Fidelity National Information Services Inc (FIS) 2008 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the FIS third quarter earnings conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS) As a reminder this conference is being recorded. I would now like to turn the conference over to our host, Senior Vice President of investor relations, Mary Waggoner. Please go ahead.

Thank you, Karen, and good afternoon. Joining me today are Executive Chairman, Bill Foley, Lee Kennedy, President and CEO, and George Scanlon, CFO. Today's discussion will contain reference to non-GAAP and pro forma results in order to provide more meaningful comparisons between the periods presented. Reconciliations between non -- between GAAP and non-GAAP results and schedules showing historical detail are provided in the press release. We have also included a power point presentation to supplement today's discussion. Both documents are available on our website, fidelityinfoservices.com.

Before we continue, I would like to remind that you some of the comments made on today's call will contain forward-looking statements. These statements are subject to risks and uncertainties described in our press -- 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 annual and quarterly guidance. In addition to being recorded this call is being webcast live over the internet and a replay will be available on our website shortly after the call. A telephone replay will also be available and the dial-in information is included in today's press release.

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

Thanks, Mary, and good afternoon, everyone, and thank you for joining us today. FIS reported an outstanding quarter by any measure. Strong results across all of our segments drove organic growth of 9.4%, margin expansion of 50 basis points and adjusted earnings per share of $0.42. We were particularly pleased with the 3.7% growth rate in EBS, our large bank component, which serves all of the large financial institutions in our marketplace. The consistent improvement in organic revenue growth, margin and free cash flow in this challenging environment demonstrates resiliency of our operating model and the success we are having executing our business plan. We continue to achieve solid sales results and we also have a healthy pipeline of new customer implementations underway, which provides visibility into future revenue streams. Our balance sheet remains strong and we have locked in fixed rates on 80% of our outstanding debt. In addition, the recent sale of the Certegy Australia business, which was completed on October 13th, will result in more efficient use of our working capital.

Let me now turn the call over to Lee for a detailed business review.

Thank you, Bill. Good afternoon, everyone, and thanks for joining us today. If you will turn to slide 4 we have included an agenda outlining the topics that we will cover in today's call. In addition to providing a summary of third-quarter operating results I will discuss our view of the financial institution market and how current market conditions are impacting our business. In response to your request I have included an analysis of our customer base and revenue mix, which illustrates our low level of customer concentration and significant revenue diversity. We will conclude today's prepared remarks with a third-quarter financial report and then we will open it up for your questions.

I'll begin with a summary of third-quarter operating results. Overall it was a great quarter, driven by strong performance in each of our businesses. Total revenue increased 25.4%. Excluding eFunds organic revenue grew 9.4%. All three of our reporting segments generated strong organic growth. Our international business grew 25.5%, IFS grew 9%, and EBS, which declined year over year last quarter, grew 3.7%. Our sales teams are clearly delivering excellent results in a very difficult environment. We are also making significant progress in improving the profitability of FIS. The third quarter EBITDA margin increased to 25.6%, which is a 50 basis point improvement over prior year and sequentially a 250 basis point improvement over the second quarter. Adjusted net earnings came in at $0.42 per diluted share, which is a 35.5% increase over prior year. These results were driven by the successful execution of our business plan, which includes four primary objectives; increasing organic revenue growth, improving profitability, reducing capital expenditures, and improving free cash flow.

If you will turn to slides 5 and 6 we have summarized the solid progress that we've made throughout the year. As illustrated on slide 5, organic revenue growth improved from approximately 4% in the first quarter to 6% in the second quarter to 9% in the third quarter. The EBITDA margin increased from 22% in the first quarter to 25.6% in the third quarter and expanded 50 basis points year over year. This improvement is being driven by new sales and volume leverage, the successful integration of eFunds and the implementation of cost reduction initiatives discussed on our first quarter call. The successful execution of these initiatives have driven solid sequential growth in earnings per share. We're also making good progress in reducing capital expenditures and improving free cash flow.

As shown on slide 6, CapEx declines of $48 million in the third quarter from $78 million in the first quarter of 2008 and $52 million in the second quarter, reflecting more efficient utilization of technology, development and infrastructure resources and the wind down of major development projects, including our new Brazilian card processing platform and the rewrite of our German core banking system. Year-to-date capital expenditures total $179 million, which puts us on track to achieve our full-year target. This is a $31 million improvement over prior year. Third quarter cash flow increased to $118 million. Free cash flow totaled $209 million through the end of the third quarter, which is a 500% improvement over the same period last year. In summary, it was a good quarter by any standard and the strong results were balanced across all primary businesses. We have successfully implemented the initiatives communicated in our first quarter call and they are driving solid measurable benefits.

