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Executives

Mary Waggoner – Senior Vice President Investor Relations

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

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

Analysts

David J. Koning – Baird Equity Research

Glenn Greene – Oppenheimer & Co, Inc.

Brett Huff – Stephens, Inc.

Tien-Tsin Huang – JP Morgan

John Kraft – D. A. Davidson & Co.

Greg Smith – Duncan-Williams, Inc.

James F. Kissane – Bank of America

Julio Quinteros – Goldman Sachs

Roger S. Smith – Fox-Pitt Kelton, Inc.

Bryan Keane – Credit Suisse

Andrew W. Jeffrey – SunTrust Robinson Humphrey

Fidelity National Information Services, Inc. (FIS) Q2 2009 Earnings Call July 28, 2009 5:00 PM ET

Operator

Welcome to the Fidelity National Information Services second quarter earnings call. At this time all lines are in a listen only mode. Later, there will be an opportunity for questions and instructions will be given at that time. (Operator Instructions) As a reminder, this conference is being recorded. I’ll now turn the conference over to Mary Waggoner, Senior Vice President Investor Relations.

Mary Waggoner

With me are President and Chief Executive Officer Lee Kennedy and Chief Financial Officer George Scanlon. We will be using a slide presentation to supplement today’s discussion. The slides as well as the press release are available on our website www.FidelityInfoServices.com. As a reminder, today’s commentary 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 the 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. A telephone replay will also be available and that replay number is provided in the press release.

Now, I will turn it over to our CEO lee Kennedy.

Lee A. Kennedy

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

First, Metavante; since our initial announcement in early April we’ve made excellent progress in preparing for the combination of FIS and Metavante. As stated in last week’s press release the S4 has been declared effective and the shareholder vote will take place on September 4th. In addition, we continue to work closely with the DOJ to comply with the request for additional information and expect to complete the acquisition in the fourth quarter.

The staking of the integration teams is complete and the project plans for combining the two companies will be finalized and in place prior to closing. As outlined in our April investor presentation, the integration of Metavante and FIS will generate approximately $260 million in cost savings through expense reductions and efficiency gains in corporate, technology and business operations. We are confident that we will be able to achieve the cost synergy goal with minimum disruption to our customer base.

If you’ll please turn to Slide Five, I will continue with the second quarter business review. We’re very pleased with the strong second quarter results particularly in light of the challenging market conditions which persisted throughout the second quarter. We achieved excellent double digit growth in earnings and free cash flow. In addition, the overall margin grew 250 basis points over prior year. Adjusted earnings per share increased 24% to $0.42 on a reported basis and 27% in constant currency. It was a very clean quarter with no benefit from significant software sales or termination fees.

The strong growth in earnings per share was driven by strong margin expansion in all of our operating segments. Free cash flow totaled $125 million which was a 45% increase over prior year. As illustrated on Slide Six, second quarter constant currency revenue was comparable to prior year. Second quarter top line growth remained challenging driven by difficult market conditions which persisted throughout the quarter. However, the steps that we have taken to generate higher efficiencies in development, technology and operations together with quick and decisive actions to reduce costs in the second quarter enable us to drive strong growth in EBITDA and margins.

Second quarter EBITDA grew 6.9% and the margin increased 250 basis points to 25.3%. This is the fourth consecutive quarter of 90 plus basis point improvement year-over-year margin improvement which clearly demonstrates our ability to aggressively manage costs and drive strong operating leverage even with lower revenue growth. This is evidenced that the profit improvement plans initially implemented in 2007 are generating excellent long term results for our company.

In early 2007 we outlined four strategic initiatives to improve profitability and free cash flow. Our business plan included initiatives to better leverage development; processing and support services across business unit lines and geographies; initiatives to reduce IT infrastructure costs through the consolidation of processing centers; stronger vendor management and better utilization of our mainframe and mid range systems and operating resources; a project planned to lower capital spending by leveraging development resources across business units and geographies, eliminating redundant product development; and finally, the implementation of a plan to improve sales efficiencies and cross selling through the creation of a centralized sales organization.

The results to date are measurable and clear. Earnings per share increased more than 20% in 2008 and in the first half of 2009. Free cash flow more than doubled to $358 million in 2008 and we’re on track to exceed our free cash flow guidance for 2009. After peaking at $273 million or 9% of revenue in 2007, 2009 cap ex is expected to be in the low $200s which is approximately 6% of total revenue.

We are making progress in selling our payment products up market and increasing the number of product relationships that we have with anchor core processing customers. We have also significantly reduced debt and interest expense over the last two years which has enabled us to pursue strategic acquisitions and better opportunities that have added new product capability and scale, improved our competitive positions in the US and internationally.

At the same time we have also focused on strengthening and expanding significant customer relationships. In the second quarter we signed multiyear renewals with the Independent Community Bankers of America for debit processing and the Illinois Credit Union League for card processing and loyalty services. We are pleased to continue our long standing relationships with these two important organizations.

We also established new core processing relationships with [Post Oak] Bank, the Bank of Virginia and Alliance Bank; each was a competitive take away. In addition, FIS was selected to provide loyalty services for Bank of the West which is the 25th largest bank in the country. Bank of the West is an example of the success that we are having in cross selling payment products to our larger core processing customers.

We’re also seeing increasing interest for outsourced core and card processing services outside the US particularly in the UK and Europe where banks have historically processed in house. I am also pleased to report that all major customer implementations remain on track for 2009. In June, we successfully converted over $98 million prepaid cards for American Express to our new prepaid card platform.

