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Executives

Kirk T. Larsen – Treasurer and Vice President of Investor Relations

Frank R. Martire – Chairman and Chief Executive Officer

Michael D. Hayford – President and Chief Operating Officer

Timothy C. Oliver – Senior Executive Vice President and Chief Financial Officer

Analysts

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

Brett Huff – Stephens Incorporated

David Kane – JPMorgan Securities

John Kraft – D.A. Davidson & Co.

Metavante Technologies, Inc. (MV) Q4 2008 Earnings Call Transcript February 5, 2009 8:30 AM ET

Operator

Thank you for holding and welcome to the Metavante Technologies’ quarterly conference call. I need to remind everyone that today’s conference call is being recorded. Later on in the call, we will open the lines for question. (Operator Instructions)

At this time I would like to turn the call over to Mr. Kirk Larsen, Metavante Technologies’ Treasurer and Vice President of Investor Relations. Mr. Larsen, please go ahead.

Kirk Larsen

Thank you, Stacy. Good morning and thank you all for joining us for Metavante Technologies’ fourth quarter earnings release conference call. Our results were released earlier this morning and have been posted to our website at www.metavante.com. A webcast of the audio portion of this call and all the charts that we reference during the call are available on that website. They will remain there for the next month.

With me today are Frank Martire, Chairman and Chief Executive Officer; Mike Hayford, President and Chief Operating Officer; and Tim Oliver, Chief Financial Officer. Our agenda includes opening remarks by Frank, and then Tim will review the fourth quarter and full-year results for 2008 and our outlook for 2009 and then Mike will talk about sales success.

We will leave ample time at the end of the call to take your questions and ask that you self-limit to two questions to allow broader participation.

As a reminder, our comments today will include statements related to the expected future results of Metavante and are therefore forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995.

Our actual results may differ materially from our forecasted projections due to a wide range of risks and uncertainties that are described in our earnings release and detailed in all of our SEC filings.

In addition to customary GAAP measures, our presentation also includes certain non-GAAP financial measures. All information should be read in conjunction with our SEC filings.

With that, I will turn the call over to Frank.

Frank Martire

Thank you, Kirk and thanks to those of you, who are joining us on the phone. I will keep my remarks brief to make sure that we have left plenty of time for Tim to walk you through the quarter and have Mike talk about our sales success and banking trends.

Our fourth quarter crawls out a very good year for Metavante. I am extremely pleased and our first year as a public company, we were able to deliver consistently strong results that repeatedly exceeded the expectations that we set during our initial road shows back in November of 2007.

For the full year, we delivered 7% revenue growth and expanded operating margins by 1.2 percentage points. And our fourth quarter revenue grew 6% and operating margins expanded by more than 1.4 percentage point. For the quarter, we posted very solid operational results that sustained the momentum we built over the last several quarters and allowed us to once again deliver favorable year-over-year comparisons.

These results again showed the strength of the Metavante business model. We have a revenue base that is highly recurring and diverse and a leverageable cost structure that generates strong incremental margins. This performance is particularly impressive when considered in the context of a difficult and in many regards unprecedented market environment. It is a credit to remarkable efforts of our employees and depth of our client relationships.

As we launch our plans for 2009, we remain focused on two things. Helping out clients navigate a tough economic environment and drive in long-term value creation for our investors

For our clients we will continue investing in our platforms to ensure consistency, reliability, and security. We will develop new products and capabilities that help them compete. We will further improve integration across our product portfolio. We will enhance our selling organization to make us easier to do business with and we will attract and retain the very best people to help us get all of this done.

And for our investors, we will redouble our selling efforts to capture our share of wallet and market share. We will continue to drive costs productivity and we will develop contingency plans that allow us to adapt to changing market conditions to preserve profitability. These efforts will not only optimize the results that we are able to deliver during this economic down cycle, but it will also ensure that we emerge from this cycle better than we went it, with more opportunity for growth and higher profitability.

With that I will turn the call over to Tim, so he can walk you through some more details on the quarter and our outlook for 2009. Thank you.

Timothy Oliver

Great thanks Frank, and good morning to all of you who called in on the phone. My comments today will reference the charts provided on our website. These charts summarize the data provided as attachments to the earnings release and have some analytics. Since Kirk has already reviewed the cautionary language on both Safe Harbor and Reg G, I will move right to slide one entitled 2008 performance.

