Fidelity National Information Services Inc (FIS) 2009 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the FIS third quarter earnings call. (Operator Instructions). I would now like to turn the conference over to Ms. Mary Waggoner, Senior Vice President of Investor Relations. Please go ahead.

Thank you, Paul, and thanks to everyone for joining us today. Bill Foley, Executive Chairman will open today's call. Lee Kennedy ,Vice Chairman, and George Scanlon, Executive Vice President of Finance will follow with the third quarter business review and detailed financial report for FIS on a stand-alone basis. Mike Hayford, Chief Financial Officer will continue with an overview of Metavante third quarter results, and the fourth quarter outlook for the combined Company. And Frank Martire, President and Chief Executive Officer will close with a few brief remarks. Before we get started, I would like remind everyone of the upcoming Investor Day, which is scheduled on Monday afternoon, December 7th in New York. We will distribute additional details including registration information in the next couple of weeks.

Today's discussion will include a slide presentation, to facilitate the discussion of third quarter results. Unless otherwise noted, our comments will pertain to FIS on a stand-alone basis. The presentation and today's press release are available on our website. As a reminder, today's commentary will contain reference 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 risks and uncertainties as described in the press release and other filings with the SEC. The Company expressly disclaims any duty to update or revise any 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. Now I will turn the call over to our Chairman, Bill Foley.

Thanks, Mary. Although revenue growth remains challenging in the current environment, FIS again delivered strong margin expansion, double digit EPS growth, and excellent free cash flow. Our management team continues to do a great job executing to plan. We are confident in our ability to drive solid organic top line growth, and strong operating leverage as the economy recovers. After more than a year of due diligence and preparations, we are very pleased to have completed our combination with Metavante on October 1st. We believe the added scale, product capability, and industry expertise will enable us to compete more effectively, and ultimately build greater value for our shareholders. I would like to take this opportunity to welcome Frank Martire, Mike Hayford, and all of the former Metavante associates to FIS. And finally on behalf of the FIS board of directors, management team and employees, I would like to thank Lee Kennedy for the dedication and leadership he has provided since joining the Company three and a half years ago. Under Lee's direction, FIS has generated excellent financial results and significantly enhanced its competitive position as a leading global technology provider. Lee will continue to serve on our board as Vice Chairman and will act as a board liaison doing the Metavante integration. I will now turn the call over to Lee Kennedy.

Thank you, Bill. Good afternoon, everyone and thanks for joining us today. If you will please turn to the slide 5, I will start with the third quarter business review. We are pleased with our strong third quarter results, particularly in light of the challenging market conditions that existed throughout the quarter. FIS once again achieved excellent double digit growth and earnings in free cash flow. In addition, the overall margin grew an impressive 250 basis points over prior year. Adjusted earnings per share increased 12%, to $0.46 on a reported basis, and nearly 15% in constant currency. It was a very clean quarter. We received no material benefit from software sales for termination fees. The strong growth in earnings per share was driven by substantial margin expansion in all of our operating segments. Free cash flow totaled $133 million which was a 12% increase over prior year.

As illustrated on slide 6, third quarter constant currency revenue declined 1.9% compared to prior year. Top line growth remained challenging due to weak market conditions, and difficult year-over-year comparisons. Profitability however remained strong, driven by discipline and cost management and the successful implementation of productivity initiatives which generated significant operating efficiencies in systems development, sales, technology, and back office operations. I am pleased to report that during the quarter, we finalized a five year debit and credit card processing contract extension with card services for credit unions, and it is 3500 member credit unions. 2009 marks the 20 year anniversary of this very important critical partnership. Also during the quarter, we converted New York Community Bank to our MISER core processing platform, successfully completing one of the largest core processing conversions in recent history. Community bank with $33 billion in assets is a 24th largest holding company bank in the country.

I'm also pleased to report the successful installation of Profile for Allied bank during the third quarter. The migration was completed on schedule and on budget in less than nine months. Profile, our next generation core processing platform is gaining considerable traction worldwide. Last weekend, one of Thailand's largest banks with more than 18 million accounts successfully converted to Profile. Five of the six largest banks in Thailand are now currently being processed on FIS core processing platforms. Two of the top six are running on Profile. Our international business returned to double digit growth in the third quarter, and a 12.7% increase in constant currency. The margin expanded 710 basis points to 21.1%, driven by strong growth and improved profitability across all major regions.

Now I will turn the Brazil. As discussed last quarter, we processed more than 30 million cards for 14 banks in Brazil, and also provide a wide range of call center and back office support services. Bradesco, which added 800,000 new cards in the third quarter now processes more than 11 million cards on our platform. When we last updated you on the status of Bradesco remaining 12 million cards, we expected to complete the conversion by the end of the third quarter. Bradesco has since requested more time to conduct additional testing of various interfaces to insure a seemless transition. While the timing represents a challenge, this type of request is not unusual given the size and scope of this project. Both FIS and Bradesco are eager to convert the remaining portfolio as soon as possible, and we will update you on the timing as appropriate.

