Fidelity National Information Services, Inc. (FIS) Q4 2008 Earnings Report, Transcript and Summary

Welcome to the FIS fourth quarter earnings call. At this time all participants are in a listen only mode and later we will conduct a question and answer session with instructions being given at that time. (Operator Instructions) As a reminder, today’s conference is being recorded and I would now like to turn the conference over to your host, Senior Vice President of Investor Relations Mary Waggoner.

With me are Executive Chairman Bill Foley; President and CEO Lee Kennedy; and Chief Financial Officer George Scanlon. The fourth quarter earnings release and supplemental slide presentation can be found on our website www.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 attachment to the press release. Today’s discussion will also include forward-looking statements. These statements are subject to risks and uncertainties as described in today’s press release and other filings with the SEC. The company expressly declaims any duty to update or revise the forward-looking statements including annual and quarterly 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 and the dial in information is included in today’s press release. Now, I will turn the call over to our Executive Chairman Bill Foley. BB It was a solid quarter and a very good year for FIS. Revenue growth, earnings and free cash flow exceeded our expectations and demonstrated the strength of our balanced business model, our products and our people. During 2008 we completed a series of initiatives aimed at building a more focused and efficient organization and enhancing our competitive position. In July we successfully launched Lender Processing Services as a new public company. This spinoff has enabled management at both companies to better focus on their respective core operations. We also completed the sale of three non-strategic businesses including FIS Credit, Certegy Gaming Services and Check Australia. The disposition of these assets has freed up capital and has enabled us to improve our overall financial performance. During the past five years we have built the industry’s premier global core and payment processing company. Our diverse markets, unmatched product breadth and global reach have provided excellent opportunities to expand our footprint and further penetrate our customer base. These attributes have also mitigated downside risk against weakness in certain market segments and product lines. We are very pleased with the consistent [inaudible] performance of FIS. While we feel very good about our business and the momentum we have going in to 2009, the economic challenges facing the financial industry are likely to persist for the foreseeable future. We are closely monitoring the markets and our customers and will continue to manage our company accordingly. I will now turn the call over to Lee Kennedy who will cover our fourth quarter results.

If you will turn to Slide Four, we’ve included an agenda outlining the topics that we will cover on today’s call. I will begin today’s prepared remarks with a summary of fourth quarter operating results. George will follow with the financial report and an overview of the new segment reporting that we will implement in the first quarter. We will conclude today’s call with our outlook for 2009 and then open it up for your questions. I’ll now cover fourth quarter operating results. It was another good quarter driven by strong solid results in each of our businesses. Fourth quarter revenue increased 4.3% in constant currency driven by 6.4% growth in IFS and 9.7% growth in international. EBS revenue increased 2.7% excluding our retail check risk management business. We are pleased with the progress that we have made in improving the quality of earnings and operating leverage of FIS. Consistent with this, the fourth quarter EBITDA margin increased to 26.3% which is a 90 basis point improvement over prior year and a 110 basis point improvement over the third quarter. Adjusted net earnings came in at $0.48 per diluted share which is a 41.2% increase over prior year. Fourth quarter earnings per share grew to $0.49 in constant currency which is a 44.1% increase over prior year. For the year, revenue increased 18% and adjusted EPS increased to $1.49 which is a 26.3% increase over prior year. These strong results met the upper end of our 2008 guidance. When we communicated our operating goals at the beginning of 2008, we discussed the stable recurring solid growth in professional services in 2008. Professional services revenue grew 6% in the fourth quarter and net of a large Bank of America TouchPoint project 7% year-over-year. While it is true that some banks reduced spending in 2008 for certain discretionary products and services, other continued to invest in new technologies to reduce operating costs, add new product capability and improve customer service. Perhaps most encouraging, demand for our core processing systems remains strong. During the year, 10 banks with more than $50 billion in assets purchased FIS core processing systems. Despite the difficult environment, 2008 was a strong new sales year. Consistent with this, in the fourth quarter, one of Russia’s largest banks with assets of approximately $100 billion selected FIS to upgrade its core processing and channel delivery systems. The bank which asked not to be identified by name will install TouchPoint, Profile and Express over the next 12 to 24 months. This competitive win follows a recent implementation of Profile and TouchPoint for Renaissance Capital which is one of Russia’s largest investment banking companies. In addition, one of the largest banks in the US which is an existing customer purchased an Express integration license in the fourth quarter. This was the second major FIS technology platform selected by the bank in the last two years. Our US and international sales pipeline remain full and we are encouraged with the strong interest in our payment and core processing products. These and other trends support our belief that even in difficult market conditions, financial institutions will continue to invest in new technologies and capabilities if their return is strong enough. In 2008 our management team concentrated on achieving four primary objectives which were central to our business plan: increasing organic revenue growth; improving profitability; reducing capital expenditures; and improving free cash flow. The charts on pages five and six document the solid results achieved for each of these objectives and the comparative improvement over prior year. We’re especially pleased with the progress that we have made in improving FIS’ free cash flow. As shown on Slide Seven, FIS generated record free cash flow of $149 million in the fourth quarter and $358 million for the year which is more than double the free cash generated throughout 2007. Improved operating margins, the divestiture of non-strategic capital intensive businesses, more profitable product implementations and lower capital expenditures were the primary reasons for the strong improvement in free cash. Slide Seven also highlights the significant year-over-year and quarterly run rate improvements in cap ex. As illustrated, capital expenditures totaled $51 million in the fourth quarter which is a 16% improvement over 2007. Cap ex came in at $230 million for the full year which is $10 million better than the low end of our 2008 guidance and $43 million below 2007. The improvement in cap ex was driven by the more efficient use of development resources and the winding down or completion of several major strategic development initiatives including TouchPoint, Profile, Express, the new [Cordova] core processing platform and investments in hardware and software to improve operating efficiencies of our data centers. All of these strategic investments are starting to generate strong tangible results. In summary, it was a solid quarter and a very good year for our company. Our management team and associates have done a good job of managing through a very difficult environment to achieve the original growth objectives communicated to you at the beginning of 2008. We remain enthusiastic and confident with our future and the progress that we are making in strengthening our competitive position. I’ll now turn the call over to George who will continue with the financial report and provide an overview of the new reporting segments.