Before I go through the details of the quarter and the year, I just want to take a moment to amplify points that Frank made in his remarks. In short, we did we said we are going to do. Despite some obvious challenges for our clients and the business environment in general and even after absorbing some unexpected and unplanned non-operating hedge to profit, our venture results approximated the higher end of our guided ranges.

We delivered 7% organic growth with 6% from organic sources and calculating these numbers doesn’t require any adjustments or rationalization for things that used to be or that we wish were. External forces like flowed interest or bank consolidation or tough business environment or price compression or currency rates did impact us while we generated sufficient real growth to more than overcome all those headwinds.

From a profitability perspective, we drove 1.2 percentage points of margin expansion despite already having arguably some of the best margins in our industry, and we delivered EPS well in excess of our original guidance. Similar to revenue, these results were generated despite the impact of exogenous dynamics. Execution on our contingency plans and hence cost productivity allowed us to post these results.

Well we don’t always get to select the yardstick by which we are measured, we are confident that these results will stack up very favorably against most any industry comparable or peer group that is relevant. A diligent planning process, frequent robust operating reviews, shelf ready contingency plans and improved forecasting acumen gave us a better chance of being right in the end. And since it worked will imply a similar approach in 2009.

So, moving to slide 2, entitled Q4 Results: Summary. Overall our fourth quarter results were consistent with both our expectations and the qualitative guidance we provided last quarter. Walking down the P&L, revenue in the quarter was $433 million, an increase of 6% compared to last year’s fourth quarter.

Organic revenue growth was 5% driven by our healthcare payments business, increased volume in payment transactions and higher core processing activity. Two relatively small acquisitions that we closed earlier in 2008 added about a percentage point to this growth rate.

Segment operating income was $121 million, up 10% from Q4 of last year. I’ll provide some color on the source of the margin expansion, when I get to the segment details.

Corporate and other costs were $31 million, which is about $4 million higher than our expected run rate, but only slightly higher than last year. The primary reason for higher expense this year with another $2 million of unrealized losses on our invested equity warrants in Temenos and higher external professional services fees related to legal matters.

As you remember these same two non-operating items were also discussed as [causal] descriptors in the third quarter. The good news I guess is that we have less than a $1 million of book value remaining on the warrants, so they don’t represent a material risk going forward. And the trial preparation that cost the legal expenses despite it’s substantially complete.

The impairment charges while it relates to the goodwill and other intangible assets primarily in our image business that were deemed to be impaired in the fourth quarter of last year.

Transaction related costs related to our separation for M&I and interest expense increased $4 million from last year due entirely to our new more leveraged capital structure following the separation transaction.

The tax rate you will calculate is about 30%, which is well below the full year 2008 rate and the rate the same quarter last year. As we discussed on the Q3 call, the R&D tax credit was extended in October of 2008 as part of the first financial stimulus package. While we had presumed this extension in our guided full year rate, rules required that we wait until the extension was past before we recorded any benefit.

Our full year benefit that was about $4 million was recorded in the fourth quarter, resulting in a much lower quarterly rate than obviously our full year rate or the rate the same quarter of last year.

That said, the resulting full year rate was consistent with the original guidance and our assumptions. And finally our share count for the quarter about $120 million shares. The resulting math generates GAAP EPS of $0.34 a share and cash EPS of $0.40 a share.

Moving to slide 3, Fourth Quarter 2008 Net Income Walk. The slide is a graphical depiction meant to provide you some context when thinking about net income relative to our prior year results. The chart starts with GAAP reported results in 2007.

The next four bars size the impact of things that are unrelated to operational performance and that complicate the comparisons. They include the impairment charges that I just described, the net transaction related cost that obviously didn’t recur in 2008.

The effect of a lower tax rate in the fourth quarter of 2008 compared to the fourth quarter of 2007 and the higher interest expense related to our levered post-spin capital structure. The next bar label “Performance” then represents the after tax effect of the performance of our businesses net of corporate and other costs. Taken together, these items walk you from GAAP reported results in last year’s noisy fourth quarter to the GAAP reported results for this fourth quarter.

Slide four is titled Q4 Result: Financial Solutions Group and shows a trailing five quarters of the revenue and segment operating income for the financial solutions operating segment. Revenue at FSG increased 4% compared to the fourth quarter of last year driven by higher core processing activity. FSG also grew 4% for the year.