Next, as many of you are aware from the recent IPO of it's Brazilian operations, Banco Santander has publicly stated it's long-term goal to consolidate all of it world-wide operations to a single IT platform by the year 2010. Consistent with Santander's acquisition of Banco Real, and the parent company's goal to consolidate it's IT processing, Santander's have notified us of it's intent to migrate the card transaction processing to it's proprietary platform. As part of this proposal, FIS would continue providing call center and card holder support services, at least through the end of 2010, and potentially beyond. Approximately $29 million of revenue from Santander year-to-date, or less than 1% of our pro forma consolidated revenue, is tied to transaction processing services. The remainder is generated by call center and support service offerings. Potential impacts on earnings will not be material if they elect to convert.

I would like to emphasize that we have not reached an agreement regarding the timing of Santander's potential deconversion, or the bank's financial obligation resulting from a change to the existing contract terms. However, as is in the case for all of our large customers, our agreement with Santander contains very strong contractual provisions, including very substantial early termination penalties to protect the investment and profitability for our Company. We will keep you updated on our progress in Brazil, and provide additional information when it becomes available. Importantly, we continue to maintain a very strong relationship with Santander. And the bank has indicated a strong willingness to continue that relationship and work towards building it into the future. We remain very optimistic about the future growth potential of the Brazilian marketplace. And we believe that our scale, experience, and local market expertise positions us very well to take advantage of the opportunities that this market will generate. Now I will turn the call over to George who will provide additional details on the third quarter results.

Thank you, Lee and good afternoon, everybody. I will begin with slide 8. Consolidated revenue in the quarter totaled $851 million, compared to $884 million in the prior period. The 3.8% decrease in reported revenue included an unfavorable currency impact of $17 million. Excluding the currency impact, revenue decreased 1.9% compared to Q3 2008. We have previously indicated in our second quarter call, that third quarter comparisons would be challenging, because we had particularly strong software sales in Q3 '08, as well as certain nonrecurring revenue in our payment segment. Consolidated EBITDA totaled $235 million, and increased 5.6% relative to prior year, despite the decline in reported revenue and a $4 million unfavorable currency impact. Our EBITDA margins expanded 250 basis points to 27.7%, compared to 25.2% in Q3, 2008, and 25.3% in Q2 '09, as we experienced strong year-over-year and sequential margin improvement in each of our operating segments.

Proactive cost reductions in part associated with the anticipated closure of the Metavante acquisition, mitigated the earnings impact of softer revenue. Adjusted earnings totaled $0.46 per share, reflecting 12.2% growth, and were negatively impacted by a $0.01 for currency effects. All in all we continue to demonstrate the resiliency of our operating model in a challenging revenue environment, with very strong bottom line performance. Now if you turn to slide 9, I will provide additional detail on the third quarter segment results. Financial Solutions revenue declined $22 million or 7.3% to $278 million in Q3 of 2009, compared to $300 million in Q3 of 2008. The decline was due to an $8 million reduction in professional services, and a $15 million reduction in software license sales, which as we discussed last quarter were exceptionally strong last year.

Despite the short fall in revenue and a significant change in product mix, Financial Solutions EBITDA decreased by only $2 million, as cost reductions mitigated the decline in high margin software revenue. The EBITDA margin increased 260 basis points to 45.5% compared to 42.9% in the prior year quarter, driven by increased productivity, synergy benefits and improved resource utilization. As shown on slide 10, payment solutions revenue declined $19 million to 370 million in the quarter, or 5% below prior year. Check services revenue accounted for 90 basis points of the payment segment decline. As we guided last quarter, the year-over-year comparison was also impacted by interchange adjustments and nonrepetitive card marketing revenue, totaling $10 million in Q3 '08. Debit transactions actually increased 8.1%, compared to the same quarter in the prior year, after growing 7.3% in the second quarter and were flat on a sequential basis.

Credit card trends also improved as transactions declined 1/2 of 1% compared to Q3 '08, in contrast with the 5% year-over-year decline in Q1 and the 3% decline in Q2. While we have seen improving trends in year-over-year comparisons, we expect our payments businesses will continue to be negatively impacted by weak consumer sales, and lower item processing volumes. Payment solutions EBITDA increased 2.8% to $108 million versus $105 million in the prior period, and the margin improved the 220 basis points to 29.3% compared to 27.1% in Q3 '08. Margins expanded as a result of various cost initiatives. The results from our international operations were particularly strong as indicated on slide 11. Revenue increased 4.1% on a reported basis, and returned to double digit growth of 12.7% in constant currency, driven by 14.3% growth in core processing revenue and 11.8% growth in payments revenue.

Strong services revenue and volumes in EMEA and the Asia Pacific region, coupled with organic account and transaction growth across all regions contributed to the strong performance. EBITDA increased 57.1% compared to prior years, and increased 70.6% in constant currency. The EBITDA margin expanded by 710 basis points to 21.1%, as we experienced improvement across the board, in core processing, payments and BPO operations, as well as higher software sales. Slide 12 provides additional insight into our foreign currency exposure. Compared to the same period, the Euro declined approximately 5%, while the Brazilian real and sterling declined approximately 10% and 13% respectively. Our exposure to each major currency is illustrated in the pie chart at the bottom of the page. The chart on the right depicts the impact of foreign translation for the past several quarters. As a result of continued recent weakness in the US dollar, and improving comparisons to rates in the prior year, we expect the recent negative trend to reverse and for currency comparisons to contribute favorably to Q4 reported revenue.