Next I will discuss our view of the financial institution market and how volatile market conditions are affecting our business. Our balanced mix of products, customers, markets and geographies served has enabled us to generate solid organic growth in a very difficult and highly-challenging market. If you will turn to slide 7 you will find a breakdown of revenue by market segment. You will see that our revenue base is well diversified across all markets served. This diversification advantage is further strengthened by long-term customer contracts with significant termination penalties. More than 86% of our revenue base is reoccurring, which is consistent with the majority of our peers. You will also see on slide 7 that we have no significant customer or segment concentration. Our top ten customers account for approximately 14% of consolidated revenue, or just over 1% on average. These customers are well diversified in terms of size, geographical location and the level of outsourcing provided.

There has obviously been considerable legitimate focus on the potential impact of recent bank failures, acquisitions and liquidations on our business. As illustrated on slide 8 to date we believe that less than 0.5%, or less than $20 million of our total revenue is at risk. This at-risk revenue could be partially or completely offset by higher demand for professional services to assist acquiring institutions with the conversion and integration of acquired assets. This is similar to the incremental professional service work which was generated when Cap One acquired Norfolk Bank and Toronto Dominion acquired Commerce Bank.

The weakness and turmoil in the banking industry did not just surface in the third quarter. The banking market has been volatile for well over a year and especially since the beginning of 2008. We discussed this volatility in our first quarter call after we began in thing weak software and professional service sales. We took immediate and decisive actions to reduce costs in order to neutralize the impact on earnings and refocused our sales efforts to products and markets less affected. Our management team has done an excellent job of executing this plan in spite of an extremely difficult environment. Our sales organizations continue to generate strong results across all principle businesses.

As we have stated in the past, we believe our balanced product, diversified customer base and global footprint help buffer weaknesses by may occur in certain market segments. Admittedly the market is deteriorated even further over the past 45 days and we believe that the US banking industry will continue to face significant challenges in the fourth quarter and throughout most of 2009. Financial institutions will likely continue to reduce spending on discretionary software and professional services, which do not generate strong immediate benefits. Software and professional service products that drive tangible strong cost reductions or enable an institution to more cost effectively comply with regulatory requirements will remain solid. We will continue to focus on helping our customers operate more efficiently,which is now one of their highest priorities, while remaining diligent and controlling our own costs and making sure that our sales organizations continue to aggressively cross-sell our ancillary products and services. We believe that the banking industry will emerge from the current crisis much stronger and that the overall demand for our products and services will continue to grow well into the future.

I will now turn the call over to George, who will cover the third-quarter financial results and our outlook for the remainder of the year. George?

Thank you, Lee. Good afternoon, everybody. As Bill mentioned we successfully completed the spin-off of Lender Processing Services on July 2nd. As you can see on slide 9 we have discontinued several businesses and beginning in the third quarter LPS is now reported as a discontinued operation for all periods presented. The 8-K that we furnished to the SEC on September 5th recast the previous six quarters to reflect LPS as a discontinued operation and also provides the allocation of certain interest costs and corporate expense to LPS on a pro forma basis. I would encourage you to review the document if you haven't already done so and contact investor relations if you have any questions. On October 13th we completed the sale of Certegy Australia, which will be reported as a discontinued operation beginning in the fourth quarter. I will provide additional details regarding the sale later in the call.

If you now turn to slide 10 we will discuss the third-quarter financial results. Consolidated third quarter revenue totaled $893.8 million, which is a 25.4% increase compared to the prior-year quarter. EFunds contributed revenue of almost $143 million compared to $26.6 million in the third quarter of 2007. Excluding eFunds from both periods FIS revenue increased by 9.4% over the prior year and improved sequentially from the 5.7% growth rate we experienced in Q2 '08. Our Q3 '08 results include a $5.6 million year-to-date correction for pass-through interchange revenue. Excluding this revenue third-quarter revenue increased 8.6% compared to the prior year. Termination fees were not significant in either period. For comparative purposes my remaining comments will exclude revenue from eFunds.

IFS revenue totaled $322.9 million, a 9% increase compared to the third quarter of 2007. Excluding the interchange adjustment I referenced earlier IFS revenue increased 7.2%, driven primarily by growth in core processing, eBusiness and card marketing programs and complimented the 7.9% growth we discussed in the second quarter. Enterprise revenue increased 3.7% to $240.1 million in the third quarter and improved sequentially from $227.4 million in the second quarter. This was the first quarter of the year in which we were able to show positive year-over-year growth. Higher software license fees and outsource technology revenue more than offset a $6.9 million decline in retail check risk management revenue. Excluding the impact of the check business, EBS revenue grew a strong 9.4%.

International revenue increased 25.5% to $178.3 million. Currency gains added approximately $14 million to revenue in the quarter. Strong growth in our core banking operations in Germany, new customer implementations, and continued strong card issuance in Brazil fueled the increase. At the end of the quarter we were processing 28 million cards through our Brazilian joint venture and added 1.7 million cards during the quarter. Corporate and other revenue is comprised primarily of the outsource data processing services that we are providing to Fidelity National Financial. The prior-year quarter also includes revenue from a leasing operation that was sold in the third quarter of last year.

