provide additional visibility into 2009, and demonstrate that our sales, product and development teams were performing well, and that that there is continuing solid demand for our products and services.

Based on what we know today, we remain confident that the revenue and pre-tax earnings guidance communicated at our May investor day. Although we are pleased with the strength of the second quarter results, the market remains challenging, and we are not prepared at this time to increase our revenue and pre-tax earnings guidance for he remainder of the year.

I will now call the -- turn the call over to George for the second quarter financial results. George?

Thank you, Lee, and good afternoon, everybody. As you know, we successfully completed the spin off of LPS on July second. We are required under accounting and disclosure rules to report LPS in our continuing operations at June 30, which the numbers reflected in the press release. Since both companies are now operating independently, we also wanted to provide additional information to set the new foundation for understanding FIS operating results on a post spin basis.

Last Friday we filed an 8-K to provide investors with a pro forma look at FIS assuming LPS was treated as a discontinued operation, for the prior five quarters. Because the rules for discontinued accounting differ somewhat from the assumptions used in the carve out of LPS in our investor day presentations, we also provided a reconciliation back to the information we shared with you that day.

The principal differences relate to the treatment of interest and corporate expenses, which are not fully allocable to discontinued operations and remain with FIS through June 30. The slides I will use today to discuss our quarterly performance will be based on the assumption that LPS is treated as a discontinued operation for the quarter ended June 30.

We recognize the complexity of our reporting this quarter, and we are hopeful that the information we are providing will improve your understanding of FIS on a post spin basis , and end able you to improve your analysis. As Mary mentioned, similar to last quarter, we are also providing slides to better enable you to follow my commentary. These slides are available on our website for easy reference.

I'll start with a couple of house-keeping items on page four. Consistent with our first quarter earnings report, Property Insight which was sold in the third quarter of 2007, and three businesses sold or discontinued during the first half of 2008, FIS credit services, Certegy Game Cash, and Home Financial Network, are now and will continue to be reported as discontinued operations by FIS.

Beginning in the third quarter, both LPS, and Certegy Australia will be reported as discontinued operations in accordance with GAAP. Financial results of Certegy Australia, the sale of which is expected to close in the fourth quarter of this year, are included in continuing operations for purposes of today's discussion, while LPS results are excluded to improvement comparability for the separate companies.

If you now turn to page five, it will discuss the second quarter financial results for post spin FIS which followed the format introduced on investor day. Second quarter revenue totaled 867.2 million, which is a 26.6% increase compared to the prior-year quarter. E-funds revenue of 137.2 million was in line with our expectations. Excluding E-funds, FIS revenue increased by 6.6% over the prior year, and improved sequentially with from the 4.5% growth rate we experienced in Q1 '08.

For comparative purposes my comments pertaining to segment growth will exclude revenue there E-funds. International revenue increased 34.2%, to 192.3 million, fueled by strong growth in our core banking operations and our card businesses. The increase in card revenue in our Brazilian joint venture was driven by the conversion of ABN AMRO in late March and augmented by strong new card issuances during the quarter.

Higher account volumes in our European core processing operation, together with increased license and services revenue in key markets, contributed to the increase in core banking revenue. IFS revenue totaled 310.6 million, an increase of 4.5%, compared to the second quarter of 2007, driven by growth across all major product lines. As Lee indicated termination fees declined by nine million, compared to the 2007 quarter, the result of decreased consolidation activity and strong customer retention.

We have been asked by some of you to discuss the magnitude of termination fees to our quarterly results, and I added footnote one to the page to illustrate the impact. During the second quarter, we only had 1.6 million in term fees, in comparison to 10.6 million last year. So if you normalize results, and exclude the impact of these term fees, IFS actually grew am exceptionally strong 7.9% this quarter.

On average for FIS termination fees account for less than 1% of consolidated revenue in any given year, and totaled 18.9 million in all of 2007. To date through June 30, we have realized only 2.2 million year to date this year. Enterprise revenue declined 7.3% to 227.4 million in the second quarter. It's important to note that aside from the 11.2 million in revenue associated with last year's Banc of America touch point implementation, EBS core bank processing and servicing revenue was actually comparable to the first quarter of 2008, and the prior-year quarter.

Year-over-year comparisons were also negatively affected as revenue from our check risk management business declined by approximately $6 million, compared to the prior year. The corporate other revenue line is new this quarter, and is comprised primarily of the managed operations or outsourced data processing services that we are providing to Fidelity National Financial. As dicussed at our investor day, this revenue stream which was included with lender processing services under the previous reporting structure is now part of FIS.

Moving on to EBITDA on page six. TPS EBITDA increased to 25.9% to 216.1 million. The margin was 24.9% compared to 25.1% in the prior-year quarter, and 23.6% in Q1 of this year. Progress we made in reducing our cost structure is somewhat overshadowed by the lower termination fees, which carry a 100% margin. Growth in lower-margin businesses, including international which is currently running in the low teens, and to a lesser degree, pricing.

Excluding the impact of term fees, margins would have been 24.8% in Q2 '08, compared to 23.9% in Q2 '07. Corporate other includes corporate overhead and our IT infrastructure which supports our operations and those of Fidelity National Financial. Corporate overhead included in this line was 33.4 million in Q2 '08, compared with 23.8 million in Q2 '07. The increase is principally associated with higher stock-option expense and incentive accruals, as well as the impact of the leasing group, who's assets were sold in the third quarter of last year.

For the balance of the year, we expect corporate overhead to average 25 million for Q3 and Q4. Total depreciation and amortization was 97.9 million versus 87 million in the second quarter of 2007, and was down slightly from the first quarter of 2008. We are expecting D&A to trend modestly higher in the third and fourth quarters above the Q1 rate as fully depreciated yet functional equipment remains in service for a longer period of time. Our strategy of more fully utilizing existing equipment is enabling us to reduce incremental capital spending.

EBIT grew 29.6% over the prior quarter and improved from the 19.8% growth in Q1 '08. Now, on to adjusted net earnings on page seven. Second quarter adjusted net earnings for stand alone FIS totaled 70.8 million or $0.36 per diluted share, compared to $0.29 in the 2007 quarter, and $0.28 in the first quarter of 2008. As indicated, adjusted net earnings, exclude after-tax integration, restructuring and spin-related costs totaling 24.1 million, which were relatively higher this quarter due to the restructuring and spinoff.

