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Executives

Mary Waggoner – Senior Vice President Investor Relations

William P. Foley, II – Executive Chairman of the Board

Lee A. Kennedy – President, Chief Executive Officer & Vice President

George P. Scanlon – Chief Financial Officer & Executive Vice President

Analysts

Glenn Greene - Oppenheimer & Co.

Brett Huff - Stephens, Inc.

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

Bryan Keane - Credit Suisse

Tien-Tsin Huang - J.P. Morgan

James Kissane - BAS-ML

John Kraft - D. A. Davidson & Co.

Julio Quinteros - Goldman Sachs

Wayne Johnson - Raymond James

Daniel Perlin - RBC Capital Markets

Fidelity National Information Services, Inc. (FIS) Q1 2009 Earnings Call April 29, 2009 8:30 AM ET

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Fidelity National Information Services first quarter earnings call. (Operator Instructions)

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

Mary Waggoner

Thank you, [Alex]. Good morning, everyone, and thank you for joining us today.

With me are Executive Chairman Bill Foley, President and CEO Lee Kennedy, and Chief Financial Officer George Scanlon.

The first quarter earnings release and supplemental slide presentation are available on our website, FidelityInfoServices.com.

As a reminder, our discussion will contain references to non-GAAP results in order to provide more meaningful comparisons between the periods presented. Reconciliations between GAAP and non-GAAP results are provided in the attachments to the press release.

Today's discussion will also include forward-looking statements. These statements are subject to risks and uncertainties as described in today's press release and other filings with the SEC. The company expressly disclaims any duty to update or revise the forward-looking statements, including guidance.

In addition to being recorded, today's call is being webcast and a replay will be available on our website shortly after the call. Telephone replay will also be available. The dial-in information is included in the press release and will also be provided at the end of this call.

Now I will turn it over to our Executive Chairman, Bill Foley.

William P. Foley, II

Thanks, Mary.

FIS posted a solid first quarter result, with 19% growth in earnings per share, a 100 basis point improvement in margin, and strong free cash flow of $119 million. These results are particularly impressive in light of the persistent economic challenges.

As we discussed last quarter, we continue to monitor markets and our customers closely. Our management team is executing very well in the current environment and we believe that FIS will be well positioned to grow revenue and earnings as the economy regains strength.

Now I'd like to spend a few minutes to discuss our pending acquisition of Metavante. On April 1 we entered into a definitive agreement to acquire Metavante in an all-stock transaction. The proposed combination is the result of a comprehensive analysis of the continued evolution of the financial services industry. As Lee discussed at the investor meeting, we believe that strong product capability, scale and broad market and geographic reach will become increasingly important in the future.

We have been very pleased with the favorable response from customers, shareholders and employees. The management team, which is comprised of executives from both companies, has strong depth, broad if industry experience, and a proven track record of achieving revenue and cost synergies from acquisitions.

The combination is subject to customary regulatory approval and approval by FIS and Metavante shareholders. We have completed the initial Hart-Scott-Rodino filing and expect to filed the preliminary proxy statement in early May. We expect to finalize the transaction early in the third quarter.

I will now turn the call over to Lee Kennedy, who will cover our first quarter results.

Lee A. Kennedy

Thanks very much, Bill, and good morning, everyone, and thanks for joining us today.

If you'll turn to Slide 4, we've included an agenda outlining the topics that we'll cover in today's call. I'll begin with a few additional comments regarding the Metavante acquisition, followed by a review of our first quarter results. I will conclude with an update of our outlook for 2009. George will follow with the financial report, then we'll open it up for your questions.

As Bill mentioned, Metavante is a great strategic fit for our company which will generate significant value for shareholders, customers and employees. The combination will add critical scale and improved payment and core processing capabilities. In addition, it will create strong cross-sell opportunities in bill payment, network services, loyalty, software and professional services through the addition of 800 new leveragable core processing customers. Perhaps most importantly, the transaction will become accretive within a short period of time.

We expect to generate approximately $260 million in cost savings through the elimination of duplicate corporate functions and the consolidation of technology, operating and sales organizations. Metavante and FIS have an excellent long-term track record of meeting or exceeding acquisition synergy targets and we are confident that we will achieve our $260 million goal.

If you'll please turn to Slide 5, I'll cover first quarter operating results.