Please turn to slide 13 for a reconciliation of adjusted net earnings. Third quarter adjusted net earnings totaled $90 million or $0.46 per diluted share, compared to $0.41 in the 2008 quarter. As indicated, adjusted net earnings exclude after tax purchase amortization of $19 million, and M&A related costs of $4 million. The effective tax rate was 34.4% in the third quarter, compared to 34.9% in the prior year. Average shares outstanding spiked up a bit this quarter at 194.6 million, compared to 191.8 million in Q3 '08, and 192.7 million in Q2 '09. The higher share count is a function of the higher stock price used, and the calculation of average diluted shares in the current quarter.

As shown on slide 14, free cash flow was $133 million compared to $118 million in Q3 '08. The increase was driven by higher earnings and improved working capital management, offset by higher tax payments. Receivables collections included $18 million related to the former Certegy Australia business. We have collected $101 million since the sale of the business in October of last year, which leaves $28 million remained to be collected at September 30th. We expect to collect the remaining balance through early 2011. Capital expenditures totaled $49 million in the quarter, which was comparable to Q3 '08. Our continued focus on cash management led to a stronger balance sheet, as we further delevered in advance of the Metavante acquisition.

Turning to slide 15, we had $2.1 billion in debt outstanding at quarter-end, including $1.9 billion on the term A facility, and $201 million drawn against the $900 million revolver. We have paid down $371 million in debt since the beginning of of the year. At quarter end, 99% of our debt was swapped at fixed rates with approximately $32 million floating against LIBOR. The effective interest rate, including swaps and amortization of debt issuance costs was 5.9% at quarter-end. On October 1st, we assumed a portion of the Metavante deb, expanded the existing FIS credit facility, and entered into a new asset-backed receivables facility in conjunction with the acquisition, bringing total debt outstanding to $3.4 billion. As of today, the current fixed to floating ratio is 77%. As discussed last quarter, Q4 results will be favorably impacted by the termination and replacement of higher cost fixed rate swaps. Our targeted fixed to floating ratio over time will approximate 70% to 80%. And additional details on our capital structure will be provided at the December 7th analyst meeting. Now I will turn the call over to Mike, for a discussion of Metavante's Q3 results, combined company synergies, and the Q4 outlook. Mike?

Thanks, George. If you turn to slide 16, I will start with a short overview of the third quarter financial highlights for Metavante. Metavante revenues were $425 million for the quarter, increased slightly basically flat to the third quarter of 2008. In spite of a $10 million decline in terminations fees, financial solutions revenue increased 2%, as higher process professional services revenue more than offset lower termination fees. And payments solutions revenue declined 1.5% due to lower software license revenue and reduced buyout fees on a year-over-year basis. Despite the tough revenue comparison and changing product mix, adjusted EBITDA increased 17.6% and adjusted EBITDA margin expanded 480 basis points to 32.7%. Cash earnings increased 28.6% to $0.45 per share, compared to $0.35 per share in Q3 2008. Free cash flow through the first nine months totaled $118 million. This is slightly lower than a comparable 2008 period, due to the timing, precisely with movement of funds in payments business, and the increase of capital expenditures based on timing events, that more than offset the increased earnings. The EBITDA and free cash flow are all adjusted to exclude the transaction cost related to the FIS merger. Now let me shift my focus to the new FIS, to the combined Fidelity Metavante organization, beginning with a integration update. The integration team have been in place several months now,and are tracking towards our planned synergy target of $260 million. We have achieved approximately $32 million in combined cost savings year-to-date, including $21 million in the third quarter. And we expect to attain approximate savings of $60 million to $65 million for the full-year 2009. We will be providing more detail regarding our expectations for 2010 at the December 7th analyst meeting. Next I would like to provide a few thoughts on our outlook for the fourth quarter. As has been the case throughout 2009, revenue growth remains challenging as banks continue to preserve capital, in order to cope with bad credit losses. We experienced lower payment transaction volumes, and reduced spending in software and professional services. And there is no indications, that the environment will show marked improvement in the fourth quarter of 2009, or do we expect it to improve in early 2010. We also have seen, while FDIC actions to date, have had limited impact on our financials, we do expect more of an impact going forward as recent accelerations in bank failures..

Based on our current projections, we expect combined fourth quarter for the new FIS to be flat compared to prior year, due to the overall weak macro environment and difficult year-over-year comparisons, with some strong license and equipment revenue that was recorded in the fourth quarter of 2008. In addition, the prior year fourth quarter, included approximately $11 million in termination fees, that we do not expect to recur in fourth quarter of '09. Now I would like to cover a few housekeeping items before I turn the call over to Frank. First, we plan to issue pro forma financial statements for the combined Company to assist you in building your fourth quarter and 2010 models. The periods covered will include the full-year and fourth quarter of 2008, and the first three quarters of 2009. We are working to complete the pro forma financials prior to Thanksgiving. Second, our fourth quarter results also be impacted by several merger related items, including purchase and accounting adjustments, and integration costs. We will break these items out separately to provide you with a better understanding of our underlying operating results. And finally, we will provide more specific details regarding our outlook for 2010, including a time line for achieving the remaining cost synergies at our December Analysts day. Now I will turn the call over to Frank Martire, for a few closing comments.

