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Executives

Mary Waggoner – Senior Vice President, Investor Relations

William P. Foley II – Executive Chairman

Lee A. Kennedy – President, Chief Executive Officer

George Scanlon – Chief Financial Officer

Analysts

Bryan Keane – Credit Suisse

David Koning – Robert W. Baird & Co., Inc.

Julio Quinteros – Goldman Sachs

Gregory Smith – Merrill Lynch

Paul Bartoli – P.B. Investment Research

James Casane – Bank of America

Tien-Tsin Huang – J.P. Morgan

Glenn Greene – Oppenheimer & Co.

Wayne Johnson – Raymond James

John Kraft – D.A. Davidson & Co.

Brett Huff – Stephens, Inc.

Fidelity National Information Services Inc. (FIS) Q3 2008 Earnings Call October 27, 2008 5:00 PM ET

Operator

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

Mary Waggoner

Thank you Karen and good afternoon. Joining me today are Executive Chairman Bill Foley, Lee Kennedy, President and CEO and George Scanlon, CFO.

Today’s discussion will contain reference to non-GAAP and pro forma results in order to provide more meaningful comparisons between the periods presented. Reconciliation between GAAP and non-GAAP results and schedules showing historical detail are provided in the press release. We have also included a power point presentation to supplement today’s discussion. Both documents are available on our website, fidelityinfoservices.com.

Before we continue, I would like to remind you that some of the comments made on today’s call will contain forward-looking statements. These statements are subject to risks and uncertainties described in our earnings release and other filings with the SEC. The company expressly disclaims any duty to update or revise those forward-looking statements, including annual and quarterly guidance.

In addition to being recorded, this call is being webcast live over the Internet and a replay will be available on our website shortly after the call. A telephone replay will also be available and the dial-in information is included in today’s press release. Now I will turn the call over to our Executive Chairman, Bill Foley.

William P. Foley II

Thanks Mary and good afternoon everyone and thank you for joining us today. FIS reported an outstanding quarter by any measure. Strong results across all of our segments drove organic growth of 9.4%, margin expansion of 50 basis points and adjusted earnings per share of $0.42. We were particularly pleased with the 3.7% growth rate in EBS, our large bank component which serves all the large financial institutions in our marketplace.

The consistent improvement of organic revenue growth, margin and pre-cash flow in this challenging environment demonstrates the resiliency of our operating model and the success we are having executing our business plan. We continue to achieve solid sales results and we also have a healthy pipeline of new customer implementations underway, which provides visibility into future revenue streams. Our balance sheet remains strong and we have locked in fixed rates on 80% of our outstanding debt.

In addition, the recent sale of the Certegy Australia business, which was completed on

October 13, will result in more efficient use of our working capital. Let me now turn the call over to Lee for a detailed business review. Lee.

Lee A. Kennedy

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

We will conclude today’s prepared remarks with a third quarter financial report and then we will open it up for your questions. I’ll begin with the summary of third quarter operating results. Overall, it was a great quarter, driven by strong performance in each of our businesses. Total revenue increased 25.4%. Excluding eFunds, organic revenue grew 9.4%. All three of our reporting segments generated strong, organic growth. Our international business grew 25.5%. IFS grew 9%. And EBS which declined year-over-year last quarter grew 3.7%.

Our sales teams are clearly delivering excellent results in a very difficult environment. We are also making significant progress in improving the profitability of FIS. The third quarter EBITDA margin increased to 25.6%, which is a 50 basis point improvement over prior year and sequentially a 250 basis point improvement over the second quarter. Adjusted net earnings came in at $0.42 per diluted share, which is a 35.5% increase over prior year.

These results were driven by the successful execution of our business plan, which includes four primary objectives; increasing organic revenue growth, improving profitability, reducing capital expenditures and improving free cash flow. If you will turn to Slides 5 and 6, we have summarized the solid progress that we’ve made throughout the year. And illustrated on Slide 5, organic revenue growth improved from approximately 4% in the first quarter to 6% in the second quarter to 9% in the third quarter.