Our strong focus on improving operating efficiencies and disciplined cost management enabled FIS to achieve excellent double-digit earnings growth and free cash flow in the first quarter despite very difficult market conditions.

Adjusted earnings per share grew an impressive 19% to $0.31 on a reported basis, and increased 23% in constant currency.

First quarter free cash flow was $119 million, which was a significant improvement over the $5 million posted last year. Higher earnings, improved working capital management and a 42% reduction in CapEx contributed to the strong turnaround.

As illustrated on Slide 6, first quarter constant currency revenue was comparable to prior year. Excluding our check retail business, constant currency revenue increased approximately 2% [break in audio] to prior year.

Our International businesses generated strong double-digit earnings growth, offsetting a modest decline in Financial Solutions which was driven primarily by reduced software and professional service revenue. As we discussed on prior calls, the timing of software and professional service sales is difficult to predict, which can cause variability in quarterly revenue growth. In spite of lower software and professional service revenue, our pipeline remains full and we believe this segment will strengthen as we move throughout 2009.

The decrease in Payment Solutions revenue was driven primarily by a $10 million decline in our check risk management business. Card transaction volumes were consistent with the trends reported in the fourth quarter. Debit transactions increased 4.5% compared to the first quarter of 2008, while credit transactions declined 5.4%, consistent with the fourth quarter. Overall, card transaction volumes increased 4%.

Bill payment services continued to generate strong double-digit growth.

As previously discussed, over the last 18 months we've investigated several strategic alternatives for our check risk management business. Although year-over-year declines in check usage have resulted in declining revenue for this business, this business still generates reasonable margins and good profitability. While we have received several offers for this business, none has been high enough to justify its divestiture. Until current market conditions improve and an acceptable offer is received we will continue to operate this business and concentrate on improving its financial performance. We will break out check on a stand-alone basis so that you can better understand the performance of our underlying core businesses.

Turning to EBITDA, we have made significant progress in improving margins. The first quarter EBITDA margin increased to 22.7%, which is a 100 basis point improvement over prior year. This clearly demonstrates our ability to generate strong leverage with lower revenue growth. This marks the third consecutive quarter of 90 basis point plus improvement in year-over-year margins.

Although we expect challenging market conditions to persist throughout 2009, we are encouraged with April's new business sales and the increased level of sales pipeline activity.

Financial institutions are increasingly turning to third-party service providers to help them add product capability, reduce costs or improve customer service. Last week we finalized a new Profile core processing and Internet banking agreement with Scott Trade, a leading online brokerage firm. This is the sixth competitive profile win over the past 12 months. Earlier this month we announced that Alior Bank, which is the largest start-up bank in Poland's history, completed its installation of our Profile core banking platform in more than 100 branches across Poland. Profile's quickly becoming the system of choice for large direct and regional international banks throughout the world.

In summary, it was a solid quarter highlighted by strong growth in earnings, margins and free cash flow. Our management team and associates continue to do an excellent job in managing through a very difficult environment and we remain confident in our ability to achieve our original earnings growth and free cash flow objectives. We expect revenue growth to accelerate in the second half of the year, driven by increased software and professional services sales. George will provide more detail later in the call, but we expect overall growth rate for the year to come in at the lower end of our guidance range.

As we work towards finalizing the acquisition of Metavante, we remain excited about the enhanced product capability, scale and management depth that Metavante will add to our company. The new FIS will be a stronger, more competitive organization, better equipped to serve customers and to take advantage of the resurgence in bank technology spending as market conditions improve throughout the world. We look forward to updating you on our progress as we work through the regulatory integration and shareholder approval processes.

I'll now turn the call over to George, who will continue with our first quarter financial report.

George?

George P. Scanlon

Thank you, Lee, and good morning, everybody. I'll begin with Slide 8.

As we discussed, consolidated revenue in the quarter totaled $798 million compared to $830 million in the prior period. The 3.9% decrease included unfavorable currency adjustments of $35 million. Revenue was slightly ahead of Q1 '08 when you exclude the impact of currency.

Consolidated EBITDA totaled $181 million, which included an unfavorable currency impact of $5 million, and held up relative to prior year despite the decline in reported revenue. As a result, the EBITDA margin actually expanded by 100 basis points to 22.7% driven by ongoing stringent cost control and improved operating efficiency.