Slide 11 gives you additional insight into our international revenues. Figure 1 shows our revenue by quarter for 2008, including eFunds. Because our revenues and costs are mostly denominated in the same local currency and our international margins have lagged, the impact of foreign exchange to overall profitability has been minimal. Favorable currency rates contributed approximately $14 million to third quarter revenue, $21 million in the second quarter, and $17 million in the first quarter. You can also see that our quarterly revenue growth in constant currency has been strong throughout the year, as we grew 13.8% in Q1, 27.7% in Q2, and 23.6% in Q3. As we look to the fourth quarter with the full year-over-year impact of the eFunds acquisition we would anticipate achieving growth in constant currency of somewhere between 10% and 12%. In response to market volatility and other factors the strengthening of the dollar has recently accelerated, especially as turmoil in the financial markets increased in October.

As you can see in figure 2 since quarter end through October 24th exchange rates for the Brazilian real have declined 17.5% while the sterling and euro have declined by about 10% each. It is impossible for us to project with any certainty the impact that currency translation will ultimately have on our Q4 results, but unless there is a meaningful reversal in the current trends, which we are not expecting, the impact will be negative to US dollar revenue growth in the fourth quarter. Figure 3 is based on our Q3 '08 revenues and provides additional insight into the currencies in which our revenue from international are generated to enable you to see the relative exposure we have to those particular currencies.

Moving on to EBITDA on page 12, EBITDA increased 27.9% to $228.9 million. The 25.6% margin exceeded third quarter 2007 margin by 50 basis points, and as Lee mentioned, improved sequentially from 22% in Q1 and just over 23% in Q2. The margin expansion was driven by higher profitability in international, cost savings associated with the eFund integration and other cost reductions we undertook, and stronger software license revenue. The corporate and other EBITDA line, which totaled $10 million in the quarter, includes corporate overhead expense, in addition to our IT infrastructure, which supports our operation and those of Fidelity National Financial. Third quarter '07 corporate and other EBITDA of $6.8 million also included the leasing group, whose assets were sold in the third quarter of last year. The traditional corporate overhead expense included in this line was $22 million in Q3 '08 and it is expected to approximate $26 million in the fourth quarter.

Total depreciation and amortization in the quarter was a $100 million versus $94 million in Q3 '07 and increased modestly compared to Q3 '08 -- Q2 '08. We expect similar D&A expense in the fourth quarter, resulting in $400 million in D&A for the year. EBIT totaled $128.9 million in the quarter, a 51.6% increase over the prior- year quarter, and improved from the 32.4% growth in Q2 '08. The EBIT margin increased to 14.4%, a 250 basis point improvement over the prior year, and improved 220 basis points sequentially from 12.2% in Q2 '08.

Please turn to slide 13 for an overview of an adjusted net earnings. Third-quarter adjusted net earnings for FIS totaled $80.2 million, or $0.42 per diluted share, compared to $0.31 in the 2007 quarter and $0.36 in the second quarter of 2008. As indicated, adjusted net earnings exclude an after-tax integration expense of $1.5 million and $9 million associated with the write-off of debt origination costs related to the term B facility we paid off in connection with the spin-off of LPS. Adjusted net earnings also exclude an after-tax purchase amortization of $24.1 million. Average outstanding shares were 191.9 million. We did not repurchase any shares this quarter and remain focused on using excess cash to pay down debt.

As shown on slide 14, free cash flow, which is defined as operating cash flow minus capital expenditures, improved significantly to $118 million in the quarter and $209 million, or 102% of adjusted earnings on a year-to-date basis. The increase was driven by higher earnings and improved working capital management in combination with lower capital expenditures. Third quarter CapEx of $48.2 million declined $4.1 million sequentially from Q2 '08 and declined $33 million compared to Q3 '07. We are expecting approximately $60 million to $65 million of CapEx in Q4 and $240 million to $245 million for the year, which is within our previously-established guidance. We also expect to achieve our guidance of between $315 million and $345 million in free cash flow for the year.

Turning to slide 15, at September 30th we had $238 million in cash and cash equivalents and $2.6 billion in debt, including $2 billion outstanding on the term A facility, and $620 million against the $900 million revolver. During the quarter we made scheduled payments on our term A facility of $13 million and utilized our revolver to retire $200 million of secured 4.75% fixed rate notes which matured. Approximately $2.1 billion, or 80% of our debt has been swapped to fixed rates. The effective interest rate including swaps and dead issuance cost was 5.5% at quarter end and we paid $9.5 million in shareholder dividends during the quarter.