Adjusted net earnings also exclude after-tax purchase amortization of 23.1 million. Finally, we made adjustments for interest and corporate expenses, which were allocated to LPS in their carve-out financials, but under GAAP have to remain with the parent under accounting for discontinued operations. I will reconcile this for you in a few minutes when we discuss guidance for the balance of the year. The effective tax rate in Q2 and year to date was 32.5% and average outstanding shares were 194.4 million.

The tax rate reflects the benefit of lower international tax rates and certain other adjustments. Tax rate for the second half of the year for FIS is expected to approximate 35% and we are working on strategies to lower that. Moving on to the balance sheet and free cash flow, as shown on page eight, free cash flow which is defined as operating cash flow minus capital expenditures, the 102 million year to date 2008.

Capital expenditures in the second quarter totaled $52 million. A $27 million decline compared to the first quarter of 2008, attributable to a reduction in international, principally associated with the ABN implementation in Brazil, and a continued focus on reducing non-strategic capital investments. We anticipate CapEx to increase in Q3, associated with E-funds integration investment, and then decline in Q4 to below Q2 levels, and expect to meet our guidance for CapEx of between 240 million and 250 million for the year.

During the quarter, we paid 9.5 million in shareholder dividends and repurchased 5.8 million shares for a total investment of 226 million. No debt repayments were made this quarter. As indicated on page nine, FIS had approximately 4.3 billion in outstanding debt at June 30 at a weighted average, effective rate at quarter end including swaps, of 5.9%. Also included is the amortization of up-front debt costs.

In conjunction with the July second spinoff of LPS, we retired the remaining 1.585 billion in term-B debt , resulting in current outstanding balance of 2.7 billion for FIS on a stand alone basis. In connection with the retirement of this debt, we will write off approximately 8.2 million after tax in debt origination costs in the third quarter. Our weighted average interest rate after the retirement of the Series B debt will approximate 6.3%.

In the third quarter, we will make scheduled debt repayments of 13 million, and in September, we'll also draw against the revolver to repay 200 million in notes from the Certegy merger that are maturing and carrying a fixed rate of 4.75%. Turning to page ten, before we discuss guidance for the balance of the year, I wanted to make sure we were at the same starting point.

At our investor day presentation our some of the parts analysis demonstrated how the guidance for the separated LPS and FIS entities equal the consolidated earnings guidance, we had established earlier this year. You may recall for FIS we showed adjusted earnings per share of $1.23 for 2007, with an expected range of $1.48 to $1.54 for 2008. The accounting rules for discontinued operations do not permit the full allocation of interest or corporate expenses to LPS, so FIS will reflect those expenses in its continuing operations through June 30.

Since these expenses have been allocated to FIS in their pro forma statements, that Jeff and Francis will discuss later, we need to discuss our GAAP reported numbers for these amounts. As you can see we have reconciled back to the $1.23 for 2007, and have provided the adjustments for the first and second quarters of 2008. For comparative purposes the correct amounts to use for 2008 are earnings per diluted share of $0.28 and $0.36 for the first and second quarters, respectively.

As illustrated on page 11, the adjustments to corporate expense also impacted the EBITDA margin in 2007, accordingly the relevant starting point is 24.6%. Now I will discuss our outlook for the remainder of the year as presented on page 12. As stated in today's press release, due solely to than a lower than anticipated tax rate, we are revising our previously reported adjusted net earnings guidance of $1.48 to $1.54 per diluted share for full year 2008, to $1.51 to $1.57 per diluted share.

Our assumptions include full-year organic revenue growth of 4% to 6%, which implies that year to date average growth continues throughout the second half of 2008. We are projecting free cash flow of 315 million to 345 million based on the current earnings guidance, and reiterate that capital expenditures will be within the 240 million to $250 million level.

This guidance excludes after-tax adjustments of approximately $30 million in M&A restructuring and integration costs, 18 million associated with the spinoff of LPS, including retained corporate costs of 12.6 million, and the 8.2 million write down of debt issuance costs, we will record in Q3. That concludes our prepared remarks for FIS. Now we'll open the line for FIS stand alone results before continuing with the LPS

(OPERATOR INSTRUCTIONS). And our first question comes from the line of James Kissane from Banc of America Securities. Please go ahead.

Thanks, and good job, guys. George, I just want to make clear, the $1.23 is the right number to use for the base in calendar '07, right, for continuing operations of FIS?

Yes, that's correct. Jim.

Okay. Because the 8-K was confusing on Friday as it relates to that. The FX benefit in the quarter. Can you break that out?

Yes, we estimate that's about 20 million in the quarter, and we think that will level off towards the balance of the year, but we did enjoy the benefit of the currency appreciation.

Okay. And Lee, in terms of the check business, do you see it stabilizing in terms of revenue over the next year or so?

Yes, actually we do, we think we're really -- the downturn is going to slow. I think the profitability will remain fairly stable. We have a number of new models that we've introduced recently, Jim. We also have a series of larger retail merchants that have received price increases. So all in all I think it's stable enough that we can kind of hold on to it for a while, and then we'll take a good look at the market as we move forward, to see what we are going to do with that business.

Okay and just an update on the E-fund integration and the synergies being achieved?

Jim, that's right on track. We'll have $35 million by year end, and over 60 by the end of next year, so on a cost basis, it's working out quite well. We have already realized some significant sales wins as a result of the combination.

We have been able to leverage existing customers on the risk management side of eFunds and sell additional products in to that base, including bill payment, including loyalty card programs, including debit card processing. So we're doing fairly well in that respect, and overall I would say it has been a good combination and exactly what we expected.

Okay. Thanks, Lee.

You're welcome.

Our next question comes from the line of Julio Quinteros from Goldman Sachs. Please go ahead.

I like the accent there. That's great. On the -- the business just in general. Just wanted to make sure on the post-spin income statement presentation on page ten. Some of these numbers don't match up with the Friday filing, so just to make sure that the only component that is different there is this change in allocation related to this interest expense? Is that correct?

Yes, that's -- I mean that's correct. Julio. We did provide for Q1 and Q2 '08, the $0.03 related to the allocation of corporate costs.

Okay. Yes.

And then bridged from the $0.99 to the $1.23, which was the full-year effect in 2007 of those allocations.