Thank you, Mike. I would also like to thank everyone for joining us on today's call. I'm excited to speak to you from Jacksonville, and even more excited about the future of this great Company. I will keep my comments very brief today, to allow plenty of time for your questions. I am very pleased how the two organizations have come together as one, as evidenced by the leadership team already fully in place, with a clear focus on our clients. At the same time as we discussed, we are confident we will achieve our synergy targets, while we remain focused on growing the revenue of the Company. Thank you again for your time this afternoon. I look forward in seeing you at the Investor Day in December. Operator, we are ready to open the line for questions.

(Operator Instructions). Our first question is from David Koning with Robert W. Baird. Please go ahead.

Yes, hey guys. Nice job on the margin expansion

Thank you, David.

I guess, first of all, the international margins you talked about , and it looked like EBIT almost doubled sequentially. And I am just wondering if that trajectory is expected to continue now to get strong expansion, to continue as you layer on more portfolios, et cetera. It just seems like we reached an inflection point the last couple of quarters. And maybe you can talk a little bit more about

David, this is George. We obviously had an excellent quarter in margin in international. And sequentially, we have improved each quarter this year. If you look at our business, Brazil has been lagging in margin contribution, and is starting to more meaningfully contribute. But honestly, across the board, virtually all of our operations outside of the US had improvements year-over-year. We targeted a 20% margin by the end of the year. We obviously got there earlier. We would expect to maintain this level for the fourth quarter.

As we look over the longer term, on annualized basis I would say a 20% plus margin is attainable. I would say at the same time, that the margin will vary quarter to quarter, based on product mix. This quarter, as I mentioned in my remarks, we had improved software sales year-over-year in the international segment. That was about $4 million, but on a relative basis that can help the reported margin. So, we are very encouraged by what we see internationally, and expect good news to continue.

I will add one thing, the software sale that is we had internationally jumped and improved over prior year also. So that also contributed to the lift that we saw in this quarter.

Okay, thanks. And then, I guess one follow up. Just with the margins strong at both companies this quarter. And it sounds like a nice savings, $60 million or so this year from synergies. Is that pulled out of next year? Initially, when you announced the deal, you talked about $195 million of synergies next next year, does that mean some of those got pulled into 2009. and might not be incremental into next year? Is that a fair way to think about it?

Well, David, Mike. So it's195 on an annual basis, so we got a jump start. We have $60 million that hits in '09 numbers, but those are going recur, so we do have a jump start. So you can't -- you have to go 60 to the next number next year. We will share that December 7th number, kind of where we stand looking at 2010.

This is George. What we said was we expected to get about 210 million in the first 18 months. And I think at this point, despite closing October 1st, we both began actions before closing, in anticipation of the closing. And therefore didn't lose any ground. And I think we are still targeting to maintain at that target, or beat it over the first 18 months.

That's great. Thank you.

We have a question from Glenn Greene with Oppenheimer. Please go ahead.

Maybe both a question for Lee and Frank, but just wanted to get some color on the integration progress thus far, any surprises or incremental opportunities you found, or just sort of your observations in the last kind of three to six months

Well, I think the good thing is really no surprises. I think the plan we laid out well over a year ago is holding true. I will say that if anything, we think there is some upside to the 260 potentially, that we've talked to the market about. It might take us a little bit longer to get it. So far, it there's any one combination we have done, and any integration we put in place, I think this one is as advanced, and as under control as any combination we have ever attempted. So we are very, very pleased with the way our management teams are responding, and what they're doing to make sure that we will live up to the commitments we have made to the marketplace.

Okay.

And Glen, the only thing I would add to Lee's comments because he covered it all, was how well the teams have worked together and how quickly they have done it. And I am pleasantly pleased about that.

Okay. And then probably another question for both of you, it is just sort of a general comment on the environment, a sense for the pipeline and activity, and timing of when discretionary spending may loosen, which is probably the thousand dollar question or whatever.

I will say this, I will say we have seen certain, certain cases, slight improvements to the pipeline, the quality of the pipeline activity up. And it is as strong as ever but I am not willing to say at this point in time, that we expect a substantial change over what we have experienced in the last few quarters. It is still our thinking as we move through 2010, and get into the second half potentially of 2010, we will see some type of an improvement. But I think you should kind of bank on status quo. It is what it is, it is going to remain that way for another few quarters, and then hopefully we will move upward from there. The positive sign is international this quarter, we had a very good strong quarter in terms of software license sales. And that was not typical relative to the prior quarters that we've had. So we see some improvement there. But it is pretty much as is, and it is going to remain as is for the foreseeable future.

