Fidelity National Information Services Inc (FIS) 2009 Q1 法說會逐字稿

Ladies and Gentlemen, thank you for standing by and welcome to the Fidelity National Information Service First Quarter earnings call. At this time all participants are in a listen only mode. Later we will conduct a question and answer session. Instructions will be given at that time. (Operator Instructions) As a reminder this conference is being recorded.

I would like to turn the conference over to our host to Ms. Mary Waggoner, Senior Vice President of Investor Relations. Please go ahead.

Thank you, Alex. Good morning, everyone, and thank you for joining us today. With me are Executive Chairman, Bill Foley, President and CEO, Lee Kennedy, and Chief Financial Officer, George Scanlon. The first quarter earnings release and supplemental slide presentation are available on our website, fidelityinfoservices.com. As a reminder our discussion will contain references to non-GAAP results in order to provide more meaningful comparisons between the periods presented. Reconciliations between GAAP and non-GAAP results are provided in the attachments to the press release. Today's discussion will also include forward-looking statements. These statements are subject to risk and uncertainties as described in today's press release and other filings with the SEC.

The Company expressly disclaims any duty to update or revise the forward-looking statements including guidance. In addition to being recorded, today's call is being webcast and a replay will be available on our website shortly after the call. A telephone replay will also be available. The dial-in information is included in the press release and will also be provided at the end of this call. Now, I will turn it over to our Executive Chairman, Bill Foley.

Thanks, Mary. FIS posted a solid first quarter result with 19% growth in earnings per share, a 100 basis point improvement in margin and strong free cash flow of $119 million. These results are particularly impressive in light of the persistent economic challenges. As we discussed last quarter, we continue to monitor markets and our customers closely. Our management team is executing very well in the current environment and we believe that FIS will be well positioned to grow revenue and earnings as the Company regains strength -- as the economy regains strength. Now I'd like to spend a few minutes to discuss our pending acquisition of Metavante. On April 1st we entered into a definitive agreement to acquire Metavante in an all stock transaction. The proposed combination is a result of a comprehensive analysis of the continued evolution of the financial services industry.

As Lee discussed at the investor meeting, we believe that strong product capability, scale in broad market and geographic reach will become increasingly important in the future. We have been very pleased with the favorable response from customers, shareholders, and employees. The management team, which is comprised of executives from both companies, has strong depth, broad industry experience, and a proven track record of achieving revenue and cost synergies from acquisitions. The combination is subject to customary regulatory approvals and approval by FIS and Metavante shareholders. We have completed the initial Hart-Scott-Rodino filing and expect to file the preliminary proxy statement in early May. We expect to finalize the transaction early in the third quarter. I will now call -- I will now turn the call over to Lee Kennedy, who will cover our first quarter results.

Thanks very much, Bill, and good morning, everyone, and thanks for joining us today. If you'll turn to slide four, we've included an agenda outlining the topics that we'll cover in today's call. I'll begin with a few additional comments regarding the Metavante acquisition followed by a review of our first quarter results. I will conclude with an update of our outlook for 2009. George will follow with the financial report, then we'll open it up for your questions. As Bill mentioned, Metavante is a great strategic fit for our Company, which will generate significant value for our shareholders, customers and employees. The combination will add critical scale and improved payment and core processing capabilities. In addition, it will create strong cross-sell opportunities in bill payment, network services, loyalty, software, and professional services through the addition of 800 new leverageable core processing customers. Perhaps most importantly, the transaction will become accretive within a short period of time.

We expect to generate approximately $260 million in cost savings through the elimination of duplicate corporate functions and the consolidation of technology, operating and sales organizations. Metavante and FIS have an excellent long-term track records of meeting or exceeding acquisition synergy targets and we are confident that we will achieve our $260 million goal. If you'll please turn to slide five I'll cover first quarter operating results. Our strong focus on improving operating efficiencies and disciplined cost management enabled FIS to achieve excellent double digit earnings growth and free cash flow in the first quarter, despite very difficult market conditions. Adjusted earnings per share grew an impressive 19% to $0.31 on a reported basis and increased 23% in constant currency. First quarter free cash flow was $119 million, which was a significant improvement over the $5 million posted last year.

Higher earnings, improved working capital management and a 42% reduction in CapEx contributed to the strong turnaround. As illustrated on slide six, first quarter constant currency revenue was comparable to prior year. Excluding our check retail business, constant currency revenue increased approximately 2% compared to prior year. Our International businesses generated strong double digit earning growth offsetting the modest decline in Financial Solutions, which was driven primarily by reduced software and professional service revenue. As we discussed on prior calls, the timing of software and professional service sales is difficult to predict, which can cause variability in quarterly revenue growth. In spite of lower software and professional service revenue, our pipeline remains full and we believe this segment will strengthen as we move throughout 2009. The decrease in Payment Solutions revenue was driven primarily by a $10 million decline in our check risk management business.

Card transaction volumes were consistent with the trends reported in the fourth quarter. Debit transactions increased 4.5% compared to the first quarter of 2008, while credit transactions declined 5.4% consistent with the fourth quarter. Overall, card transaction volumes increased 4%. Bill payment services continue to generate strong double digit growth. As previously discussed, over the last 18 months we've investigated several strategic alternatives for our check risk management business. Although year-over-year declines in check usage have resulted in declining revenue for this business, this business still generates reasonable margins and good profitability. While we have received several offers for this business, none has been high enough to justify a divestiture. Until current market conditions improve and an acceptable offer is received, we will continue to operate this business and concentrate on perform -- improving its financial performance.