Adjusted earnings totaled $0.31 per share and were negatively affected by about $0.01 for currency effects.

Now if you turn to Slide 9, I will provide additional detail on our first quarter operating segment results.

As we described last quarter, our new reporting structure consists of three operating segments - Financial Solutions, Payment Solutions and International. Historical information recasting our 2008 results by quarter in this new format was previously provided in an 8-K filed on March 19th. As shown in the center column, Financial Solutions constituted 34% of reported revenue and 46% of EBITDA in Q-1 2009, Payment Solutions constituted 46% of reported revenue and 43% of EBITDA, and International constituted approximately 20% of reported revenue and 11% of EBITDA in the quarter.

Turning to Slide 10, Financial Solutions revenue totaled $271 million in Q1 2009 compared to $280 million in the prior year. Increased demand for risk management and technology outsourcing services was offset by lower software license and professional services revenue, as Lee referenced. Financial Solutions EBITDA declined by $3 million, but we held our margin percentage flat despite the change in product mix resulting from an $8 million reduction in high margin software license sales.

As shown on Slide 11, Payment Solutions revenue declined $9 million to $365 million in the quarter or 2.3% below prior year. The decrease was driven primarily by a $10 million or 15% decline in check services revenue as well as lower professional services and equipment sales. In addition, growth in debit processing, cardholder support services, and output solutions was offset by declines in prepaid, merchant and item processing activity.

Debit transactions increased approximately 5% compared to the prior quarter and this growth was reasonably balanced during the quarter. Credit card transactions declined by about 5% for the quarter, but we saw trends improve somewhat in March, although it is not apparent that the trend is sustainable or an indication of a reversal.

Payment Solutions EBITDA increased 11.5% to $95 million compared to $85 million in the prior period and the margin significantly improved by 320 basis points to 26.1% compared to [22.9%] in Q1 2008, indicating the leverage we have in this business. Increases in margin occurred in most of our payment product lines as a result of effective execution of cost control and improve operating efficiency.

Slide 12 summarizes the results of our check business and is once again provided to improve your understanding of our segment growth rates and overall company performance. Declining trends in check usage and weak retail sales resulted in a 15% reduction in retail check services revenue, although on a positive note we were able to keep margins flat through cost management actions. Excluding checks from both periods, payment service revenue was comparable to Q1 2008 and total company revenue on a constant currency basis grew 1.6%.

Turning to International, which is detailed on Slide 13, International revenue increased 11.5% in constant currency, excluding the $35 million unfavorable currency impact described earlier. New customer implementations and continued solid growth in the Brazil joint venture contributed to the increase. Approximately 1.3 million new cards were added to the JV during the quarter. We expect to complete the Bradesco conversion, which will add more than 10 million cards to our platform, in the third quarter. As of March 31st we are processing over 31 million cards in Brazil, including 24 million cards from our JV partners.

International EBITDA declined 8.6% to $23 million in the first quarter, including a $5 million unfavorable currency adjustment. EBITDA margin declined 10 basis points to 14.4% and was comparable to Q1 '08 on a constant currency basis. High margin new customer implementation revenue in Q1 '08 also impacted year-over-year growth rate and margin comparisons.

Slide 14 provides additional insight into our foreign currency exposure. As you can see from the chart, the euro declined approximately 13% compared to the first quarter of 2008 while the Brazilian [pia] and the sterling declined more than 25% against the U.S. dollar. The pie chart at the bottom of the page depicts our exposure to each major currency. As you can see from the chart on the right, based on current FX rates the negative currency comparisons will continue through the third quarter of 2009 and then somewhat normalize in Q4.

In addition to currency, the second quarter comparisons will be difficult due to $8 million in high margin license revenue from customers in Thailand and Germany recognized in Q2 2008. As a result we expect our Q2 growth in the International segment to be low to mid single digit on a constant currency basis and then to resume double-digit growth in the second half of the year. Our overall guidance of 10% to 12% for the International segment remains intact.

Please turn to Slide 15 for a reconciliation of adjusted net earnings. First quarter adjusted net earnings totaled $59 million or $0.31 per diluted share compared to $0.26 in the 2008 quarter. As I mentioned earlier, currency negatively impacted earnings by $0.01 in the quarter. As indicated, adjusted net earnings excludes after-tax purchase amortization of $20 million and $5 million of after-tax M&A costs principally related to the Metavante transaction.