In the second quarter we also converted more than 45,000 point of sale terminals at more than 15,000 US postal service branches across the US to our newly designed and implemented online payment switch. We will expand this service to an additional 17,000 post office locations in 2010. Both of these opportunities were initially generated through the acquisition of eFunds. We remain on track to convert Bradesco’s card portfolio by the end of the third quarter.

In addition to Bradesco’s legacy portfolio, we’ll add more than 12 million cards to our platform bringing the total number of cards processed by the JV to more than 44 million. Fidelity Brazil which is the first processor in the country to achieve PCI certification serves a broad customer based consisting of 14 Brazilian banks which in total will generate approximately $250 million in annual revenue. Our BASE2000 platform supports more than 500 different types of plastic cards including credit, private label, prepaid and store value cards. We also provide a wide range of bank office and card holder support services including fraud management, collection, dispute resolution and loyalty programs.

More than seven million consumer calls per month are handled through our 3,000 seat state of the art call center. Brazil is expected to become the third largest card market in the world by 2013 and we believe that our scale, experience, local market expertise positions us very well to take advantage of the significant opportunities that this market will generate.

In summary, it was another good quarter for our company highlighted by excellent growth in earnings, margins and free cash flow. While our outlook for revenue growth is slightly more cautious for the balance of 2009 we are confident that the positive pipeline and market trends will continue to improve driving stronger revenue growth as the economy improves. Based on the strong results of the first half of 2009 and our positive outlook for the remainder of the year, we are raising our guidance to $1.71 to $1.75 per share from $1.60 to $1.66 per share that we previously communicated.

We continue to work towards finalizing the acquisition of Metavante and expect it to close in the fourth quarter. We remain very enthusiastic about the enhanced product capability, improved scale and combined management depth of the new company. The new FIS will be stronger, it will be more competitive and it will be uniquely positioned to take advantage of the opportunities in high growth markets that we believe will grow and exist throughout the world.

I’ll now turn the call over to George who will continue with the second quarter financial report.

George P. Scanlon

I’ll begin with Slide Eight, as Lee discussed consolidated revenue in the quarter totaled $835 million compared to $870 million in the prior period. The 4% decrease in reported revenue included an unfavorable currency impact of $31 million. Excluding the currency impact revenue was comparable to Q2 ’08. Termination fees were insignificant and there were no large software sales or major customer implementations that benefitted the current quarter.

Consolidated EBITDA totaled $212 million an increased 6.9% relative to prior year despite the decline in reported revenue and the impact of a $6 million unfavorable currency adjustment. As a result, the EBITDA margin expanded by 250 basis points to 25.3% as we experienced strong year-over-year and sequential margin improvement across the board in all of our operating segments. Ongoing spending discipline and proactive cost reductions continue to improve our operating leverage and mitigate the earnings impact of softer revenues. Adjusted earnings totaled $0.42 per share and were negatively impacted by $0.01 for currency effects. All-in-all we demonstrated the resiliency of our operating model with very strong bottom line performance.

Now, if you turn to Slide Nine, I will provide additional detail on our second quarter operating segment results. Financial solutions revenue declined 1.4% to $277 million in Q2 ’09 compared to $281 million in the prior year. Increases in account processing, outsource technology and risk management services were offset by lower professional services revenue and a decline in software sales which tend to be more discretionary purchases. Financial solution’s EBITDA increased by $16 million primarily due to increased productivity and improved resource utilization.

As reported, the margin increased 610 basis points to 43.1% compared to 37% in the prior year quarter. Now, while there was no impact to consolidated margin, there was an anomaly related to the allocation of severance costs between the operating and corporate segments in Q2 ’08 which had the effect of understating prior year margins for the financial solutions and international segments and overstating corporate. Normalizing for this effect, the quarterly improvement in the financial solutions margin was a strong 250 basis points. We have included a chart in the appendix to illustrate the normalized EBITDA and margin expansion for the respective segments.

As shown on Slide 10, payment solutions revenue declined $3 million to $380 million in the quarter or .9% below prior year. Payment solutions increased .4% if you exclude retail check services. A slide summarizing the results of our check business is included in the appendix for your reference. Solid growth in debit processing and output solutions offset declines in prepaid, credit card and item processing activity. We saw positive developments this quarter in transaction trends relative to Q1.

Debit transactions increased 7.3% year-over-years versus 4.6% growth in the first quarter and improved 9.3% sequentially. Credit card transactions declined 2.8% year-over-year compared to a 5.4% decline in Q1 and increased 9.6% sequentially. Payment solutions EBITDA increased 8.2% to $105 million versus $97 million in the prior period and the margin improved 230 basis points to 27.7% compared to 25.4% in Q2 ’08. Improved operating efficiency across most product lines resulting from strong expense management contributed to the enhanced performance.

Turning to international which is detailed on Slide 11, our international revenue increased 1.4% in constant currency which was in line with our expectations and the guidance we communicated last quarter. As previously discussed, the second quarter growth rate was impacted by significant new customer implementation revenue in Brazil, Europe and Asia Pac in Q2 ’08. We anticipate international revenue growth to accelerate in the second half of 2009 driven by new customer implementations including the Bradesco portfolio conversion and organic account growth.

International EBITDA increased over 29% compared with prior year and more than 57% in constant currency. The EBITDA margin expanded by 550 basis points on a reported basis and 610 basis points in constant currency. Accounting for the severance adjustment I previously mentioned, international margins expanded by 360 basis points. Our payment solutions products in credit, debit and item processing contributed to the margin growth while financial services was down modestly primarily due to lower software sales.