If you turn to Slide Seven I will provide additional detail on our fourth quarter financial results. Consolidated revenues increased just under 1% to $862 million which included unfavorable currency adjustments in the quarter of $30 million. The fourth quarter growth rate was 4.3% assuming no change in currency compared to the prior period. IFS revenue totaled $392 million which is a 6.4% increase compared to the fourth quarter of 2007. Organic revenue growth for IFS exceeded 7% in the second half of 2008 compared to 4.7% in the first half through the solid growth in ePayments, new core processing customer implementations and higher equipment sales which constituted $11 million in Q4 ’08 compared with $5 million in Q4 ’07. Enterprise revenue decreased 2.4% to $282 million compared to $289 million in Q4 ’07 due to a $13 million decline in the retail check business. The check business declined 17% in the fourth quarter reflecting lower utilization and the impact of reduced consumer spending. Excluding check from both periods, EBS revenue increased 2.7% in the quarter and 21.9% for the year driven by higher processing, software license and maintenance revenue. Turning to international which begins on Slide Eight, we have a growing international business which will be subject to variations in exchange rates and we believe the best way to evaluate performance is on a constant currency basis. In constant currency international revenue increased 9.7% in Q4 and grew 9.9% on a sequential basis. The Brazil card joint venture continues to be a significant contributor to international growth with 1.4 million new cards added during the quarter. At year end we were processing more than 30 million cards in Brazil including 22 million cards from our JV partners. In addition, new customer implementations in Europe including Barclays and HBOS, and modestly higher software sales contributed to the fourth quarter growth rate. As we guided last quarter, a significant strengthening of the dollar had a meaningful negative effect on our fourth quarter reported growth rate. The Euro declined approximately 9% compared to the fourth quarter 2007 while the Brazilian Real and the Sterling declined more than 20%. The resulting $30 million impact of this drove a 5.4% decline in reported international revenue compared to Q4 ’07. This was the first quarter of the year in which currency had a negative impact. The pie chart provides additional insight in to our exposures to the major currencies based on the $177 million in revenues we reported in the fourth quarter of 2008. Turning to Slide Nine, you will see that currency added $21 million or just under 1% to full year revenue growth. Currency negatively impacted Q4 earnings by $0.01 with no impact to full year earnings. Moving on to EBITDA on Slide 10; consolidated EBITDA increased 4.3% to $227 million which included a $4 million negative currency impact. The 26.3% margin exceeded fourth quarter 2007 by 90 basis points and as Lee mentioned, improved sequentially by 110 basis points from 25.2% in Q3. The margin expansion was driven by leverage on new sales and ongoing efforts to reduce operating costs. Corporate and other EBTIDA which includes corporate overhead expense and our IT infrastructure totaled $8 million in the quarter comparable to Q4 ’07. The traditional corporate overhead expense included in this line was $27 million compared to $22 million in Q4 ’07 an increase due to higher stock option expense and incentive compensation. Please turn to Slide 11 for a reconciliation of adjusted net earnings. Fourth quarter adjusted net earnings totaled $91 million or $0.48 per diluted share compared to $0.34 in the 2007 quarter and $0.41 in the third quarter of 2008. 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 $24 million in addition to an $18 million after tax impairment charge related to the Certegy check services trademark. During the quarter, we recorded an after tax impairment charge of $35 million or $0.18 per share in conjunction with the sale of the Australian check business and the ongoing declines in check volumes. Approximately half, or $0.09 per share is associated with the Australian business and recorded in discontinued operations while the remaining $0.09 per share is included in continuing operations. The effective tax rate was 32% in Q4 ’08 and 33% for the year. The Q4 tax rate benefitted from the federal research and development tax credit and certain state tax planning strategies. The lower Q4 tax rate attributed $0.02 per share compared to Q3 and $0.03 compared to Q4 ’07. Average shares outstanding were 191.1 million. We did not repurchase any shares this quarter and have been out of the market since the second quarter. As shown on Slide 12 free cash flow which is defined as operating cash flow minus capital expenditures improved significantly to $149 million in the quarter and $358 million or 124% of adjusted earnings for the full year. The increase was driven by higher earnings, improved working capital management including a $33 million reduction in receivables related to the former Certegy Australia business and lower capital expenditures. Fourth quarter cap ex of $52 million declined $11 million compared to the prior year and is indicative of the run rate you should expect going forward. In fact, we have been at that run rate for the past three quarters. Total spend for the year was $230 million, a 16% decrease compared to 2007 and within our target of 5% to 7% of revenue. Capital efficiency has been enhanced to improve leverage of our infrastructure in more efficient equipment and labor utilization. Our cash flow priorities center on reinvesting in the business, maintaining our dividend and reducing leverage. We paid $9 million in shareholder dividends in the quarter and made scheduled payments of $13 million on our Term A facility. We also reduced the revolver balance by $121 million. Turning to Slide 13, at December 31st we had $221 million in cash and cash equivalents and $2.5 billion in debt including just under $2 billion outstanding on the Term A facility and $499 million against the $900 million revolver. Approximately $2.1 billion or 84% 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 cost was 5.1% at quarter end. Mandatory payments under the Term A facility increased from $52 million in 2008 to $105 million in 2009 and $210 million in 2010. Both the Term A and the revolving credit facilities are in place until January 2012. Next, I will take a few minutes to review the new segment reporting which will be included in our Form 10K and will be the basis for future reporting. Please turn to Slide 14. Our rational behind the new segments is three fold: first to align our external reporting with the way we now manage the company; second, this new reporting structure will provide improved transparency in to our operating performance; and third, we believe it will provide the investment community with a better relative comparison of FIS to our peers. You’ll see that the new reporting structure will consist of four segments: financial solutions which comprises approximately 34% of total revenue; payment solutions which comprises approximately 44% of total revenue; international at 22% of revenue; and corporate and other which includes corporate overhead expense and the domestic sales and marketing group. The major product lines assigned to each segment are highlighted under the respective headings. The next Slide on page 15 provides a bridge for 2008 between the previous reporting structure and the new segments. Our 10K for 2008 will be filed at the end of this month and will reflect the new segment disclosure and prior to the end of the first quarter we will furnish an 8K that recasts 2007 and 2008 by quarter in a new format to assist you in building your model. Finally, as you know customer utilization of checks is in a state of decline. In response to your inquiries about the impact of these trends on FIS, we have included additional disclosure which we believe will improve your understanding of our segment growth rates and overall company performance. Slide 16 summarizes the results of our retail check business for the quarter and full year. Check services revenue declined 7.6% during 2008 and decelerated almost 17% in the fourth quarter as consumer spending slowed. The decrease negatively impacted EBS’ fourth quarter revenue growth by 510 basis points and consolidated revenue growth by 170 basis points. EBTIDA and earnings were affected to a lesser degree. To put check services in perspective, this business represents less than 8% of revenue and only 3% of total company EBITDA and will continue to become an increasingly smaller part of the FIS story as growth in our other businesses offset the contraction in check. Despite the declining market, we have a number of initiatives in 2009 to mitigate the downward pressure on revenue and margins but it will remain difficult to overcome the market trends. Now, we’ll move forward to the 2009 outlook.