The effective tax rate was 34.5% in Q1 2009 compared to 33.1% in the 2008 quarter.

Average shares outstanding were 191.6 million.

As shown on Slide 16, free cash flow, which is defined as operating cash flow minus capital expenditures, improved significantly to $119 million. The increase was driven by higher earnings, continued focus on receivables collections and a $33 million reduction in capital expenditures. Cash flow also benefited from a $27 million reduction in other receivables related to the former Certegy Australia business. We have collected $60 million since the sale of that business in October of last year and have $56 million remaining to be collected at March 31st.

Uses of cash in the quarter included $26 million in scheduled payments on the Term A facility and a $28 million reduction in the revolver balance. We also paid $10 million in shareholder dividends.

As of March 31st, the balance sheet strengthened as cash and cash equivalents totaled $272 million, an increase of $51 million since year end.

Turning to Slide 17, we had $2.5 billion in debt outstanding at quarter end, including just under $2 billion on the Term A facility and $471 million against the $900 million revolver. Approximately $2.1 billion or 86% of our debt has been swapped at fixed rates, with the balance floating against LIBOR. The effective interest rate, including swaps and amortization of debt issuance costs, was 5.2% at quarter end.

As we indicated in the press release, the overall earnings guidance for 2009 for FIS on a stand-alone basis remains unchanged at $1.60 to $1.66 per share. In addition, we continue to anticipate margin expansion of 50 to 100 basis points. We are on track to achieve our cash flow guidance of $410 to $430 million. The revenue environment will remain challenging and uneven, especially in the near term and our progress toward our revenue growth objectives will be biased toward the second half of the year, but we believe that the continued execution on our cost containment initiatives will help drive solid growth in margins and profitability. We will update fiscal 2009 guidance to include the acquisition of Metavante following the completion of the transaction.

That concludes our prepared remarks for FIS. Alex, we will now open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Glenn Greene - Oppenheimer & Co..

Glenn Greene - Oppenheimer & Co.

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

Lee A. Kennedy

I think to answer that question let's go back and take a look at what we actually saw last year. Last year, in spite of a very difficult economy, software sales actually increased 5% year-over-year and professional service revenue increased in the 6% to 7% range. And a lot of those sales took place towards the latter part of the year, which I think everyone will pretty much agree that the environment really weakened a little bit as we moved throughout the year.

When you look at the shortfall that we had in the first quarter, it was on or around the $25 million range. And let me break it down for you so you see clearly where it came from.

About $5 to $7 million of that shortfall came from our check business, with more erosion and lower usage than what we actually anticipated when we put the plan together; $15 million came from lower professional services, and about $10 million came from software being lower than what we expected or what we had actually planned for. So if you add those two up, about $25 million were driven by fewer discretionary dollars being spent on software projects, not only domestically but also throughout the world. It's a very volatile segment of our business. It doesn’t come on evenly.

And I'll say this, that as we look at the quarter itself it strengthened somewhat as we moved towards the very end of the quarter and strengthened a little bit as we moved into April. So still the same type of volatility that we've seen in the past, all related to the spending that is more discretionary than not or discretionary in nature. So the environment really hasn't improved.

I can also add this comment, that our ability to sell software into the market is really governed to a large extent by the banks and how they feel in any given point in time. And I think what we've seen in the first quarter is it's remained very volatile. Spending has been driven by the news of the day or the event of the day. We're still not at the point in time that I would consider the market stable and secure and predictable. I think that will continue on through the year. I think there will be pressure on discretionary spending, but I think we'll look towards some improvement as we move into the second half.

Our pipelines are very, very strong. We had a number of deals that unfortunately we had planned on securing in the first quarter that did not come in that are large in nature, and it's our hope that we'll be able to sign those and secure those by the end of the year. So I think the same news as we've seen for the last few quarters, it remains and it's fairly weak around discretionary items.

Glenn Greene - Oppenheimer & Co.