Slide 12 provides additional insight in to our foreign currency exposure. Compared to the same period in the prior year, the Euro declined approximately 13% while the Brazilian [Real] and the Sterling declined approximately 20%. Our exposure to each major currency is illustrated by the pie chart at the bottom of the page. The chart on the right depicts the negative currency comparisons we have experienced over the past several quarters. We expect the negative currency impact to continue through the third quarter with more normalized comparisons beginning in Q4.

Please turn to Slide 13 for a reconciliation of adjusted net earnings. Second quarter adjusted net earnings totaled $80 million or $0.42 per diluted share compared to $0.34 in the 2008 quarter. As I mentioned earlier, currency negatively impacted earnings by about $0.01 in the quarter which offset a comparable non-operating currency transaction adjustment. As indicated, adjusted net earnings include after tax purchase amortization of $19 million and about $1 million of after tax M&A costs. These costs were significantly higher last year as a result of the spinoff of LPS and other related restructurings I previously mentioned.

The effective tax rate was 34.5% in Q2 ’09 compared to 32% in the prior year and our average shares outstanding were 192.7 million. As shown on Slide 14, free cash flow improved significantly to $125 million. The increase was driven by higher earnings and improved working capital management and we achieved some onetime benefits in accounts payable through more effective management of vendor payment terms. Receivables collections included $23 million related to the former Certegy Australia business. To date we have collected $83 million since the sale of the business in October of last year and have $41 million remaining to be collected at June 30th.

Capital expenditures totaled $51 million in the quarter and were comparable to Q2 ’08. The balance sheet strengthened in the quarter as we further delevered. Uses of cash included $26 million in scheduled payments on the Term A debt and $141 million reduction in the revolver balance. We also paid $10 million in shareholder dividends and cash and cash equivalents totaled $228 million at June 30th.

Turning to Slide 15, we had $2.3 billion in debt outstanding at quarter end including $1.9 billion on the Term A facility and $330 million drawn against the $900 million revolver. Approximately $2.1 billion or 92% 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 5.5% at quarter end. We have swaps expiring in the fourth quarter and expect to enter in to new swap agreements after the completion of the deal with Metavante.

We are evaluating various fixed/floating alternatives but do expect a $0.01 benefit in the fourth quarter which we have factored in to our revised guidance which is summarized on Slide 16. On a consolidated basis our outlook assumes revenue growth for the year to be slightly positive in constant currency and down slightly compared to prior year on a reported basis. We have several significant software and professional services deals in progress and if we are able to close these prior to the end of the year we would expect upside to our revised guidance.

However, based on the difficulty in predicting customer decision making around discretionary purchases, we think it’s prudent at this time to maintain a more conservative view for the balance of the year. As a reminder, regarding calendarization of our revised guidance, we face difficult third quarter comparisons in our financial solutions segment due to particularly strong software and professional services sales in Q3 ’08. We also face difficult third quarter comparisons in payment solutions relating to a $6 million interchange adjustment and strong card marketing revenue recognized in Q3 ’08 that is not expected to recur this year.

Consequently, third quarter revenue in our domestic segments will likely decline year-over-year before picking back up in Q4. As I mentioned earlier we expect international revenue growth to accelerate beginning in Q3 and expect full year international growth to be around 10% on a constant currency basis and flat for the year on a reported basis. Our original EBTIDA margin improvement was targeted at 50 to 100 basis points. Despite the flattening of revenue, we now expect revenue improvement to exceed 150 basis points this year.

We will also exceed the upper end of our cash flow guidance of $430 million and expect adjusted earnings per share of $1.71 to $1.75 for the full year 2009 with the upside to prior guidance more heavily skewed to the fourth quarter due to higher operating leverage and lower interest costs. The ongoing and proactive discipline over expense and capital management that we’ve maintained for the past several quarters has enabled us to produce expanding margins and consistently strong profitability in a challenging environment and positions us for even greater success when the markets normalize as they inevitably will.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from David J. Koning – Baird Equity Research.

David J. Koning – Baird Equity Research

I guess first of all just on the financial solutions versus payments, you did a great job kind of laying out the headwinds in Q3 and then how they’d get a little better in Q4. I’m just wondering if this year and even as we look in the future do you expect both of those segments to look about the same from a growth profile? Or, maybe you can talk a little bit about the puts and takes?

Lee A. Kennedy

Dave, I would say that as we look forward we would anticipate that the payments part of our business would have faster growth characteristics and the financial solution segment would have a little bit more lumpier story. The software sales this year have been a challenge as you can imagine, we’re down about 30% year-over-year and yet we’ve been able to expand margins despite the loss of that most profitable part of our business.

We know from the pipeline that there are deals in the future, it’s just the delays in getting customers to the finish line have compressed revenue growth. But, we know over time that part of our business will come back along with the professional services and so we think we can resume a normalized level of growth. The payment side though I would expect to grow faster on average.

George P. Scanlon

I think payment will be aided by the strong growth in debit. We had really good growth for the quarter, we expect that to continue on and also the conversion of some of the accounts in Brazil which will add to that on the international side anyways. So, I think those factors will push payment at a faster rate than what you see on the financial services side.

David J. Koning – Baird Equity Research

Just one other question, if that was a challenge, kind of how to adjust numbers after guidance gets raised so meaningfully to the out year and I know you don’t want to comment much on 2010 by any means yet but my one question I guess around that is this year it seems like license was obviously very weak so it seems like the comp gets easier in 2010 and fx gets a little easier too, are those kind of the two main comps that do get a lot easier in 2010 or is there anything else happening this year that you would expect to get a lot easier in to 2010?