Segment operating income was flat compared to the fourth quarter of last year resulting in margin contraction of about 90 basis points. The benefit of higher volume in the fourth quarter of 2008 was offset by revenue mix and the planned increases in discretionary spending for new product development that we’ve talked about in the past. For the full year, FSG margins were about one point below last year and the same causes would apply.

Slide five, Q4 Results for Payment Solutions Group provides the same data for other operating segment. PSG’s revenues increased 8% compared to last year’s fourth quarter, driven by the healthcare business, higher payment transaction volumes and certain of our issuing businesses and one point of lift coming from the acquisitions of Nomad and RepayMe earlier this year. PSG also grew 8% for the full year.

Segment operating income increased 16% compared to last year resulting in a strong margin expansion of 2.3 points. This performance can be attributed to two things. First, the benefit of actions taken in the second half of last year to improve the cost structure and the performance in the image business, and second the operating leverage that accompanies strong top line growth in this business.

At this point, I’m going to shift from a quarter to the full year on slide six entitled Full Year Results: Summary. This chart summarizes full year information in the same format we used in slide 2. Walking down the P&L again, full year revenue came in at $1.707 million, an increase of 7% compared to 2007. As we’ve said a couple of times, organic revenue growth was 6% and the two relatively small acquisitions from earlier this year did add 1 percentage point growth.

Segment operating income was $482 million, up 12%. Corporate and other costs were $118 million, up $29 million from last year. The amount in 2008 was above our expected run rate due to the losses related to the Temenos warrants and a higher professional services fees related to legal matters. Remember too that the expenses in 2007 were partially offset but again our Firstsource investment.

Acquisition intangible amortization is up $1 million due to those acquisitions. I have already described the next two lines impairment charges and transaction related costs when we are on slide two, as you can see in the interest expense line, the impact of our new capital structure.

We calculated the full year tax rate to be 36%, relatively comparable to the rate for 2007, when you adjust for the impairment charge and transaction related costs last year. And finally our share count for the full year was 120 million shares. The resulting there generates GAAP EPS of $1.23 per share and cash EPS of $1.45 a share.

Slide seven is titled Free Cash Flow Walk and summarizes the drivers of $165 million of free cash flow for the full year 2008, and provides 2007 data for comparison sake. Looking at the cash flow summary relative to last year, two items warrant clarification: other non-cash items and changes in assets and liabilities. The $50 million change in other non-cash items is due to several factors, The amortization of our debt issuance cost, the unrealized losses in the Temenos warrants in 2008, the deferred tax benefit related to the impairment charges in the 2007 and the non-cash first cash gain in 2007.

The use of cash in the generically named changes in assets and liabilities and 2008 is the result of a number of individual items generally related to timing. Timing in this case includes the calendarization of interest payments and tax payments, the runoff of deferred revenue and that of other accrued liabilities.

Capital expenditures for the full year 2008 were relatively similar to the previous year level and somewhat lower than we communicated to you last quarter.

The net result is a free cash flow for 2008 of $165 million, or 112% of net income. As we told you in the past, we like to break out the effect of other people’s money on this metric, meaning the transitory cash that moves through our balance sheet as part of the transaction settlement that we do as part of our business. This caused true performance to be understated for the full year by $2 million.

Slide eight, entitled 2009 Outlook summarizes our current outlook and compares it to our 2008 performance. I think it’s important before I go into the details of our outlook to take a moment to talk about our theory on guidance. First, we only think it should be provided when it is instructive and it’s capable of being predictive. We don’t provide quarterly guidance because we can’t be specific enough in any one 90-day period to be helpful and it might in fact encourage volatility rather than provide insight.

Second, when we give guidance, we intend for it to be balance between risks and opportunities and represent our best thinking at the time that we give it. Good guidance we think should be durable enough to absorb the typical pattern of positive and negative variances from plan or unexpected events that occur in every year.

And third, we intend our guidance to ascertain power beyond just the next 90-day period. Annual guidance that is amended quarterly is really just quarterly guidance.

With that being said I’ll provide some color on our expectations from 2009. Our current outlook suggests organic revenue growth at 3% to 4%. This range contemplates the persistently challenging environment and considerable uncertainty around three things: consumer payment transaction volumes, voluntary of forced bank consolidation and capital spending by financial institutions. The perennial headwinds of business loss to consolidation or insourcing and the price compression will be somewhat higher in 2008 and will be more pronounced in the payment segment than in the financial solutions segment.