The EBITDA margin increased from 22% in the first quarter to 25.6% in the third quarter and expanded 50 basis points year-over-year. This improvement is being driven by new sales and volume leverage, the successful integration of eFunds and the implementation of cost reduction initiatives discussed on our first quarter call. The successful execution of these initiatives has driven solid, sequential growth in earnings per share.

We are also making good progress in reducing capital expenditures and improving free cash flow. As shown on Slide 6, CapEx declined to $48 million in the third quarter from $78 million in the first quarter of 2008 and $52 million in the second quarter, reflecting more efficient utilization of technology, development and infrastructure resources in the wind down of major development projects including our new Brazilian card processing platform and the re-write of our German core banking system.

Year-to-date capital expenditures total $179 million, which puts us on track to achieve our full year target. This is a $31 million improvement over prior year. Third quarter cash flow increased to $118 million. Free cash flow totaled $209 million through the end of the third quarter, which is a 500% improvement over the same period last year.

In summary, it was a good quarter by any standard and the strong results were balanced across all primary businesses. We have successfully implemented the initiatives communicated in our first quarter call and they are driving solid, measurable benefits. Next I will discuss our view of the financial institution market and how volatile market conditions are affecting our business.

Our balanced mix of products, customers, markets and geographies served has enabled us to generate solid organic growth in a very difficult and highly challenging market. If you will turn to Slide 7, you’ll find a breakdown of revenue by market segment. You will see that our revenue base is well diversified across all markets served. This diversification advantage is further strengthened by long term customer contracts with significant termination and penalties. More than 86% of our revenue base is reoccurring, which is consistent with the majority of our peers.

You will also see on Slide 7 that we have no significant customer or segment concentration. Our top ten customers account for approximately 14% of consolidated revenue or just over 1% on average. These customers are well diversified in terms of size, geographical location and the level of outsourcing provided. There has obviously been considerable legitimate focus on the potential impact of recent bank failures, acquisitions and liquidations on our business.

As illustrated on Slide 8, to date we believe that less than one-half of 1% or less than

$20 million of our total revenue is at risk. This at risk revenue could be partially or completely offset by higher demand for professional services to assist acquiring institutions with the conversion and integration of acquired assets. This is similar to the incremental professional service work which was generated when Cap One acquired Norfolk Bank and Toronto Dominion acquired Commerce Bank.

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

Our sales organizations continue to generate strong results across all principal businesses. As we have stated in the past, we believe that our balanced products, diversified customer base, and global footprint help buffer weaknesses which may occur in certain market segments. Admittedly, the market has deteriorated even further over the past 45 days and we believe that the U.S. banking industry will continue to face significant challenges in the fourth quarter and throughout most of 2009.

Financial institutions will likely continue to reduce spending on discretionary software and professional services, which do not generate strong, immediate benefits. Software and professional service products that drive tangible strong cost reductions or enable an institution to more cost effectively comply with regulatory requirements will remain solid.

We will continue to focus on helping our customers operate more efficiently, which is now one of their highest priorities, while remaining diligent and controlling our own costs and making sure that our sales organizations continue to aggressively cross-sell our ancillary products and services. We believe that the banking industry will emerge from the current crisis much stronger and that the overall demand for our products and services will continue to grow well into the future. I will now turn the call over to George who will cover the third quarter financial results and our outlook for the remainder of the year. George.

George Scanlon

Thank you Lee. Good afternoon everybody. As Bill mentioned, we successfully completed the spin off of Lender Processing Services on July 2. As you can see on Slide 9, we have discontinued several businesses and beginning in the third quarter LPS is now reported as a discontinued operation for all periods presented. The 8-K that we furnished to the SEC on September 5 recaps the previous six quarters to reflect LPS as a discontinued operation and also provides the allocation of certain interest costs and corporate expense to LPS on a pro forma basis.

I would encourage you to review the document if you haven’t already done so and contact investor relations if you have any questions.

October 13 we completed the sale of Certegy Australia, which will be reported as a discontinued operation beginning in the fourth quarter. I’ll provide additional details regarding the sale later in the call. If you’ll now turn to Slide 10 we will discuss the third quarter financial results. Consolidated third quarter revenue totaled $893.8 million which is a 25.4% increase compared to the prior year quarter. EFunds contributed revenue of almost $143 million compared to

$26.6 million in the third quarter of 2007.