Lee A. Kennedy

I think the product lines that are more discretionary get easier going forward. If you look at our software sales year-to-date they’ve been very weak. We don’t expect that to continue in to 2010 so we’re going to get some natural lift just from institutions that have delayed decisions really jumping in the fray and implementing new capabilities so I’d say discretionary nature you’ll see the improvement there.

Operator

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

Glenn Greene – Oppenheimer & Co, Inc.

I guess I just want to get more clarity and color on the order of magnitude of the margin ramp, that seems to be the story of the quarter especially in light of the software sales being as weak as you talked about, I think George said down 30% year-over-year. Did you take sort of extraordinary cost efforts? Were there more layoffs? I’m just trying to get some understanding of how you sort of achieved the margin ramp that you did in the quarter because it was certainly beyond anyone’s expectations I think.

Lee A. Kennedy

Well, in preparation of what we thought would kind of be a weak year, remainder of the year, we took actions earlier in the year to take out expense. So, yes there were cost reductions and headcount reductions but a lot of it is also being driven by the efficiencies that are being generated through the consolidation of various operation organizations. Our development organization is now operating on a combined basis so we’ve eliminated a lot of the duplicate development efforts that we’ve had in that past.

We have much more capacity and flow through and efficiency in our call centers as we brought additional volumes from other parts of the company in to those call centers. We’re seeing a significant lift on the technology side of the business. [Rom Charey], you heads up our technology has done a phenomenal job in taking out expense in that piece of the organization not only by better utilization of mainframes and our server environment and also a mid range platform but by more cost effective negotiation of the various maintenance agreements and licenses that we operate under.

It’s really been a series of initiatives that started really last year that are producing really good strong results this year aided by some very aggressive cost management starting early at the end of the first quarter through the second quarter to make sure that we actually achieved the financial results that we communicated to the market or better.

George P. Scanlon

I think if you look at it we were preemptive really about a year ago in taking costs out in anticipation of what we thought would be a softer revenue environment which materialized. Coming in to the year we really felt the same way so I’d say it’s really an ongoing effort by everybody to really tighten up spending whether it’s no the expense side or whether it’s on the capital side. We’re seeing the benefits in the cash flow and trying to lower our run rate going forward so that when revenue does come back we’ll get in an even better margin pop.

Glenn Greene – Oppenheimer & Co, Inc.

Then Lee if you could just broadly talk about the spending environment by the bank customers, what pipeline activity looks like, any loosening of the purse strings or just a really uncertain environment still?

Lee A. Kennedy

I think it’s still somewhat uncertain and we’re cautious about the environment at least for the remainder of the year. The areas of spending that are being held back all center around software sales and the more discretionary products that they might by from our company including hardware sales or hardware refits that we provide to institutions. I think that will continue on at least through the end of the year.

As far as the sales pipeline, it’s as strong and robust as we’ve ever seen it. Without question leading in to next year we’re confident that our number of deals that we currently have under way or that we’re in the process of negotiating will close and produce some really strong benefit next year. There are at least five direct banks that are being organized or launched by financial services companies that we’re right in the middle of.

We hope to expect to close some of those later on in the year and others as we approach next year. So, I think it’s still the same story that we communicated in the first quarter. Cautious, they’re not spending a lot right now, they’re waiting until the financial strength of the bank improves and once that does I think we’re going to be in really good shape going forward.

Operator

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

Brett Huff – Stephens, Inc.

A quick just detail a little bit follow up on the last call, can you characterize big versus small or however you want to sort of characterize different size banks in the way the sales conversations are going and I’m not sure who best to answer that?

Lee A. Kennedy

Well, I think the hold back has been more on the end of the larger banks that is looking at acquiring or purchasing professional service work from us or new software licenses. The smaller bank actually the spending is pretty robust, it’s pretty decent, it’s not at great levels but it certainly isn’t at the level of the larger banks. So, more caution I would say at the upper end of the market than the lower end of the market. We’re still cross selling a lot of our payment products in to our core customer base. That hasn’t dropped off significantly, it’s been a little bit of a down tick but not significant so I would say more skewed towards the upper end and the higher end of the mid market range that we service.

Brett Huff – Stephens, Inc.

The second question is it sounds like you feel good about international revenue in the second half of the year even on a constant currency basis. It’s a little bit lower than where you guys were before but even looking out in the 2010, do you still have the same amount of confidence saying that’s really going to be the market to grow a lot more quickly even beyond the Brazil deal, maybe core in Europe? Can you talk about anything like that as you look at your pipeline?

George P. Scanlon

I think we remain optimistic about international. Brett, when you think about it we’re covering several continents and multiple countries so there’s lots of opportunities to sell. We’re seeing an increasing propensity to outsource and so we’re engaged in more conversations particularly in Europe. The pipelines for international remains strong. Obviously getting Bradesco fully converted will start to normalize the operations for that joint venture and we should see margin expansion along with that.

The European markets seem to be less adversely impacted to date than what we’ve seen domestically. So, we’re encouraged by our outlook longer term for international and we think it will remain the fastest growing part of our business.

Lee A. Kennedy

Without question we think that.

Brett Huff – Stephens, Inc.

One last quick question, it sounds like the expenses we’re seeing now are a combination of things started in ’07 that you outlined and then even ’08 and even ’09. Do you see the same kind of layering over the next couple of years or are most of the expense saves that we’re seeing going to kind of taper off or is this continual kind of cost improvement that we should see over the next couple of years as well?