We will breakout check on a standalone basis so that you can better understand the performance of our underlying core businesses. Turning to EBITDA. We have made significant progress in improving margins. The first quarter EBITDA margin increased to 22.7%, which is a 100 basis point improvement over prior year. This clearly demonstrates our ability to generate strong leverage with lower revenue growth. This marks the third consecutive quarter of 90 basis point plus improvement in year-over-year margins. Although we expect challenging market conditions to persist throughout 2009, we are encouraged with April's new business sales and the increased level of sales pipeline activity. Financial institutions are increasingly turning to third party service providers to help them add product capability, reduce cost, or improve customer service.

Last week, we finalized a new profile core processing and internet banking agreement with Scott Trade, a leading online brokerage firm. This is the sixth competitive profile win over the past 12 months. Earlier this month, we announced that Alior Bank, which is the largest start up bank in Poland's history, completed the installation of our profile core banking platform in more than 100 branches across Poland. Profile is quickly becoming the system of choice for large direct and regional international banks throughout the world. In summary, it was a solid quarter highlighted by strong growth in earnings, margins and free cash flow. Our management team and associates continue to do an excellent job in managing through a very difficult environment and we remain confident in our ability to achieve our original earnings growth and free cash flow objectives.

We expect revenue growth to accelerate in the second half of the year, driven by increased software and professional service sales. George will provide more detail later in the call, but we expect overall revenue growth for the year to come in at the lower end of our guidance range. As we work towards finalizing the acquisition of Metavante, we remain excited about the enhanced product capability, scale, and management depth that Metavante will add to our Company. The new FIS will be a stronger more competitive organization, better equipped to serve customers and to take advantage of the resurgence in bank technology spending as market conditions improve throughout the world. We look forward to upgrade -- updating you on our progress as we work through the regulatory, integration and shareholder approval processes. I'll now turn the call over to George, who will continue with our first quarter financial report. George?

Thank you, Lee, and good morning, everybody. I'll begin with slide eight. As we discussed, consolidated revenue in the quarter totaled $798 million compared to $830 million in the prior period. The 3.9% decrease included unfavorable currency adjustments of $35 million. Revenue was slightly ahead of Q1 '08 when you exclude the impact of currency. Consolidated EBITDA totaled $181 million, which included an unfavorable currency impact of $5 million and held up relative to prior year despite the decline in reported revenue. As a result, the EBITDA margin actually expanded by 100 basis points to 22.7% driven by ongoing stringent cost controls and improved operating efficiency. Adjusted earnings totaled $0.31 per share and were negatively affected by about $0.01 for currency effects. Now if you turn to slide nine I will provide additional detail on our first quarter operating segment results.

As we described last quarter, our new reporting structure consists of three operating segments -- Financial Solutions; Payment Solutions; and International. Historical information recasting our 2008 results by quarter in this new format was previously provided in an 8-K filed on March 19th. As shown in the center column, Financial Solutions constituted 34% of reported revenue and 46% of EBITDA in Q1 2009. Payment Solutions constituted 46% of reported revenue and 43% of EBITDA and International constituted approximately 20% of reported revenue and 11% of EBITDA in the quarter. Turning to slide ten, Financial Solutions revenue totaled $271 million in Q1 2009 compared to $280 million in the prior year. Increase demand for risk management and technology outsourcing services was offset by lower software license and professional services revenue, as Lee referenced.

Financial Solutions EBITDA declined by $3 million, but we held our margin percentage flat despite the change in product mix resulting from an $8 million reduction in high margin software license sales. As shown on slide 11, Payment Solutions revenue declined $9 million to $365 million in the quarter or 2.3% below prior year. The decrease was driven primarily by a $10 million or 15% decline in check services revenue, as well as lower professional services and equipment sales. In addition, growth in debit processing, card holder support services and output solutions was offset by declines in prepaid, merchant and item processing activity. Debit transactions increased approximately 5% compared to the prior quarter and this growth was reasonably balanced during the quarter. Credit card transactions declined by about 5% for the quarter, but we saw trends improve somewhat in March, although it is not apparent that the trend is sustainable or an indication of a reversal.

Payment Solutions EBITDA increased 11.5% to $95 million compared to $85 million in the prior period and the margin significantly improved by 320 basis points to 26.1% compared to 22.9% in Q1 2008 indicating the leverage we have in this business. Increases in margin occurred in most of our payment product lines as a result of effective execution of cost control and improved operating efficiency. Slide 12 summarizes the results of our check business and is once again provided to improve your understanding of our segment growth rates and overall Company performance. Declining trends in check usage and weak retail sales resulted in a 15% reduction in retail check services revenue. Although on a positive note we were able to keep margins flat through cost management actions. Excluding check from both periods, payment service revenue was comparable to Q1 2008 and total Company revenue on a constant currency basis grew 1.6%.