Now I will discuss the outlook for the remainder of the year as presented on slide 16. As I mentioned earlier, Certegy Australia will be accounted for as a discontinued operation beginning in the fourth quarter. You may recall our decision to sell this business was predicated on our desire to focus on businesses which can be leveraged across our financial institution customer base, as well as to free up a relatively significant investment in working capital. While EBIT margins were good in this business we believe we can better deploy the capital in our core businesses. The sale of this operation will generate a small loss in the fourth quarter, but will significantly improve free cash flow in 2009, as we expect to collect approximately $110 million in outstanding receivables over the next 15 to 18 months. Certegy Australia contributed $0.05 per share through the first nine months of 2008 and was expected to generate about $0.02 in the fourth quarter or $0.07 for the full year. Based on our strong performance year to date, combined with a slightly more cautious outlook for the fourth quarter and the sale of our Certegy Australia operation we are reiterating our original guidance and expect full-year adjusted EPS from continuing operations of $1.44 to $1.50, which implies $0.43 to $0.49 in the fourth quarter after the adjustment for Certegy Australia. I want to emphasize the only change to the guidance we previously communicated is the treatment of Certegy Australia as a discontinued operation.

That concludes our prepared remarks for FIS,. We will now open the line for questions. Operator?

Our first question comes from the line of Bryan Keane with Credit Suisse.

Hi, good afternoon. George, in the second quarter release it looked like FIS expected to record Certegy Australia's discontinued OP the third quarter results, so I guess I was under the impression that Certegy Australia was already excluded from guidance for the rest of 2008. Was that not the case?

Well, we thought at the time of the second quarter there was a possibility to close the transaction by the end of the quarter, Bryan, and as it turned out the transaction didn't close until mid October. And because of the timing and the uncertainty at the end of the quarter with regard to absolutely closing the transaction we decided to appropriately push the discontinuance into the fourth quarter.

Okay. But it wasn't included -- I guess it wasn't -- didn't already exclude it from --

No, it's been consistently in continuing operations.

Okay. And then looking on slide 8, the bank failures and consolidations, the revenue at risk, can you just describe how you guys came to that number, how did you figure that number?

Well, we actually broke it down by product line then ranked the probability of retaining that line of business with the acquiring institution. And in all cases, where we posted it as a saved we had an existing relationship in place for certain product with the acquirer, therefore highly likely that we would continue to benefit from the addition of volume from the acquired institution. So that's how we broke it apart and that's how we detailed, but it was on a product line by product line basis.

Okay. And then just finally, on EBS it was nice to see that bounce back in the quarter. Is that sustainable at that kind of level going forward or should we see that level bounce around a little?

I think it's going to bounce a little bit. It think you'd be safe in looking towards more of a flat revenue base when you move into the fourth quarter and look a little bit beyond that. We benefited from one large software license that we secured in the third quarter that will not be repetitive, but it certainly, we don't believe, will be anywhere near what we saw in the second quarter, which was negative 7.7%. So look to kind of a flat quarter as we move forward.

Okay.

Bryan, the EBS contains the check business, and as we have talked about year-over-year revenue's declined and we disclosed it in this quarter, as well, running around 10%. So that overshadows the results for EBS, as well. But I think Lee's suggestion to look flattish for the fourth quarter is correct.

Okay. So overall for the fourth quarter organic growth, any thoughts on that?

Well, I'd say that we've had obviously a very strong third quarter. I think as Lee mentioned, with the market the way it's evolved into October I think it's tempering our outlook a little bit, but I think our objective certainly is obviously to meet the guidance we set of 4% to 6% organic and 16% to 18% on a total including eFunds basis. The other new element that's come into play in the fourth quarter of course is currency and that's going to pull down, obviously, the international growth rates in dollar terms. We still expect low double-digit growth in a local currency.

And I think when you look at the whole year you should look towards the higher end of our revenue guidance range, we think that's achievable.

Okay. Congratulations on the very solid results.

Thank you.

Next we go to David Koning with Robert W. Baird.

Hay guys, great quarter and a nice live presentation, too. When I look at growth going out into Q4 and really past that, is it fair to think about -- you kind of said enterprise flattish and it sounds like international 10% or so constant currency, and then IFS it seems like mid single digits might be reasonable, and you mash all those together and you get about 5%. But next year, if we think about currency, it looks like -- in my model -- it should have about a 2% headwind into 09, so we take the 5% now to maybe down to 3% organic. Is that a ballpark baseline next year, just rough estimate do you think so far?

David,we're still in the midst of our business planning for next year. Clearly the currency rate effect will create headwinds for us and your estimate probably isn't that far off. We do also still have pretty good visibility and some opportunities to grow international. We'll be adding the [Rodesco] cards to the conversion next year and we have several other contracts that we'll be implementing. So I don't want to give a specific number at this point. Our long-term guidance is 6% to 9% and as I said we're in the midst of planning for that right now. And clearly the markets are evolving day to day, so we're trying to use the best information available before we come out early next year with guidance that we can stand behind with confidence and give you guys better visibility.