Lee A. Kennedy

I think you’re going to see a continuous improvement, it’s just not going to drop off. There’s still a lot of efficiencies to be gained even if the companies were to operate long term individually, there’s a lot of money that we believe we can take out of the core operations. But, the target and the real effort will be directly towards achieving the $260 million in cost synergies once we combine with Metavante. We’re very comfortable and confident that we’ll be able to achieve that number collectively.

Operator

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

Tien-Tsin Huang – JP Morgan

I wanted to ask about that, in financial solutions George I heard you mention the change in some of the allocation on the severance, can we look at it sequentially because it was a pretty big $11 million sequential step down in expenses within that segment. I just wanted to make sure that was a good base that we can use going forward?

George P. Scanlon

I think that is the base going forward Tien-Tsin.

Tien-Tsin Huang – JP Morgan

So nothing else unusual beyond that?

George P. Scanlon

No.

Tien-Tsin Huang – JP Morgan

Just the compare from the prior year?

George P. Scanlon

That’s exactly right.

Tien-Tsin Huang – JP Morgan

So the cost reduction, it sounds like it’s pretty consistent with your plans. I guess a question I have, I’m not sure how you answer it but does the reduction in the cost here change at all to where the degree of difficulty and your ability to capture the cost synergies related to the Metavante deal because it does seem like a pretty large nominal improvement.

Lee A. Kennedy

Look, some of the cost take out that we’ve achieved will be directly related to the combination of the two companies that we had an opportunity to take out in advance of the combination. But, there’s also quite a bit of expense that’s directly related to the core operating part of our business also on a standalone basis. We’ll give you a complete reconciliation of it once we get the two companies together and we hold our investor day which hopefully will be sometime in November. So, we’ll give you that accounting but the number you should really focus on is $260 and we’ll achieve that.

Tien-Tsin Huang – JP Morgan

Maybe if I can ask one more, just the impact of the new credit card legislation in particularly obviously for your card processing business, what kind of implications could that have in the near term and the long term? I suppose there could be some systems updates that need to be done to meet those deadlines?

Lee A. Kennedy

Well, we do have some system work which we started to work through. It’s not going to be material in nature and I think we have our arms around that. Some of the system work that we have to put in place will be shared with other customers that operate our software so the net expense to FIS will be a little bit lower than what we initially thought. The good news is that with the base that we service in the US is they’re primarily community institutions. They’re not exotic in the way they administer their card programs so in some cases there’s not as much risk associated with the changes because they really don’t go overboard they’re pretty benevolent in nature.

So, we’ll keep you updated on it but it shouldn’t be something that our investor base should be concerned with. We’ll be able to complete that development work and will not have a material impact on the growth of the business or the expense base of the business in general.

Operator

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

John Kraft – D. A. Davidson & Co.

I wanted to just touch base on the change in your revenue portion of the guidance, that change in sentiment there. Is that simply those deals George that you talked about that were in the pipeline still but you didn’t expect them to sign, is that the difference there?

George P. Scanlon

I think that’s the principle difference John. We’ve got deals and the markets remain volatile and to get them finished and signed is just taking longer and so as I said, we see some potential upside really more in the fourth quarter if we can get these deals closed. We did see improving trends on the card side this quarter really both in debit and credit. I think the credit side remains negative but less so. One quarter is not an indication necessarily of a trend but it is encouraging to see the negative trends reverse so there’s some possible upside there as well. But, I’d say it’s principally related to our ability to get additional software sales and professional services deals done.

John Kraft – D. A. Davidson & Co.

Then just on that last point the credit, Q1 was down 5.4% and I thought you said Q2 was up 2.8%?

George P. Scanlon

No, it was actually down I think 2.8% but up 9.6% sequentially. So, we saw the negative year-over-year comparisons get less negative and the sequential comparison get much more favorable.

John Kraft – D. A. Davidson & Co.

How did those trends change month-to-month in Q2 for both debit and credit?

George P. Scanlon

We saw increasing improvement. June was the strongest month of the quarter and again, three months doesn’t make a trend but I think we’re more positive about the trend today than we were 90 days ago and hopefully we’ll feel that way 90 days from now. I would say John the consumer remains under pressure and unemployment continues to rise so we think realistically we’ve got a ways to work through the consumer spending part of the cycle and it will probably lag the decision making that the banks do on the software and professional services side.

John Kraft – D. A. Davidson & Co.

Just to clarify, the other income line the $5.5 million, what was that related to?

George P. Scanlon

That relates to dollar denominated notes we’ve got in Brazil and the fx effect in converting them so what I said was basically that pick up was offset by the loss of about $0.01 on the conversion of our international operations EBITDA so net/net it kind of washes.

Operator

Your next question comes from Greg Smith – Duncan-Williams, Inc.

Greg Smith – Duncan-Williams, Inc.

I’m just wondering if you can at all talk about any insight you may have in to why the Department of Justice did the second request and what they’re looking at and where they may be getting hung up?

Lee A. Kennedy

I don’t think they’re getting hung up I think Greg it has become more of a standard process that they’ve implemented with the change of the administration. They want to be very careful and prudent in what they do. We don’t expect any issues with it, we’re complying with it, we’re on schedule, we still expect to close the transaction in the fourth quarter. But, I think it’s become pretty much a standard or will be a standard in to the future especially with companies that center around banking in general. So, there’s nothing that we’ve seen that gives us any concern. We still feel very confident about it and hopefully in the fourth quarter we’ll be a combined company.

Greg Smith – Duncan-Williams, Inc.

Then in the past you guys have given some specific kind of revenues around the potential impact from bank failures that have been announced, we’ve certainly got some more since the last time you guys gave us any numbers, has anything changed significantly on that front?