Turning to International, which is detailed on slide 13, International revenue increased 11.5% in constant currency, excluding the $35 million unfavorable currency impact described earlier. New customer implementations and continued solid growth in the Brazil joint venture contributed to the increase. Approximately 1.3 million new cards were added to the JV during the quarter. We expect to complete the Bradesco conversion, which will add more than 10 million cards to our platform in the third quarter. As of March 31st, we are processing over 31 million cards in Brazil, including 24 million cards from our JV partners. International EBITDA declined 8.6% to $23 million in the first quarter, including a $5 million unfavorable currency adjustment. The EBITDA margin declined 10 basis points to 14.4% and was comparable to Q1 '08 on a constant currency basis. High margin new customer implementation revenue in Q1 '08 also impacted year-over-year growth rate and margin comparisons.

Slide 14 provides additional insight into our foreign currency exposure. As you can see from the chart, the Euro declined approximately 13% compared to the first quarter of 2008, while the Brazilian [real] and the Sterling declined more than 25% against the U.S. dollar. The pie chart at the bottom of the page depicts our exposure to each major currency. As you can see from the chart on the right, based on current FX rates, the negative currency comparisons will continue through the third quarter of 2009 and then somewhat normalize in Q4. In addition to currency the second quarter comparisons will be difficult due to $8 million in high margin license revenue from customers in Thailand and Germany recognized in Q2 2008. As a result we expect our Q2 growth in the International segment to be low to mid single digit on a constant currency basis and then to resume double digit growth in the second half of the year.

Our overall guidance of 10% to 12% for the International segment remains intact. Please turn to slide 15 for a reconciliation of adjusted net earnings. First quarter adjusted net earnings totaled $59 million or $0.31 per diluted share compared to $0.26 in the 2008 quarter. As I mentioned earlier, currency negatively impacted earnings by $0.01 in the quarter. As indicated adjusted net earnings exclude after-tax purchase amortization of $20 million and $5 million of aftertax M&A costs principally related to the Metavante transaction. The effective tax rate was 34.5% in Q1 2009 compared to 33.1% in the 2008 quarter. The average shares outstanding were 191.6 million. As shown on slide 16, free cash flow, which is defined as operating cash flow minus capital expenditures, improved significantly to $119 million.

The increase was driven by higher earnings, continued focus on receivables collections, and a $33 million reduction in capital expenditures. Cash flow also benefited from a $27 million reduction in other receivables related to the former Certegy Australia business. We have collected $60 million since the sale of that business in October of last year and have $56 million remaining to be collected at March 31st. Uses of cash in the quarter include a $26 million in scheduled payments on the Term A facility and a $28 million reduction in the revolver balance. We also paid $10 million in shareholder dividends. As of March 31st, the balance sheet strengthened as cash and cash equivalents totaled $272 million, an increase of $51 million since year-end. Turning to slide 17, we had $2.5 billion in debt outstanding at quarter end, including just under $2 billion on the Term A facility and $471 million against the $900 million revolver.

Approximately $2.1 billion or 86% of our debt has been swapped at fixed rates with the balance floating against LIBOR. The effective interest rate, including swaps and amortization of debt issuance costs, was 5.2% at quarter end. As we indicated in the press release, the overall earnings guidance for 2009 for FIS on a standalone basis remains unchanged at $1.60 to $1.66 per share. In addition, we continue to anticipate margin expansion of 50 to 100 basis points. We are on track to achieve our cash flow guidance of $410 million to $430 million. The revenue environment will remain challenging and uneven, especially in the near-term, and our progress toward our revenue growth objectives will be biased toward the second half of the year, but we believe that the continued execution on our cost containment initiatives will help drive solid growth in margins and profitability. We will update fiscal 2009 guidance to include the acquisition of Metavante following the completion of the transaction. That concludes our prepared remarks for FIS. Alex, we'll now open the line for questions.

(Operator Instructions) And our first question comes from the line of Glenn Greene with Oppenheimer. Please go ahead.

Thank you, good morning, Lee and George.

Good morning, Glenn.

I guess the first question, Lee, if you could just give a little bit more color on the environment and what you're seeing and sort of a little bit of more color on why the software and professional services were so weak and what you are seeing in terms of the pipeline opportunities going forward?

Yes, sure. Well, Glenn, I think to answer that question, let's go back and take a look at what we actually saw last year. Last year, in spite of a very difficult economy, software sales actually increased 5% year-over-year and professional service revenue increased in the 6% to 7% range. And a lot of those sales took place towards the latter part of the year with which I think everyone will pretty much agree that the environment really weakened a little bit as we moved throughout the year. When you look at the shortfall that we had in the first quarter, it was on or around the $25 million range and let me break it down for you so you see clearly where it came from. About $5 million to $7 million of that shortfall came from our check business, with more erosion and lesser usage, lower usage than what we actually anticipated when we put the plan together.

$15 million came from lower professional services and about $10 million came from software being lower than what we expected or what we had actually planned for. So if you add those two up, about $25 million were driven by fewer discretionary dollars being spent on software projects, not only domestically but also throughout the world. It's a very volatile segment of our business. It doesn't come on evenly and I'll say this, that as we look at the quarter itself, it strengthened somewhat as we moved towards the very end of the quarter and strengthened a little bit as we moved into April. So still the same type of volatility that we've seen in the past, all related to the spending that is more discretionary than not or discretionary in nature. So the environment really hasn't improved.