Okay.

And I think you should plan on about a $100 million of revenue, which will be highly visible as we roll and move into '09 that was signed in '08.

Great, that's helpful. Then when we think about EPS this year the mid point of your new guidance will be about $1.47. In the two swing factors into next year that we know about I want to verify that they're still in place, but eFunds, if we get a full-year benefit next year given what you've done so far and then into next year, $35 or so million, that's a $0.10 benefits, and then just the use on the cash flow this year should be at least a $0.05 benefit into next year. So are those two fair swing factors? And then we obviously don't know exactly where operations will be, can we assume that they'll hopefully be positive, there'll be some growth in EBIT next year, too?

Yes, I think that -- first with regards to the eFunds cost takeout we said we 'd be at a $65 million run rate by the end of next year, so you can incrementally add that in absolute terms it'll ramp up during the year. But clearly we came into the year, had some concerns about revenue and made some decisions to take cost down and obviously as we look to next year we're focused on that, as well. But the other side of the equation, of course, is the revenue side and some element of price compression offset by opportunities that it created. I don't mean to be evasive, it's just we haven't done the detailed work at this point where we're in a position to guide much on '09.

All right, great. Thank you.

You're welcome.

Next we go to the line of Julio Quinteros with Goldman Sachs.

Hi, guys, one quick thing. Can you give back through the business on the international segment. Aside from the currency impact that we're looking at now, even on a constant currency basis it looks like that segment is actually down quarter to quarter. Can you just help us understand why that business would have actually declined quarter to quarter on a constant currency basis?

Yes, Julio, we had a big jump in Q2 when we made the conversion of the Indian amero cards in our Brazil joint venture, so I think the growth rate in Q2 was disproportionate and obviously not sustainable. I think as we look to Q2 next year we would expect to see a similar bump when we do the [Predesco] conversion.

Okay, got it. And then just to make sure I have this straight, the target that you're setting for the rest of the year just in terms of the organic number, the four to six, that's for calendar year '08 for the full year, not for the fourth quarter, is that correct?

That's correct.

That's correct.

Okay, got it. Great, thanks, guys.

Welcome.

Next line is -- or question -- I'm sorry -- is from Greg Smith with Merrill Lynch.

Yes, hi, guys. The guidance range for 4q looks pretty wide, I'm was just wondering what the biggest variables of that, just more than the check risk management side, wondering why that's so wide?

It's a little bit to do with check. Obviously it's an uncertain consumer season we're facing so there's some conservativeness and wideness drive because, but that's one factor, sure

And am I reading this right? By the guidance -- I'm looking at slide 16 -- you're saying you still may be able to do the $0.49 even without Certegy Australia in the mix, is that correct.

That's correct, Greg.. There are a lot of deals in the pipeline and you're never certain when they're going to cross the finish line so they can make a huge difference in the quarter. We had some benefit from that in Q3 and as a result we've got the upper end there, as well, so we're shooting for that.

Yes, $0.49 would be --

Internationally we actually have about five or six deals that are currently pending, so a lot of licensed deals outside of the US underway, especially with more profile products, so depends on when we're able to bring those home and when we're able to sign them and get them booked, Greg. So there's still some possibility it's going to work in our favor, we'll see what happens.

Then Lee, you talked about opportunities that have arisen in the past to help your customers integrate acquisitions, just general opportunities to increase efficiency. Obviously financial institutions are going to be very focused on running their own operations efficiently. Can you talk about how that could manifest itself into incremental growth for you guys?

Sure. There's a large number of institutions throughout the country that are -- that's running on our software, especially with tier one institutions. We might not be generating significant revenue from those institutions, but as they start to roll up acquired institutions and have to convert those institutions onto their base processing platform it generates sometimes an opportunity for our organizations similar to what happened with Cap One and Toronto Dominion. So we think we'll be -- we will benefit from some of the consolidation that's taking place in the form of incremental conversion work, which is professional service work, because we're actually supporting the system today and we have good, strong, available, knowledgeable resources that we can place with the acquirer's. So I think it -- some of it could come from that angle and from that type of product capability or opportunity, but we think there's some upside there.

Great. And then just lastly, what -- if you could remind us maybe over the next couple years what the repayment schedule is on any of your debt, I guess on your term note what your cash demand may be over the next few years to repay debt?

Yes, Greg, we'll be paying down about $26 million a quarter on the term A facility starting Q1 next year and I believe that doubles the following year to $52 million, and then the facility is through early 2012.

Great. Thanks a lot and congratulations.

Thank you.

Thank you.

Next we go to the line of Paul Bartolai with PB Investment Research.

Thanks, good afternoon. First just clarify into EBS, the flat growth you expect in fourth quarter is that on a reported basis or just excluding the check business?

That's on a reported basis.