Excluding eFunds from both periods, FIS revenue increased by 9.4% over the prior year and improved sequentially from the 5.7% growth rate we experienced in Q2 ’08. Our Q3 ’08 results include a $5.6 million year-to-date correction for past due interchange revenue. Excluding this revenue, third quarter revenue increased 8.6% compared to the prior year. Termination fees were not significant in either period.

For comparative purposes, my remaining comments will exclude revenue from eFunds. IFS revenue totaled $322.9 million, a 9% increase compared to the third quarter of 2007. Excluding the interchange adjustment I referenced earlier, IFS revenue increased 7.2% driven primarily by growth in core processing, e-business and card marketing programs, and complemented the 7.9% growth we discussed in the second quarter.

Enterprise revenue increased 3.7% to $240.1 million in the third quarter and improved sequentially from $227.4 million in the second quarter. This was the first quarter of the year in which we were able to show positive year-over-year growth. Higher software license fees and outsourced technology revenue more than offset a $6.9 million decline in retail check risk management revenue. Excluding the impact of the check business, EBS revenue grew a strong 9.4%.

International revenue increased 25.5% to $178.3 million. Currency gains added approximately $14 million to revenue in the quarter. Strong growth in our core banking operations in Germany, new customer implementations, and continued strong card issuance in Brazil fueled the increase. At the end of the quarter we were processing 28 million cards through our Brazilian joint venture and added 1.7 million cards during the quarter.

Corporate and other revenues comprised primarily of the outsourced data processing services that we are providing to Fidelity National Financial. The prior year quarter also includes revenue from a leasing operation that was sold in the third quarter of last year.

Slide 11 gives you additional insight into our international revenues. Figure 1 shows our revenue by quarter for 2008, including eFunds. Because our revenues and costs are mostly denominated in the same local currency, and our international margins have lagged, the impact of foreign exchange to overall profitability has been minimal. Favorable currency rates contributed approximately $14 million to third quarter revenue, $21 million in the second quarter and

$17 million in the first quarter.

You can also see that our quarterly revenue growth in constant currency has been strong throughout the year as we grew 13.8% in Q1, 27.7% in Q2 and 23.6% in Q3. As we look to the fourth quarter with the full year-over-year impact of the eFunds acquisition, we would anticipate achieving growth in constant currency of somewhere between 10 and 12%. In response to market volatility and other factors, the strengthening of the dollar has recently accelerated, especially as turmoil in the financial markets increased in October.

As you can see in Figure 2, since quarter end through October 24, exchange rates for the Brazilian real have declined 17.5% while the sterling and euro have declined by about 10% each. It is impossible for us to project with any certainty the impact that currency translation will ultimately have on our Q4 results. And unless there is a meaningful reversal in the current trends, which we are not expecting, the impact will be negative to U.S. dollar revenue growth in the fourth quarter.

Figure 3 is based on our Q3 ’08 revenues and provides additional insight into the currencies in which our revenue from international are generated to enable you to see the relative exposure we have to those particular currencies.

Moving on to EBITDA on page 12, EBITDA increased 27.9% to $228.9 million. The 25.6% margin exceeded third quarter 2007 margin by 50 basis points and as Lee mentioned improved sequentially from 22% in Q1 and just over 23% in Q2. The margin expansion was driven by higher profitability in international, cost savings associated with the eFunds integration and other cost reduction initiatives we undertook, and stronger software license revenue.

The corporate and other EBITDA line, which totaled $10 million in the quarter, includes corporate overhead expense in addition to our IT infrastructure, which supports our operations and those of Fidelity National Financial. Third quarter ’07 corporate and other EBITDA of

$6.8 million also included the leasing group whose assets were sold in the third quarter of last year. The traditional corporate overhead expense included in this line was $22 million in Q3 ’08 and is expected to approximately $26 million in the fourth quarter.

