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Executives

Mary Waggoner – SVP IR

William Foley – Executive Chairman

Frank Matire – President & CEO

Lee Kennedy – Vice Chairman

George Scanlon – EVP Finance

Michael Hayford – CFO

Analysts

David Koning – Robert W. Baird

Glenn Greene - Oppenheimer & Co.

Brett Huff - Stephens, Inc.

Tien-Tsin Huang - JP Morgan

John Kraft - D.A. Davidson & Co.

Julio Quinteros - Goldman Sachs

Kartik Mehta - Northcoast Research

Wayne Johnson - Raymond James & Associates

Bryan Keane - Credit-Suisse

Fidelity National Information Services, Inc. (FIS) Q3 2009 Earnings Call October 21, 2009 5:00 PM ET

Operator

Welcome to the Fidelity National Information Services third quarter earnings call. (Operator Instructions) I’ll now turn the conference over to Mary Waggoner, Senior Vice President of Investor Relations.

Mary Waggoner

Thanks to everyone for joining us today. William Foley, Executive Chairman will open today’s call. Lee Kennedy, Vice Chairman, and George Scanlon, Executive Vice President of Finance will follow with the third quarter business review and detailed financial report for FIS on a standalone basis. Michael Hayford, Chief Financial Officer will continue with an overview of Metavante’s third quarter results and the fourth quarter outlook for the combined company. And Frank Matire, President and Chief Executive Officer will close with a few brief remarks.

Before we get started I’d like to remind everyone of the upcoming Investor Day which is scheduled for Monday afternoon, December 7th in New York. We will distribute additional details including registration information in the next couple of weeks.

Today’s discussion will include a slide presentation to facilitate the discussion of third quarter results. Unless otherwise noted our comments will pertain to FIS on a standalone basis. The presentation and today’s press release are available on our website.

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.

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

William Foley

Thanks Mary, although revenue growth remains challenging in the current environment FIS again delivered strong margin expansion, double-digit EPS growth, and excellent free cash flow. Our management team continues to do a great job executing to plan.

We are confident in our ability to drive solid organic top line growth and strong operating leverage as the economy recovers. After more than a year of due diligence and preparation we are very pleased to have completed our combination with Metavante on October 1.

We believe the added scale, product capability and industry expertise, will enable us to compete more effectively and ultimately build greater value for our shareholders. I’d like to take this opportunity to welcome Frank Matire, Michael Hayford, and all the former Metavante associates to FIS.

And finally on behalf of the FIS Board of Directors, management team and employees, I’d like to thank Lee Kennedy for the dedication and leadership he has provided since joining the company three and a half years ago.

Under Lee’s direction FIS has generated excellent financial results and significantly enhanced the competitive as a leading global technology provider. Lee will continue to serve on our Board as Vice Chairman and will act as a Board liaison during the Metavante integration.

I’ll now turn the call over to Lee Kennedy.

Lee Kennedy

Thank you William, good afternoon everyone and thanks for joining us today. If you’ll please turn to slide five, I’ll start with the third quarter business review. We’re pleased with our strong third quarter results, particularly in light of the challenging market conditions that existed throughout the quarter.

FIS once again achieved excellent double-digit growth in earnings and free cash flow. In addition the overall margin grew an impressive 250 basis points over prior year. Adjusted earnings per share increased 12% to $0.46 on a reported basis, and nearly 15% in constant currency.

It was a very clean quarter. We received no material benefit from software sales or termination fees. The strong growth in earnings per share was driven by substantial margin expansion in all of our operating segments.

Free cash flow totaled $133 million which was a 12% increase over prior year. As illustrated on slide six, third quarter constant currency revenue declined 1.9% compared to prior year. Top line growth remained challenging due to weak market conditions and difficult year over year comparisons.

Profitability however remained strong driven by disciplined cost management and the successful implementation of productivity initiatives which generated significant operating efficiencies in systems development, sales, technology, and back office operations.

I’m pleased to report that during the quarter we finalized a five-year debit and credit card processing contract extension with card services for Credit Unions and its 3,500 member credit unions. The year 2009 marks the 20-year anniversary of this very important critical partnership.

Also during the quarter we converted New York Community Bank to our MISER core-processing platform successfully completing one of the largest core processing conversions in recent history. New York Community Bank with $33 billion in assets, is the 24th largest holding company bank in the country.