And different direction, just sort of an update on what you've seen from the big bank consolidation. I know you guys have done a risk-weighted analysis the last couple of quarters suggesting it's sort of 0.5% and I've been actually a little bit surprised at how rapidly some of the big banks are making decisions to either consolidate, convert platforms, whatnot. I'm wondering if you could give us an update on what you're seeing there in terms of what may impact your business?

Lee A. Kennedy

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

Operator

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

Brett Huff - Stephens, Inc.

Can you talk just a little bit about the layout of the thing that you're expecting to come on specifically as it relates - just a little more detail - on the card stuff, if you could update us a little bit more on that.

And then, Lee, you had mentioned that some deals had been pushed from 1Q out. Can you give us also whatever expectations you have that are built into the guidance on that?

Lee A. Kennedy

We have roughly three or four major deals that we're currently working on. A couple of them are very similar to the Scott Trade deal that we secured in the first quarter. We have one International large software license that's also pending. And it remains to be seen when they'll be finalized, but we're projecting somewhere in the second half of the year.

So we haven't really seen a slowdown, again, in the pipeline. The activity levels are still very high. It's anyone's guess right now on when the timing is going to be precisely, but we do expect that these deals will come onboard in the latter part and they'll help the growth in the latter part of the year.

George P. Scanlon

Brett, on the International side, the Bradesco card conversion, which, as we said, will happen in the third quarter, will add incremental revenue this year along with some additional services. So we've got reasonable visibility. I think where the challenge is is trying to predict the timing of closing some of these software deals. It's just in this environment it's very challenging with any precision to predict those and we saw some of those slip in Q1 and our sales guys are saying there's more deliberation on the customer side in coming around to making the decision. So that will continue to add some quarter to quarter variability.

As we look at the pipeline, we saw some strengthening and firming up in April, but having said that, it's still trying to get across the finish line that remains a challenge.

Operator

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

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

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

George P. Scanlon

Yes, David, as you know, we changed our reporting and no longer track our business along those older segments because honestly we don't manage it that way.

Lee A. Kennedy

I think if you want to look at big banks versus small banks, they were pretty consistent with the core processing services that we provide. The volatility really came with the larger institutions in terms of software purchases and that's where the variability's been. But there hasn't really been a big change or a significant change in the trend rates or the parity between the two types of customer bases. They're still very solid.

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

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

Lee A. Kennedy

I think it's continued expansion in our Brazilian business principally. And the European businesses remain very solid; it's just we had a couple of deals last year that are going to make the trends difficult. So what I want to make sure you guys don't do is misinterpret a reported growth rate as being a larger issue than it is, because it's not. As we look to the second half of the year, our pipelines in Europe, our activity down in Brazil, we feel very good about that. It's just you're going to see some unevenness in Q2 and I'm trying to give you a heads up not to be surprised by that.

But it's more a reflection of the tougher comp year-over-year. You know, when you have $8 million of software deals that go straight to the bottom line, it makes it challenging to overcome. So that's how I think we're going to end up.

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

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

Lee A. Kennedy

Well, part of that depends on whether the environment further deteriorates. As I said, on the credit card side we actually saw improvement in March but it kind of regressed a little in April, so I'm reluctant to say that the worst is behind us. Clearly we started to see the slowdown in Q4, so I think by then we'll certainly have more favorability in our comps.

Some of the businesses that detracted from growth in the Payments, for example, our item processing business was down 15% year-over-year. And that's a business that will be a low-growth business for us, but it tends to overshadow some of the progress we made in debit, for example, where we had a pretty good quarter. So we're working through the pipeline, seeing if we can get some item processing deals closed. It on average is a lower margin business so it depresses the overall payments margins, but it's still a very good business. It's just we found that there's been some softening in that one in particular.

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

George P. Scanlon

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

Operator

Your next question comes from Bryan Keane - Credit Suisse.

Bryan Keane - Credit Suisse

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

George P. Scanlon

You mean within the International segment?

Bryan Keane - Credit Suisse

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

George P. Scanlon

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

Bryan Keane - Credit Suisse

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

George P. Scanlon

Well, I say, Bryan, it's all relative, you know? What I'm saying is if you're talking about a couple percent on one and 1% on the other, that's twice as fast. We just came into this year in the aggregated businesses that are in our Payments business that we didn't anticipate significant growth.