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

Please turn to Slide 13 for an overview of adjusted net earnings. Third quarter adjusted net earnings for FIS totaled $80.2 million or $0.42 per diluted share compared to $0.31 in the 2007 quarter and $0.36 in the second quarter of 2008. As indicated, adjusted net earnings exclude after tax integration expense of $1.5 million and $9 million associated with the write off of debt origination costs related to the Term B facility we paid off in connection with the spin off of LPS. Adjusted net earnings also exclude after tax purchase amortization of $28.1 million.

Average outstanding shares were $191.9 million. We did not repurchase any shares this quarter and remain focused on using excess cash to pay down debt.

As shown on Slide 14 free cash flow, which is defined as operating cash flow minus capital expenditures, improved significantly to $118 million in the quarter and $209 million or 102% of adjusted earnings on a year-to-date basis. The increase was driven by higher earnings and improved working capital management in combination with lower capital expenditures.

Third quarter CapEx of $48.2 million declined $4.1 million sequentially from Q2 ’08 and declined $33 million when compared to Q3 ’07. We are expecting approximately $60 to

$65 million of CapEx in Q4 and $240 to $245 million for the year, which is within our previously established guidance. We also expect to achieve our guidance of between $315 million and $345 million in free cash flow for the year.

Turning to Slide 15, at September 30 we had $238 million in cash and cash equivalence and

$2.6 billion in debt, including $2 billion outstanding on the Term A facility and $620 million against the $900 million revolver. During the quarter we made scheduled payments on our Term A facility of $13 million and utilized our revolver to retire $200 million of secured, 4.75% and fixed rate notes which matured.

Approximately $2.1 billion or 80% of our debt has been swapped to fixed rates. The effective interest rate including the swaps and debt issuance costs was 5.5% at quarter end. And we paid

$9.5 million in shareholder dividends during the quarter.

I will discuss the outlook for the remainder of the year as presented on Slide 16. As I mentioned earlier, Certegy Australia will be accounted for as a discontinued operation beginning in the fourth quarter. You may recall our decision to sell this business was predicated on our desire to focus on businesses which can be leveraged across our financial institution customer base, as well as to free up a relatively significant investment in working capital.

While EBID margins were good in this business, we believe we can better deploy the capital in our core businesses. The sale of this operation will generate a small loss in the fourth quarter, but will significantly improve free cash flow in 2009 as we expect to collect approximately

$110 million in outstanding receivables over the next 15 to 18 months.

Certegy Australia contributed $0.05 per share for the first nine months of 2008 and was expected to generate about $0.02 in the fourth quarter or $0.07 for the full year. Based on our strong performance year-to-date combined with a slightly more cautious outlook for the fourth quarter, and the sale of our Certegy Australia operation, we are reiterating our original guidance and expect full year adjusted EPS from continuing operations of $1.44 to $1.50, which implies $0.43 to $0.49 in the fourth quarter after the adjustment for Certegy Australia.

I want to emphasize that the only change to the guidance we previously communicated is the treatment of Certegy Australia as a discontinued operation. And that concludes our prepared remarks for FIS. We will now open the line for questions. Operator.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Bryan Keane – Credit Suisse.

Bryan Keane – Credit Suisse

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

George Scanlon

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

Bryan Keane – Credit Suisse

But it wasn’t included, I guess, it didn’t already excluded from [inaudible] –

George Scanlon

No it’s been consistently a continuing operation.

Bryan Keane – Credit Suisse

And then looking on Slide 8, the bank fillers and consolidation business, the revenue at risk can you just describe how you guys came to that number? How did you figure that number?

George Scanlon

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

Bryan Keane – Credit Suisse

On EBS it was nice to see that bounce back in the quarter. Is that sustainable at that kind of level going forward, or should we see that number bounce around a little?

Lee A. Kennedy

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

George Scanlon

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

Bryan Keane – Credit Suisse

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

George Scanlon

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

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

Operator

Your next question comes from David Koning – Robert W. Baird & Co., Inc.

David Koning – Robert W. Baird & Co., Inc.