Okay. Got it. That's helpful. Just in terms of -- just want to go back to the commentary about the pricing environment, and just relative to some of the competitors that have reported as well. Can you talk a little bit about what that environment looks like? Could it get worst from here? And then just in terms of what you expect to be the key drivers for -- of the growth in the core banking business, that would be helpful? Thank you.

Julio. The pricing to date has been isolated to two specific product lines. It has been isolated to Community Bank core processing, and the price compression on that has historically averaged in the low single-digit range and it continues to do that. And it also centered about debit card processing. That is something that is not anything new with debit card processing. For the last 10 years, we have had moderate price compression in that area, and it's isolated specifically to transaction processing charges, and processing the debit transactions.

The services that surround debit card processing have literally -- have not be affected in terms of price compression at all. So figure low single-digits in that rage for debit card process consistent with what we have seen for a long period of time. And then on the core processing side, Community Banks only, low single digits also.

Okay. And just to kind of circle back to the first quarter when -- when you had a little bit of an update in terms of what you guys were seeing intraquarter. You guys took some aggressive steps at that point in time to sort of help offset on the cost side. Can you give us an update on whether that trend has continued? And what the benefits are that we should expect to see for the rest of this year?

It's actually has, it is pretty much the way it's operating today is very similar to what we saw in the first quarter. It's isolated to larger software licenses, larger tier one institutions, we think the exposure remains at about $60 million on an annual basis. If you really back in and looked at the number and the performance of EBS this quarter it's -- that's pretty consistent with that. And that's -- that's where the down side is.

As far as the expense takeout, that's on track and on target. We have taken out about $30 million worth of expense to compensate for that downturn in revenue, and we replaced that revenue to a large extent with -- with lower margin -- some lower margin revenue internationally.

That will ramp-up as we get through -- move through the remainder of the year, and then some other card processing revenue domestically, which has pretty strong margins,. So expense cuts are still offsetting the revenue run off that we talked about or the slowdown on the larger tier bank side.

Okay. Great. Thanks, guys.

You're welcome.

Our next question comes from the line of Dan [Perlin] from Wachovia Securities. Please go ahead.

Thanks. I want to circle back to an earlier question about the E-funds cost synergies. I know you said you are on track for the full year. But what should we be expecting in the back half or -- said another way, what did you guys complete in the first half?

It's -- it's ramped up towards the second half of the year. It took some time to get the expense out, so I think you should see larger percentage of that in any second half of the year versus the six half -- or the first half of the year.

Okay. So more than 50%, you'de be comfortable with?

I would be comfortable with that yes.

And what about the over$30 million you guys called out last quarter of identified cost savings you'd expect.

That's cost savings in the current businesses within EBS and intentional cost takeout, some IFS cost takeout. And that pretty much has been taken out already. We moved quickly on that, so the expense cuts were made last quarter and into this quarter, and it ramps up, and you'll have an annualized number of about $30 million in cost savings as you move forward.

Okay. But the majority of that has already been achieved so we wouldn't expect that's a ramp in the back half?

That's correct.

Okay. And then the -- I thought I heard you say the international margins were in the low teens. Did I hear that right?

Yes, that's right, Dan, this is George.

Hi, George.

We did see as we said very significant growth in Brazil in the card processing operation, and incurred started-up costs in connection with the rollout of the ABN platform.

Right.

Which hurt margins in the quarter, but as you saw from the revenue, we feel very good going forward about that, but there's always some start-up costs that you have to work through in training people and getting the productivity up, both from the people and the systems. And it's about a 90-day process that we ear work through.

We actually hired over 1,000 new employees in Brazil over the last six months to staff the three call centers that we operate for our client base. Two of those call centers are new call centers that we established too prepare for the conversion of ABN, and also Berdesco. So the learning curve will take a number of months to shake out, but as it does shake out and the operators and staff members become more efficient you'll see increased leverage in that business.

And then I guess two questions on Berdesco, one is you , you're already processing I guess some Berdesco cards, but not the ten million that are going to be converted later

Yes, we arear actually processing more cards currently than will convert in. And the issuing rate is just very, very strong. It's well over one million cards per quarter. So we're going to started handling some of their call-center activities over the next few months and move some of the activities and services in to Newco away from the back office of the bank. So it will gradually start to convert over the next two months and then wrap up sometime next year.

Okay. And based on that significant growth you are seeing at Berdesco is that there a risk to pushing off the card conversion to 2009.

There really isn't, the growth we have currently in Brazil is so far over what we have expected that will more than compensate for any push one way or the other a month or two of that conversion. The actual issuing rates of the two largest institutions that are currently on our system are way, way higher than what we expected, so we're very pleased with the ramp-ups in volumes and the new accounts that are being added. And that will keep us in really good shape.

Excellent. One last question and then I'll jump off. Should we expect another accelerated stock comp charge in the third quarter? Or should this be the last quarter? And then this is the run rate we should be looking at really the 11 million or the 13 million?

Actually, the -- Dan, there won't be an acceleration. That was associated with E-funds options, and the actual run rate for FIS post spin going forward should be about 8.5 million.

So in the back half of the year it's like a little over 16, $17 million.

That's about right.

Okay. So that will come down quite a bit. And should we expect in the back half of the year for there be another adjustment for the corporate cost of LPS non discontinued op? You had 12 million of it in the first half. Does that go away in the back half?

That does go away, and I incorporated that in to my outlook when I said we expected corporate expenses to gravitate down to 25.

Got it. Just wanted to make sure I understood that Thank you very much.

You're welcome.

Our next question comes from the line of David Koning from Robert W. Baird. Please go ahead.

Hi, guys nice job. Just a couple of quick ones. I guess the tax rate for the year looks like it will average somewhere around the 34% range. Is that kind of the sustainable rate going forward that we should model in to '09? I just want to kind of understand any puts and takes in to '09 including that, and then it sounds like the stock comp is actually going to be a positive in '09 given that you are not going to have that accelerated stock comp?

I guess two things, Dave. One we guided to a second half rate of 35%, and I think at this point that's the rate I would use.

I mentioned we are looking at some tax planning strategies, and the overall rate and our ability to take them down will depend on the amount of among other things foreign-source income we have got. I would say at this point to use 35, and we'll update you guys in the balance of the year upon that rate, but we did enjoy a lower rate in the first half and the blended will be just north of 34% for the year as -- as we suggested.