Now if we decompose that a bit and we look at the check business specifically - because I think you have to carve that out and my discussion about low single digit and flattish included check - you know, we saw a 15% decline in Q1, we saw a 17% decline in Q4. I think in the 10% plus range is probably directionally for the balance of the year what I would expect. It's a market decline and it's sensitive to the retail spending environment.

So if we take that out - and I think we reported modest growth in Payments this quarter - I would still say low, low single digit growth based on the environment.

Bryan Keane - Credit Suisse

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

George P. Scanlon

I'd say that if you look in totality, Bryan, across the company software represents roughly 4% of revenue - call it $120 - $130 million - and professional services is about 8%. And those are the discretionary items that are in our product portfolio and they tend to be more weighted toward the Financial segment and the International segment.

I mentioned that we were down $8 million in the Financial Solutions segment this quarter, which is significant on a percentage basis. We don't break out software by individual segment. But that $8 million also drops to the bottom line, which is why I wanted to make the point that the EBITDA margins held up pretty well considering we effectively lost $8 million of EBITDA as well. So the cost efficiency on the Financial Solutions side isn't as apparent in the numbers as it was on the Payment side because we were able to overcome that shortfall in software.

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

Lee A. Kennedy

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

Bryan Keane - Credit Suisse

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

George P. Scanlon

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

But again, I'll reiterate caution in that side because it's hard to get customer to pull the trigger and we saw some evidence of that in Q1.

Bryan Keane - Credit Suisse

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

George P. Scanlon

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

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

Lee A. Kennedy

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

Operator

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

Tien-Tsin Huang - J.P. Morgan

This is a follow up, I guess, on International. I think last quarter you mentioned that the backlog was about $80 million or so in local currency. Where does that stand today?

Lee A. Kennedy

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

Tien-Tsin Huang - J.P. Morgan

And you still feel good about that closing, I guess, this year, converting this year, in particular, I guess, Bradesco?

Lee A. Kennedy

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

Tien-Tsin Huang - J.P. Morgan

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

Lee A. Kennedy

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

Tien-Tsin Huang - J.P. Morgan

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

Lee A. Kennedy

Oh, no. No. No, not at all.

Tien-Tsin Huang - J.P. Morgan

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

Lee A. Kennedy

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

Operator

Your next question comes from James Kissane - BAS-ML.

James Kissane - BAS-ML

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

Lee A. Kennedy

Jim, I think when you look at Payments - I think that's pretty much item processing - for the time being will be low growth, no growth unless we're able to convince larger institutions to outsource their check processing. And as volumes go down, there's more and more of an inclination of the larger bank to look at third-party alternatives. So I guess for the foreseeable future, weak, but certainly with a lot of potential as banks start to shed costs that are not costs that they consider to be strategically placed.

So when you look at the card processing business, the prepaid business, the debit card business, the loyalty business, and the bill payment business, all of them still have good strong runways and all of them have traditionally over the last several years exhibited pretty strong growth. I think the downturn in growth is going to be short in duration. It's going to consumer related and directly linked to the economic conditions that we're facing. Once we're through that I see no reason why debit card and the other products that I just cited won't continue to grow.

To kind of look at the upside, even in spite of the downturn some of our Payment products are growing very, very well. Our bill payment product, the revenue stream grew 15% this quarter and that's likely not to stop and we hope to accelerate that going forward. So I think it's isolated to check. For the time being. check item processing and check processing - risk management are the two, Jim.

James Kissane - BAS-ML

And Lee, just following up on that, given the strong growth in bill payment, is that share gain, just organic growth from existing customers?

Lee A. Kennedy

It's a combination of both because our community banks are under penetrated and they're still adding clients and that's upping the core base revenue, but it's also being driven by some pretty significant share gain. We're doing very well in the community bank space. We're up close to 1,000 institutions on our bill payment systems currently. And if you look back over the last three to four years since we really entered that business and completed the development of our bill payment capabilities, we have been double-digit growth ever since we launched it, so we think that will continue. So it's both.

James Kissane - BAS-ML

And just, George, your outlook for CapEx? Given the Metavante deal, are you scaling back on your original CapEx plan?

George P. Scanlon

Well, you know, Jim, what I'd say is we had guided 5% to 7% as our target, you know, in the $210 million range. Our objective, setting aside the Metavante acquisition, would be to beat that number. As you saw in the first quarter, there's some timing involved but we had a strong first quarter in CapEx.