I’m also pleased to report the successful installation of Profile for Allied Bank during the third quarter. The migration was completed on schedule and on budget in less then nine months. Profile, our next generation core-processing platform, is gaining considerable traction worldwide.

Last weekend one of Thailand’s largest banks with more than 18 million accounts successfully converted to Profile. Five of the six largest banks in Thailand are now currently being processed on FIS core processing platforms.

Two of the top six are running on Profile. Our international business returned to double-digit growth in the third quarter and a 12.7% increase in constant currency. The margin expanded 710 basis points to 21.1% driven by strong growth and improved profitability across all major regions.

Now I’ll turn to Brazil, as discussed last quarter, we’ve processed more than 30 million cards for 14 banks in Brazil and also provide a wide range of call center and back office support services. Bradesco, which added 800,000 new cards in the third quarter now processes more than 11 million cards on our platform.

When we last updated you on the status of Bradesco’s remaining 12 million cards, we expected to complete the conversion by the end of the third quarter. Bradesco has since requested more time to conduct additional testing of various interfaces to ensure a seamless transition.

While the timing represents a challenge, this type of request is not unusual given the size and scope of this project. Both FIS and Bradesco are eager to convert the remaining portfolio as soon as possible and we will update you on the timing as appropriate.

Next as many of you are aware from its recent IPO of its Brazilian operation, Banco Santander has publically stated its long-term goal to consolidate all of its worldwide operations to a single IT platform by the year 2010. Consistent with Santander’s acquisition of Banco Real and the parent company’s goal to consolidate its IT processing, Santander has notified us of its intent to migrate its card transaction processing to its proprietary platform.

As part of this proposal FIS would continue providing call center and cardholder support services at least through the end of 2010 and potentially beyond. Approximately $29 million of revenue from Santander year to date or less than 1% of our pro forma consolidated revenue is tied to transaction processing services.

The remainder is generated by call center and support service offerings. Potential impact on earnings will not be material if they elect to convert. I would like to emphasize that we have not reached an agreement regarding the timing of Santander’s potential de-conversion or the bank’s financial obligation resulting from a change to the existing contract terms.

However as is in the case for all of our large customers, our agreement with Santander contained very strong contractual provisions including very substantial early termination penalties to protect the investment and profitability for our company.

We will keep you updated on our progress in Brazil and provide additional information when it becomes available. Importantly we continue to maintain a very strong relationship with Santander and the bank has indicated a strong willingness to continue that relationship and work towards building it into the future.

We remain very optimistic about the future growth potential of the Brazilian marketplace and we believe that our scale, experience and local market expertise positions us very well to take advantage of the opportunities that this market will generate.

Now I’ll turn the call over to George who will provide additional details on our third quarter results.

George Scanlon

Thank you Lee and good afternoon everybody, I’ll begin with slide eight. Consolidated revenue in the quarter totaled $851 million compared to $884 million in the prior period. A 3.8% decrease in reported revenue included an unfavorable currency impact of $17 million.

Excluding the currency impact revenue decreased 1.9% compared to Q3 2008. We have previously indicated in our second quarter call that third quarter comparisons would be challenging because we had particularly strong software sales in Q3 2008 as well as certain non-recurring revenue in our payment segment.

Consolidated EBITDA totaled $235 million, and increased 5.6% relative to prior year despite the decline in reported revenue and a $4 million unfavorable currency impact. Our EBITDA margins expanded 250 basis points to 27.7%, compared to 25.2% in Q3 2008, and 25.3% in Q2 2009 as we experienced strong year over year and sequential margin improvement in each of our operating segments.

Proactive cost reductions in part associated with the anticipated closure of the Metavante acquisition mitigated the earnings impact of softer revenue. Adjusted earnings totaled $0.46 per share reflecting 12.2% growth and were negatively impacted by $0.01 for currency effects.

All in all we continue to demonstrate the resiliency of our operating model in a challenging revenue environment with very strong bottom line performance. Now if you turn to slide nine, I will provide additional detail on our third quarter segment results.

Financial solutions revenue declined $22 million or 7.3% to $278 million in Q3 2009 compared to $300 million in Q3 of 2008. The decline was due to an $8 million reduction in professional services and a $15 million reduction in software license sales which as we discussed last quarter were exceptionally strong last year.

Despite the shortfall in revenue and a significant change in product mix, financial solutions EBITDA decreased by only $2 million as cost reductions mitigated the decline in high margin software revenue.