Okay. Great. And just one -- one follow up. The free cash flow, looks like it is going to be greater than earnings. It looks like the guidance is somewhere in the $1.60 to $1.80 range per share of free cash flow. Is that type of conversion sustainable going forward? Meaning should free cash flow be slightly greater than earnings over the next several years?

Well, I think it -- one of the things that obviously we're trying to focus on is lowering the capital intensity of our business, and we're making progress on that and still have more, I think opportunity. Also looking at working capital, and I think finally strategically we have exited businesses that were big consumers of working capital that were really hidden inside our cash flow.

As we exit those businesses and get that cash back in to the system, I think we'll be perceived and in reality be a much more cash efficient company. But I think to answer your question, it should be yes. It does depend on the mix of businesses, but overall if we can bring the CapEx rate down to that 5% to 7% revenue target, which we talked about at investor day, we think we can sustain that.

Great. Thank you.

We probably have time for one more question so we allow time for LPS. And our last question from the line of Greg Smith with Merrill Lynch. Please go ahead.

Hello. First, on the check business, since it sounds like you are now keeping the US retail check business -- I mean, the revenues sound actually impressive, they're only falling by the amount you said. But how do we get comfortable that the loss rates are manageable and something won't come and bite us here in this kind of economic environment?

It's all a matter of how we manage the models, and we have a new whole series of new models, and the results we have Greg, are just very, very encouraging. We also have a series of price increases that we're implementing with key major merchants. Where we've typically in the past been in a marginal position. They are now -- with these price increasing showing pretty significant improvements in profitability.

So the combination of those two items, we're very comfortable that we're going to be able to maintain profitability in that business. The new models have a wide range of consumer attributes attached to the risk management systems that drive the point of sale terminals that we have in place, and they have proven to be very, very accurate at detecting fraud at the point of sales. So far, so good and it's a matter of making sure those models perform the right way, and so far we are very comfortable they are going to do that.

Okay. And then on the international margins, there was already some discussion on that, but I mean there's no structural reason and nothing with the pricing of the business internationally that would inhibit those margins from reaching, kind of comparable US margins; is that a fair statement?

I don't think they are going to get quite to the US card margins -- I'll take the card business first, because we have so many cards that are operated on one system in the US, so you've got a whole lot of leverage and you sell a lot of full-service products attached to that, to the core engine or the transaction processing that drive those margins up.

But certainly when you look at the margins internationally. We're looking for middle double digits, somewhere in that range. Maybe a little bit above, and we think that's very achievable.

Okay and then just a quick one to wrap up. Just on -- as far as the tax strategies, and if you are able to bring down that tax rate, that has a direct cash flow benefit, correct? I mean that is something that could result all things being equal, more cash flow on a free cash flow.

That's right. Lower tax rates are good for cash flow.

Okay. And any -- do you have any kind of longer-term target where that tax rate could go two to three years out?

I think as we -- obviously coming out of the spin -- and again, I think it depends on our international growth, because we do benefit from a lower tax rate internationally. So -- the first quarter or first half of the year, at 32.5 was -- was probably lower, but we're hopeful, as I said that the second half rate of 35, there's some opportunity to take that down, and then drive a sustainably lower rate over time. I would stay at 35 right now.

I think we have visibility in to a significant number of new accounts that will start generating international revenue and profitability as we move through 2009. And if you add up ber Berdesco and you add up [Ishbank], and you add up [Aughsberger] and Pakistan, and Thailand and the ones we recently announced, we'll well over $100 million in revenue that will start to play in feed in as we hit 2009. That obviously -- we'll benefit from that on the tax side because that's international business.

We'll keep it in our back pocket for now. Thank you.

Very good. Thank you.

Thank you. I would like now turn the call over to Parag Bhansali, Senior VIce President of Investor Relations of LPS, please go ahead.

Thank you. Good afternoon, and welcome this the LPS portion of today's conference call. Joining me today to review LPS's second quarter results are Jeff Carbiener President and CEO, and Francis Chan, Chief Financial Officer.

Today's discussion will be based on LPS carveout financials consistent with what was presented in the Form ten, and what will essentially be the basis for LPS as stand-alone company going forward. Also our discussion will contain references to non-GAAP and pro forma results in order to provide a more meaningful presentation and comparison to prior periods.

Reconciliations between GAAP and non-GAAP results are provided in today's earnings release which is available on our website. We'll be using a PowerPoint present to facilitate today's review of our second quarter results. These slides have also been posted to our website. Now I would like to take a minute to walk you through our earnings release and related exhibit.

As you notice, all of the quantitative detail is in the exhibit accompanying the release, which also includes historical information. Exhibits A B, and C are the usual consolidated income statement, balance sheet, and cash flow. Exhibit D includes supplemental financial information with current and trailing five quarters of revenue, including segment-level data, depreciation and amortization, capital expenditures, and stock compensation expense.

Exhibit E provides non-GAAP financial information along with the financial bridges, back to GAAP results for EBIT, net earnings and free cash flow. Also as you may know we filed an 8-K last Friday that provided historical LPS carveout information by quarter for nine quarters starting with first quarter 2008 going back to first quarter of 2006. This combined with the historical annual information in the Form ten will provide you with extensive detailed LPS financial history. This expanded disclosure and presentation should facilitate your analysis and make it easier to understand the LPS story.

Before I turn it over to Jeff, I would like to remind you that some of the comments made on today's call will contain forward-looking statements. The statements are subject to various risks and uncertainties described in our earnings release, Form ten, 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.

With that, I'll turn the call over to Jeff.

Thanks, Parag. And good afternoon. I'll begin with a review of second quarter results including an update on our key business initiatives, and will conclude with the outlook for the remainder of 2008. Francis Chan will follow with a detailed review of the financials.

We are off to a solid start as a stand-alone public company. As you all know, LPS was spun off from FIS on July second, 2008, and while it entailed a significant amount of effort for many employees, the transition was smooth and virtually seamless. Operationally the LPS business has already ran autonomously, and from a corporate functions standpoint we have made all of the changes and realignments necessary for us to operate as a stand-alone company. We are very excited about the prospects that lie ahead and are focused on enhancing shareholder value.