You may recall that in last year’s first quarter call we expressed concern over the lengthening sales cycles for certain discretionary products and services. Anticipating somewhat lower revenue growth through the year we took immediate action to reduce costs to protect our earnings per share commitment and finished the year at the upper end of our EPS guidance range. In other words we were able to achieve strong results in a difficult environment without lowering expectations through aggressive selling and disciplined cost management. The same challenging but manageable market conditions that persisted throughout 2008 will continue in to 2009. Our outlook for 2009 assumes that many of the economic and environmental factors that pressured 2008 will continue including additional strengthening of the dollar, moderate declines in consumer credit card activity and weak discretionary spending. As a hedge to these difficult market conditions, it’s important to point out that our revenue base is highly diversified and not concentrated. Our largest customer accounts for approximately 2% of total revenue and our top 10 customers account for approximately 13%. We also believe that our comprehensive range of products and services, diverse markets and broad geographical reach help balance market risk and provide strong opportunities for growth. We continue to project approximately $200 to $250 bank failures over the next few years offset to a large decree by lower institution attrition due to fewer acquisitions. To date, our potential exposure to bank failures and forced government actions is estimated at less than one half of 1% of revenues which is unchanged from the third quarter. This does not factor in any upside from potential license or professional service work associated with helping institutions integrate acquired assets. In spite of this challenging environment, we believe that FIS remains well positioned to generate strong operating results. We are confident that we will achieve sold year-over-year growth in EPS, free cash flow and profitability on somewhat lower revenue growth than in the past. Many of the sales, products and efficiency initiatives implemented in 2008 along with new ones planned for this year will help drive increased operating efficiencies and strong year-over-year improvements in margin and free cash flow. In addition, the new organization structure which we implemented in late 2007 is generating stronger sales results. As illustrated on Slide 17 for 2009 we anticipate revenue growth of 3% to 5% in constant currency and 0% to 2% on a reported basis. We expect earnings per share of $1.60 to $1.66 which is a 7% to 11% increase over 2008 and a 10% to 14% increase in constant currency. We expect to generate strong free cash flow of $410 to $430 million which is a 17% improvement over 2008 driven by solid growth in earnings, ongoing efforts to reduce cap ex and continued tight management of working capital. We will use free cash to reduce debt to strengthen our balance sheet. We believe a strong balance sheet is important in today’s environment and provides greater flexibility to take advantage of opportunities that may surface in the future. I’ll now turn it back over to George who will provide more detail on 2009 guidance and then we’ll be ready to take your questions.

Our 2008 cash flow of $358 million as we discussed earlier, included the collection of $33 million in Australian receivables. We are expecting our cash flow in 2009 to increase between 14% and 20% from between $410 million and $430 million which assumed collection of $50 million in Australian receivable. This strong performance is attributable to the same focus we had in 2008. I’ll just quickly cover a few other key assumptions we wanted to add to our guidance. As indicated on Slide 18, we are targeting EBITDA margin improvement of between 50 and 100 basis points and expect the tax rate to be 34.5%. We’re not anticipating any dramatic increase in interest rate and shares should remain relatively flat as we are not assuming any buy backs for 2009. If you turn to Slide 19, we provide our estimate of the impact of currency to revenue and EPS. As you can see we’re looking for solid revenue growth of 10% to 12% in constant currency for our international operations. On a reported basis, international revenue is likely to decline year-over-year, at least for the first three quarters based on our current exchange rate assumptions. We also estimate that currency will have a negative $0.04 impact to reported EPS. Although we do not typically provide quarterly guidance we are making an exception for Q1 ’09 to assist you with [calendarization] and differences in fx. We expect first quarter reported revenue to range between $820 and $830 million and expected adjusted earnings per share of between $0.30 and $0.32. As has been the case in prior years, revenue, EBTIDA and EPS should ramp sequentially throughout the year. That concludes our prepared remarks for FIS. Operator we will now open the line for questions.

(Operator Instructions) Your first question comes from Bryan Keane – Credit Suisse Securities. Bryan Keane – Credit Suisse Securities: George, you talked about constant currency for international being at 10% to 12%, maybe a little bit of an uptick from the 9.7% reported, maybe you could just give us a little color on what’s in the pipeline and what could drive the acceleration there?

Bryan I’d say certainly relative to what we reported in Q4, we actually had a tougher grow over year-over-year in Q4 related to a payment we received from one of our customers as a settlement for a delayed implementation so that actually benefitted Q4 ’07 by about $6 million. I think if you look at the growth rate with that factored in you end up back in the mid teens. I think as we look to 2009 the 10% to 12% we feel is reasonable given the pipelines and given the overall economic environment. As Lee said, we’ve had success internationally in selling larger license deals to bigger banks and we’ve grown our card processing activity in Brazil pretty strongly. But, Europe and South America are not immune to what’s going on globally and so we think the 10% to 12% is a reasonable place to be. We’d like to hope for upside there obviously but that’s where we’re guiding right now. Bryan Keane – Credit Suisse Securities: Any new contracts that will be coming on internationally that will help supplement the growth next year?