Glenn, you have to have patience. It's going to come back to market. It's going to be slow and the declines and the spending. We just have to be prepared when it does, and we have the products and capabilities that they need when they're ready to buy. Right now, we think there is a slight up tick but clearly a lot more of the same right now.

Okay. Great. Thanks, guys.

We have a question from Brett Huff with Stephens. Please go ahead.

Good afternoon and congrats on the margins, and congrats on the combination.

Thank you.

Just a quick question on a few particular deals that you all called out in the past. And I am not sure what you can tell us about them at this point. But the American Express prepaid deal, and then I think you mentioned that the post office, the E fund driven post office deal had maybe been implemented late last quarter or early this quarter? And then, is the Scott trade, do we have anymore information on Scott trade deal, anything you can tell us incrementally on those?

I will take the third one first. We can't really talk about the Scott trade deal at this point in time, other than we are, we are in really good shape at this point. I will just leave it at that. The other two deals are fully implemented. They're up and running. They're generating revenue, if anything, the transaction counts in some of the activity list that we've seen with American Express are ahead of what we originally thought. No surprises there, and both remain excellent deals for our Company. And both as I said before, were driven off of the eFunds acquisition, so they are starting to produce really good traction. We are in good shape.

I got to meet with American Express, this is Frank, a week ago, and they were just pleased with the job that was done by FIS.

Great. I'm glad to hear it. And then on the additional detail on the Brazil stuff that you talked about earlier, Lee, do we have any sense yet of potential timing or is it just too early to -- for them -- for the bank to figure out exactly when they might want to go live or --

It is still -- I would say too early. We hope to learn more within the next few weeks, and get a more definitive time frame for you. I think, I think the message on Brazil, and the good news on Brazil, it is only a portion of the total processing. It fits with their strategy, and it makes sense for them to do that. We understand that. And the bottom line is we expect to maintain and keep a good strong relationship with them going forward, and we will handle a larger portion of their business going forward.

And then, last question on Brazil, it seems like that Brazil has really helped, not just the legacy platform, but has the more organic, or the non-legacy stuff that you've converted, grown faster than you have expected, and will that help offset some of that.

The nonlegacy portion has been the fastest growing business that we have in Brazil. We still have those accounts on file. They're still contributing very strong growth rates, Bradesco alone grew over 800,000 accounts last quarter in a somewhat of a weak economy. So yes the accounts on file, and there is still a lot of potential in addition to that. There are some other cards portfolios, that we are talking to various institutions we are talking about, and some of our current customers about. So, we are not discouraged with Brazil, we are still very positive on Brazil. We think it represents a good strong opportunity for us, and we will sort this out as we go forward. But we expect to maintain good strong revenue growth and good strong business from that region.

Great. Congrats again. Thank you.

You have a question from [Tinjen Wong] with JPMorgan. Please go ahead.

Hi, this is David Cohen for [Tinjen] With the Santander, I thought I heard you say it was a potential of $29 million in terms of the impact. Did I get that right?

It was $29 million through the first three quarters. So if you annualize it, look at about $40 million in revenue from a transaction processing side of the business.

Okay.

And less than 1% of our revenue business.

I understand. And then on, but you are also doing the BPO. Is there a risk that they would decide to bring that piece in house as well?

We actually are in good shape with BPO. We have actually extended some of our contract with some of our current customers. So they're longer term, and they're better in nature for our Company. So we feel very good about that. In fact we think there's opportunity on top of that. It is not only BPO. There's also some system integration work. There's core processing. There's a lot of opportunities that we think we can leverage off of this relationship.

Okay. After -- how should we think about the margins on that $48 million annualized?

Well, what I would say is, David, is that margins for that portfolio have been on a relative basis below average, because the processing requirements for that portfolio are more intensive. And so it requires a higher MPs utilization. So while Lee mentioned the less than 1% impact to revenue, it will even have less of an impact to EBITDA, and profitability.

Great, and then how much was the international license in the quarter? You mentioned a couple times that it was particularly good.

What I said was, unlike the domestic segments, software was actually $4 million higher year-over-year in international. And as you know deals are dependent on timing, and can happen in one quarter and not another. So overall, we are seeing software down about 40% year-over-year in the quarter, down dramatically in financial services segment. And yet despite that, we overcame that loss in margin down in the payments solution segment, but the international segment was higher.

And there was no one deal that drove that variance, it was a number of deals that accounted for the difference. That's good news also.

Okay. I missed -- you gave the Metavante historical financial segment performance. Would you mind repeating that?

Yes. This is Mike, just a quick update. Year-over-year revenue was basically flat, slightly up in '09 from '08, 425 is the revenue in 2009. EBITDA was up 17.6% to 139.1. Cash EPS was $0.45 versus $0.35 in '08. So up 28.6%.

And I'm sorry, the financial segment?

The financial segment was up 2% year-over-year, and the payment segment was down 1.5%.

Great. And then just a bigger picture question, how is the international core pipeline looking?

It is -- it remains very, very strong. I think as a general statement, the quality and depth of all of our pipelines, not only internationally, but domestically are strong as ever. So we are at, we are in good shape relative to the sales process. And as soon as some of the spending loosens up we expect to be able to really capitalize on that. So it is very good for our company.