These headwinds combined with consumer transaction volume risk cause our model to anticipate faster growth from FSG than PSG in 2009. Even with revenue growth that are somewhat lower then both our historical average and our longer-term goal, we expect to continue our pattern of modest margin expansion.

Driving margin expansion at lower revenue growth rates requires disciplined discretionary expense control and a higher cost productivity to offset less benefit from just pure leverage. Our typical practice of metering out incremental spending only after capturing supporting revenue will be particularly important in 2009.

Bridging the last few items between segment income and EPS, we expect corporate and other cost to be less in 2009 than in 2008 due to the absence of the losses from the Temenos warrants and the lower external professional services fees. We expect 2009 interest expense to be similar to 2008 despite lower interest rates. As you all remember, we have fixed the rate in nearly all of our debt to interest rate swaps, and the returns in our cash and investments remain very low.

Last item before EPS, income tax expense or anticipating effective rate of 37% in 2009. The result of all these inputs is expected GAAP EPS growth of 12% to 16%, which translates to cash EPS growth of 10% to 14%. For free cash flow we are again targeting cash conversion of a 100% of net income.

One key input you want for your models is capital expenditures, which were assuming to be approximately $150 million in 2009.

Moving to slide entitled of calendarization, this slide gives you a sense immediately a very wage sense of how we planned our quarters internally. Unlike 2008, we don’t expect 2009 revenue to be linear. More like the calendarization we experienced in 2007, the phasing of new business coming online is somewhat lagged relative to the deconversion of clients due to consolidation. This will result in sequential quarterly increases in revenue across the year of 2009.

We expect a particularly challenging revenue first quarter due to both a very strong Q1 last year while we had tremendous surge in our tax season related to – and our tax related business. And the loss this year of about $10 million of call center business that a very good non-bank customer decided to take in-house. Results and expectation at Q1’09 operating performance will be relatively flat versus the previous year.

Beyond the first quarter, we expect revenue to benefit from the typical seasonal lift in Q2 and then to have a stronger second half of the year as new business sold in 2008 spools up and Mike is going to walk you through some of that business.

My last slide is slide 10 called Cash Flow Priorities. This slide is similar to the one we’ve shown you in the past but it is becoming increasingly topical as we continue to generate cash and allowed to accumulate on our balance sheet.

Our 2009 guidance could be clear presumes that our cash remains invested in high-grade short-term investments with yields below 1%. More accretive reallocations of these resources could obviously be added into that guidance. While our cash balances have changed, our redeployment priorities have not. First we will make good in the requirements described in our debt agreement but this immediately doesn’t absorb much cash. Our next priority is to invest in organic growth, the cheapest and least risky source of growth but these investments are typically covered our CapEx plan.

Next then is acquisitions, which remained our priority but that have not used a lot of cash as of late. After funding these priorities, any permanently excess cash could be redeployed either to repurchase shares or to repay or repurchase our debt and in the current environment, both of these choices would deliver very attractive returns. While our credit agreement does play some restrictions on repurchases and while acquisitions are hard to predict, we can’t find the right balance between financial flexibility and economic efficiency. We intend to revisit this high-class problem of under deployed excess cash balances in the very near future when our business continues to generate free cash flow and if acquisitions continue to allude us.

So, with that I'm going to turn the call over to Mike to talk about the selling environment and some of our successes. Mike.

Michael Hayford

Thanks Tim. In past calls you've asked about our sales success and specifically what products have done well. I will give you a brief overview and then will be happy to answer any questions.

We continue to have strong sales success across the broad product set in 2008. In 2008, we had another record sales here in top of a record sales in '07. PSG was particularly strong, led by the Image and debit issuing divisions. FSG had success with e-banking, core banking and wealth management.

In addition to continued cross selling that assumed important to our growth strategy, we also had some noteworthy new business deals including our first sale of the CIM product to EverBank as part of the core renewal. As I said this is our first sale of the CIM product, which is a component of our global integrated banking suite partnership with Temenos, which we announced last year.