Well, we had previously disclosed I think a $100 million number on earlier calls. With the exchange rate affect that number is closer to $80 million now. That would include the Bradesco conversion, Barclays, HBOS and some of the Asia Pac business that we sold that Lee referenced earlier.

Bryan, there is also a number of deals that are currently in the pipeline that we expect to close over the next few months so that will also affect the margins and the profitability as we move throughout 2008. Bryan Keane – Credit Suisse Securities: Then just finally for me, the EBITDA expansion of 50 to 100 basis points, can you just break that down a little bit? How much of that is restructuring versus eFunds, versus some other cost cuts?

Bryan, as you’d expect it is a combination of those things. I think as we look to 2009 we’ve got some additional run rate benefit from some of the cost reductions that we took last year as well as incremental eFunds benefits. I’d say those aggregate to $25 to $30 million. The other manifestation of that is through lower cap ex. Our IDSW came down year-over-year as we took costs out that effectively was capitalized labor so we’re benefiting cash flow that way as well. I think the other side is we’re continuing to prune the organization in light of the economic environment and take those actions necessary to manage the cost size. International, we should see some margin expansion in ’09 as we layer in additional volumes and get the margins up from the low teens to the mid to high teens in 2009.

Your next question comes from James F. Kissane – Bank of America Securities. James F. Kissane – Bank of America Securities: The software sales seem relatively strong in the quarter, could you possibly size it? And, I think you mentioned international benefited a little bit?

Jim, that’s a great question. That was one of the areas that we early on in the year expressed concern over because we thought if there’s anything discretionary it’s going to boil down the center around software sales. About 50% of our software sales in general are what we consider to be highly discretionary and software accounts for about 5% of our total revenue base. The surprising thing is that if you look at the success in the results that we generated in 2008 our software grew 5% year-over-year and that was all centered around some of the larger bank deals that I covered when I said we signed 10 institutions with asset bases over $50 billion. A lot of that came out, came through the international operations so we benefited from that but across the board, not only software but also professional service work was also very strong, 6% growth in the fourth quarter tagging along as a product or a byproduct of the software sale we pick up professional service work too. So, overall very strong results through aggressive selling. James F. Kissane – Bank of America Securities: I think the new segment reporting is going to be much better going forward but given that you’re starting it George is it possible to give maybe the size of the discreet components? If you go back to I think it was Slide 14, the size of the discreet components say within the payment segment like retail, check, print and mail, item processing, credit card and ATM?

Jim, I don’t think we’re prepared on this call to get down to that level of detail. We wanted to provide you insight in to the different products that exist within each segment. We, as you know, have not historically broken our revenues down to a product level and I don’t think we’re going to plan on doing that.

I think what we will do Jim is we’ll make sure that as we get the disclosures out and the filings out that we give you enough information that you can properly model and put your projections together. We’ll make sure that you’re not short on that and we’ll follow up with you individually. James F. Kissane – Bank of America Securities: One last question, Lee on the last call we sort of talked about processor consolidation. Do you think they’ll be any processor consolidation before there’s more stability in the bank customer base or do you think it can happen before that?

Jim, I think that’s a hard call because transactions don’t always happen when you think they’re going to happen. At this point in time I’ll say that I do think that over the next year or two that there’s going to be further consolidation. I can’t give you specific names but I think the trends clearly point in that direction. So, I think it’s going to be ongoing Jim and it could happen sooner than later so we’ll have to wait and see what the market produces on that.

Your next question comes from David J. Koning – Robert W. Baird. David J. Koning – Robert W. Baird: As we look in to ’09, you gave overall company guidance and a little bit on international but can we expect IFS to continue kind of in the ballpark of mid single and enterprise in the ballpark of flat?

We’re going to be reporting differently in ’09 but I would say directionally IFS in low to mid digits in ’09 and EBS flattish excluding check is probably a reasonable outlook right now. We provided guidance for the international segment going forward. If you do the math on the other segments you’re going to look at low single digit growth on both the financial solutions side and the payment solutions side and I think that’s the right way to look at it.

I’d say this and add to it, the sales momentum that we’ve had in IFS over the last couple of years hasn’t slowed down. It’s still very, very strong. An awful lot of activity coming from selling ancillary products in to our core processing customers and card processing customers and we expect that momentum to continue so yes, we ought to see it on or around the range that we’ve displayed or generated traditionally. David J. Koning – Robert W. Baird: Secondly, free cash flow looks really strong. I guess the guidance, even if we take out the $50 million of Australia collections, it looks like it would still be $1.85 to $1.90 per share which is still a lot above cash EPS. Am I thinking about that right?

You are Dave and I think again it’s a combination of things. It’s going to be the margin improvement that we’re targeting, continued focus on working capital and more specifically receivables collection and tightening up on cap ex. We continue to invest in our platforms and make sure that we’re enhancing functionality to maintain high customer satisfaction but we’re just really being very discretionary about what we capitalize and I think when you put those three together it adds to a pretty good cash flow story. David J. Koning – Robert W. Baird: Then finally, as we look at your results and guidance and then last week some of your competitors as well, everybody put up guidance and outlooks that were pretty solid especially given the bank environment and the overall economy. I’m just wondering what happens when the economy and the bank environment improves? How much better can growth actually get? I mean, should we see 2% to 3% reacceleration? Do you see kind of pipelines out there that aren’t closing that all of a sudden revenue growth will be a lot better once the environment gets a little bit better?

I think if you look at our traditional revenue growth that we’ve had over the last there years and plotted by each year you’ll see that it was probably two to three points, if not more, higher a couple of years ago than it is today. So, I think the answer to that is yes, I think there are a number of deals that have been held back just because of the economy in general and the fact is this, if the banks want to really compete in to the future they’ve got to find a way to lower their cost base and they’re not going to be able to easily do that without installing new technologies to allow that to happen. So, I think the answer is yes. The key to us and what we’re most pleased with is we’ve still been able to generate solid operating results with somewhat lower revenue growth and that’s a real benefit to have in this environment and that will improve as we go forward.