Before I review the financials, I would like to note while the broader economic environment is sluggish and the mortgage market in particular is challenging, LPS is unique well positioned to offer solutions to lending institutions to help them through this period and in fact enable them to realize much sought-after efficiencies and cost savings.

We are very pleased with our second quarter and year to date revenue growth, as consolidated revenues grew 8.3% during the quarter and 10.5% year to date, driven primarily by continued strong performance in default services. Operating income growth was 8.7% for the quarter and 12.5% year to date resulting in operating margins of 23.7% for the quarter and 23.5% year to date, which is a 40 basis point improvement over last year. The growth in operating income was the primary contributor to the increase in adjusted earnings per share $0.61 for the quarter, and $1.16 year to date.

The financial performance in the second quarter and year to date was in line with the expectations and trends discussed during investor day and subsequent road shows. Our revenue growth continues to be impacted by accelerating foreclosure activity and stable loan services accounts, which more than offset the impact of declining year-over-year origination and refinance volumes.

Additionally, revenue growth was influenced in the current quarter by the annualization of a large appraisal contract signed in the second quarter of 2007, and another large customer that shut down it's wholesale lending channel during the quarter. Although operating margins are up for the year, they were flat in the second quarter, as the positive margin impact from growth and default services was offset by margin contraction in a few of our origination-based services.

Specifically, volume declines drove margins down in our tax, flood, and the 1031 exchange businesses, and high-margin loan origination software sales were down during the quarter, as would be anticipated in the current environment. We expect origination volumes to stabilize in the later part of 2008, which should have a positive impact on all of our origination-based services. While we were pleased with top and bottom-line results, as I noted earlier we are dealing with difficult market conditions.

Our results, however, reflect the strong balanced model that we believe capitalizes on opportunities regardless of market conditions. Moving on to review of the business segments, starting with technology, data, and analytics, or TD&A. While TD&A revenues were essentially flat year over year, in MSB we continue to resign all major customer contracts as they come up for renewal.

Thus far in 2008 we have successfully renewed seven accounts, representing nearly 12 million loans including our top two customers. We also continue to win new business with the signing of American Home Funding and Penny Mac and we successfully completed the conversion of Chase's sub prime portfolio in early July. This conversion was a major milestone in the process to convert the larger Chase prime portfolio in mid-2009 and was viewed by the customer as a very high-qualify implementation.

In our other TD&A services, strong demand continues for our workflow automation system or desktop, as we signed agreements that should bill to more than 20 million in annualized revenues, once all services are implemented. Additionally as I mentioned earlier, although sales of loan origination platform slowed in the first half of the year, we had begun to see some improvement and recently assigned a top tier bank to our empower platform.

The sales pipeline in TD&A remains strong with numerous opportunities in MSP including a number of first mortgage opportunities, and a growing interest in utilizing MSP to service HELOC portfolios. Outside of MSP, we continue to see strength in the desktop sales pipeline, driven by continued opportunities in foreclosure and ROE, as well as opportunities to expand the desktop platform in to other areas in the lender serving operations.

In our data and analytics areas, we recently announced the acquisition of [McDash] and the consolidation of all data and analytical services in to one operating unit called Applied Analytics.

Lending institutions have indicated a strong desire for analytic and predictive tools to not only help with risk management, but with refining operational processes like loan underwriting. Our new capabilities and organizational alignment will better position us to leverage those opportunities.

Moving on to our other major segment, loan transaction services, or LTS, revenues for the quarter were a solid 14.4% above last year. Within this segment, loan facilitation services, which includes our origination and refinance-related services had revenues that declined in line with the general market decline.

We continue to remain optimistic about the market beginning to stabilize later this year, and in to 2009. And while this is difficult time in the market, the trends towards outsourcing, and centralization of underwriting continue and we remain well positioned to gain additional market share and drive greater product penetration and usage of services within existing customers.

Specifically during the quarter, we signed agreements to expand the services provided to Regions Financial and to provide new services to Flagstar Wholesale. Default services more than made up for decline in loan facilitation services as revenues grew 89.7% compared to last year driven by strong growth in foreclosure activity, and increasing demand for our services that support all activities over the foreclosure and REO life cycle.

Clients in this environment are constantly evaluating the scope, time line, and economics of managing services in the default area, and our comprehensive suite of default management services enables us to manage the outsourcing of these services and deliver meaningfully efficiencies to our customers.

Additionally by leveraging our market-leading positions in desktop and foreclosure services, and the tight integration of our other services, like default title and REO management into our core technology platforms, we have continued to expand our market share across all of our default product lines. Specifically during the quarter we signed a number of agreements including new of expanded default title agreements with three of the nation's top lenders. Bottom line, our ability to enable customers to complete services more easily, quickly, and less expensively, creates a win-win situation.

LPS has been and continues to outperform essentially all market metrics in the mortgage and real estate space. We remain focused on our key growth drivers and the favorable market dynamics, such as the continued flight to quality, the need for lenders to lower internal costs and the movement by lenders towards centralized lending. These dynamics combined with our market-leading products position us well for continued growth.

From a guidance stand point, we are reiterating 7% to 9% revenue growth in 2008. Additionally we expect continued increases in foreclosure activity over the foreseeable future, stabilizing origination and refinance activity in late 2008, market share gains in existing products and the continued expansion of our technology and product capabilities to support an annual growth rate of 6% to 9% from a long-term perspective.

From a segment view, while we expect revenues in TD&A to be flat in 2008, we also expect to see long-term growth rates return to historical levels beginning in 2009 and beyond. This is based on continued market share gains by existing customers, a strong pipeline of first mortgage and HELOC MSP prospects, significant opportunities in desktop, data and analytics and other TD&A services, and large conversions, such as the Chase prime portfolio and Wachovia's HELOC portfolio currently scheduled for conversion in the late 2009 or early 2010 time frame.

In LTS, we expect strong growth trends in default to continue to offset weakness in loan facilitation revenue streams and drive growth in the low to mid-teens for 2008. Additionally, the long-term origination, refinance, and default trends, and expected market share gains I mentioned earlier, should support solid long-term growth in LTS. As we noted in prior calls, challenges in the mortgage industry continue to present significant opportunities for LPS.