I think I can also add this comment that our ability to sell software into the market is really governed to a large extent by the banks and how they feel in any given point in time. And I think what we've seen in the first quarter is it's remained very volatile. Its spending has been driven by the news of the day or the event of the day. We're still not at the point in time that I would consider the market stable and secure and predictable. I think that will continue on through the year. I think there will be pressure on discretionary spending, but I think we'll look towards some improvement as we move into the second half. Our pipelines are very very strong. We had a number of deals that unfortunately we had planned on securing in the first quarter that did not come in that are large in nature and it's our hope that we'll be able to sign those and secure those by the end of the year. So I think the same news as we've seen for the last few quarters, it remains and it's fairly weak around discretionary items.

All right and different direction just sort of an update on what you've seen from the big bank consolidation. I know you guys have done a risk weighted analysis the last couple of quarters suggesting it's sort of half of 1% and I've been actually a little bit surprised at how rapidly some of the big banks are making decisions to either consolidate, convert platforms, what not. Wondering if you could give us an update on what you're seeing there in terms of it may impact your business.

Be glad to. As you know we track that very carefully and very closely and if you look at the incremental failures that have taken place here which, this year, which are about 25 in number, our exposure is somewhere in the neighborhood of about $1.5 million in revenues. So so far, either through failure or combination, we've kind of escaped any fall out or major fall out and we're still in the $20 million range, $21 million range in terms of total exposure and that's if everything goes wrong and we believe that won't be the case and we'll actually have some pick up with that, so we think we're pretty neutral.

Okay, great. Thank you very much.

You're welcome.

Next question comes from the line of Brett Huff with Stephens, Inc. Please go ahead.

Good morning and congrats on a nice quarter.

Thank you, Brett.

Can you talk just a little bit about the layout of the things that you're expecting to come on, specifically as it relates just a little more detail on the card stuff, if you could update us a little bit more on that. And then, Lee, you had mentioned that some deals had been pushed from 1Q out. Can you give us also whatever expectations you have that are built into guidance on that? Thanks.

Yeah, we have roughly three or four major deals that we're currently working on. A couple of them are very similar to the Scott Trade deal that we secured in the fourth quarter -- first quarter. We have one international large software license that's also pending and it remains to be seen when they will be finalized, but we're projecting somewhere in the second half of the year. So we haven't really seen a slowdown again in the pipeline. The activity levels are still very high. It's anyones guess right now on when the timing is going to be precisely, but we do expect that these deals will come on board in the latter part and they will help the growth in the latter part of the year.

Brett on the international side, the Bradesco Card conversion, which as we said will happen in the third quarter, will add incremental revenue this year along with some additional services. So we've got reasonable visibility. I think where the challenge is is trying to predict the timing of closing some of these software deals. It's just in this environment very challenging with any precision to predict those and we saw some of those slip in Q1 and our sales guys are saying it is just -- there's more deliberation on the customer side in coming around to making the decision. So that will continue to add some quarter to quarter variability. But as we look at the pipelines we saw some strengthening and firming up in April, but having said that, it's still trying to get across the finish line that remains a challenge.

Okay, thank you.

You're welcome.

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

If you could break out at all kind of the old segmentation, kind of what IFS did and what enterprise did or maybe just directionally kind of how the big banks trended relative to the smaller banks?

Yeah, Dave, as you know, we've changed our reporting and no longer track our business along those older segments because, honestly, we don't manage it that way. Yeah, I think if you want to look at big banks versus small banks, they were pretty consistent with the core processing services that we provide. The volatility really came with the larger institutions in terms of software purchases and that's where the variability has been, but there hasn't really been a big change or a significant change in the trend rates or the parity between the two types of customer bases. They're still very solid.

Okay, great, And I guess secondly, you talked about in the second quarter International having a little bit of a tough comp and the expectation of low to mid single digit kind of organic constant currency growth. To me it looks like that would still mean up about $10 million to $15 million sequentially and I'm wondering, given Bradesco doesn't come out until Q3, kind of what gives you the confidence of the sequential growth in International?

Well, I think it's continued expansion in our Brazilian business, principally, and European businesses remain very solid. It's just we had a couple of deals last year that are going to make the trends difficult. So what I want to make sure you guys don't do is misinterpret a reported growth rate as being a larger issue than it is because it's not. As we look to the second half of the year, our pipelines in Europe, our activity down in Brazil, we feel very good about that. It's just you're going to see some unevenness in Q2 and I'm trying to give you a heads up not to be surprised by that. But it's more a reflection of the tougher comp year-over-year. When you have $8 million new software deals that go straight to the bottom-line, it makes it challenging to overcome and so that's how I think we are going to end up.

Okay, great and then just finally, in Payments it was about flat year-over-year, ex check and you did a nice job kind of outlining the puts and takes. I'm wondering when do you expect that to return to growth mode kind of as you anniversary some of this stuff or as trends maybe you've seen some things get a little better. Just wondering what quarter we might start seeing growth again?