Your next question comes from Julio Quinteros – Goldman Sachs. Julio Quinteros – Goldman Sachs: Really quickly can you just go back through how you – maybe I just misunderstood this but I thought you were trying to translate the growth assumptions in to ’09 under the old standards IFS, EBS, international in to the new reporting segments that you’re talking about with payments and international and the other segment that you have here. Could you just walk back through that real quick?

What I said is that we did provide guidance of 10% to 12% for international and based on our overall guidance of 3% to 5% constant currency, when you do the math you’ll find that the balance of revenue on both the financial services or solutions side and the payments services side will come in low single digits is what we would look at for 2009. Now, obviously we’re cutting those segments differently than we did under the old IFS EBS definition which I’d say we would expect flattish EBS performance, negative performance in check and low to mid single digit in IFS somewhat dependent on the payment environment. Julio Quinteros – Goldman Sachs: Then maybe thinking about the new segments, you gave us 34%, 44% and 22% revenue contributions. Can you give us a margin profile for each one of those segments as well please?

We’ll be including that in our 10K disclosure Julio so you’ll be getting a lot more discussion about segment performance in the new reported way in the 10K. And, as I mentioned, we’ll provide additional detailed disclosure on a quarterly basis to give you better insight in to the margin trends and performance for these segments. Julio Quinteros – Goldman Sachs: You don’t have any annual view right now then?

No. Julio Quinteros – Goldman Sachs: Then, if I think about the business I think one of the things going back to your last analyst day and presentations, it seemed like the focus and the emphasis on the payment side of the business and not necessarily getting the same credit for having such a big contribution, almost 50% of your business, obviously you guys are breaking that out clearly now. How do we think about that as it relates to the margin opportunity? In other words, does the payment part of your business really have potentially more margin leverage? As we kind of think about that going forward is it more scalable and is that something that we need to kind of get use to as we think about that business relative to international financial where there might not be as much margin leverage. Can you just talk a little bit about some of the margin drivers within the payment solutions and how that would sort of play out differently than financial or international?

Sure. If I start with payment solutions and if you look at the five components of that segment, the margins on ATM, debit, bill pay, credit card and prepaid are very strong. So, this is a segment that’s got kind of a blending of higher margin activity on the transaction driven versus what I would say are lower margin products which include item processing, print and mail and obviously as we shared with you earlier retail check. So, the aggregate margins for payment will be lower than financial solutions because of the mix of revenue that’s included in that segment. On the international side as you can tell, we’ve got a mix of financial solutions and payment solutions. The payment solutions in international probably represent about two thirds of the revenue base. So, you do the math on that you get even greater payment concentration. That’s where I think as we’ve said from a company perspective we’ve got the most relative upside in margins and as we convert the remaining cards at Bradesco and get that to a steady state we’ll start to see more of a normalized margin coming out of Brazil and that should help the overall reported results for international. Julio Quinteros – Goldman Sachs: So just to get that clear, on the 2009 margin expectations how much of that is coming from international alone? In other words, are the Bradesco ramps or anything that’s going on in Brazil is that really behind us in ’09 or are you still seeing a little bit of margin headwind at this point?

I would say I don’t know if it is headwind as much as it hasn’t reached the state that we expect I to reach when [inaudible] conversion. So, I would say it’s headwind at this point. What I did say is the margin expansion that we’re seeing will be a combination of continued focus on the cost side of the business and trying to lower our operating costs in combination with the benefits of incremental revenue growth with international being a little bit more biased in that area because of the backlog we have in the pipeline.

Your next question comes from Andrew W. Jeffrey – SunTrust Robinson Humphrey. Andrew W. Jeffrey – SunTrust Robinson Humphrey: Could you elaborate a little bit on the success you’ve had domestically in IFS? The share gains there have been pretty impressive and pretty consistent. Maybe if you could sort of touch on product by product if that’s appropriate and also sort of the extension as it relates to bill pay in particular. Is that an area where you feel like you’re having some outsized success competitively?

Let me answer the second question first. We’re starting to compete very effectively and very well on the bill payment side of the business not only with community banks and we signed a large number this year but, also in the mid tier market and hopefully stretching above that market. So, the answer is yes on what we think we can do we still have a relatively low base, we think our system capability is strong and is strong as anybody in the market and we’re obviously going to take advantage of that through the new consolidated organization. That’s one of the reasons we put that organization together so that we had consolidated sales capability capable of reaching in to the upper tier market and leveraging existing relationships to sell more product in to it. The reason that IFS has been so effective over the last three years fetters around first of all we think we have a very professional high powered sales force and I think that’s a given in order to generate revenue growth, especially in today’s market. But, a lot of its been driven around coupling and integrating our product capability in to our core processing platforms. It effectively reduces the cost of delivery for the institution, it gives them better access to integrated data so that they can manage the customer relationship much more effectively and drive down costs and drive down loss ratios. It enables them to sell more products in to that customer because at one view, in one look they can see the whole entire customer relationship and it provides some really strong tangible benefit to the consumers that they service in that by when they access their eBanking system they’re able to for example have a view of the entire financial relationship they have with the given institution and not just bits and pieces. All of those factors have led to the success that Gary Norcross team has put together and demonstrated over the last three years. So, it’s ancillary products and its coupled with the core. A couple of products in particular where we’ve had really good strong success, products that center around prepaid, products that center around creating loyalty programs for core processing relationships have all generated substantial growth and growth above what we have on the average. So, they’ve led the way along with bill payment, along with eBanking. Debit card continues to generate good strong results, well over up in the middle to upper single digits so it’s a combination of things but it’s leveraging a lot of different areas to achieve these results and we expect that to continue on in to the future. Andrew W. Jeffrey – SunTrust Robinson Humphrey: Do you think that the same applies in EBS? Is it functionality, check notwithstanding, is it functionality predominately? Is it just having fingers in a lot of different pies, or is it really some combination thereof that has given you success and what is otherwise a pretty tough market?