The EBITDA margin increased 260 basis points to 45.5% compared to 42.9% in the prior year quarter driven by increased productivity, synergy benefits, and improved resource utilization. As shown on slide 10, payment solutions revenue declined $19 million to $370 million in the quarter or 5% below prior year.

Check services revenue accounted for 90 basis points of the payment segment decline. As we guided last quarter, the year over year comparison was also impacted by interchange adjustments and non-repetitive card marketing revenue totaling $10 million in Q3 2008.

Debit transactions actually increased 8.1% compared to the same quarter in the prior year after growing 7.3% in the second quarter and were flat on a sequential basis. Credit card trends also improved as transactions declined one-half of one percent compared to Q3 2008 in contrast with the 5% year over year decline in Q1 and the 3% decline in Q2.

While we have seen improving trends in year over year comparisons, we expect our payments businesses will continue to be negatively impacted by weak consumer sales and lower item processing volumes.

Payment solutions EBITDA increased 2.8% to $108 million versus $105 million in the prior period and the margin improved 220 basis points to 29.3% compared to 27.1% in Q3 2008. Margins expanded as a result of various cost initiatives.

The results from our international operations were particularly strong as indicated on slide 11. Revenue increased 4.1% on a reported basis and returned to double-digit growth of 12.7% in constant currency driven by 14.3% growth in core processing revenue and 11.8% growth in payments revenue.

Strong services revenue and volumes in EMEA, and the Asia Pacific region, coupled with organic account and transaction growth across all regions, contributed to the strong performance. EBITDA increased 57.1% compared to prior year and increased 70.6% in constant currency.

The EBITDA margin expanded by 710 basis points to 21.1% as we experienced improvement across the board in core processing, payments and BPO operations, as well as higher software sales. Slide 12 provides additional insight into our foreign currency exposure.

Compared to the same period in the prior year the euro declined approximately 5% while the Brazilian real and the sterling declined approximately 10% and 13% respectively. Our exposure to each major currency is illustrated in the pie chart at the bottom of the page.

The chart on the right depicts the impact of foreign translation for the past several quarters. As a result of continued recent weakness in the US dollar and improving comparisons to rates in the prior year we expect the recent negative trend to reverse and for currency comparisons to contribute favorably to Q4 reported revenue.

Please turn to slide 13 for a reconciliation of adjusted net earnings, third quarter adjusted net earnings totaled $90 million or $0.46 per diluted share compared to $0.41 in the 2008 quarter. As indicated adjusted net earnings exclude after-tax purchase amortization of $19 million and M&A related costs of $4 million.

The effective tax rate was 34.4% in the third quarter compared to 34.9% in the prior year. Average shares outstanding spiked up a bit this quarter at 194.6 million compared to 191.8 million in Q3 2008 and 192.7 million in Q2 2009.

The higher share count is a function of the higher stock price used in the calculation of average diluted shares in the current quarter. As shown on slide 14 free cash flow was $133 million compared to $118 million in Q3 2008. The increase was driven by higher earnings and improved working capital management offset by higher tax payments.

Receivables collections included $18 million related to the former [Certegy] Australia business. We have collected $101 million since the sale of the business in October of last year, which leaves $28 million remaining to be collected at September 30.

We expect to collect the remaining balance through early 2011. Capital expenditures totaled $49 million in the quarter which was comparable to Q3 2008. Our continued focus on cash management led to a stronger balance sheet as we further delevered in advance of the Metavante acquisition.

Turning to slide 15 we had $2.1 billion in debt outstanding at quarter end including $1.9 billion on the Term A facility and $201 million drawn against the $900 million revolver. We have paid down $371 million in debt since the beginning of the year. At quarter end, 99% of our debt was swapped at fixed rates with approximately $32 million floating against LIBOR.

The effective interest rate including swaps and amortization of debt issuance costs, was 5.9% at quarter end. On October 1, we assumed a portion of the Metavante debt, expanded the existing FIS credit facility, and entered into a new asset backed receivables facility in conjunction with the acquisition, bringing total debt outstanding to $3.4 billion.

As of today the current fixed to floating ratio is 77%. As discussed last quarter Q4 results will be favorably impacted by the termination and replacement of higher cost fixed rate swaps. Our targeted fixed to floating ratio over time will approximate 70% to 80% and additional details on our capital structure will be provided at the December 7th Analyst Meeting.