Good. Thank you very much.

You're welcome.

We have a question from John Kraft with D. A. Davidson.

Hey guys, just a few follow ups here. Mike, just to clarify you said that you expect Q4, was that a combined basis EPS would be flat?

No, revenue. Revenue relatively flat from '08 for the combined entity.

Okay. And then George, just follow up on something you mentioned, too, the lower item processing volumes. Is that -- are you seeing an increasing deceleration, or was there a client loss there?

No, no, nothing specific other than the general overall market, John.

Okay. And then lastly, just follow up on the Bradesco migration there. Are those cards, those 12 million that haven't migrated are those contractually committed?

Yes, they are.

They're all committed through the agreement that supports the joint venture with some pretty strong penalties. So yes they are committed.

Just not on a time frame.

There's no time frame on it that's associated with this. So they're committed. As soon as Bradesco is ready, we're hopeful they will get that conversion rolling, and we will get them on file. A lot of the activity is already converted over. As we said in the past, the call centers, the support centers are already operating on our system, and driving revenue. So this is in total, a sizable portion of the revenue stream, but certainly not to the degree tha one would think.

If I can sneak one more easy one in there. New York community bank, how much of that was recognized in Q3, license wise?

Actually none of it it.

Actually none. We recognized the license revenue in Q3 last year, the majority of it anyway.

We have actually expensed to make the conversion and support them. So we really incurred more expense and didn't pick up the revenue in that quarter.

Well, that was a nice implementation anyway.

Thank you.

Appreciate it.

We have a question from Greg Smith with Duncan Williams.

Hi, guys. Have you guys re-upped all of your swaps then, at this point?

Greg, this is George. No. Obviously in connection with the closing of the deal, we had a billion dollars swap we terminated. It was in the scheduled for October 11th, I think. And we have managed our fixed to variable ratio down to 77%, which is within our targeted range. We have another $250 million in swaps expiring in early December. So, we will give a lot further clarity on the, the capital structure and what we see going forward including interest costs. But we were able to bring down our average cost of debt through repricing swaps earlier this quarter.

Yes, I am just trying to get at ball park rate on the $3.4 billion, anything we should be thinking about for 2010?

Greg, I think rather than piece meal data about 2010, I think it would be better to see it holistically at the December 7th meeting. But net-net as you know, we incurred higher cost debt in connection with the deal, as we had to renegotiate the Metavante facility. So that was a bit of a negative. Our objective is to pay down that debt as quickly as possible. And at closing we actually incurred about $300 million less in debt than we had originally anticipated. So, our debt balances are coming down. We will pay down the high costs debt balances. And as we reprice the swaps, I think directionally a 100 basis points from where we are at right now is achievable. But we will give a lot better insight into that in about six weeks or so.

That was actually very helpful. But why was the debt $300 million lower? I noticed that.

Well, we closed later. We generated cash flow, both companies had stronger earnings. we have been monitoring our capital spend in anticipation of getting together. So, it was really that combination, and as we have said our objective is to pay down debt and get to investment grade. and be at a stronger financial position as we get to the second half of 2010.

The April 1st announcement assumed a July 1st close. So we obviously closed a quarter later.

Yes, and it is just using free cash flow in the meanwhile.

Yes.

And just switching gears slightly, you guys give the, you gave the credit card and debit card volumes year-over-year, but do you have the percentage change for both, just sequentially, 3Q versus 2Q?

Debit was flat, and I believe credit was up 3%. If I am not mistaken.

Which was a pretty big improvement.

We have seen favorable trends, but it is not going to materially affect the revenue line for the near future.

Great. Thanks, guys.

All right, Greg.

We have a question from Julio Quinteros with Goldman Sachs.

Hey guys.

Hi, Julio.

Real quickly, would you mind going through growth expectations, by sort of the old business lines, so into the fourth quarter, what you expect for financial services and payment for the old FIS and the old MB, just so we have those lined up correctly?

When we sit down December 7th, I think we can give clarity on -- I think that you can expect that payments -- and as you can see (inaudible) to date -- that payment transaction volumes are down. We have a little bit of a mix difference between the two organizations. We -- legacy Metavante has more license than payments. Like FIS has more license -- and license is impacted a little more with the ex spending down. But again, year-over-year, we are expecting fourth quarter year-over-year to be relatively flat to last year, for the full year you can project that forward. We don't see a lot of growth in the combined entity from an '08 perspective. So I think you can kind of look at payments, and financial (inaudible) group running about the same as they have done year-to-date.

Okay. That's helpful. And then maybe just to get back to a little bit on the revenue growth side. The track record of FIS plus Certegy and other deals on the cost side I think is pretty straightforward. And even on the revenue side you guys have done a pretty good job historically on with getting to the revenue growth targets. Of the environment, obviously into the next 12 months is very different from what we have seen in the past. So to be very specific, if the demand environment stays weak because of the sort of the context that the banks are dealing with, what are the two or three specific things you are going to focus on to drive growth where possible?