We signed several banks with large or settled deals with large municipalities and county government for our link to government payment product including a large West Coast municipality, which coupled with our Los Angeles County relationship provides a very strong presence on the West Coast. The extended and exciting relationship with a top 15 bank to convert all of the EFT products of a top 50 bank that they had acquired in 2008, onto our debit platform. This includes debit card issuing, ATM driving and the NYCE network.

We also recently signed a deal with People's United Bank that includes core processing, outsourcing and a number of other products to a long-term contract. People’s is a $20 billion bank based in Connecticut with over 300 branches. In 2008, we had sustained success with our Branch Capture image products including sales to Citizens Republic Bank in Michigan, Fulton Financial Bank and a partnership with Brinks

In 2008, Metavante began providing health savings account system for the financial arm of a national health insurance provider with affiliations in more than 35 states.

In summary, we close 2008 with our third straight record setting sales here. We entered 2009 with a solid pipeline in goals that are equally as challenging as when we entered 2008. In 2009, we see challenges faced by our bank customer as opportunities for Metavante to provide products and services to drive efficiency, enhance revenue and impact the bottom line of our bank customers. The opportunity to engage clients and prospects in dialogue of our Metavante capabilities to impact the business has never been greater.

In this time of economic uncertainty, our clients welcome the insights and expertise of professionals at Metavante to provide new ideas. Our entire team is excited about the potential in 2009 to meet the market needs and to grow our market share.

Operator that is the end of our prepared statement. You may now open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line David Koning with RW Baird. Please proceed.

David Koning – Robert W. Baird & Co.

Hey guys nice results throughout the year this year.

Timothy Oliver

Thanks David.

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

Good morning. And I guess first of all, you talked in the past a little bit about how each year M&A has a little impact on your business meaning M&A of your bank clients. And I think in '08 it had a little less of an impact that it did in '07. I’m just wondering how we should kind of handicap just the thoughts on that for '09?

Timothy Oliver

Yeah, David this is Tim. You are right. 2007 was one of those years where you had a particularly heavy headwind and it did abate somewhat in 2008. Going into 2009, we have nearly - exactly the same amount of headwind due to consolidation in 2009 that we experienced in 2008. So it shouldn’t be much different. The shape of the impact is a little bit more front-end loaded, so as I talked about calendarization – we are experiencing some of that, more of that impact in Q1 in a particularly seasonal business and then maybe Mike should comment on, there are obviously four large deals out there that make up potential for that number to change over the course of the year, but Mike you want to comment on those.

Michael Hayford

Yeah David. We also watch what’s going on there as some large deals that we announced last year. Net-net we’re still working through those the JPMorgan/WaMu ones probably the ones just because the way that transaction got completed which is more challenging but the other three net-net we think will come up slightly ahead and then the earlier caution we put out there as we can’t anticipate the unknown, so every year we look at how we enter the year and it assumes that we think from decent shape in '09 and very similar to '08, which is not nearly severe as it was in '07, so we are pleased with that and as we get close to midyear any impact that would be announced to have or any deals that would be announced would not have any impact in ’09, so we have a few more months here where something could happen that would impact us late in the year.

Timothy Oliver

So I’d characterize our ’09 guidance as incorporating everything that we know on that front now and doing so on a reasonably conservative basis.

Frank Martire

And you know David, it’s hard to have a crystal ball in this environment but at the end of day where a lot of these consolidations, when they do take place and if they happen to our customers, our clients though we may in case lose a product and many cases we gain other products through the consolidation, so sometimes the nets are favorable to us.

David Koning – Robert W. Baird & Co.

Okay, that’s helpful, thank you and then secondly, I guess this is a two-part question but in the FSG segment this year, it sounds like growth is going to be a little better than payments and that’s certainly better than what it sounds like a lot of your competitors are expecting in core processing, so I’m just wondering, what makes you kind of take share right now from your competitors and then second and kind of unrelated just maybe talk a little about the M&I relationship as well?

Timothy Oliver

I’ll hand up to Mike to on more specifics and some of the good wins we had in 2008, but actually what’s happened in the FSG segment, as they continue to click along at a relatively consistent growth rate in that 4% to 5% range every year and so they don’t see these volatiles of payment side. On the payment side, as I started to say in the script, most of the losses that we were encountering this year will hit those guys pretty hard, so well if adjusted for those, you’re going to have a nice growth year. They just got a pretty substantial headwind that they need to overcome before they get, credit for the next incremental dollar revenue. But I would say rather than FSG stepping up, it’s more, they continued to perform as they performed and PSG has a little bit of a headwind to get through but maybe Mike can talk a little more.