Well part of that depends on whether the environment further deteriorates. As I said on the credit card side we actually saw improvement in March, but it kind of regressed a little in April so I'm reluctant to say that the worst is behind us. Clearly, we started to see the slowdown in Q4, so I think by then, we'll certainly have more favorability in our comps. Some of the businesses that detracted from growth in the Payment side, for example, our item processing business was down 15% year-over-year and that's a business that will be a low growth business for us, but it tends to overshadow some of the progress we made in debit, for example, where we had a pretty good quarter. So we're working through the pipeline, seeing if we can get some item processing deals closed. It on average is a lower margin business, so it depresses the overall Payments margins but it's still a very good business.

It's just we found that the -- there's been some softening in that one in particular. Credit card actually, on an aggregate basis, was up in revenue year-over-year despite the 5% reduction in transaction. So there are a lot of good things happening. It's just the consumer environment remains difficult. Unemployment is going to increase. And so we're not anticipating any significant change over the next couple of quarters, but by Q4 I think the comps do get a little better on the Payment side.

Yes. I think just safe to say the big driver of that decline or weakness was really item processing or check processing, which is consumer oriented and consumer related. So that's the one that really pulled us down.

Great. Thanks. Nice job.

Thanks.

And our next question comes from the line of Bryan Keane with Credit Suisse. Please go ahead.

Hi, good morning. Now that we have the three segments and we know that the International revenues are expected to be $10 million to $12 million in constant currency for 2009, I was hoping to get some color on the constant currency guidance for the Financial and Payment segments this year.

You mean within the International segment?

No, no, I'm sorry. Just the separate segments.

Yeah, I think what we've said at the onset of the year was for those two segments was low single digit and I think based on the guidance Lee gave, it's going to be a flattish year in those segments. Part of it is overcoming, obviously, the Q1 results. So as we look at the balance of the year, we're expecting strengthening Q on Q through the end of the year, but I think overall you are going to see flattish to modest growth in each of those segments.

So the Payments -- I would have thought the Payment segment would grow faster than the Financial, but that's not going to be the case?

Well I'd say, Bryan, it's all relative. What I'm saying is if you're talking about a couple percent on one and 1% on the other, that's twice as fast. So we just came into this year in the aggregated businesses that are in our Payments business that we didn't anticipate significant growth. Now if we decompose that a bit and we look at the check business specifically, because I think you have to carve that out and my discussion about low single digit and flattish included check, we saw 15% decline in Q1, we saw 17% decline in Q4, I think in the 10% plus range is probably directionally for the balance of the year what I would expect. It's a market decline and it's sensitive to the retail spending environment, so if we take that out and I think we reported modest growth in Payments this quarter, I would still say low -- low single digit growth based on the environment we're in.

Okay and then on the Financial Solutions segment where the software and professional services revenues, I think that's mostly some of the shortfall that you guys described, I guess what percentage of revenue is software and then separately professional services and then do you guys have some expectations for growth this year? I know they both grew actually pretty impressively last year so what are you expecting for those segments on growth this year?

Well, I'd say that if you look in totality, Bryan, across the Company, Finance -- software represents roughly 4% of revenue, let's call it $120 million, $130 million and professional services is about 8%. And those are the discretionary items that -- that are -- are in our product portfolio and they tend to be more weighted toward the Financial segment and the International segment. So I mentioned that we were down $8 million in the Financial Solutions segment this quarter, which is significant on a percentage basis. We don't breakout software by individual segment, but that $8 million also drops to the bottom-line which is why I wanted to make the point that the EBITDA margins held up pretty well considering we effectively lost $8 million of EBITDA as well. So the cost efficiency on the Financial Solutions side isn't as apparent in the numbers as it was on the Payment side because we were able to overcome that shortfall in software.

I think that's the most volatile and difficult part of our business to predict. We've got, as Lee said, large deals in the pipeline. The challenge is twofold, keeping them large and getting them done. And what we find is customers are looking at phasing projects, so they aren't willing to commit to projects maybe in the tens of millions, but they are looking at an initial breakdown of maybe between $5 million and $10 million is what they're committing to. So it's just a difficult software environment and if we could get to what we did last year, that would be, I think, a good year.

Yeah, the deals that we currently have in the pipeline range anywhere from a minimum of $5 million up to as high as $50 million, so one large deal shores up the gap completely. So it will remain volatile, Bryan, until we -- until we move throughout the year.

Okay and then to hit the low end of the revenue guidance that you guys are suggesting, does software and professional services need to be flat, slightly up or how do we think about that?

Well, I would say to get to that low end, they could be down a little year on year, but not down at the percentage that we saw in Q1. I mean, it's just -- it's just a meaningful part of our business and a meaningful earnings contributor and our expectation is that it does improve throughout the year, not necessarily because of the market environment getting better because we're not assuming that it will. It's more based on where the deals are in our pipeline and our expectations based on feedback from the customers of when we think we can close them. But again, I'll reiterate caution on that side because it's hard to get customers to pull the trigger and we saw some evidence of that in Q1.

Okay and then just finally for me. The EBITDA expansion, I guess I was under the impression that the growth would come from International segment this quarter, it came from the Payment segment, so could you give us a little bit of color on where does that reverse or should we see kind of a similar EBITDA expansion in the segments that we saw going forward?

What I would say, Bryan, is the International EBITDA margins will expand sequentially and I don't think you'll see the dramatic improvement in Payment that we saw this quarter, but our expectation is for all the segments that we'll see margin expansion because the cost actions that we took last quarter, we continue to focus on cost this year. We know that's the one part of our business we have full control over, along with capital spending, and so we're doing what we can to control our destiny and as a result, the 50 to 100 basis point margin expansion is something we remain very committed to, despite the revenue environment that we're in. So I think we'll see it -- we'll see it coming through.