So, well the demand environment has been a challenge with banks, very focused on preserving capital, and probably cutting back on projects, right, the software and financial services have been impacted. We also talked about a little bit of head wind with FDIC and the actions they have taken on banks which year-to-date hasn't been felt in the numbers. But as we look forward, it is a little bigger hole to climb out of it. I think you also heard a fair amount of optimism on sales and success, not only year-to-date, but with what both companies have done in recent quarters driving sales. So I think if you put it in combination I think the international side as George pointed out is driving a fair amount of activity. And I think we see opportunities for institutions. We have talked about this in the past, institutions are under stress, it opens the doors for dialogue, it opens the doors for opportunities where FIS, given the size and scale can provide some value.

Services, and maybe the bank, had not considered outsourcing the past. And clearly, Gary Norcross and his team, they're going to take every avenue they can to get the word on the street, share the new FIS story and try to support the banks and help them through some difficult times. And so, it is not that we are not going to knock on the doors and push growth, and we think sales will continue to be good. We are looking at a macro environment which just hasn't given us growth in the last 12 months. So we are just waiting for that to turn around.

And any sense on whether large banks versus small banks, which you would expect to come back first if one versus the other?

It depends on the institutions, like some of the large regional institutions are doing quite well and spending money, and others are struggling a little bit more. We have seen community banks in general, up until the last couple quarters that were doing very well. And I think they have been hit a little harder, with commercial real estate and some of those portfolios. So I think it depends on institution and the country into -- bank has performed.

And Julio, notwithstanding, this is Frank, it's difficult environment, right that we have been in for quite a while. And we do have the opportunity to have several products, a lot of products from a cross sales standpoint across the entire enterprise that we can make available.

Right. And lastly, on the, just to sort of hit two on the legislative front, interchange, we have been sort of hearing about it. And I think we understand where that is. And I guess we are all waiting for that GAO study. But I guess a couple of days ago, we also had the introduction of overdraft. How are you thinking about what that means to the banks as they think about fees and revenue streams, and potentially does that impact your business at all, on the bank processing side?

On the interchange, we are primarily fee and transaction base, we probably have a few businesses taking a piece of the interchange that would have an impact. On the fee structure that the banks have, it is probably a minimal impact to us. We are providing technology that banks to help them determine their sequence, and their posting sequence for their payments coming in. I know we've had a lot of dialogue with our clients. They are going to find other ways to get the fee income relative to their DDA, their checking accounts. So if they have to go back and charge fees on a monthly basis, or do some other activities, they will have to do that. I think that helps us, we can of service, we can help upgrade their systems and create more capacity capability for them. I don't think it will hurt us. The interchange, I think is a minor potential impact, and we will just have to watch that.

What about on the overdraft legislation side?

Well, that overdraft fees that I was talking about on the check side, where banks may have change their sequence that's the impact on the check side where the banks may have to change the sequence of posting. We have heard the banks may have to find other ways to collect fee revenue or fee income from their clients.

Sure.

So from our perspective, we don't get a slice of that, we provide technology that enables them to charge fees, whether it is overdraft protection or other ways. And so, effectively negative, and it may have a positive impact on helping them services or other technology.

Okay. Great. Thanks, guys. Good luck.

Thank you.

We have a question from Kartik Mehta with Northcoast Research.

Good afternoon. What I wanted to ask you Frank, is how do you anticipate demand impacting revenue once banks decide to start spending money? And what I was trying to get to, is do you there will be pent up demand that you can see for some really strong growth for the first couple of quarters as banks come back? Or do you think this comes back in a more normalized manner?

I think you have to be careful there. It is a good question, but it is going to be more normalized. I think there is some pent up demand. No question about it, because there are things on the investment side banks would like to do, but don't expect it to all happen at once. It will be over a period of time. And that's okay, but clearly it will come back, and it will be the investment spending on the part of banks. But I would see it as being gradual. Not something overnight.

And as you look at 2010 would you anticipate more bank failures or less compared to 2009, at least in terms of your customer base?

I have got to tell you, what's happening in 2009, there has been so many projections up and down. And recently we have seen quite a few, right. I don't know really what to expect. I suggest there will be more bank bank failures, right? I think we all know that. To the degree, tough to tell right now.

And I just had one last question on the swaps. I think George you mentioned that you thought 100 basis points lower. Would that be just for the fourth quarter, I'm assuming not really what could happen in 2010 when you get everything else worked out?

Well, as I said, we will provide a lot more detail, so everybody gets grounded from the same starting point. But with the fixed and variable floating we got, I think we will pick up at least 80 basis points this quarter.

Okay. Thank you very much. I appreciate it.

Thank you.

We have a question from Gauray Vohra with Raymond James. Please go ahead.

Hey guys, this is Gorav, on behalf of Wayne Johnson. I have a couple of quick questions for you guys. First of all, now with the flat revenue in the fourth quarter for the combined Company, does that include a benefit from foreign exchange?

No. That would with a constant currency. So we stripped out the benefit in the fourth quarter.

Okay. And then for fourth quarter, excluding any cost synergies of the who or so that would be expected in the fourth quarter. Would we still expect an uptick in margins?