As we get into the integration planning with Metavante I think we're going to see opportunities on both sides to spend capital a little differently. We obviously haven't provided specific guidance in that area but I would anticipate that, if you took what we do and what they do that on a going forward basis, we'll be able to reduce that number.

Operator

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

John Kraft - D. A. Davidson & Co.

Just one question left and that is just a clarification, really, on the progression or the trend throughout the quarter in the Payments business. You did mention the debit, but on credit and bill pay and some of the other areas, can you clarify kind of the progression you saw throughout the quarter? The reason I'm asking is Metavante was pretty clear they saw an acceleration throughout the quarter with their Payments businesses.

Lee A. Kennedy

Yes, I think as I recall from the Metavante call they said that January was a disaster, but they saw strength return in February and March. Just to clarify, on the debit side we saw pretty consistent 5%-ish growth year-over-year month to month, so there was no real variability.

On the credit card side, we saw weakness in the first couple of months. I'd say on a relative basis, a very, very strong March. The early April trends aren't indicating to be like March, which was close to flat year-over-year. And so, as I said, until we get a few more months under our belt, it's premature to say that there's any reversal in trend coming. I think it's going to remain difficult. And the timing for March could be related to Easter year-over-year. I really don't know.

John Kraft - D. A. Davidson & Co.

And how about bill pay?

Lee A. Kennedy

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

Operator

Your next question comes from Julio Quinteros - Goldman Sachs.

Julio Quinteros - Goldman Sachs

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

Lee A. Kennedy

Well, you know, I say that, Julio, we've got the benefit coming into this year from the cost takeouts last year, some residual [inaudible] benefit which we provided in our guidance earlier in the year. We're continuing to focus on our cost structure. We've had selective headcount reductions in 2009 based on trying to match our infrastructure with the revenue environment, and we're continuing to prune where we have to - a tough process to go through but, in the absence of a positive revenue environment, we know those are the things we have to do to deliver our earnings commitments.

I would say nothing specific in the back half of the year. Clearly, assuming the Metavante transaction closes in the July, early August timeframe, we're going to together do things in combining the organizations that modify our respective cost structures. But obviously that hasn’t closed and so the things we're doing today are in contemplation of being a stand-alone company.

George P. Scanlon

A number of the improvements, Julio, center around upgrades and changes in the way we deploy technology. There's a lot of cost takeout that remains to be had in getting more efficient in the way we utilize mainframes and the way we utilize shared midrange systems throughout the country, specifically on our check business. We're going to work towards getting that cost down by consolidating some of the processing into some of our regional hubs.

And there's other projects that center around that, too, so technology deployment is one. Development resources, we're still continuing to consolidate our technology organizations and work more efficiently in how we develop products. There's sales force reorganizations that are currently under way that are going to give us some lift. So there's really a wide range of cost takeout measures or efficiency improvement measures that we have ongoing that will start to take hold in the second half of the year.

Julio Quinteros - Goldman Sachs

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

George P. Scanlon

Well, I think it's just not as simple as Bradesco. There's organic growth in the Brazilian market that we're anticipating, so as it relates to Brazil specifically. As I said, we added 1 million cards this quarter so, despite the global economic conditions, the card business is growing down there very solidly. And the Bradesco opportunity creates that inflection point to take it to the 40 million card level.

Beyond that, I think as we look at International we've got some deals that we expect to close in the second quarter that will roll into the second half of the year and we've got some annualization as well. So we're looking to second half improvement; last year we achieved that. We're not counting on the economy to get markedly better, but we've got to close some deals, too.

Julio Quinteros - Goldman Sachs

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

George P. Scanlon

Well, I think we'll see improvement in the domestic businesses as well. There's some seasonality. The first quarter tends to be our slowest quarter traditionally, so you have to factor that in. And the first quarter was a tough environment; I'm not sure it's going to get worse. As I said, in April - and I think Lee mentioned this as well - we saw some strengthening in the pipeline and we have to convert that pipeline. So that gives us some confidence in the future, but we've got to get deals closed here as well.

You know, the overall guidance I think we gave coming into the year was 3% to 5%. We're maintaining the lower end of that guidance at 3% and that's really our view right now and that's what we're shooting for. There could be some potential upside if some big deals close. But, again, I think to hold to the 5% right now in the environment we're in would be probably unduly optimistic. So I think the 3% is a reasonable target.