It is also important to note that much of the growth in the loan transaction services business, continues to be driven by the long-standing and deep mortgage processing relationships we have with most of the nation's top financial institutions. From an adjusted earnings standpoint, we are reiterating the guidance we gave at our investor day in late May. However, given the lower share count, this translates to $2.36 to $2.48 per diluted share as opposed to the earlier adjusted EPS guidance of $2.34 to $2.46 per share.

Before I turn the call over to Francis, I want to emphasis again that LPS is well positioned to not only weather these challenging times, but in fact benefit from them. Our strong market position in each of our businesses combined with our balanced portfolio should allow us to grow profitably as a stand-alone company and deliver above average returns to our shareholders. Now I'll turn it over to Francis, who will review the financials in greater detail.

Francis?

Thanks, and good afternoon. We have slides that I will refer to as I go through my comments. These slides have been posted to our website for easy reference.

As you can see on our revenue slide on page three, second quarter consolidated revenues increased 8.3% over the prior year. Technology data, and analytics, or TD&A revenues were essentially consistent year over year, while loan transaction services revenues grew 14.4%. Moving on to the business segments, starting with TD&A. Revenue of 141.7 million for the quarter were consistent compared to last year.

Mortgage processing revenues of 82 million declined slightly, primarily due to the deconversion of ABN's 1.5 million loan portfolio in the fourth quarter of 2007. Average number of loans processed were 26.9 million, compared to 28.4 million in the prior-year quarter. Other TD&A revenues of 59.7 million were up slightly compared to the same period last year, mainly due to the continued strong demand for our work flow automation tool known as desktop, somewhat offset by lower revenues in our loan origination offerings.

Moving on to our other segment, loan transaction services. Revenues for the quarter of 322.3 million were a solid 14.4% above last year. Within this segment, loan facilitation, which includes our front-end origination-related services, revenues of 125.1 million, declined 29.6% compared to last year, primarily due to lower appraisal volumes and lower revenues in tax, flood, and our 1031 property exchange services.

Offsetting a trend in origination, revenues for default services were 192 -- 197.2 million an 89.7% increase compared to last year. During this quarter -- during the quarter, we saw strong increases in foreclosures nationwide, and coupled with strong demand for our services, we continue to expand our market-leading presence. To recap, despite difficult market conditions and a tough economic environment, our results reflect the highly diversified model that we believe will enable us to grow throughout the various cycles of the industry.

Moving on to the EBIT slide on page four. Operating income for the quarter of 109.1 million increased 8.7%, compared to the second quarter 2007. Margins increased slightly year-over-year, and they improved 40 basis points sequentially. TD&A margins for the copyright declined compared to last year, primarily due to lower income from some of the higher margin loan origination software and data and analytics offerings, somewhat offset by higher income in mortgage processing and desktop.

Year to date margins, however, were 50 basis points higher compared to last year. Loan transaction services margins for the quarter grew compared to the second quarter 2007. As lower income from some of our origination-related services, such as tax, and 1031 property exchange businesses, were more than offset by higher income in default services.

Depreciation and amortization for the quarter came in at 20.9 million and was in line with our expectations. It was lower compared to the second quarter of 2007, compared -- consistent with lower capital expenditure trends and declined purchase amortization. Corporate expenses net of nonrecurring charges, which totaled 11.8 million were higher than in prior-year period, mainly due to higher incentive and stock related compensation.

Now on to pro forma adjusted net earnings slide on page five. On a pro forma basis, adjusted net income second quarter was 57.8 million or $0.61 per share, compared to 51.5 million or $0.53 per share up 15.1% on a per-share basis. These amounts exclude the after-tax of restructuring charges, and purchase amortization, but include pro forma interest expense as if our new 1.6 billion debt facilities were in place as of the beginning of 2007. We feel this presentation provides a more accurate depiction of our current and go-forward financial performances.

Moving on to the free cash flow slide on page six. Pro forma adjusted free cash flow for the six months ended June 30, was 86.7 million, compared to 78.1 million for the same period in 2007. Year to date capital expenditures totaled 25.1 million compared to 25 million in 2007. Note that the second quarter 2008 cash flow was below the first quarter due to a customer-funded payment of $82 million, associated with the tax service business. $82 million for an inflow in the first quarter and an outflow in the second quarter.

Historically, these tax payments come in April, and are paid out in the same quarter, and thus, cash flow wouldn't seem as volatile as it did this year. Now I would like to review the outlook for the remainder of 2008. As you can see on the guidance slide on page seven, based on current trends, we department third quarter adjusted earnings to be in the range of $0.60 to $0.62 per diluted share. Since this third quarter will be our first quarter as a our own public company, we are providing a more detailed guidance this period.

For 2008, we are reiterating our revenue guidance of 7% to 9%. Note that implies a slight moderation in growth rate for the second half of 2008, which is due to the annualization of certain large appraisal contracts and known volume declines with certain of our customers.

While we expect mortgage processing revenues to decline modestly in 2008, continued market share gains by existing customers, a strong pipeline of HELOC prospects, along with the conversion of Chase prime portfolio mid-2009, and Wachovia's HELOC portfolio currently targeted for late 2009 or early 2010. We expect continued growth in this business over the next few years. As an aside, we successfully converted Chaste's sup prime portfolio in early July.

In the other TD&A segment we expect revenues to be up slightly so that for TD&A in total as we noted in our investor day, we expect revenues to be consistent year-over-year. Given the challenges -- challenging and origination refi markets against a backdrop of a sluggish economy, we expect loan facilitation services revenue -- revenues to be down in 2008.

We expect a decline for the remainder of 2008 to moderate as we annualized through easier comparisons due to the steeper declines from a year ago, especially in the fourth quarter of 2007. However, as Jeff noted, market trends and dynamics, such as continued flight to quality, a trend to outsource, centralized tending, and a need for lenders to lower internal costs will continue to benefit us.

We remain confident that we are well positioned to perform better than the market metrics, and will continue to grow when the market stabilizes. On the default services side, we are well positioned to expand our growth. We expect growth for the remainder of 2008 to moderate as we bump in to last year's strong growth periods.

As we have noted in the past, based on our current projections, demand for our outsourced default services is expected to remain strong over the next few years. For the year, we continue to expect operating income growth to be in the range of 6% to 8%, which incorporates the incremental public company costs. Moving on to adjusted earnings, which incorporates the incremental company costs as well as interest expense on our new debt facilities.