Now I will turn the call over to Michael for a discussion about Metavante’s Q3 results, combined company synergies, and the Q4 outlook.

Michael Hayford

Thanks George, if you turn to slide 16, I’ll start with a short overview of third quarter financial highlights for Metavante. Metavante revenues were $425 million for the quarter, increased slightly basically flat to the third quarter of 2008, in spite of a $10 million decline in termination fees.

Financial solutions revenue increased 2% as higher processing and professional services revenue more then offset lower termination fees and payments solutions revenue declined 1.5% due to lower software license revenue and reduced buyout fees on a year over year basis.

Despite the tough revenue comparison and changing product mix, adjusted EBITDA increased 17.6% and adjusted EBITDA margin expanded 480 basis points to 32.7%. Cash earnings increased 28.6% to $0.45 per share compared to $0.35 per share in Q3 of 2008.

Free cash flow for the first nine months totaled $118 million. This is slightly lower then a comparable 2008 period due to the timing associated with movement of funds to the payment business and the increase of capital expenditures based on the timing of events that more then offset the increased earnings.

The EBITDA, cash, EPS, and free cash flow are all adjusted to exclude the transaction costs related to the FIS merger. Now let me shift my focus to the new FIS or the combined Fidelity Metavante organizations beginning with the integration update.

The integration teams have been in place for several months now and are tracking towards our planned synergy target of $260 million. We have achieved approximately $32 million in combined cost savings year to date including $21 million in the third quarter and we expect to attain approximate savings of $60 to $65 million for the full year 2009.

We will be providing more detail regarding our expectations for 2010 at the December 7th Analyst Meeting.

Next I’d like to provide a few thoughts on our outlook for the fourth quarter, as has been the case throughout 2009 revenue growth remains challenging as banks continue to preserve capital in order to cope with the credit losses. We experienced lower payment transaction volumes and reduces spending in software and professional services.

And there’s no indication that the environment will show market improvement in the fourth quarter of 2009 or do we expect it to improve in the early 2010. We also have seen that while [FDIC] actions to date have a limited impact on our financial, we do expect more of an impact going forward as recent accelerations in bank failures.

Based on our current projections we expect combined fourth quarter for the FIS to be flat compared to the prior year due to the overall weak American environment and difficult year over year comparisons with some strong license and equipment revenue that was recorded in the fourth quarter of 2008.

In addition the prior year fourth quarter include approximately $11 million in termination fees that we do not expect to recur in fourth quarter of 2009. Now I’d like to cover a few housekeeping items before I turn the call over to Frank.

First we plan to issue a pro forma financial statement for the combined company to assist you in building your fourth quarter and 2010 models. The periods covered will include the full year and fourth quarter of 2008 and the first three quarters of 2009. We are working to complete the pro forma financials prior to Thanksgiving.

Second, our fourth quarter results will be impacted by several merger related items including purchase accounting adjustments and integration costs. We will break these items out separately to provide you with a better understanding of our underlying operating results.

And finally, we will provide more specific details regarding our outlook for 2010 including a timeline for achieving the remaining cost synergies at our December Analyst day. Now I will turn the call over to Frank Matire for a few closing comments.

Frank Matire

Thank you Michael, I’d also like to thank everyone for joining on today’s call. I am excited to be speaking to you from Jacksonville, and even more excited about the future of this great company. I’ll keep my remarks very brief today to allow plenty of time for your questions.

I am very pleased how the two organizations have come together as one, as evidenced by the leadership team already fully in place, with a clear focus on our clients. At the same time as we discussed we are confident that we will achieve our synergy targets while we remain focused on growing the revenue of the company.

Thank you again for your time this afternoon. I look forward to seeing you at the investor day in December. We are ready to open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of David Koning – Robert W. Baird

David Koning – Robert W. Baird

Nice job on the margin expansion, I guess first of all the international margins, you talked about how much better those have gotten and it looked like EBIT almost doubled sequentially and I’m just wondering if that trajectory is expected to continue now to get strong expansion to continue as you layer on more portfolios etc. It just seems like we’ve reached an inflection point the last couple of quarters and maybe you could talk a little more about that.

George Scanlon

We obviously had an excellent quarter in margin in international and sequentially we’ve improved each quarter this year. If you look at our business, Brazil has been lagging in margin contribution and is starting to more meaningfully contribute.