On a relative basis, International should contribute the most because we should get from the 14.5% range up to the higher teen range as we get into the third and fourth quarter. And we've got some, I think, more favorable comparisons in Q3 in some of our businesses as well. So Q2 will be challenging on the revenue side, but I think will be better on the margin side in International and then I think you'll see margin progression Q3 and Q4 driven principally from Brazil.

Yes. But the point is that margin expansion will take place in both businesses, both domestic and international.

Okay, all right thanks a lot.

You're welcome.

And our next question comes from the line of Tien-Tsin Huang with JPMorgan. Please go ahead.

Thank you. Just to follow-up I guess on International. I think last quarter you mentioned that the backlog was about 80 million or so in local currency. Where does that stand today?

Well, it's still in that range, Tien-Tsin, with Bradesco being a meaningful part of that HPOS and we've got some Barclays as well. So no real change to that outlook right now.

Okay and you still feel good about that closing, I guess, this year, converting this year and in particular I guess Bradesco.

Both are on target, on schedule and we still anticipate the conversion to remain on schedule.

Okay, good. You mentioned item processing, gave detail there, that was good to hear the detail. I guess prepaid and merchant, I think I wrote that down as also being a little bit weaker. Can you describe that some more for us?

It's really all consumer driven. That's what it is. It's very consistent with what MasterCard and Visa reported on the merchant side and it's very consistent with other providers on the prepaid card side. It's all discretionary in nature and consumers have pulled back in the first quarter in making purchases, so we'll see how that tracks going forward. Hopefully it improves throughout the remainder of the year, but the first quarter was particularly weak following a pretty bad Christmas season and I think consumer sentiment in the first quarter wasn't strong. We think it's improved somewhat so we'rehopeful that it will turnaround as we move forward.

Okay. So purely cyclical, wasn't related to client conversions or anything?

No,no, no, not at all.

Last one, just on pricing I guess, are we still in this 1% to 2% pricing pressure?

We're still in that range. It's concentrated with core. A debit card, as we said in the past, has always had pretty significant or material price compression, that continues on. Nothing is really changed outside of those two trends that we cited, so 1% to 2% overall is still reasonable.

Very good. Thank you.

You're welcome.

Next question comes from the line of James Kissane with Banc of America/Merrill Lynch. Please go ahead.

Thanks and not to beat a dead horse, but if you look at the Payments business, what portion would you consider kind of long-term growth businesses and what portion is more stable low growth, maybe no growth like item processing?

Jim, I think when you look at Payments, I think that's pretty much an item processing for the time being will be low growth/no growth unless we're able to convince larger institutions to outsource their check processing. And as volumes go down, there's more and more of an inclination of the larger bank to look at third party alternatives. So I guess for the foreseeable future, weak but certainly with a lot of potential as banks start to shed costs that are not costs that they consider to be strategically placed. So when you look at the card processing business, the pre-paid business, the debit card business, the loyalty business, and the bill payment business, all of them still have good strong runways and all of them have traditionally over the last several years exhibited pretty strong growth.

I think the downturn in growth is going to be short in duration, it's going to be consumer related and directly linked to the economic conditions that we're facing. Once we're through that, I see no reason why debit card and the other products that I just cited won't continue to grow. Kind of look at the upside, even in spite of the downturn, some of our Payment products are growing very, very well. Our bill payment product, the revenue stream grew 15% this quarter and that's likely not to stop and we hope to accelerate that going forward. So I think it's -- I think it's isolated to check. For the time being those are the, check item processing and check processing risk management are the two, Jim.

And, Lee, just following up on that, given the strong growth in bill payment, is that share gain, just organic growth just in customers and what the (multiple speakers).

Jim, Jim, it's really, it's a combination of both because our community banks are underpenetrated and they are still adding clients and that's upping the core base revenue, but it's also being driven by some pretty significant share gain. We're -- we're doing very well in the community bank space. We're up close to 1000 institutions on our bill payment systems currently and if you look back over the last three to four years since we really entered that business and completed the development of our bill payment capabilities, we have been double digit growth ever since we launched it. So we think that will continue. So it's both.

Great. And just, George, your outlook for CapEx this -- I mean given the Metavante deal are you scaling back on your original CapEx plans?

Well, Jim, what I'd say is we had guided 5% to 7% as our target in the 210 range. Our objective, setting aside the Metavante acquisition, would be to beat that number. As you saw in the first quarter, we -- we -- there's some timing involved, but we had -- we had a strong first quarter in CapEx. As we get into the integration planning with Metavante, I think we're going to see opportunities on both sides to spend capital a little differently and we obviously haven't provided specific guidance in that area, but I would anticipate that if you took what we do and what they do that on a going forward basis we'll be able to reduce that number.

Okay, that makes sense. Thanks a lot.

You're welcome.

And our next question comes from the line of John Kraft with D.A. Davidson. Please go ahead.