Our outlook for the full year, 2008 remains unchanged, which now translates to $2.36 to $2.48 per diluted share, compared to our earlier guidance of $2.34 to $2.46 per diluted share, solely due to the lower shares outstanding of 95.1 million shares for the current quarter, and 95.7 million shares for the full year. For free cash flow we are reiterating the guidance of 193 to 228 million for 2008.

However, we expect to be in the lower end of the guidance based on larger working capital adjustments, primarily due to our continued growth in default services. The other free cash flow assumptions are; one, the current earnings guidance. The estimated capital expenditures of 65 to 75 million, which is more heavily weighted towards the second half of the year, and total depreciation and amortization of approximately 95 million.

Finally, our guidance excludes 3.3 million after-tax restructuring and spin related charges which were incurred in the first half of 2008. On a go-forward basis, we do not expect to incur these expenses. Now I will turn the call over to the operator for the Q&A portion of the call.

Thank you. (OPERATOR INSTRUCTIONS). And our first question comes from the line of Greg Smith with Merrill Lynch. Please go ahead.

Yes, hi, guys. Nice start. On -- can you just give us an update on how things -- how you think things may play out with Banc of America and Country Wide?

Yes sure, Greg. The deal's not closed. And we actually had a meeting with the senior management teem that's going to run the combined company's mortgage operations going forward. That meeting occurred last week.

And we didn't get any update on the lean-to decisions. They haven't made any final decisions at this point regarding MSP and appraisal. From our stand point it was a good meeting, both sides did recognize that we're important customers and partners.

We did discuss a number of new opportunities and we'll be attempting to finalize those opportunities over the coming months as we learn about the lean-to decisions on the other offerings. So, we still think the statements we made back during investor day -- later I guess than investor day -- that this should not have an impact on either current or go forward guidance. They're still valid.

Okay. Excellent. And then what about an update on the appraisal situation with -- [Andrew Homer's] proposal. Where exactly does that exactly stand and how do you see that playing our?

I wish we could put some of these things to bed, we get these question every time. But what I will say is that there's still a ground swell of opposition against the current proposal from you name it, Federal regulators, Congress, et cetera, and it makes us, cautiously optimistic as to the outcome. But to be honest with you, we're not going to be comfortable in until the final position is filed.

And they haven't announced any specific timetable for giving a final decision. With that deadline looming, if they don't make the call in the next couple of weeks, they're going to have to either extend the deadline or make it go away. But again, based on the amount of opposition we have seen from pretty much every angle coming at this thing, we feel pretty good about where it will shake out.

Okay. Great. And then just lastly, where are default margins today?

Default margins have continued to increase from a -- from an operating standpoint and from an EBITDA standpoint, not that big of gap in just the pure default margins you see within loan transaction services, not a whole of D&A, so they are in -- let's just say the mid-to high 20s.

Great. Thank you.

And our next question comes from the line of Julio Quinteros, Goldman Sachs. Please go ahead.

Great, Jeff, I guess since I have a chance to put you on the spot on the default side. Given the trajectory that we are seeing on default right not, what in the data would really suggest that default volumes from here would moderate?

I mean I understand the year-over-year comps are tough. You had a tough comp to begin the year with, and yet you still grew almost 90%. Can you walk us through what the assumptions are for moderation from current levels?

Yes. I'm not go -- I'm not going to give you exacts for default. But just look at in terms of the sequential growth you saw in '07. From Q1 to Q2 you saw sequential revenue growth of what, about 3 million, Francis?

Yes. And then, as we advanced into Q3 and Q4, that is when you really did start to see pretty explosive growth last year. I think we jumped up 19 million from Q2 to Q3, jumped up another 23 million from Q3 to Q4. So just based on the absolute dollars of increases LA year, that's what is causing us to temper our growth somewhat. We certainly do see continued foreclosure activity as a strength and we are continuing to pick up market share.

Just in terms of the metrics that you guys talked about in the past, is there any updated view in terms of what the mortgage default rate really should be for '08? I mean, it seems like all of the data we're seeing right now is actually higher?

Well our model do show -- again I'm not going to give you specifics, but our models do show that default trends should continue to increase through '08. Our models actually show it continues through '09 and '010 and starts to moderate in '011.

So from our standpoint and looking out, if we're to give you our projections for the next three years, I mean that's one of the reasons we feel comfortable with the 6% to 9% long-term growth rate.

Is we don't see default trends slowing right now and frankly on the origination side, we do think that just based on getting to easy year-over-year comps once we get to our comparison base over Q4 '07, in other words get up to Q4 '08, without estimating any radical increase in origination activity, that puts us in a very favorable spot moving forward.

Okay. So by the time -- I guess -- I'll just trying to sort of offset -- by the time the default part starts to decelerate, your expectation is that the origination component would actually begin to kick in again?

Flatten or modestly increase. I guess the one thing I would say, Julio, is that when you are looking at the cycles, as they pass -- The cycle that we don't like is the cycle where you are seeing significant declines in origination-based activity without any increases in default

Because just based on the sheer amount of origination and refinance activity, when those numbers start to fall, they can fall in terms of three, four, five million transactions per year.

Right.

When you are looking at default activity exploding say it '06 to '07, it's going from 600,000 transactions to 1.2 million. When you start to see that default trend turn down out of the 2011 time frame, it's going to be coming down in terms of hundreds of thousands of transactions.

So you don't need a whole lot of lift on the origination or refi side to off set that. And with the way we have been gaining market share on the origination refi side, we feel pretty good about our ability to offset that degradation when it does occur.

Understood and just in terms of the components in loan facilitation, settlement, appraisal and the other origination service as we use to have those disclosed. Can you just give us a sense for where the year-over-year drags were, and maybe just some ranges for growth rates on each one of those components?

I don't think we want to get in to the details of each of those components, but I think that as we talked about in the past, we have got a component that -- for example, our tax services, our tender and exchange, our flood, those really kind of trend with the market metrics, and especially our tax services, that we're more foe focused on the subprime.

We really saw some decreases in line with -- or in the case of tax, actually worse than in really the market metrics, because of the focus on the subprime portfolio. Going forward, as Jeff mentioned, we do some in to some easier comps just because of the huge decline in late last 2007.