Reported? Is that pretty similar to what you saw in the third quarter?

I think it -- no.

No.

I think what we tried --

Excluding the software license, sorry

I think if you look -- that's right. If you look at Q3 it was particularly strong at 9.4%, excluding check. We had the benefit of some license deals that came through, and a lot does depend on what happens to check in the fourth quarter. It's a seasonal business, certainly everybody's focused on the retail sector and what's going to happen there. So it's a challenging business the margins are actually holding up well, we're just seeing revenue decline.

Okay, great. And then switching to IFS, that business continues to do pretty well and with what you're seeing in the core market for banking services and the bigger decline you have seen in the last 45 days, have you seen much of an impact on that business or do you still feel pretty comfortable that can stay in the mid to maybe even mid high single digits going forward?

(inaudible) all of our key product lines are growing very strongly right now, so the growth hasn't been isolated just to the payment-oriented products. It also rolls over to our core processing capabilities and market, also. So we see it really across the board and we're pretty confident that we can maintain that growth rate, yes.

Okay, great. And then the Predesco contract portfolio that converts, what's the update on the timing of that? George, did you mention Q2, is that pushed back a little bit from, I think, 1Q initially?

Well, yes, we were trying to get through the early part of the year and basically I think right now we're targeting a first week of April implementation, which everybody's very focused on.

Okay, great. Then just last one, you mentioned the use of free cash is mostly focused on paying down debt. I was just a little bit curious why at these levels not looking to buyback stock a little bit more?

Well, you know the credit markets have really tightened up and we want to make sure that we've got as much dry powder as possible to take advantages -- of the advantage of opportunities that may present themselves to us. So we obviously think the stock is very cheap at these levels. We had unusual quarter in the third quarter because we had to retire the 200 million Certegy notes, so we stepped up the use of our revolver and we'd really like to bring that down a little bit and then that's really where the cash flow will be going certainly in the near term.

Okay, great, thank you very much.

Welcome.

Next we'll go to the line of James Kissane with Banc of America Securities.

Thanks. Yes, Jim Kissane , good

Thanks, Jim.

Lee, you touched it a little bit, but can you elaborate more on the pipeline for core processing, community banks in particular? As the pie shrinks are you seeing pricing becoming a little more intense?

Jim, I'll cover pricing first. The answer to that is over the last year or so we have seen some price compression in our core processing business, but it's lower single digit, it's not major. At this point in time it's nothing really for us to be really concerned about. As far as opportunities going forward and the pipeline in general it remains very, very strong. A lot of our growth is coming obviously from payment side of the business because the institution can convert into system a lot easier than they can with converting a core processing system. But the pipeline still remains strong on core processing. We've secured a number of really good strong deals this year and we expect to continue to secure those deals as we move forward. So all in all, Jim, that business is evidenced by the growth this quarter, it remains pretty strong for us.

Okay, great. Now everyone's talking about bank consolidation, but what are your thoughts about processor consolidation given what --?

It's a great question because I think without question the industry is over-supplied. There will be additional consolidation. I don't think there's room for five or six players in this market, similar to what we saw happen in the card business a number of years ago. And over the next few years we expect some of the mid-tier players to consolidate into other organizations in order to survive. So yes we think it's going to happen, it's a natural and I believe it's going to take place.

Okay, thanks Lee.

Thank you.

Next we go to the line of Tien-Tsin Huang with JPMorgan.

Thanks, great quarter and appreciate the disclosure. Free cash flow, should that track pretty closely with adjusted earnings for the rest of '08 and as we think about 2009 as well?

Yes, I think it should. We're going to get a little bit of a pickup as we collect those receivables from Australia, so that's why in our guidance we went from $315 million to $345 million, the upper limit being dependent on how much of those receivables we can collect this quarter. I think that's a pretty good starting point.

Okay, great. Then in the retail check business -- I know you got a lot of questions about that -- anything out there on the horizon that can perhaps reverse the trends there? Lee, I know you've talked about pricing in the past.

Pricing is helping the profitability of that business, so even though the revenue base is declining year over year we've been able to keep the profits pretty much flat and stagnant year over year. So I think you should look for that trend to continue into the future. Revenue pressure. profitability pretty much where it's been trending maybe slightly down, maybe slightly up, but on or around that range.

Okay, because there seems to me the revenue tracking about down 10%. 4Q I know is a pretty seasonal -- seasonally strong quarter. Anything different to consider there in the fourth quarter?

Yes, the thing that's really helping us with the profitability of that business is the new series of models that we introduced about six months ago. The new models incorporate into the whole decision process a number of consumer attributes that are very, very specific in identifying the risk of fraud. So that's helped us on the profitability side and even though the revenue is declining at a greater rate today than it was a year or two ago we have been able to offset that through models and also through price improvements and price increases that we passed on to the retailers. So those two factors are keeping our head above water and we believe that trend will continue throughout 2009.