But honestly across the board virtually all of our operations outside the US had improvements year over year. What I would say is we targeted a 20% margin by the end of the year. We obviously got there earlier. We would expect to maintain this level into the fourth quarter and as we look over the longer term, on an annualized basis I would say a 20% plus margin is attainable.

I would say at the same time that the margin will vary quarter to quarter based on product mix. This quarter as I mentioned in my remarks we had improved software sales year over year in the international segment. That was about $4 million but on a relative basis that can help the reported margins.

So we’re very encouraged by what we see internationally and expect good news to continue.

Lee Kennedy

I’ll add one thing, the software sales that we had internationally jumped and improved over prior year also so that also contributed to the lift that we saw in this quarter.

David Koning – Robert W. Baird

And then I guess one follow-up, just with the margin strong at both companies this quarter and it sounds like a nice savings, $60 million or so this year from synergies, is that pulled out of next year. I know initially when you announced the deal you talked about $195 million of synergies next year, but does that mean that some of those got pulled into 2009 and might not be incremental into next year. Is that a fair way to think about it.

Michael Hayford

So its $195 on an annual basis. So we had a jump-start. We have $60 million that hit the 2009 numbers but those are going to recur so we do have a jump start but you can’t, so you have to go $60 to the next number next year and we’ll share that on the December 7 number, kind of where we stand looking at 2010.

George Scanlon

What we said was we expected to get about $210 million in the first 18 months and I think at this point despite closing October 1 we both began actions before closing in anticipation of the closing, and therefore didn’t lose any ground and I think we’re still targeting to maintain that target or beat it over the first 18 months.

Operator

Your next question comes from the line of Glenn Greene - Oppenheimer & Co.

Glenn Greene - Oppenheimer & Co.

Maybe a question for both Lee and Frank, but just wanted to get a, some color on the integration progress thus far, any surprises or incremental opportunities you found, or just sort of your observations on the last three, six months.

Lee Kennedy

I think the good thing is really no surprises. I think the plan that we laid out well over a year ago is holding true. I’ll say that if anything we think there is some upside to the 260, potentially that we talked to the market about. Might take us a little bit longer to get it. But so far, we are, if there’s any one combination that we’ve done and any integration that we ever put in place, I think this one is as advanced and as under control as any combination we’ve ever attempted.

So we’re very, very pleased with the way our management teams are responding and what they’re doing to make sure that we will live up to the commitments that we’ve made to the marketplace.

Frank Matire

The only thing I would add from Lee’s comments because he covered it all was that how well the teams have worked together and how quickly they have done it. Pleasantly pleased about that.

Glenn Greene - Oppenheimer & Co.

Then just sort of a general comment on the environment, the sense for the pipeline of activity and timing of when discretionary spending may loosen which is probably the $1000 question or whatever.

Lee Kennedy

I’ll say this, I’ll say we’ve seen certain cases slight improvements to the pipeline. The quality of pipeline activity is up and its as strong as ever but I’m not willing to say at this point in time that we expect a substantial change over what we’ve experienced in the last few quarters.

Its still our thinking that as we move through 2010 and get into the second half potentially of 2010 we’ll see some type of an improvement but I think you should kind of bank on status quo. It is what it is. Its going to remain that way for another few quarters and then hopefully we’ll move upward from there.

The positive signs is international this quarter. We had a very good strong quarter in terms of software license sales and that was not typical relative to the prior quarters that we’ve had, so we’ve seen some improvement there. But its pretty much as is and its going to remain as is for the foreseeable future.

Frank Matire

You have to have patience and its going to come back to market. Its going to be slow and the declines in the spending, we just have to be prepared when it does and we have the products and we have the capabilities that they need when they’re ready to buy and right now we think there is a slight up tick but clearly a lot more of the same right now.

Operator

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

Brett Huff - Stephens, Inc.

Congrats on the margins and congrats on the combination. Just a quick question on a few particular deals that you all have called out in the past and I’m not sure what you can tell us about them at this point, but the American Express prepay deal and then I think you had mentioned that the post office, the eFunds driven post office deal had maybe had been implemented late last quarter, early this quarter. And then is the Scott Trade, do we have any more information on the Scott Trade deal, anything that you can tell us incrementally on those.

Lee Kennedy

I’ll take the third one first, we can’t really talk about the Scott Trade deal at this point in time other then we’re in really good shape there. I’ll just leave it at that. The other two deals are fully implemented. They’re up and running. They’re generating revenue. If anything the transaction counts and some of the activity lifts that we’ve seen with American Express are ahead of what we had originally thought.