I think it’s a combination of things. I think that opportunity opens up and we’ve been able to capitalize on it when you can go back to an institution and you can prove on a very tangible basis that by implementing certain technologies, you enable the institution to drive expense down. That’s the name of the game stay. Our products and capabilities are structured and designed in a way that properly implemented in an institution that is effectively exactly what they do. So, there is a lot of interest there and that continues on. There is also a building level of interest in some of our payment capabilities that have traditionally been sold in to the community bank market only. We’ve never marketed those payment capabilities up market and we’re starting to gain some real traction and have some real success in taking those relationships where we have a core processing relationship or a system relationship in place and then bundling products and services in to one complete solution, pricing it accordingly and delivering it back to the institution. That’s how it’s happening and we expect the opportunities on the upper side of the market Andrew to be just as good over the long term.

Your next question comes from Tien-Tsin Huang – JP Morgan. Tien-Tsin Huang – JP Morgan: A few questions, I was hoping to get more detail on the payment and transaction growth trends in the quarter and also if you could maybe remind us how it changes in any kind of growth between the transactions and how that might influence the new segment, I think card payment solutions?

Let me cover just some of the payment transaction volumes and the increases that we saw in the fourth quarter. Clearly, the fourth quarter was a more difficult quarter than any other quarter in the year. I think not only did we see that but just about every service provider that has reported has acknowledged that. The numbers that I’m going to give you will kind of level set what we actually saw. I’ll say it up front we’re pretty consistent with what the card associations are actually reporting. Where the card association, MasterCard specifically said they saw pressure on credit transactions in the 5% to 6% range. That’s exactly what we saw. We saw debit card volumes and transactions increase middle single digits to a little bit above that so we had some strength in debit and that didn’t erode. So combining the two on or around there’s a mix of about 5% somewhere in that range year-over-year which was above the rate that the card associations actually generated. One of the reasons for that is that a lot of our payment activities are still concentrated with community institutions and credit unions and they haven’t been hit as hard to date as some of the other issuers so we’re still seeing more stability at higher growth volumes on transactions because they’re so selective in how they issue their cards and who they issue cards to. Tien-Tsin Huang – JP Morgan: What about your expectations on volume growth for the rest of the year? And, how much a change five points either way, how would that influence your top line performance in the net payment solutions group?

Well, I don’t think it’s going to be material because the business is pretty diversified and not a large portion of our transactions are we don’t bill on that basis. So, we have other factors that roll in to it. So, what we did looking forward is we didn’t take the first, or second, or third quarter as the base for 2009, we factored in the fourth quarter. So, we think we’ve caught probably one of those difficult periods that’s ever existed in this country and we used that as a base to project our revenue going forward. I think we’re hedged somewhat and we’ve accounted for some of the difficulties and some of the pressure that we’re likely to see throughout 2009. Tien-Tsin Huang – JP Morgan: Trends in January were pretty consistent?

It’s a little too early to say but I think they’re going to be fairly consistent. Tien-Tsin Huang – JP Morgan: Last question, just retail check, that was great disclosure there. I know that there was a price increase that was factored in so my question was really what kind of volume declines are you seeing? When do you anniversary the price increase in retail check and are you going to be impacted by any potential conversions or consolidation? I know it’s getting smaller as a percentage of revenues but I just want to make sure we get that right.

I think there’s only one area that we’re watching very closely and that’s retail merchants that just don’t make it. In certain cases when they don’t make it and they go out of business that volume migrates to the nearest competitor. So, in the case of a Circuit City we don’t expect that to be a complete run off, they’re just going to quite frankly go to Best Buy and they’re going to make their purchases there. Early indications are we’re starting to see some of that. I think if anywhere, that’s where a lot of the pressure will center. Now, the abnormal decrease that we saw in the fourth quarter which was Christmas related and seasoned related, we’re not projecting that that 16% increase continues throughout 2009. That’s the one area that we moderated somewhat because we don’t think that will be repetitive in nature. But, I think on the average we’re going to see a little bit north probably of 7% erosion going forward. I think that’s safe to say. As far as price increases, we’ve now been successful in negotiating I think in the low double digits relative to merchants with price increases. We’ll continue to do that as the contracts allow us to do that and before it’s all over we’ll be pretty much back to just about every merchant that we serve with a price increase to mitigate some of this run off. The value delivered to the merchant is still significant. We think there’s room for some upward pricing across the board.

Your next question comes from John Kraft – D. A. Davidson & Co. John Kraft – D. A. Davidson & Co.: I just want to follow up on that last question, just real quick not to beat on a dead horse but if you were to pull out the pricing in retail check and pull out the current slowdown as far as just a simple transaction decline, is that what you say is a 7% decline that’s sort of a fair estimate going forward?

I think it’s revenue overall so pricing escalation, pricing increases have not contributed a significant amount to the revenue so far. As we cycle through the base we’ll see more of an impact so I don’t have the precise numbers in front of me but most of the decline that we’re talking about really is transaction driven. It’s fewer checks being written at the point of sale, pressured in an abnormal way during the Christmas season.

John, that reduction in volume is obviously offset by new sales that we’re making, conversion of customers to our warranty product line which is a higher revenue per transaction, new rate increases that we implement during the year and different things that we can do to improve our loss experience. So, there’s a lot of factors that come in to the mix but net/net as Lee said because of the volume declines going in to the year downward revenue pressure that we have to overcome that is obviously more difficult in a market like this. John Kraft – D. A. Davidson & Co.: Lee, in your prepared remarks you mentioned that the US pipeline at least was full I think was the word you used. Would you characterize it as stronger than last quarter or equal to?

I think it’s pretty much equal to last quarter because I don’t think it changes that dramatically quarter-to-quarter. A lot of these sales cycles are six months in duration if not a little bit more so I don’t think we’re seeing a huge uptick from the run rate that we had at the end of last year. But, it is strong and it is strong across the board for products and services which we can deliver that will produce cost reductions and improvements and efficiencies for the institutions. John Kraft – D. A. Davidson & Co.: Along the TouchPoint product line you talked about the Renaissance and the unnamed Russian bank, any of those revenues in the quarter in the Q4 results?

Renaissance bank was, we had a little bit of a tail off revenue as we finished the installation of Renaissance and the other bank I don’t believe was in the fourth quarter. We’ll start seeing that as we move forward. John Kraft – D. A. Davidson & Co.: Multiple quarter implementation?