Lee A. Kennedy

You know Greg it hasn’t, we still have less than 1% of our revenue base at risk and I think most of the accounts with banks that have failed are still processing with us, are still paying their bills so it’s insignificant so far so we’ll keep our fingers crossed but no material change.

Greg Smith – Duncan-Williams, Inc.

Then George you mentioned that it sounds like the swaps rolling off for you guys doing something with those swaps in the fourth quarter this year is going to add $0.01 but that kind of begs the question about 2010 you getting potentially quite a large benefit depending on what you do there. Any clarity you can provide because I don’t think that $0.01 implies annual run rate of $0.04 as far as how that could benefit you.

George P. Scanlon

That’s exactly right Greg, we’ll see more significant benefit in 2010. Essentially, we’ve got $1 billion of swaps expiring in October and $250 million expiring in December. As I said, we’re looking at the combined company’s debt position and the fixed variable mix we want to maintain. Obviously, there’s a bias towards going more variable today because of the yield curve and we’re weighing different swap lengths and we will see benefit in 2010.

Obviously as part of the guidance we provide you on the combined company we will give clarity in to our capital structure and the benefit we see next year. But, I would say it’s $1,250,000 that’s being repriced this year and then I think there’s another $850,000 that comes due in April. So effectively all that debt gets repriced and we’ll be picking up as you know additional debt in the Metavante transaction. They are 100% swapped right now on a fixed basis so it’s a bit of trying to manage through our outlook and the advisors that we’re talking with.

Greg Smith – Duncan-Williams, Inc.

When did their swaps expire?

George P. Scanlon

They actually go out I think until 2014. They’re longer term. They’ve got some that come due next year and so we’re trying to not preemptively make decisions until we get more certainly on the timing of the deal closing but when you add it altogether Greg your point is on that we will benefit 2010 by having a lower average interest costs. As we’ve talked about, the objective of the combined companies is to pay down debt so that should become a lower part of our cost structure.

Lee A. Kennedy

We’ll get you the number Greg once we get the negotiations done but it’s well north of $0.04.

Greg Smith – Duncan-Williams, Inc.

Then just one last one, if I can sneak it in, I think George you may have already mentioned this but what was the sequential percentage increase in your credit card and debit card volumes?

George P. Scanlon

It was 9.6 in credit card and 9.3 in debit.

Operator

Your next question comes from James F. Kissane – Bank of America.

James F. Kissane – Bank of America

If you look at the international business that the revenue growth reaccelerates in the back half of the year will you continue to drive margins higher there? And also, kind of related will there be a step up in margins post Bradesco conversion?

George P. Scanlon

Jim, we achieved good margin growth this quarter, I would expect margin expansion to continue in Q3 and Q4. Clearly, we’ve got to get the Bradesco conversion completed and it will realistically take 90 to 120 days post conversion to stabilize the platform, the [mips] utilization which has a cost to it. So, as we look in to next year I would expect margins to continue to expand in 2010 in international and exceed what we did in 2009. We targeted I think coming in to the year getting in to the high teens in international, that remains our target and I think that’s achievable.

Lee A. Kennedy

We should hit that target for sure in the fourth quarter. There is some seasonality involved and that gives you more leverage so we’ll hit that goal Jim.

James F. Kissane – Bank of America

Just on the $260 target with Metavante, have you eaten in to some of that or will that all be incremental?

Lee A. Kennedy

Some of the expense that we took out this quarter you can attribute or should attribute to synergy expense take out that we took out in preparation for the combination of the two companies. Again, we’ll give you a complete reconciliation of that but by no means was it a substantial portion or the majority portion of the leverage and the expense take out that we had in the business in the second quarter.

George P. Scanlon

You may recall Jim that we announced the deal on April 1st and we had made an assumption of a July 1st close and obviously with the second request it extended it probably a quarter or so. I think both companies have been working together on organizational design and trying to get as much ahead of this as we can and obviously that’s the story we’ll tell post combination.

James F. Kissane – Bank of America

Just one last question, a detail question, billed payment growth George in the quarter did you give that?

George P. Scanlon

If you can just give me a second.

James F. Kissane – Bank of America

Lee, while you’re doing that, it sounds like some of the revenue compression in the back half is related to software and timing so it sounds like the impact on the bottom line could be disproportional if they do come through.

Lee A. Kennedy

We’ve looked at that and we’re comfortable with what we’re going to have in terms of additional expense take out and leverage for the remain quarters so you shouldn’t view that as material or significantly impacting the profitability of the business. We missed software sales this quarter also that we had in prior quarters so it’s not something that just ramps up and starts.

George P. Scanlon

Jim bill payment growth was about 7% in the quarter.

Operator

Your next question comes from Julio Quinteros – Goldman Sachs.

Julio Quinteros – Goldman Sachs

Just one point of clarification, the 9.6 and 9.3 for credit and debit were those quarter-to-quarter or year-over-year numbers?

George P. Scanlon

That was sequential.

Julio Quinteros – Goldman Sachs

And what are the annual comparisons on that?

George P. Scanlon

The year-over-year you mean?

Julio Quinteros – Goldman Sachs

Yes.

George P. Scanlon

Credit was -2.8 and debit was 7.3.

Julio Quinteros – Goldman Sachs

Then just to go back to the commentary on the revenues and I apologize I had to switch over but I caught the tail end of what you were talking about on large banks versus small banks. Can you just rehash that because I think I heard you say that the big banks were holding back but the small banks were doing okay and I guess I’m just trying to understand what okay means for the small banks in terms of spend.