When I look at growth kind of going out into Q4 and really past that, is it fair to think about you kind of said “enterprise flattish”, it sounds like international 10% or so, kind of constant currency and then IFS it seems like mid single digits might be reasonable? And you kind of mash all those together and you get about 5%. But next year if we think about currency it looks like in my model it should have about a 2% headwind into ’09, so we take that 5% down to maybe 3% organic.

Is that just a ballpark kind of baseline next year, just rough estimate do you think so far?

Lee A. Kennedy

Well you know, David, we’re still in the midst of our business planning for next year. Clearly the currency rate affect will create headwinds for us. Your estimate probably isn’t that far off. We do also have pretty good visibility and some opportunities to grow international. We’ll be adding to Bradesco cars through the conversion next year. We have several of the contracts that we’ll be implementing. So I don’t want to give a specific number at this point.

Our long term guidance is 6 to 9% and as I said we’re in the midst of planning for that right now and included in markets are evolving day to day, so we’re trying to use the best information available before we come out early next year with guidance that we can stand behind with confidence and give you guys some better visibility.

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

David Koning – Robert W. Baird & Co., Inc.

And then when we think about EPS this year the mid-point of your new guidance would be about $1.47. In the two swing factors into next year that we know about, I just want to verify that they’re still in place but eFunds if we get a full year benefit next year, given what you’ve done so far and then into next year $35 or so million, that’s a $0.10 benefit. And then just you saw the cash flow this year should be at least a $0.05 benefit into next year.

So are those two fair swing factors? And then we obviously don’t know exactly what operations will be, but can we assume that they’ll hopefully be positive, there’ll be some growth in EBID next year, too?

Lee A. Kennedy

First in regards to the eFunds cost take out, we said we’d be at a $65 million run rate by the end of next year so you can’t incrementally add that in absolute terms. It’ll ramp up during the year. Clearly we came into the year, had some concerns about revenue and made some decisions to pay costs down. And obviously as we look to next year we’re focused on that as well.

But the other side of the equation, of course, is the revenue side and some element of price compression offset by opportunities that created. So I don’t mean to be evasive, it’s just we haven’t done the detail work at this point where we’re in a position to guide much on ’09.

Operator

Your next question comes from Julio Quinteros – Goldman Sachs.

Julio Quinteros – Goldman Sachs

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

Lee A. Kennedy

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

Julio Quinteros – Goldman Sachs

And then just to make sure I have this straight, the targets that you’re setting for the rest of the year just in terms of the organic number, the 4 to 6 that’s for calendar year ’08 for the full year not for the fourth quarter, is that correct?

Lee A. Kennedy

That’s correct.

Operator

Your next question comes from Gregory Smith – Merrill Lynch.

Gregory Smith – Merrill Lynch

The guidance range for 4Q looks pretty wide. I’m just wondering what the biggest variables, is that more in the check risk management side? Just wondering why that’s so wide.

Lee A. Kennedy

It’s a little bit to do with check obviously. It’s an uncertain consumer season that we’re facing and so there’s some conservativeness and wideness drive because of that. But that’s one factor, sure.

Gregory Smith – Merrill Lynch

And am I reading this right? I mean, by the guidance you supplied on 5/16 I mean you’re still saying you may be able to do the $0.49 even without Certegy Australia in the mix? Is that correct?

Lee A. Kennedy

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

Internationally we actually have bout five or six deals that are currently pending so a lot of license deals outside of the U.S. underway, especially with our profile product. So it depends on when we’re able to bring those home and when we’re able to sign them and get them booked, Greg. So there still is a possibility it’s going to work in our favor. We’ll see what happens.

Gregory Smith – Merrill Lynch

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

Lee A. Kennedy

Sure. There’s a large number of institutions throughout the country that’s running on our software, especially with Tier One institutions that we might not be generating significant revenue from those institutions, but as they start to roll up acquired institutions and have to convert those institutions onto their bank base processing platform, it generates sometimes an opportunity for organizations, similar to what happened with Cap One and Toronto Dominion.