Okay, that's great. George, on the FX side, really appreciate, again, the disclosure there. The benefit was $14 million to revenues, can you give us a rough idea what the earnings impact was on that? Sounds like it's minimal, but just want to make sure.

Yes, it is Tien-Tsin. As I said the margins have lagged in international. We looked at the cumulative for the year I think it was about $1.6 million, so in the quarter it wasn't that significant. Clearly as we grow international and it gets more consistently profitable we'll look at some hedging alternatives in countries where that's practical. In Brazil it's not practical --

Sure.

-- so over time we'll tried to moderate that. But I think obviously the story over the next year is going to be to get everyone focused on the local currency growth and how we're performing operationally, because the dollar conversion is going to neutralize in the progress I think we're going to otherwise show.

Okay, so cumulatives of less than $2 million, is that what you're --?

That's correct, year to date.

Year to date.

Correct.

Okay, terrific. Two quick more questions. Just what exactly is driving the interchange revenue adjustment?

That's just really an internal accounting thing. We had made an system adjustment literally third quarter of last year and performing certain reconciliations discovered that in making that adjustment it wasn't interfacing properly. There was no cash effect because it's a pass through so the revenue is completely offset with expense, but we did a catchup adjustment to correct the year-to-date amounts. And incrementally it'll add a little over $2 million a quarter. But again it washes right through, so the margin story actually is a little better --

Right.

-- than you would otherwise think because of the impact of the 56 on both revenue and expense.

Okay, got it. And you said it was going to be about $2 million going forward?

That's right.

In terms of pass through. Last one on the card issuance front, any noticeable change in card issuance growth coming out of Brazil or even in the US, I suppose, from the community banks?

Not so far as the Brazilian issuing base is fairly stable and consistent, so not any change there. On the US side with community institutions not a significant or much of a change there either. So so far on both front we're in pretty good shape.

Terrific, appreciate it.

Thank you.

Next we go to Glenn Greene with Oppenheimer.

Thank you. Good afternoon and also congratulations on the quarter.

Thanks, Glenn.

I guess just going back to the sales activity question -- and it sounds like you had -- you obviously had a great quarter and you benefited from some big software license deals, but was there any of tail-off towards the tail end of the quarter given all the anxiety in the market or even into October? Just what's the sense from your client base? What are they -- are they sort of getting uptight, nervous, or are starting to hold back spending? What's sort of the tone and mood of the customer base?

I think the mood is pretty consistent with what we communicated in the first quarter. In the US, if the software sale is discretionary in nature there's been some of a pullback and a delay in signing deals. Internationally that's not the case. It still remains fairly strong, the pipelines are full. Especially for products like our Profile Core Banking System, the demand is very, very strong and we've actually signed and sold more new accounts this year than we did at any time over the last two or three years. So exceptional demand and it still continues on, not only throughout Europe but also Asia-Pacific and we had the first level interest expressed in South America recently. So across the board and in all geographies.

And then, George, just quickly. You touched on international profitability, could you update us on what the level of profitability was within a range?

I think we're still hanging in that 12% to 14% EBITDA margin range and it varies by region and honestly gets affected by the timing of deals. So clearly, Brazil as you can see is a good part of international operations, making good progress there and expecting profitability improvement over time, particularly as we add volume to that card base.

Okay.

It was a good quarter for us internationally. It's on a relative basis a smaller revenue base, so when we have deals, as Lee mentioned, they can create some quarter-to-quarter volatility in revenue and profitability, but a good solid quarter this quarter.

And then just one final question, just on the Certegy Australia, I guess I'm just a little bit surprised that it's $0.07 dilutive. How big was that business and how profitable roughly?

Well, the revenue base was about $35 million and very good EBITDA margins -- or EBIT margins, I guess, in the close to 50% range.

Okay.

We looked at that business. Strategically it was effectively a consumer finance business and it was not aligned with the core businesses that we want to continue to invest in and so we undertook a process and found a strategic buyer that it made sense for. But the objective was, obviously, to monetize those receivables, which were tied up in that business, and that's really where the cash flow benefit will come over time. But it was a good earnings contributor. On the other hand, given the developments in the global market and the challenges we'll all be facing I think it's a business we're not sorry to have separated.

Okay. That's very helpful, thank you.

It really made sense to divest that business.

Okay, thank you.

You're welcome.

And next we go to Wayne Johnson with Raymond James.

Hi, yes, good afternoon. As a percent of sales going forward would you say that the success that you guys have had year to date in cross-selling, that that's going to continue into '09?

Well, so far every indication is that it is continuing and hopefully will into '09. We're not going to address exactly how it's going to shake out in '09 until we work through all the numbers, but we have not seen any drop-off in our success in cross-selling existing customers and adding new product capabilities to customers, so so far, Wayne, it's just been very solid for us.