Lee A. Kennedy

I think most of the software purchases that we have with our customer base are driven through the large banks. The smaller banks generally don’t buy software from us, they outsource their processing to us. It’s a requirement really to operate the banks so you don’t see a lot of variability in the revenue stream that we generate from that segment. So really the vulnerability or the weakness is at the upper end of the market traditionally with larger institutions that would purchase software or programming services from us that are discretionary that they can push back and not materially affect the operation of the bank.

That’s really the difference. Most of your products and services that a community bank offers as you know are outsourced to a third party and there’s not a lot of variability with that group and how they buy their services or whether they can just push services or delay them, they just can’t.

Julio Quinteros – Goldman Sachs

So then you’re just kind of tied more to the sort of annual kind of volume trends depending on what they are right?

Lee A. Kennedy

That’s correct.

Julio Quinteros – Goldman Sachs

Looking ahead one of the bigger sort of topics here especially in the small or medium sized banks has been this kind of roll over from the consumer to the commercial side as we look at the exposure on commercial real estate, commercial credit etc., are you guys seeing any signs that that could add another level of constraint potentially with some of your smaller or medium sized banks that they decide this is something that they can’t afford to really deal with and therefore there’s not as much spending? Is that a part of what’s embedded sort of in the costs in the back half of the year here?

Lee A. Kennedy

No, it’s not. We don’t expect a material change from the first half to the second half with community banks so not that’s not factored in. We don’t think that will be a significant problem. Yes, there will be some banks that will be affected, community banks, but all-in-all by in large community banks are still doing relatively well and they’re still spending at a reasonably strong clip.

Operator

Your next question comes from Roger S. Smith – Fox-Pitt Kelton, Inc.

Roger S. Smith – Fox-Pitt Kelton, Inc.

I guess I want to go back to the operating efficiency here again and make sure I understand this and I think you kind of just touched on this a little bit Lee but when you talk about the software and professional sales, when they come back in is there any difference in the operating or EBTIDA margins there compared to what we have on the recurring revenue basis or will that really just continue to improve?

Lee A. Kennedy

When the software purchases are made and they come back in they come on at very high margins so there’s going to be improvement in profitability and margins as those sales start to strengthen. So yes, you’ll get more leverage once they do come back on board.

Roger S. Smith – Fox-Pitt Kelton, Inc.

So when they come back we should have even more increase in the margin expansion?

Lee A. Kennedy

I think depending on the period that you look at. Keep in mind that software sales were traditionally lumpy so you might not see it on a consistent basis but when you do sign major accounts they’re going to come on strong. Last year we had a phenomenal year in terms of software sales, we sold close to 11 banks that had assets over $50 billion worldwide. We didn’t get that benefit this year but by no means are we saying that the demand isn’t there. It is there, they’re just pushing back and that will come back as the market improves.

Roger S. Smith – Fox-Pitt Kelton, Inc.

That I guess is the second point I sort of want to understand, when we talk about the market improving and how long that might be because by the banks not doing this really I’m assuming that they end up being in a less competitive position because their product or what they’re doing just isn’t as good. Who ends up seeing that and like how would we as consumers of a bank notice that and how do we know that the banks can’t just sort of push this off for a longer period of time and try and make it work with that they have now?

Lee A. Kennedy

If their goal and objective is to cut costs and get rid of expense and become more efficient so they’re more profitable there are very few ways that they can accomplish that short of number one, raising prices to the consumer which obviously doesn’t work or putting in better technology so they can operate more efficiently. So yes, they can push it off for a period of time but many of the things that they’re pushing off directly impact the consumer if they’re not put in place. The ability to not offer new product capabilities and compete with the bank across the street, the ability of not being able to offer a competitive price on their products because their cost structure is too high, there is just a whole [inaudible] of things that will eventually catch up to the bank.

I think you can look at it this way, it’s not that the banks – the banks have just cut their spending and they’re not going to be able to do that and survive on an ongoing basis. They have to improve their risk management systems to get profitability increases, they’ve got to improve their technology capabilities and they’ve got to be able to serve their customer and if they don’t do any of those three they’re going to deteriorate and they’re not going to grow going forward.

Everything that we’ve seen and our conversations with our top tier banks is that sometime towards the end of the year as we roll in to next year we’ll see an improvement. That’s with the traditional larger tier bank. There’s a segment of banks that are going to purchase regardless of the economy and those are the new direct banks that are being formed by financial service companies and there is a number of those that we have under way that we’ll start to see drop towards the end of the year and in to next year. So, we still feel pretty good about it. They’re not going to be able to push this off forever without directly affecting the quality and health of the bank.

Roger S. Smith – Fox-Pitt Kelton, Inc.

I guess the last question just on the international and when I look at the margins there on a constant currency basis, the look like they were 17.1% in the quarter versus 16.5%. I guess what I want to know is when you talked about the guidance and the constant currency numbers being less impactful in 2010, would we then necessarily see an increase in that operating margin by 50 to 70 basis points, somewhere in that range from just a smoothing of the currency?

Lee A. Kennedy

I think what you’ll see Roger next year is maybe more of a normalization of the international margins as it gains more maturity particularly in Brazil. So, I think the margins should sequentially grow from the 17.1% that you referenced in your comment for the balance of the year and then I think as we get in to next year while there is some seasonality quarter-to-quarter I think we’ll see stronger margins in 2010 than we saw in 2009. So, we will see margin expansion overall.

Operator

Your next question comes from Bryan Keane – Credit Suisse.