So we think we will benefit from some of the consolidation that’s taking place in the form of incremental conversion work, which is professional service work, because we’re actually supporting the systems today and we have good, strong, available, knowledgeable resources that we can place with the acquires. So I think some of it could come from that angle and from that type of product capability opportunity but we think there’s some roll ups out there.

Gregory Smith – Merrill Lynch

If you could just remind us maybe over the next couple of years what the repayment schedule is on any of your debt? I guess on your term note? What your cash demands may be over the next few years, just to repay debt.

Lee A. Kennedy

Yes Greg we’ll be repaying about $26 million a quarter on the Term A facility starting Q1 next year and I believe that doubles the following year to $52 million. And the facility is through early 2012.

Operator

Your next question comes from [Paul Bartoli – P.B. Investment Research].

Paul Bartoli – P.B. Investment Research

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

Lee A. Kennedy

That’s on a reported basis.

Paul Bartoli – P.B. Investment Research

And is that pretty similar to what you saw in the third quarter?

Lee A. Kennedy

Well I think it –

Paul Bartoli – P.B. Investment Research

Excluding the software license. Sorry.

Lee A. Kennedy

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

Paul Bartoli – P.B. Investment Research

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

Lee A. Kennedy

You know, it’s funny; all of our key product lines are growing very strongly right now. So the growth hasn’t been isolated, just to the payment oriented products it also rolls over to our core processing capabilities and market also. So we see it really across the board. And we’re pretty confident that we can maintain that growth rate. Yes.

Paul Bartoli – P.B. Investment Research

And then the Bradesco contract portfolio that converts, what’s the update on the time of that? George did you mention 2Q? Was that pushed back a little bit from, I think, 1Q initially?

George Scanlon

Yes we were trying to get through the early part of the year and basically I think right now we’re targeting the first week of April for implementation which everybody’s very focused on.

Paul Bartoli – P.B. Investment Research

You mentioned the use of free cash is mostly focused on paying down debt. Just a little bit curious why these levels, not looking at buying back stock a little bit more?

Lee A. Kennedy

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

Operator

Your next question comes from [James Casane] – Bank of America.

James Casane – Bank of America

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

Lee A. Kennedy

You know, Jim, I’ll cover pricing first. The answer to that is over the last year or so we have seen some price compression in our core processing business but its lower single digit, it’s not major, at this point in time it’s nothing really for us to be concerned about. As far as opportunities going forward and the pipeline in general it remains very, very strong. A lot of our growth is coming obviously from the payment side of the business, because the institution can convert into our system a lot easier than they can with converting a core processing system.

But the pipeline still remains strong on core processing. We’ve secured a number of really good, strong deals this year. And we expect to continue to secure those deals as we move forward. So all in all, Jim, that business is evidenced by the growth this quarter remains pretty strong for us.

James Casane – Bank of America

Everyone’s talking about bank consolidation. What are your thoughts about processor consolidation?

Lee A. Kennedy

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

Operator

Your next question comes from Tien-Tsin Huang – J.P. Morgan.

Tien-Tsin Huang – J.P. Morgan

Free cash flow, should that track pretty closely with adjusted earnings for the rest of ’08 and as we think about 2009 as well?

Lee A. Kennedy

Yes I think it should. We’re going to get a little bit of a pick up as we collect those receivables from Australia. So that’s why in our guidance we went from $315 to $345. The upper limit being dependent on how much of those receivables we can collect this quarter. But I think that’s a pretty good starting point.

Tien-Tsin Huang – J.P. Morgan

And then in the retail check business, I know you got a lot of questions about that. Anything out there on the horizon that can perhaps reverse the trends there? Lee I know you’ve talked about pricing in the past.

Lee A. Kennedy

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

Tien-Tsin Huang – J.P. Morgan

Because it seems to be the revenue’s tracking about down 10%. 4Q I know is a pretty seasonal, really strong quarter. Anything different to consider there in the fourth quarter?

Lee A. Kennedy

Yes the thing that’s really helping us with the profitability business is a new series of models that we introduced about six months ago. These new models incorporate into the whole decision process a number of consumer attributes that are very, very specific in identifying the risk of fraud. So that’s helped us on the profitability side. And even though the revenue is declining at a greater rate today than it was a year or two ago, we’ve been able to offset that through models and also through price improvements and price increases that we’ve passed on to the retailers.