Michael Hayford

Yeah David, and just to add to that. We are very pleased as we talked about our sales success, so we are out there strong in the community banking market and in the mid section, we call the $3 billion and up to the 50 and even higher institutions that are looking to outsource. We’re just competing very well, so I think Tim said about FSG continues to make incremental improvement and has done so in the past years and we expect that in ’09. Regarding M&I, our policy is not to talk about a particular client or you know particular situation. But we do recognize it’s a little bit unique with our past relationship obviously part of the M&I and although Frank and I can attest that we are not bankers and pretend to understand the other bank’s challenges and needs. We look at all of our customers not just M&I. We watch the reports. We obviously monitor them and we look at M&I’s position vis-à-vis some of the restructure reports we’ve seen and the capital ratios and I don’t know, we’re not making a statement about banking trend with M&I, it does not look that bad compared to some of the other banks when you look at some of the ratios and some of the numbers and again we don’t know what’s going on and any of our customers couldn’t. We expect M&I to be with us throughout ’09. We’ve included in the plan and beyond that we don’t picked anything out in the future beyond ’09 for any of our customers but they are a great client of ours. We’ve got a great relationship and we look forward to serving them.

David Koning – Robert W. Baird & Co.

Great, thank you.

Michael Hayford

You are welcome, David.

Operator

Your next question comes from the line Brett Huff with Stephens. Please proceed.

Michael Hayford

Hi, Brett.

Brett Huff – Stephens Incorporated

Good morning guys, how are you?

Timothy Oliver

Good morning.

Brett Huff – Stephens Incorporated

Congrats and a nice quarter.

Timothy Oliver

Thank you.

Brett Huff – Stephens Incorporated

Just a couple of questions on the environment. You talked a little bit about what was going on in this hope for color, but I wondered if you could talk a little bit more about big bank versus small bank in your portfolio and sort of divide that, however it make sense.

Michael Hayford

Brett, this is Mike. I think it’s hard to generalize, so when we say big bank versus small bank you have to remember too that the big bank obviously has a percent of spending continued to dominate the spend. So we had some very good success in '08 with some big bank signing up for some products. I'll give you an example. We had a very large bank sign up for our white core wholesale lot of our products, and net-net the capital investment they make for the product and implementing it has a very, very short pay back, and I think their pay back was even less than 12 months. And so we’re seeing those deals get down. We are seeing banks continue to invest when they get a shot of pay back in images in an area where we have seen a lot of success. We’ve seen big banks continue to invest in the branch platforms, continue to drive efficiency, the integration with the branch – the front office and the back office, the integration of the front office to the check imaging. Those are all areas they can drive expense efficiencies. They can also provide a better service to the clients. So, we continue to see that. We've seen other banks who – based on priorities might hold back a bit, but I don’t know if I want to characterize it as all small banks are doing great and the big banks are not and I wouldn’t want to say all big banks are not spending money. So I think it depends on institution whether the big or small.

Brett Huff – Stephens Incorporated

Gotcha. And could you comment at all on bill paid transactions in your bill pay division?

Frank Martire

Obviously we don’t share that detailed numbers but bill pay continues to be an adoption business. I think most banks out there, they are offering e-banking obviously is a lead entrant attached to bill pay on top of that but we are still seeing new adoption, new banks sign up for bill pay, new consumers and then the biggest thing is that the number of transactions consumers are delivering for user on the bill pay side.

Brett Huff - Stephens Incorporated

Gotcha and…

Timothy Oliver

This is Tim, bill pay will be one of those businesses in 2009 and even into 2010 that will be impacted by some of the consolidation we talked about, so it’s big four deals, so thing on that plays out. Mike’s right, the underlying demand curve is seems to be holding up. We will have some things that move the needle in big ways in some of those transactions.

Brett Huff – Stephens Incorporated

Great, that’s helpful.

Timothy Oliver

But we will break those out for you when it happens.

Brett Huff – Stephens Incorporated

Okay, super. And then one last question. Just regarding I know you have a small component that is license or sort of one-time type sales but any commentary on that so far in – maybe in 4Q and then also so far in January. Have you seen any changes in bank behavior on that stuff?