Bryan Keane – Credit Suisse

I got on the call a little bit late so just a couple of clarifications, how much George of the $260 million of the cost savings or synergies were realized this quarter?

George P. Scanlon

We’re not in a position to quantify that at this point Bryan. What we said earlier was that both companies have been working together in anticipation of the deal closing. The deal got delayed because of the Justice Department’s second request. We’re continuing to work on integration planning together and our anticipation at this point assuming we close reasonably early in the fourth quarter will be to host an analyst meeting in November and obviously give all of you a lot better insight in to our path to get the $260 accomplished.

Bryan Keane – Credit Suisse

But some of that $260 will also be in the third quarter, this quarter upcoming?

George P. Scanlon

Some of it will be.

Lee A. Kennedy

Some of it will be and we’ll give you a complete bridge to what we took out that is synergy related to the $260 target.

Bryan Keane – Credit Suisse

Then just on the revenues, the international constant currency revenue was flat and that’s been averaging double digit, I just wasn’t sure why it fell back to flat?

George P. Scanlon

Well, we had talked about this on the last quarter, we had several software deals and implementations in Asia Pac and Europe and then we had the ABN conversion that occurred down in Brazil so we had a disproportionately strong quarter last year that we said coming in to this quarter would be a tough grow over. I also said that I anticipated that double digit growth to resume in the third quarter.

Bryan Keane – Credit Suisse

Then software sales I think were down 30%, did you say what professional services were down? Then maybe a total percent of revenue for software and professional services now?

George P. Scanlon

Well, professional services were down about 20% and that’s been consistent really both for the quarter and year-to-date so if you think about those two parts of our business, historically software has been about 4% of revenue so round numbers $120 to $130 million and professional services has been about 8% so you just double that. Those are the two parts of our business that are more discretionary and the parts where while the pipelines are there our conversion ability just hasn’t been there because of customers’ delays in making decisions.

I said that’s where there maybe some potential upside in the fourth quarter if we’re able to get those deals across the finish line. I think what’s notable is that we achieved this margin expansion in the face of losing an amount of software revenue that contributes almost 100% incremental margin for each dollar of revenue. So, as we look forward and we get back to a more typical market, we think there’s a lot of margin opportunity when we start to get those deals done and still have the cost structure in place that we have.

Bryan Keane – Credit Suisse

I’ll just ask Lee, any idea of when that more typical market might be? Fourth quarter, first quarter or is it just too early to call?

Lee A. Kennedy

You know what, we keep on seeming to move it back every six months but hopefully as we approach midyear next year, get in to the second quarter of next year I think we’re going to see some more material improvement. However, we will sign some of the larger deals we think again, in the fourth quarter and as we approach the first quarter of next year. So, they haven’t dried up completely we just haven’t gotten back to the normal rate of growth that we’ve experienced and enjoyed for the previous three years but we’ll get there.

Operator

Your final question comes from Andrew W. Jeffrey – SunTrust Robinson Humphrey.

Andrew W. Jeffrey – SunTrust Robinson Humphrey

When you look at Metavante and some of the expense success that you’ve had can you talk about cost integration expenses? So you’ve referenced having taken out potentially some costs, has there been any incremental spend either expense or capitalized aimed at putting the two companies together? And, how would that kind of trend over the next few quarters is it a net decline or are you going to be able to parse that for us?

Lee A. Kennedy

Andrew I would say that there hasn’t been any meaningful incremental integration spending by FIS certainly, I can’t speak for Metavante, I don’t believe they’ve got it. We’ve both incurred transaction related fees which have been principally professional services based. We’ve incurred some severance in the quarter, we picked up north of $4 million of severance that we absorbed as part of the cost actions we took which is about $0.01 per share and they may have some of that as well but you’ve got to ask them about it. But, I think you’ll see more of that as the companies come together and we can more formally complete the integration that we’ve been talking about for some time now.

Andrew W. Jeffrey – SunTrust Robinson Humphrey

So would you envision having explicit integration expenses or does it all kind of get absorbed?

Lee A. Kennedy

There will be integration expense that we’ll separate from the core business and identify it so you can get your arms around it. We’ll be able to provide that sometime hopefully in October but there will definitely be integration expense and that points to severance and a number of different things, relocation some work on systems. We’ll have a lot of things that we’ll do on branding and things like that so we’ll get that bucketed and it will hopefully be short in duration and will not stretch out over a significant number of years. In most cases with major acquisitions we get through that within the first six to 12 months and we don’t expect anything different here so we’ll get that identified for you Andrew.

Andrew W. Jeffrey – SunTrust Robinson Humphrey

As far as the long term growth trajectory of the business when we see a normalized spending environment, do you still think about the combined companies as being a 6% to 9% organic revenue growth business with operating leverage?

Lee A. Kennedy

I think we haven’t backed off from the 6% to 9%. Up until a significant down turn in the economy we were exceeding that. In fact, if you look at the last four years and look at the first three or so we beat it every year. We expect our competitive position to strengthen once we put the two companies together, that’s why we’re doing this. So yes, we think that’s achievable once we get back to a normalized environment because quite frankly Metavante and FIS have done that year in and year out so we don’t think anything will be different there.

Mary Waggoner

Thanks everyone for joining us today. We’ll look forward to talking to you soon.

Operator

Ladies and gentlemen this conference will be available for replay after 8pm tonight through midnight Tuesday, August 11th. You may access the AT&T Executive playback service at any time by dialing 1-800-475-6701 and entering the access code 106703. International callers dial 320-365-3844 using the same access code 106703. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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Source: Fidelity National Information Services, Inc. Q2 2009 Earnings Call Transcript
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