I think we have looked at the full year based on where we had both expected to be at the beginning of year. And obviously we feel very strong, very good about where we are year-to-date. We feel very good about where we are going to end. We have obviously shared, that we expect to get a combined synergy number, two companies together. I think December 7th, we can sit down and share with you what kind of margin expansion we have on the stand alone businesses. Right now we are running the company's combined. I don't think we have gone back and looked at the individual fourth quarter margin expansion before synergy. But clearly, we are going to have a strong fourth quarter. In terms of earnings, obviously because of the expense we have taken out year-to-date. And we are going to get that synergy pop going forward in the fourth quarter.

I guess, what I am trying to get to, is would you reiterate your guidance for the stand alone Company for the year?

On the date of the announcement April 1st, like we said was a $1.62 was the Metavante expectations for the full year. And for the old FIS, it was $1.63. And so as we look at where we are against, how much going to synergy, that's the measurement that we use.

Okay. And then this question on the synergies, what percentage of the synergies are going to come out of cost of service? And what out of general and administrative expenses?

Again, when we sit down we'll go back -- on the first we talked about what's coming out of PSU, and what's out of FSU, and what's out of corporate overhead, and what's out of infrastructure, We'll sit down, and give you some break out on the 7th..

Okay. Great. Thanks.

Operator, we have time for one more question.

We will go to the line of Bryan Keane with Credit Suisse. Please go ahead.

Good afternoon. I just want to follow up on the fourth quarter. You talked about revenues being flat on constant currency. What about adjusted EPS? Should that -- that probably has a positive impact, can you quantify that for us?

You mean Bryan from a foreign currency perspective?

No, just overall Company adjusted EPS, I assume the deal is accretive in the fourth quarter?

Well, with the shares outstanding, I wouldn't make that assumption at all, that it will be accretive in fourth quarter. We said that it will be accretive in the first year. And it is going to take a while as we take the synergies out, to offset the additional share count.. So I would not expect it to be accretive in the first quarter coming out of the gates.

Okay. I was just wondering, because the synergies to date, if you get 60 to 65 million out, that might be a little higher than I expected for 2009. So I thought maybe that would be slightly accretive in the fourth.

I think relative to the current stand alone FIS Q4 expectations, I don't think so.

Okay.

On an EPS base.

Okay. And then, just looking at FIS on a stand alone basis, it looked like the growth rate deteriorated in the third quarter, in both financial and payment, and got better in international. So just on financial and payment, is it safe to say the market deteriorated a little bit? Or do you think maybe some of the associates were focused on the deal? I am just trying to understand the market conditions.

Well I think what I would emphasize, and Lee will add color, but just from a numbers perspective, we were down $22 million in the financial services segment. $15 million of that was software. We had our best quarter in software sales in that segment Q3 of last year. And again what I want to emphasize is that $15 million drops to the bottom line. So we had to overcome that loss of $15 million in EBITDA as well. The other piece was professional services, with let's say margins of 25% 30%. So all in, while -- while that revenue came up short, and honestly that's the most challenging part in the market right now, is that discretionary spending, we overcame the majority of that loss of revenue through the cost actions we took.

On the payments side, we had about $10 million of one-time items last year that we highlighted a year ago. And then in the guidance for balance of the year, mentioned (inaudible) fall. So I think it made the payments comparisons look particularly worse. The check business was down about 10%, which accounted for 90 basis points of the short fall. But I think as everybody on the call has indicated, the revenue environment is challenging. We are not expecting any material changes in the domestic side of revenue. We do expect continued growth in international. And we will benefit from a little tail wind from currency in the fourth quarter.

Agree, and we have been very, very diligent to make sure that our people are not distracted through the combination. and are concentrated on sales and executing business on a day-to-day basis. There has not been any drop off whatsoever in that area because of the combination.

Okay. Because the financial segment of Metavante was up positive 2. And I get a lot of questions about what's the long-term growth rate inside the financial segment. So just give your thoughts there, and that's it for me. Thanks.

Yes, this is Mike Ellis. So again, we at the (inaudible) on the Metavante side, we have been very pleased with the FSG performance in '09. And you got to remember those are deals that were sold in '08. One of them was actually sold in '07, and coming online and impacting positively '09. CSG was down the same as the Georgia team had as FIS, and strong comp in the third quarter of last year. And the environment is tough. I don't think our two organizations are alone in having third quarter challenges in revenue.

I just want to add to Lee's comments on distractions. The teams that support the clients and teams that are out selling have not been working on integration, until we got the deal done. The rest of the teams have been working on how to put the Company together, products together, the infrastructure. But the client facing teams, the sales teams were not distracted in the third quarter at all by this combination.

Yes, and if you take out the one-time software sales, we had last year which were very, very strong in the third quarter. And then compare the core business quarter-to-quarter, and year-to-year, you will see it come more in line with what you would expected, and what we would of expected. So I think there's a little noise in that, because of how strong that third quarter was last year, in terms of software license sales. They were very large sales, and very big sales.

We will also provide additional color, at the December 7th meeting about revenue growth and potential by segment.

Thanks everybody for joining us today, and we look forward to seeing you in New York on December 7th.

Thank you.

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