Michael Hayford

Yeah, it’s going to be hard to say anything about ’09. Obviously we have a plan in place and it’s still very early. We had a strong finish in ’08 and actually probably we will better finish in ’08 than we did in ’07, again lead by the Image division. And we are probably not the best hardware though we are not a huge software provider, but it still is an important component. ’08 was a good year for us. Our expectations in ’09 are similar to ’08 and again it’s a little early just to have a judgment on that.

Timothy Oliver

And Brett we had a good year in ’08 and Image as Mike said is very well for us. We are very pleased with those results but we didn’t anticipate a big uptick in ’09 and obviously it is just not a worth quarter of our business.

Brett Huff – Stephens Incorporated

Okay. That’s what I need. Thanks for the questions.

Timothy Oliver

You are welcome.

Michael Hayford

Sure.

Operator

Your next question comes from the line of Tien-Tsin Huang with JPMorgan Securities. Please proceed.

David Kane – JPMorgan Securities

Hi, this is David Kane for Tien-Tsin. Just a couple questions. You have been increasing your investments in product developments. Would you talk a little bit more about some of the things and the effects going to continue through ’09 in terms of the investments?

Timothy Oliver

Yeah, absolutely maybe our investments obviously we take a long-term view of that. And investments we’re making in ’09 will have impact in ’09, ’10 and beyond. You know we look at that every year. With regard to the budget planning cycle we look at it every quarter. We spend a lot of time with our clients. We spend a lot of time with our sales team and what’s impacting so, we will continue to invest. We’ll take a look and modify if we need to where those dollars go.

Michael Hayford

We did step up that investment in 2008. You remember because of our agreement with Temenos and our product development with them. We are now at the apex or at the terminal run rate so to speak on that project, so there will not be an increase in 2009 of spending in that regard but to say differently the step up you saw on both 2007 and a further step up in 2008 were entirely related to Temenos and there is no long rate step up. We are at the run rate in that project.

David Kane – JPMorgan Securities

That’s helpful and you mentioned some of the uses of cash. The acquisitions have been modest. What’s the outlook, the expectation, the opportunities for acquisitions as you look at ‘09?

Timothy Oliver

We continue to look out there and ’08 a lot of activity. I think we saw again in ’08 maybe the adjusting or the right sizing of the expectations on the part of the sellers but it easily lags the market, so I think we are now getting to a point where the sellers are getting more realistic about pricing expectations. We will continue to look we are not interested in over paying. We never have been interested in overpaying. We’ve continued to sign small add-in deals that we did in healthcare and government payments. We will continue to look for books business and to our banking arena. Again it’s hard to predict. We think there will be a lot of activity in ’09. We think people they are looking and will participate if we can.

Michael Hayford

Our appetite is always still there as Tim mentioned, it has always been - will be very, very prudent about what we do but nevertheless, there is still room for acquisition and growth in our company and we are looking in that direction, but we want to make sure that it’s at a prudent dollar amount.

Timothy Oliver

But remember and I think it was important in my script and we talked about it early was, if we can’t find those while it still is a priority for us, we are not going to sit on excess cash and let it get a half point overnight in bank accounts. We have plenty of financial flexibility to execute our acquisition strategy. We had it coming into the year. We have more of it now and maybe more than we need. One important point on cash redeployment is we want to make sure you understand that we are not satisfied with getting half a point overnight on cash and we know that it’s not optimal and that we can do better.

David Kane – JPMorgan Securities

Great, thanks very much.

Timothy Oliver

You are welcome.

Operator

(Operator Instructions). Your next question comes from the line of John Kraft with D.A. Davidson. Please proceed.

John Kraft – D.A. Davidson & Co.

Good morning guys. Encouraging commentary and results.

Timothy Oliver

Thank you John.

Michael Hayford

Thank you.

John Kraft – D.A. Davidson & Co.

Tim, I wanted to clarify a couple of things that you mentioned. You specifically did talk about price compression in PSG. Is that simply the result of the consolidation?