Great, terrific. And then the tax rate going forward -- and I know that you don't want to address '09 -- but as international gross should we be expecting a moderating tax rate next year?

I think that's fair, Wayne. I think I said at the last quarter's call that we were recommending using 35% balance of the year. We think there may be some opportunity to bring that down perhaps by the end of the year and also as we look to next year. We'll give you guidance on the tax rate as we look forward, but clearly there is a benefit to our international growth inasmuch as it will bring down the overall corporate tax rate, which is a source of cash flow.

Which is a great source of cash flow. Okay, terrific. Then last question is, is there a particular financial institution domestically speaking size or geographic location that you feel is more at risk than others?

I don't think I'd isolate it to any one size or any one geography. I think it's really across the board and it's spread pretty evenly between community institutions and larger institutions with the revenue being skewed towards the larger institution. But pretty much it's coming in the failures that have taken place to date are really from institutions of all sizes and institutions that use different products from FIS also. So it's been pretty diverse and pretty spread out, Wayne.

All right, traffic. Thanks for the color and good quarter, appreciate it.

Thank you Wayne.

Next we go to the line of John Kraft with D.A. Davidson.

Good afternoon, gentlemen.

Hey John.

Just wanted to go back to, I think you said slide 8, where you talked about some of the at-risk businesses. Presumably those were all announced acquisitions or some sort of transaction out there. Have you done a similar exercise for customers that simply are just struggling and may not make it?

No, we really haven't done that to date. If we learn of any that are struggling or have high risk then obviously we talk about it and we factor it into our forecast from a going-forward basis, but this particular slide only references institutions that have actually failed or been acquired to date. So nothing on the predictive side at this point in time.

Okay, that's helpful. And then I hate to bring up something potentially negative because it was a good quarter, but as you talk about all these areas of strength, the core processing and certainly in payments and Bill at the beginning mentioned regulatory products and products that help customers save money, where are the areas of weakness, where are you seeing customers put off decisions?

A couple products that we have that are more discretionary in nature. Products they can push off and not implement right away and not lose that much value in doing so. I would say the TouchPoint applications throughout the US are somewhat under pressure as more and more institutions are saying I like the capability, I like the cost savings I like all the value that system creates, but I'm not going to -- I'm not willing to spend the money for it at this point in time until we get better clarity on the financial health of our organization. So I think it's software related primarily. We haven't seen any pushback on the payment side of the business, any product capability there, we haven't seen any significant pushback on core processing with community banks and the mid-tier banks we service. TouchPoint's probably the best example I can give you domestically, that's where a lot of the pushback has taken place.

Okay, that's helpful. Thanks guys, that's it.

Thanks John.

Next we will to Brett Huff with Stephens, Inc..

Good afternoon and congrats on a good quarter again.

Thanks, Brett.

Just three quick ones. Just to drill down a little bit more into profitability internationally. Can you tell us whether or not you had enough scale that came up with those new card -- that card business that you converted to actually get to profitability, can you give us that level of detail?

I think if you look at it as we report our minority interest you can see that the earnings that we recognize, which reflect the amortization of certain intangible costs that are associated with the accounting for the deal, put us in the negative earnings for the quarter. EBITDA is positive, a little negative -- slightly negative on the EBIT side, but we've got US accounting that we have to layer on top of that investment, which is what made it negative. In local currency it's profitable.

Okay, that's helpful. In terms of cost saves you did (inaudible) a great job sequentially Q2 to 3Q, how should we think about anything that's left, either from eFunds, which I know it seems like there's a significant amount left, or just a general cost savings that you have going on or any other lowering the cost structure?

Well, on the eFunds side by year end we'll have taken out $35 million in cost so that's in your savings, and looking out one year, by the end of next year we'll take out in total about $65 million, so the incremental cost savings are still pretty significant from that business. As far as additional opportunities I can tell you this, Gary Norcross is all over our cost base, and especially as it relates to saving money or creating efficiencies in the technology end of our business. Those cost saves take more time to get after and some of them require technology changes in general, but the roadmap that he's laid out with his team shows us that there's still plenty to get out of this business as we move into the future.

And Brett, the cost takeouts will be reflected both in the P&L as well as in CapEx, because we capitalize certainly internally developed software. So to the extent we take cost out there it'll obviously benefit cash flow. You won't necessarily see that in the margin as rapidly if you will if it's a G&A item or a cost like that.

Okay, then one last question. You talked about, I think, Commerce Bank and New York Community Bank as deals you signed last quarter and I wondered how -- I suspect you recognize the license then, but in deals like that that are core processing deals, how long is that implementation typically as you referenced sort of the longer-term nature of some of the installation?

It depends on the institution, but any where from an addi -- a one-year to three-year period depending on how much work we have in front of us, but generally about a year or two at the most.

So for banks that size even that's typical?

Yes.

Okay, that's all I had, thank you.

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