So those two factors are keeping our head above water. And we believe that trend will continue throughout 2009.

Tien-Tsin Huang – J.P. Morgan

And then George on the FX side, I really appreciate again the disclosure there, the benefit was $14 million to revenues. Can you give us a rough idea of what the earnings impact was on that? Sounds like it’s minimal but just want to make sure.

George Scanlon

Yes it is. It’s as I said the margins have lagged in international. We looked at the cumulative for the year, I think it was about $1.6 million. So in the quarter it wasn’t that significant. You know, clearly as we grow international and it gets more consistently profitable, we’ll look at some hedging alternatives in countries where that’s practical. In Brazil it’s not practical. So over time we’ll try to moderate that.

But I think obviously the story over the next year is going to be get everyone focused on the local currency growth and how we’re performing operationally, because the dollar conversion is going to neutralize a lot of the progress I think we’re going to otherwise show.

Tien-Tsin Huang – J.P. Morgan

So cumulative is less than $2 million. Is that what you?

George Scanlon

That’s correct. Year-to-date. Correct.

Tien-Tsin Huang – J.P. Morgan

Just what exactly is driving the interchange revenue adjustment?

Lee A. Kennedy

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

So the margin story is actually a little better than you would otherwise think because of the impact of the 5, 6 on both revenue and expense.

Tien-Tsin Huang – J.P. Morgan

And then you said it’s going to be about $2 million going forward in terms of pass through.

Lee A. Kennedy

That’s right.

Tien-Tsin Huang – J.P. Morgan

Just on the card issuance front, any noticeable change in card issuance growth just coming out of Brazil or even in the U.S. I suppose from your community banks?

Lee A. Kennedy

Not so far. The Brazilian issuing basis fairly stable and consistent, so not any change there. And on the U.S. side with community institutions, not a significant or much of a change there either. So so far on both fronts we’re in pretty good shape.

Operator

Your next question comes from Glenn Greene – Oppenheimer & Co.

Glenn Greene – Oppenheimer & Co.

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

Lee A. Kennedy

I think the mood is pretty consistent with what we communicated in the first quarter. In the U.S. if the software sale is discretionary in nature, there’s been some of a pullback in the delay in signing deals. Internationally, that’s not the case. It still remains fairly strong. The pipelines are full, especially for products like our profile Pro Banking System, the demand is very, very strong and we’ve actually signed and closed more new accounts this year than we did at any time over the last two or three years.

So exceptional demand, and it still continues on not only throughout Europe but also Asia-Pacific and we had the first level of interest expressed in South America recently. So across the board and in all geographies.

Glenn Greene – Oppenheimer & Co.

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

George Scanlon

Yes you know, I think we’re still hanging in that 12 to 14% EBITDA margin range. And it varies by region. And honestly gets affected by the timing of deals. So clearly Brazil as you can see is a good part of international operations, making good progress there and expecting profitability improvement over time, particularly as we add volume to that card base. It was a good quarter for us internationally. On a relative basis, a smaller revenue base, so when we have deals like Lee mentioned they can create some quarter-to-quarter volatility in revenue and profitability, but a good solid quarter this quarter.

Glenn Greene – Oppenheimer & Co.

Just on the Certegy Australia, I guess I’m just a little bit surprised that its $0.07 diluted. How big was that business and how profitable roughly?

Lee A. Kennedy

Well you know the revenue base was about $35 million and very good EBITDA margins or EBID margins I guess in the 50% range. We just looked at that business strategically. It was effectively a consumer finance business. And it was not aligned with the core businesses that we want to continue to invest in. And so we undertook a process and found a strategic buyer that it made sense for. But the objective was obviously to monetize those receivables, which were tied up in that business, and that’s really where the cash flow benefit will come over time.

But it was a good earnings contributor. On the other hand, given the developments in the global market and the challenges we’ll all be facing I think it’s a business that we’re not sorry to have separated. It really made sense to divest that business.