Timothy Oliver

No, I think we have talked before about price compression across the entire company being about a 0.5 a year. So, and I would say in 2008 it was slightly higher than that, somewhere between 1.5 and 2 points. In 2009, it will also be higher than our longer-term trend of 1.5. It will be closer between 1.5 and 2 points in products closer to 2 points offset and done. So, we have seen the renegotiation of contracts earlier. So people are pulling forward the negotiation, which often is actually good for us. We get longer duration on our contract and solidifies the relationship for a long time. So while our overall growth rate of 3% to 4%, we are talking about variation of three-tenths or 0.5 point of revenue growth in a year. I did want to call it up and say it’s a little bit tougher. But it’s probably expected, I don’t think I should combine the thoughts of consolidation and price compression. I really mean to suggest that those two are related in anyway. I hadn’t really thought through whether they might be but I would suggest that I don’t know that they are.

John Kraft – D.A. Davidson & Co.

Okay. All right and the delta between I mean the reduction in growth I guess relative to the bank, the financials group, I mean it’s significant obviously there has been just the consolidation too?

Timothy Oliver

It’s a consolidation, yeah it’s actually a consolidation. I think the price compression at - if we showed you everything we can see you will be able to discern that the price compression at PSG is a little bit higher than FSG but not remarkably so.

John Kraft – D.A. Davidson & Co.

And it’s probably because of the price tearing you got right? Volume tearing?

Timothy Oliver

Probably, you’re probably right. So you put all that together it’s not really pricing that will make the difference between the two segments. It would be much more related to the consolidation. Most of the losses due to consolidation will be at PSG.

John Kraft – D.A. Davidson & Co.

Gotcha. I know that’s helpful. And then you also talked about the higher core processing activity and I guess I just wanted to dig into that a little more as well. Is there I mean certainly there is growth within your existing customer base, but it is also share gains, is that what you said?

Timothy Oliver

It’s both.

John Kraft – D.A. Davidson & Co.

Yeah. But there is certainly less core switching activity happening right now right? Or is that maybe not fair to say?

Michael Hayford

Well, every year there is not a tremendous amount of core switching but we did highlight People’s United Bank, which is $20 billion institution, which we’re pretty excited to win that deal. So there is a handful that look out there and for whatever reason, decide to make a change and we think we’re winning more than our share in that mid-market. We defined a pretty broad mid-market 3 billion on up. We used to say 50 billion but, we think institutions above that might be interested in looking at outsourcing. So we think there is a little bit of a market share pickup. Again, we are talking about huge number movements. So it’s a few deals. FSG has been very steady. Tim’s highlighted that. PSG has had a little more impact on the consolidation. PSG is also impacted a little bit in ’09 to turn lower transaction volumes because of lower spending in the consumer market, so FSG shines a little brighter this year vis-à-vis PSG and I am sure the FSG team at Metavante will point that out because the PSG team has pointed that out in the past.

Timothy Oliver

But I think you are right. There is a little bit of share pick every year as our industry continues to consolidate this. There is a little bit of volume growth because our customers continue to grow. We’ve got great customers who continue to grow. And also, we add functionality all the time and get paid a little bit more to do, what we do because we do it better. So I think you put new product and functionality with new customers and the growth of existing customers. It all ends up to a trend that’s been relatively consistent between the 3 to 5% upward trend in that business.

Frank Martire

And well John, we look at it and we are excited about the People’s United deal but there were some others that we are looking at also, so the pipeline looks very strong also. The reality is there aren’t a lot of changes that take place in a given year that’s the reality, but if you get it here and you get the right ones, it can make a big difference and we feel very good, very good about our positioning right now.

John Kraft – D.A. Davidson & Co

Okay, that’s helpful and I guess just lastly on that do you breakout termination fees? You haven’t done that earlier?

Timothy Oliver

Yeah we have. Whenever they matter like in the third quarter, we said we call people that in the third quarter of this year and third quarter of last, they are material and they change the mix of the quarters such that they impacted profitability. In this quarter they were not material.

John Kraft – D.A. Davidson & Co

And expectations for ’09?

Timothy Oliver

I would expect them to be very similar to the level we saw in 2007 and little bit lower than what we saw in 2008.

John Kraft – D.A. Davidson & Co

Okay, thank you guys.

Timothy Oliver

You are welcome.

Michael Hayford

Thank you.

Operator

(Operator Instructions).

Frank Martire

Stacy I guess that’s it. We’ll sign off. Thank you very much everyone for calling in and have a great day.

Operator

Thank you for you participation in today’s conference. This does conclude your presentation. You may now disconnect. Thank you and have a good day.

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Source: Metavante Technologies, Inc. Q4 2008 Earnings Call Transcript
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