Good morning, gentlemen. Just one question left and that is just a clarification really. On the progression or the trend throughout the quarter in the Payments businesses, you did mention the debit but on credit and bill payment and some of the other areas, can you clarify kind of the progression you saw throughout the quarter and the reason I'm asking is Metavante was pretty clear. They saw an acceleration throughout the quarter with their payments businesses.

Yes, I think as I recall from the Metavante call, they said that January was a disaster, but they saw strength return in February and March. Just to clarify, on the debit side we saw pretty consistent 5%ish growth year-over-year, month to month, so there was no real variability. On the credit card side, we saw weakness in the first couple of months. I'd say on a relative basis a very, very strong March. I just -- the early April trends aren't indicating to be like March, which was close to flat year-over-year, and so as I said, until we get a few more months under our belt, it's premature to say that there's any reversal in trend coming. I think it's going to remain difficult and the timing for March could be related to Easter year-over-year. I really don't know.

And how about Bill pay?

Bill pay has been pretty consistent for the whole quarter. It wasn't any one point in time that it improved. It was pretty level.

Okay, that's helpful. Thanks guys.

You're welcome.

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

Great. Hi, guys, good morning. Real quickly, on the -- if we look at the back half of the year and you can -- if you could just help us lay it out in terms of cost levers what you guys are expecting to still sort of see as benefits to protect the margins, assuming that the environment really doesn't improve from here. I heard you touch on a couple things and mind if you wouldn't just mind flushing those out a little bit.

Well I'd say that, Julio, we're -- we've got the benefit coming into this year from the cost take outs last year, some residual E-fund benefit, which as we provided in our guidance earlier in the year. We're continuing to focus on our cost structure. We've had selective headcount reductions in 2009 based on trying to match our infrastructure with the revenue environment and we're continuing to prune where we have to. It's a tough process to go through, but in the absence of, I think, a positive revenue environment we know those are the things we have to do to deliver our earnings commitments. So I would say nothing specific in the back half of the year. Clearly, assuming the Metavante transaction closes the July, early August timeframe, we are going together do things that in combining the organizations that will modify our respective cost structures, but obviously, that hasn't closed and so the things we're doing today are in contemplation of being a standalone Company.

A number of the improvements, Julio, center around upgrades and changes in the way we deploy technology. There's a lot of cost take out that remains to be had by in getting -- by getting more efficient in the way we utilize mainframes and the way we utilize shared mid range systems throughout the country. Specifically, on our check business we're going to work towards getting that cost down by consolidating some of the processing into some of our regional hubs. And there's other projects that center around that too, so technology deployment is one. Development resources we're still continuing to consolidate our technology organizations and work more efficiently in how we develop products. There's sales force reorganizations that are currently underway that are going to give us some lift. So it's really a wide range of cost take out measures or efficiency improvement measures that we have ongoing that will start to take hold in the second half of the year.

Okay, great. And then I think I heard you -- I think I heard you say that you were expecting some improvement in the back half of the year, but it sounded like most of that was tied to the Bradesco revenue that suppose to come in in the third quarter. Is that correct or was there -- or was there something else that you were expecting to contribute to revenue?

Well I think it's just not as simple as Bradesco. There's organic growth in the Brazilian market that we're anticipating. So as it relates to Brazil specifically, as I said, we added a million cards this quarter. So despite the global economic conditions, the card business is growing down there very solidly and Brazil, the Bradesco opportunity creates that inflection point to take it to the 40 million card level. Beyond that, I think as we look at International, we've got some deals that we expect to close in the second quarter that will roll into the second half of the year and then we've got some annualization as well. So we're looking to second half improvement. Last year we achieved that. We're not counting on the economy to get markedly better, but we've got to get -- we have got to close some deals, too.

Okay, so those second half improvement comments are specifically relegated to the International segment, not to the domestic businesses?

Well, I think we'll see improvement in the domestic businesses as well. There's some seasonality, the first quarter tends to be our slowest quarter traditionally, so you have to factor that in, and first quarter was a tough environment. I'm not sure it's going to get worse, as I said in April, I think Lee mentioned this as well, we saw some strengthening in the pipeline and we have to convert that pipeline. So that gives us some confidence in the future, but we've got to get deals closed here as well. The overall guidance I think we gave coming into the year was 3% to 5%. We're maintaining the lower end of that guidance at 3% and that's really our view right now and that's what we're shooting for. There could be some potential upside if some big deals close, but again, I think to hold to the 5% right now in the environment we're in would be probably unduly optimistic, so I think the 3% is a reasonable target for us.

And then just--

With the original -- the original EPS, Julio, and everything else that we communicated we're very comfortable with. Yes, noI got that. So it's not an issue of achieving that. It's an issue of when we ramp up revenue and at what level it's going to come in at. So for the time being, kind of think towards the lower end of our guidance range. If we get one or two software deals done that we don't have in the plan or we're not anticipating bringing in shortly, that will change that completely and put us at the mid to potential even upper end.

Got it. And then just as a point of clarification, the two pieces you gave that were discretionary, I think you said that professional services was about 8% of total revenue. Is that an annual number or was that for the quarter?

That's an annual number, Julio.

And then software, can you give me the number again there for the annual contribution from software?

Yes, it's 4%, around $120 million to $130 million.

Got it. Okay. All right guys, great. Thanks. Good luck.

Thank you.

And our next question comes from the line of Wayne Johnson with Raymond James & Associates. Please go ahead.