Lee A. Kennedy

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

Julio Quinteros - Goldman Sachs

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

Lee A. Kennedy

That's an annual number, Julio.

Julio Quinteros - Goldman Sachs

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

Lee A. Kennedy

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

Operator

Your next question comes from Wayne Johnson - Raymond James.

Wayne Johnson - Raymond James

On the SG&A and R&D, it would seem to be tracking a little ahead of my model. How should we be thinking about those two metrics going forward for the remainder of the year?

George P. Scanlon

That's a great question, Wayne.

Wayne Johnson - Raymond James

And this is on a stand-alone basis, obviously, not including Metavante.

George P. Scanlon

I know. And there's some things that come in through SG&A which create quarter to quarter volatility mainly on the corporate side, so we may have to handle that off - we don't tend to look at our operating model along the GAAP reported basis. We look at it on an EBITDA basis and hold the operations accountable for delivering on the margins and look at the D&A separately.

So the breakdown, you know, R&D's up a little because our CapEx is down in IDSW.

Lee A. Kennedy

Why don't you take it offline and analyze it.

Wayne Johnson - Raymond James

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

George P. Scanlon

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

Wayne Johnson - Raymond James

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

George P. Scanlon

We collected $27 million. We collected $33 million last years. So if you looked at our reported CapEx last year net of that $33 million, we would have been at $325 million, okay? And we've baked into the forecast this year I think around $50 - $55 million, maybe $60 million. So there's a little bit more to go. We've got about $50 million that will run into 2010, so I don't want you to bake into your models the full collection of that. We'll probably have 15 of that run into next year.

Operator

Your next question comes from Daniel Perlin - RBC Capital Markets.

Daniel Perlin - RBC Capital Markets

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

Lee A. Kennedy

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

Daniel Perlin - RBC Capital Markets

So no initial client discussions that are saying we want to take a smaller chunk today but a bigger chunk once you guys can put these two bohemic, you know, together.

Lee A. Kennedy

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

Daniel Perlin - RBC Capital Markets

Lee, can you remind me, you mentioned community banks, you've got about 1,000 institutions using bill pay. What percentage of just your overall client base is using bill pay today? I imagine that'll be one of the strong product sets that Metavante's bringing with it.

Lee A. Kennedy

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

Daniel Perlin - RBC Capital Markets

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

Lee A. Kennedy

That's constant currency, Dan, that's right.

George P. Scanlon

So the 3% is on a constant currency basis.

Daniel Perlin - RBC Capital Markets

And then could you just remind me the percentage breakdown between Brazil and Europe in your International business?

Lee A. Kennedy

I think if you look at the pie chart on 14 it'll give you a sense of how that revenue breaks down. Brazil's about a third.

Daniel Perlin - RBC Capital Markets

With it jumping maybe incrementally when you bring on those 10 million cards?

Lee A. Kennedy

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

Daniel Perlin - RBC Capital Markets

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

Lee A. Kennedy

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

Daniel Perlin - RBC Capital Markets

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

George P. Scanlon

No, you know, it's principally product mix related. We had more software deals in International last year as well, and with almost a 100% margin on a software deal, it takes a lot of processing revenue to offset that. And that's really the difference this year.

Lee A. Kennedy

Yes, the core businesses maintained strength, so there wasn't any significant movement one way or the other, it was just software.

Daniel Perlin - RBC Capital Markets

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

George P. Scanlon

That's correct.

Lee A. Kennedy

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

Operator

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

Mary Waggoner

Thank you, everyone, for joining us this morning. If you want to remain on the line, the operator will provide replay information and we'll look forward to taking any additional questions you may have.

Operator

And, ladies and gentlemen, this conference will be available for replay after 11:30 a.m. today until May 13th at midnight. You may access the AT&T Executive Playback Service at anytime by dialing 1-800-475-6701 and entering the access code of 996633. International participants may dial 1-320-365-3844 and again entering the access code of 996633.

That does conclude our conference for today. Thank you for your participation and using AT&T Executive Teleconference. You may now disconnect.

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Source: Fidelity National Information Services, Inc. Q1 2009 Earnings Call Transcript
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