I think if you are looking at the changes and the revenue growth on LTS versus prior quarters, we have always struggled with that budget that Francis is describing as all other which is taxable at [eypex] That has always moved with the market, nothing has changed there. . We continue to outperform the market on our settle services side our revenue growth or our deceleration in revenues was under 10% versus a very poor market.

The real change was on the appraisal side this quarter and I think we've given you guys good visibility into that because we knew the BofA contract was going to age out in Q2. We knew that one of our large customers had given us the heads up that they were shutting down the wholesale operation.

So that is really the group that came off and starting running with the statistics. I tell you, though, when looking forward on appraisal I think once this New York AG situation resolve itself, assuming it resolves itself the way we think it will, it will unlock the market, because you have some lock in the market right now, folks just waiting -- lenders waiting to decide on what they want to do from a long-term standpoint on appraisals until this thing sorts out. So they don't make a move and then have to pull back

Okay. Jeff, sorry just to that point then so the biggest surprise in terms of the quarter-to-quarter drag on the appraisal side was the wholesale operation that was effectively shut down in the quarter?

We mentioned that as early as investor day. So I wouldn't say it was a surprise, it's just that now we have moved to a point where appraisal right now is moving more with the market metrics.

Got it. Great. Thanks.

Our next question comes from the line of Thomas Egan from JPMorgan. Please go ahead.

Oh, thanks. Just one quick question for Francis, you went over that cash inflow and outflow in the first quarter and second quarter, pretty quickly, and I missed it. Could you just explain that to us again, and that is the reason we see the big swing in working capital between 1Q and 2Q?

Yes, that is the primary reason for the working capital change from Q1 and Q2, and it's about -- it was $82 million. And what that relates to is that one of our services in our tax business is to pay property taxes on behalf of our customers. Generally, this -- we received the payment and reprocess -- we received the cash and we process the payments in April.

In -- back in Q1 or in a -- close to March 31, we actually received the cash ahead of time this year, and therefore is an inflow at the end of the first quarter, and obviously subsequent to that we dispersed those property tax payments. So net-net, it should really be -- really, in the past historically that's all in the second quarter. And therefore, I think in this case, for the whole six months it's a better depiction because it's a little more -- it's in and out and it's $82 million.

Yes, so adjust for the $82 million and you would have seen 40 million in free cash in Q1, you'd have seen $47 million in free cash flow in Q2. The one comment I'll make here is the real proof of how we're going to operate is, how cash flow started to flow in from the point in time we became a stand-alone entity.

And what I will say is that we started off with day one of spin, we brought no cash over with us, no unrestricted cash We did bring a small amount of restricted cash, and we started out with our revolver at what Francis about 25.7 million of draw down on the revolver to fund our debt issuance costs, and over our first 30 days of operations, we have not had to draw down anything additional on that revolver not from day one forward. So we have been cash flow positive since day one. We already paid down the 25.7 million revolver and started to build up a cash balance. So we feel good about our cash flows out of the blocks.

Got it. Thank you.

(OPERATOR INSTRUCTIONS). And our next question comes from the line of Nik Fisken from Stephens Incorporated, please go ahead.

Hi. Good afternoon, everybody.

How are you doing?

I'm doing great. On that free cash flow can you kind of walk us through what you think you are going to do with it as we go forward?

Yes. One of our primary, objectives is obviously to kind of pay down debt, we'll have dividends of about $0.40 per share, ten million a quarter. And beyond that we do have some CapEx requirements, we have targeted 65 to 75 million for the year. A beyond that I think it would be -- we want to maintain the flexibility. Yes, really, we have signed up for mandatory debt paydowns of about what 140 million --

140 million

Per year. So that's the target. The 40 million in dividends that Francis mentioned obviously the CapEx that he's talking about. Those are our main uses that we guided for to this point. To be honest with you, if you look at our free cash flows as we're checking them out this year.

If you apply the growth rates that we -- the long-term growth rates that we've talked about, the 50 basis point margin expansion we think we can achieve through -- over the few years, 2009 through 2011. We'll generate a significant amount of cash flow and we haven't guided the market for the complete use of that cash flow. We're holding back until we see how the market reacts to our stock, and see what our options are. We'll make the best use of the cash as it comes available.

And on that earlier question on the Banc America, Country Wide. Was it topic of discussion more, how can we keep all and get Country Wide's MSP business or kind of walk us through some of the other products you were talking about.

You have go back and look at our overall relationships with BofA. We have shown schedules in the past that show that we have about 29 different product categories, BofA already uses us for 23, Country Wide uses us for 16, they are both top five revenue producers for us. Last year they were both top five organic growers for us.

So, our conversations with those entities are how do we expand all of our business relationships? They have clearly have seen we demonstrate value in helping them with front -end centralized settlement and closing services. We help them with -- with some ongoing front-end services like flood processing, we help them with obviously on the servicing side with BofA. We provide certain default products to both County Wide and BofA.

So, we help them across the gambet of mortgage services. So we're consistently talking to them about how we can add value across that whole gambet. So, no ,it wasn't focused in on how do we retain the MSP business. We clearly talk with them of how we think we can give them a good value to stay in our system, because we think that we're the most efficient system out there.

We clearly have the most scale with our 27 million loans versus any individual player in the marketplace but we'll work with them as they ask us to work with them and we'll be a good partner and we'll expand revenue relationship in other areas regardless.

Okay. Thanks.

Our next question comes from the line of Andrew [Polk] from OSS Capital. Please go ahead.

Hi, actually it's Tim. Could you guys clarify how you expect the New York AG fail issue to be resolved, and how you kind of expect it to impact LPS?

What I would project right now is that -- based on what I have seen come down from again the federal regulators and everybody who has the thrown up opposition to this particular proposal, my best guess at the end of the day that is that we will be allowed to operate in this marketplace and provide appraisal services as well as other settlement services.

You'll see the major banks be able to provide appraisal services on an in-house basis but we'll all have to operate to a code of conduct and certify that code of conduct. That's my best estimate. But that again, is coming from me. That's not coming from the regulars themselves, that's my best shot.

Great. Thanks.

And there are no further questions. Please continue with any closing remarks.

Thanks, everyone for joining us, and if there are other questions, feel free to give us a call.

Thank you.

Ladies and gentlemen, that does conclude our conference for today, we thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.