Hi, yes, good morning. Most of my questions have been answered, but just a quick housekeeping item on the SG&A and R&D, which seem to be tracking a little bit ahead of my model, how should we be thinking about that -- those two metrics going forward for the remainder of the year?

That's a great question, Wayne.

And this is on a standalone basis, obviously, not including Metavante.

I know. And there's some things that come in through SG&A which create quarter to quarter volatility, mainly on the corporate side, so we may have to handle that off -- we don't tend to look at our operating model along the GAAP reported basis. We look at it on an EBITDA basis and hold the operations accountable for delivering on the margins and look at the D&A separately. So the breakdown, R & D is up a little because our CapEx is down in IDSW, but our -- I don't know if Mary has got some insight, but -- .

But why don't you take it off line and analyze it.

Okay, I'll follow-up off line, okay. And so and one, sorry, one more. So cash flow really good and I heard this mentioned before that you guys were tracking, looking for 5% to 7% of kind of a revenue for this year or for CapEx and maybe you can beat that, but at the current run rate, you'd be well ahead of that, so can you remind me the 410 to 430 free cash flow guidance that you guys originally provided, does that include or exclude any payments from the Certegy Australia sale?

That includes the payments from Certegy Australia and I just want to make sure you don't simply annualize out Q1's cash flow. There are tax payments which can significantly affect the reported cash flow quarter to quarter. We, I think, did a very good job of collecting receivables this quarter, which I don't think is sustainable. So I think as you look to Q2, Q3, our reported cash flow will not be at this level, but will remain strong and we will get to that guidance that we gave coming into the year.

And so how much in the first quarter did you guys collect from the Certegy Australia, if anything?

Yeah, we collected $27 million. We collected $33 million last year. So if you looked at our reported CapEx last year, net of that $33 million, we would have been at $325 million.

Perfect.

Okay? And we baked into the forecast this year, I think, around $50 million, $55 million, maybe $60 million, so there's a little bit more to go. We've got about $50 million that will run into 2010, so I don't want you to bake into your models the full collection of that. We'll probably have $15 million of that run into next year.

Okay, great. All right, thank you.

You're welcome.

And our next question comes from the line of Dan Perlin with RBC Capital Markets. Please go ahead.

Thanks, guys. I'm wondering what if any deals are being pushed off until you close this Metavante transaction? You sound like you've got a nice pipeline, but if I was a bank, I'd wait.

I don't think they're directly related to Metavante. We've had some questions on whether we are going to maintain and keep certain product capabilities and we've gotten through those, but they are just mainly concentrated to revolve around the current environment. Banks are just becoming very cautious and very deliberate in making decisions for large purchases. They are tending to segment some of those purchases and cut them into smaller purchases and do them in sequences or in bundles, so that's what's really driving it. It's nothing, I would say, that centers around Metavante in general.

So no initial client discussions that are saying we want to take a smaller chunk today but a bigger chunk once you guys can put this two behemoth together?

I would say this. I would say that the overall response from our customer base on both sides have been very, very strong. In fact, proactively a number of the banks reached out as soon as we announced and one of this is scheduled time to come in and talk about some product capabilities that we've talked about in the past that they think with the combined Company will be better suited for them and stronger in nature. So I'd say they're very enthusiastic about it. There's going to be, I think, a lot of opportunities that come about because of the combination, so overall, just a really good approval and good response.

Lee, can you remind me, you mentioned community banks you got about 1000 institutions using bill pay. What percentage of just your overall client base is using bill pay today? I imagine that will be one of the strong products that Metavante is bringing with them.

We have way -- way less than 10% of our current client base is actually on our bill pay product, so there's a lot of untapped potential as we start to combine organizations and try to market to those untapped institutions.

And just so I'm clear, the 3% to 5% year-over-year growth that you gave initially, that was constant currency growth?

That's correct, Dan.

Constant currency, Dan, that's right..

So the 3% is on a constant currency basis.

Yes, okay, just wanted to make sure of that. And then can you just remind me the percentage breakdown between Brazil and Europe, your international business?

Well, I think if you look at the pie chart on 14 it will give you a sense of how that revenue breaks down. Brazil is about a third.

It is, okay, 33%. With it jumping maybe incrementally when you bring on this 10 million cards?

That's correct, Dan. Brazil -- Brazil is the fastest growing part of our International segment.

And I would imagine the incremental margin benefit when you layer on those 10 million cards to your cost structure is going to be meaningful?

Yes. That's why we have some confidence in that second half margin expansion in International.

And the 60 basis point year-over-year decline in International margins this quarter on an operating basis is that just FX related or is there something else?

It's principally product mix related. We had more software deals in International last year as well and with almost 100% margin on a software deal, it takes a lot of processing revenue to offset that and that's really the difference this year.

Yeah, the core businesses maintain strength, so there wasn't any movement, significant movement one way or the other. It was just software.

Got it. And the cost take outs that you guys are now really benefiting from, I just want to make sure I'm clear on this, the majority of those are going to be fixed cost take outs not variable cost take outs, is that correct?

That's correct.

That's right. That's right. That's where you get the big lift.

The gift that keeps on giving.

You bet.

Thank you very much.

Thanks, Dan.

And, presenters, we have no other questions at this time. Please continue.

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