Yes, that’s correct. These are relatively big projects, they’re significant projects. These are large, large institutions. I think Russia is a pretty good example of a very difficult market environment where banks are using this opportunity to upgrade their technology so when they come out of it they’ll be better positioned. So, there is still strength in certain pockets throughout the world and we’re going after those pockets. John Kraft – D. A. Davidson & Co.: Last question, just a clarification for George, I think you said the contribution from the Certegy receivables, Australia receivables was $50 going forward in 2009. Wasn’t at one point $110 is the difference there just fx?

Yes. As well John we expect some of those collections to continue in to 2010. So, we’ll pick up a little incremental benefit. If you take the $33 and the $50 you get to $83 and then some of that would slip in to 2010. I would hope we could beat that $50 but we’ll have to see. But, we do expect to collect the balance of those receivables but on schedule and it will carry over in to the following year.

Your next question comes from Wayne Johnson – Raymond James & Associates, Inc. Wayne Johnson – Raymond James & Associates, Inc.: Just curious, on the core bank processing side or function how has pricing been? Has there been any greater push back than normal or greater negotiation by your customers and potential customers because of the current economic conditions?

No, I don’t think it’s being driven by the current economic conditions. It’s been driven by the fact that there are a number of service providers and when contracts come up for renewal everybody lines up and everybody tries to market their product and the banks are getting smarter and they’re leveraging one bid versus another and unless you can really sell multiple products and really bundle them you have price compression. As a guide, I think overall for our company and our business in general figure about 1% to 2% price compression on an annual basis. That is what we deal with every single year and it hasn’t really gotten any larger or any greater of a problem since the economy has turned down. So, not so far Wayne. Wayne Johnson – Raymond James & Associates, Inc.: On the international side, constant currency strong particularly in this kind of a market. Can you just give us a quick 30 seconds about what do you think is driving the international demand, why that’s so strong? And, on a geographic basis, are there particular areas that tend to be the strongest that you’re going to be focusing on going forward?

Well, I think it’s really similar factors of what’s driving the demand in the US although the factors that are taking place and driving the purchases in Europe and throughout the world probably took hold a little bit later in the US but we’re enjoying the same type of movement. The factors clearly center around a bank trying to displace costs and improve operating efficiencies and to compensate for the more difficult environment that they’re facing. So, anything you can do to lower the cost base ends up being very, very important to them. I think this has accelerate the demand for outsourcing. I think in the past a lot of outsourcing opportunities never really happened because there were proprietary and self center interest within a given institution and people within the institution didn’t allow some of the bids to take place and wouldn’t consider using third parties. I think that’s changed radically over the last year or so. The bank is more interested today in making sure they get the best price possible and a lot of the capabilities that they ran in house and concentrated on within house systems are no longer strategic to them. What is strategic is investing in risk management systems and capabilities that will enable the institution to improve the performance of the institution. Certainly, in some cases some of the proprietary strategic programs operated in house really didn’t produce that benefit. So, I think that’s part of it. I think competition still bears in to the mix, regulatory changes and controls that are being implemented throughout the world factor in to it. The example with that case would be Barclays where they outsourced installment loan processing to us because they had certain regulatory changes that they had to make to their core systems and they thought third party alternatives would be more efficient. I think it’s competition, it’s the consumer driving it, it’s lower costs, it’s regulatory, it’s all of the above consistent with what you see in the US Wayne. Wayne Johnson – Raymond James & Associates, Inc.: On a geographic basis do you guys have representation in Asia?

Yes, we do. We have people on the ground in China, we have people on the ground throughout India. We have a large concentration of customers and support professional service people throughout Thailand, we have obviously in Australia. Yes, we do we have them in targeted areas throughout Asia Pacific but we have strayed away and stayed away from trying to enter the whole market. We’ve taken more of a rifle approach and we’re going to stay with that. Wayne Johnson – Raymond James & Associates, Inc.: Last question, if I heard correctly the cap ex run rate for ’09 should be roughly $200 million, is that right?

What I said was if you look at where we’ve been running, between 48 and 52, I think $205, we’ve given guidance on that. Wayne Johnson – Raymond James & Associates, Inc.: Could it possibly be under that? And, in the out years would you be looking to lower that more?

Well, I’d say yes it could possibly be under that. As I mentioned earlier we’re pretty critical in our review of the proposals that come before the capital committee. I would say over the longer term what we’ve said is 5% to 7% of revenues is our cap ex guidance. My sense is we’ll gravitate closer to the 5% to 6% range over time particularly as we got some of the international investment behind us that Lee referenced earlier. It’s just an area of focus for us. We do, as I said earlier, remain committed to reinvesting in our product because it’s easy to shut that spigot off but there are consequences that we don’t want to deal with. So, I’m hopeful we can beat that number and get on the upside but I think if you look at our run rate over the last three quarters, that’s a pretty good way to look at ’09. Wayne Johnson – Raymond James & Associates, Inc.: Unless I missed it, did you guys indicate what the use of the free cash flow that you guys are going to be generating?

Yes, I said first to reinvest in our existing operations. Second, to maintain our dividend payout and third, to retire debt.

Your next question comes from Brett Huff – Stephens, Inc. Brett Huff – Stephens, Inc.: One question, you gave us a Brazil credit card number both for the outsourcing JV but then also overall. Could you just repeat that again?

I said that the overall credit card number that we’re processing now is 30 million and I said 22 million of those cards are from our JV partners. Brett Huff – Stephens, Inc.: Do we have any more news about potentially winning more under that JV? I know at one point that was a hope.

We’re still working through it. There are pieces of business that we’re talking seriously about. We don’t have anything signed at this point in time and I think that will happen, if at all, probably six months to a year out so we’ll let you know if it does materialize as we go forward. Brett Huff – Stephens, Inc.: Anything that we should know about, termination fees? For example, I think you said there was a $6 million year-over-year payment to the positive in ’07, anything similar that we need that will adjust margins and things like that comparability in 2009?