Operator

Your next question comes from Wayne Johnson – Raymond James.

Wayne Johnson – Raymond James

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

Lee A. Kennedy

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

Wayne Johnson – Raymond James

And then the tax rate going forward. I know that you don’t want to address ’09, but as international grows should we be expecting a moderating tax rate in next year?

Lee A. Kennedy

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

Wayne Johnson – Raymond James

Is there a particular financial institution, domestically speaking, size or geographic location that you feel is more at risk than others?

Lee A. Kennedy

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

Operator

Your next question comes from John Kraft – D.A. Davidson & Co.

John Kraft – D.A. Davidson & Co.

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

Lee A. Kennedy

No, we really haven’t done that to date. If we learn of any that are struggling or have high risk, then obviously we talked about it and we factored into our forecast on an ongoing basis. But this particular slide only references institutions that have actually failed or been acquired to date. So nothing on the predictive side at this point in time.

John Kraft – D.A. Davidson & Co.

I hate to bring up something potentially negative, because it was a good quarter, but as you talked about all these areas of strength, the core processing certainly and payments and builds beginning regulatory products and products that help customers save money. Where are the areas of weakness? Where are you seeing customers just put off decisions?

Lee A. Kennedy

A couple products that we have that are more discretionary in nature or products that they can push off and not implement right away and not lose that much value in doing so. I would say the Touch Point applications that throughout the U.S. are somewhat under pressure as more and more institutions are saying “I like the capability, I like the cost savings, I like all the value that that system creates but I’m not willing to spend the money for it at this point in time until we get better clarity on the financial health of our organization”. So I think its software related primarily.

We haven’t seen any pushback on the payment side of the business, any product capability there. We haven’t seen any significant pushback on core processing with community banks and the mid-tier banks that we service. Touch Point is probably the best example I can give you domestically. That’s where a lot of the pushback has taken place.

Operator

Your next question comes from Brett Huff – Stephens, Inc.

Brett Huff – Stephens, Inc.

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

George Scanlon

Well I think if you look at it as we report our minority interests you can see that the earnings that we recognized will reflect the amortization of certain intangible costs that are associated with the accounting for the deal. Put us in the negative earnings for the quarter. EBITDA is positive. A little negative, slightly negative on the EBID side but we’ve got U.S. accounting that we have to layer on top of that investment which is what made it negative. And the local currency is profitable.

Brett Huff – Stephens, Inc.

In terms of cost saves you all did obviously a great job sequentially 2Q to 3Q. How should we think about sort of anything that’s left either from eFunds, which I know there seems like there’s a significant amount left or just the general cost savings that you have going on? Or any other sort of lowering in the cost structure?

George Scanlon

Well on the eFunds side by year end we’ll have taken out $35 million in costs. So that’s in your savings. And looking out one year by the end of next year we’ll take out in total about $65 million. So the incremental cost savings are still pretty significant from that business. As far as traditional opportunities, I can tell you this that Gary Norcross is all over our cost base. And especially as it relates to saving money or creating efficiencies in the technology end of our business. Those cost saves take more time to get after and some of them require technology changes in general.

But the road map that he has laid out with his team shows us that there’s still plenty to get out of this business as we move into the future.

Lee A. Kennedy

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

Brett Huff – Stephens, Inc.

You talked about I think Commerce Bank and New York Community Bank, deals you signed last quarter and I wondered how, I suspect you recognized the license then but in deals like that that are core processing deals how long is that implementation typically, because you referenced sort of the longer term nature of some of the installations?

Lee A. Kennedy

It depends on the institution but anywhere from an additional one year to three year period depending on how much more work we have in front of us. But generally about a year or two at the most.

Brett Huff – Stephens, Inc.

So for banks that size even that’s typical?

Lee A. Kennedy

Yes.

Operator

And there are no further questions. Please continue.

Mary Waggoner

We just wanted to thank you for joining us today. Please remain on the line for the replay information. We look forward to taking your questions. Thank you.

Operator

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Source: Fidelity National Information Services Inc. Q3 2008 (Qtr End 9/30/2008) Earnings Call Transcript
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