We don’t budget for termination fees. I think our total term fees for 2008 were $8 million and I think they were down $11 million from 2007. So, it’s not a material amount to us, it has never been historically material. I want to clarify that the $6 million was not a termination fee, it was a negotiated settlement with a customer over a delayed implementation that was in part their responsibility. The term fees in the fourth quarter were really insignificant. Brett Huff – Stephens, Inc.: You talked a little bit about some success in debit and gave us an idea of transactions. One of the things that seem most interesting obviously about eFunds is the potential to cross sell in to some of the Certegy, the ex Certegy business in those small institutions. How much of that have you already seen and how much of that do you think you have yet to see?

There still is a substantial amount of opportunity in front of us that we haven’t really penetrated or capitalized on to date. We’ve only sold a relatively small number of products in to our core base and this is some of our anchor customers. Not only do we have a lot of products that we think will fit that were existing, we are also bringing up on a regular basis new capabilities that we think will generate additional opportunities. So, we are by no means close to being penetrated. To take a wild guess we’re probably less than 50% penetrated without question. Brett Huff – Stephens, Inc.: You’re saying that you might have some more room on some costs, maybe not cuts is the wrong word but keeping tight on costs. Can you give us a sense of the things that are left to do? I know you had an opportunity to take a hard look at things when you spun off LPS, sort of what is the next couple biggest levers that you think are meaningful?

I think the biggest lever centers around how we deliver our technology to our customer base and how we use technologies to support our internal needs. Gary Norcross and his team are all over that piece of the business, finding better ways or processing, finding less expensive alternatives for disaster recovery, leveraging mid range systems versus mainframe systems, using older technology, second generation technology that still has great life attached to it instead of leading edge technology where you’re replacing hardware every time a new version of a system comes out, leveraging better development efforts throughout the company. With the consolidated organization we have a substantial portion of the development teams under common management so we’re no longer duplicating efforts across the global and systems that we develop for one product are now being transferred and implemented and installed with other products whether it be delivery systems or processing systems or whatever. It’s a matter of I think technology clearly is the biggest opportunity. It takes effort to get at that expense but we have efforts well underway. We expect some pretty good returns in the future from operating more efficiently. Brett Huff – Stephens, Inc.: Last question, a couple of conference calls ago you talked a little bit about your interest in developing more data and analysis products and I wondered if that had changed in the current environment or accelerated?

I think the interest now from institutions is stronger than ever. Anything that you can do or a company can do to provide lift to the institution and better enabling them to manage the risk associated with loans to their customers in general or better enabling them through analytics to identify what incremental opportunities exist with their customer base are getting a lot of attention in the marketplace. We’re investing money in those areas, leveraging the eFunds check system capability that we’ve had in place where we have good strong relationships across the country with a large number of institutions that are now purchasing upgraded systems that generate more revenue for us and that are more accurate to them and we’re also selling additional products that tag in to it and attach to that system that provide analytics for other applications. So, we think that’s the next avenue of growth for our company. We’re going to be very selective in how we invest in that and what we target because we don’t want to find ourselves competing against organizations that are solidly entrenched where we can’t gain substantial market share. That’s how we’re approaching it and so far the results have been very good.

Your final question comes from [Paul Bartoi – PD Investment Research]. [Paul Bartoi – PD Investment Research]: First, just a quick question, is Bradesco still on track to convert in early 2Q?

Yes, they’re still on track for the second quarter, it may move a few weeks at this point in time or a month in either direction but that’s on or around the time that we expect. Keep in mind that a large percentage of the activities that we provide to them have already been converted. We’ve already converted the support service piece, we’ve already converted some of the production pieces and all of the new accounts are already on board with us and active on our system. [Paul Bartoi – PD Investment Research]: Then I think you gave the number of $80 million of international business that’s signed to be converted in ’09?

That’s net of currency, yes. [Paul Bartoi – PD Investment Research]: It looks like that’s basically all that you’re assuming in your guidance. So, is it fair to say that any additional business that is signed would be incremental with you’re kind of assuming what’s already signed?

Well, I think the way to look at it Paul is obviously there’s ins and outs and we’re not immune to price compression and other issues like that internationally as well. But, we’ve got a good running start in to 2009 on the international side and as I said earlier when asked about the 10% to 12% I would hope there’s some upside in that number but given the overall environment it pays to be conservative and that’s where we’re at.

It think it’s conservative but also keep in mind that there are projects that we’ve had underway that drop off during the year also. So, that is not a pure net on the total base, there’s attrition along with that or completed products but that is a conservative number Paul. [Paul Bartoi – PD Investment Research]: Then on the margins, that would be a pretty nice result to get international up to the high teens. Do you have some type of target in mind for the next two to three years as you look at the international margins, how high those could get?

I’d say that I’d like to get up to the mid 20s. You’ve got a balance of activity going on in the international market. You’ve got the European market which is obviously a bit more mature where we’ve got more infrastructure that’s leverageable, you’ve got the emerging Asia Pac market where we’ve had real good success in several countries this year but don’t have a huge presence to leverage in any single country. Then obviously down in Brazil we’ve got our card joint venture. So, they all contributed varying amounts. As you might expect, the European margins are already up in the mid 20s. So, we think over time we can get there. We could expect Brazil to probably stay in the low 20s over time and Asia Pac it’s a little early to say but it will gravitate upwards. [Paul Bartoi – PD Investment Research]: Then just the last one, Lee I think you mentioned a number of half of 1% of your exposure to banks that could potentially close. Is that right, so just basically all of the banks that are potentially could go away you only have half of 1% of revenues?

No, that’s the amount that we stand to lose when you add up the potential lost revenues from the banks that have been forced to combine or have failed to date. So, it’s less than one half of 1%, that’s our exposure and that’s if everything goes the wrong way. But, if they take our systems that we have in place or our capabilities and they just rip them out and they throw them aside, that’s what that number totals. Now, there’s upside that will mitigate that loss or that exposure from professional service work and helping certain institutions integrate acquired assets and we’re making good progress with that. We’ve generated quite a bit of money in the last six months of the year driven by integration efforts and services that we provide.

Thanks to everyone for participating in today’s call. We look forward to speaking with you again.

Ladies and gentlemen that does conclude your conference for today. Thank you for your participation and for using the AT&T Executive Teleconference Service. You may now disconnect.