No surprises there and both remain excellent deals for our company and both as I said before we’re driven off of the eFunds acquisition so they’re starting to produce some really good traction. So we’re in good shape there.

Frank Matire

Actually I got to meet with American Express just a week ago and they were just very pleased with job that was done by FIS.

Brett Huff - Stephens, Inc.

And then on the additional detail on the Brazil stuff that you talked about earlier, do we have any sense yet of potential timing or is it is just too early for the bank to figure out exactly when they might want to go live or how—

Lee Kennedy

Its still, I would say too early. We hope to learn more within the next few weeks and get a more definitive timeframe for you. I think the message on Brazil and the good news on Brazil, its only a portion of the total processing. It fits with their strategy. It makes sense for them to do that. We understand that and the bottom line is we expect to maintain and keep a good strong relationship with them going forward and we’ll handle a larger portion of their business going forward.

Brett Huff - Stephens, Inc.

And then last question on Brazil, it seems like that Brazil has really helped not just the legacy platform but has the more organic or the non-legacy stuff that you’ve converted grown faster then you expected and will that help that, help offset some of that.

Lee Kennedy

The non-legacy portion of the business has been the fastest growing business that we have in Brazil. We still have those accounts on file. They’re still contributing very strong growth rates. Bradesco alone grew over 800,000 accounts last quarter in somewhat of a weak economy.

So yes, the accounts on file, and they’re still a lot of potential in addition to that. There’s some other cards portfolios that we’re talking to various institutions about and some of our current customers about. So we’re not discouraged with Brazil. We’re still very positive on Brazil. We think it represents a good strong opportunity for us and we’ll sort this out as we go forward.

But we expect to maintain good strong revenue growth and good strong business from that region.

Operator

Your next question comes from the line of Tien-Tsin Huang - JP Morgan

Tien-Tsin Huang - JP Morgan

With the Santander, I thought I heard you say it was a potential of $29 million in terms of the impact, did I get that right.

Lee Kennedy

It was $29 million through the first three quarters so if you annualize it, look at about $40 million in revenue from the transaction processing side of the business, about less then 1% of our revenue base.

Tien-Tsin Huang - JP Morgan

And then on, but you’re also doing the BPO, is there a risk that they would decide to bring that piece in house as well.

Lee Kennedy

No, we actually are in good shape with BPO, we’ve actually extended some of our contracts with the current customers so they’re longer term and they’re better in nature for our company so we feel very good about that. In fact, we think there’s opportunity on top of that. Its not only BPO, there’s also some system integration work, there’s core processing, there’s a lot of opportunities that we think we can leverage off of this relationship.

Tien-Tsin Huang - JP Morgan

And how should we think about the margins on that $40 million annualized.

George Scanlon

What I would say is that margins for that portfolio have been on a relative basis below average because the processing requirements for that portfolio are more intensive and so it requires a higher [mips] utilization so while Lee mentioned the less then 1% impact to revenue, it will even have less of an impact to EBITDA and profitability.

Tien-Tsin Huang - JP Morgan

And then how much was the international license in the quarter, you mentioned a couple of times that it was particularly good.

George Scanlon

What I said was unlike the domestic segments, software was actually $4 million higher year over year in international. As you know deals are dependent on timing and can happen in one quarter and not another and so overall we’re seeing software down about 40% year over year in the quarter. Down dramatically in the financial services segment and yet despite that we overcame that loss of margin. Down in the payments solutions segment but the international segment was higher.

Lee Kennedy

And there was no one deal that drove that variance. It was a number of deals that accounted for the difference so that’s good news also.

Tien-Tsin Huang - JP Morgan

And then I missed, you gave the Metavante, the historical Metavante financial segment performance, would you mind repeating that.

Michael Hayford

Just a quick update, so year over year revenue was basically flat to slightly up in 2009, 2008 is 425, was revenue in 2009. EBITDA was up 17.6% to 139.1, cash EPS was $0.45 versus $0.35 in 2008 so up 28.6%.

Tien-Tsin Huang - JP Morgan

And I’m sorry, the financial segment.

Michael Hayford

Financial segment was up 2% year over year and payment segment was down 1.5%.

Tien-Tsin Huang - JP Morgan

And then just a bigger picture question, how’s the international core pipeline looking.

Lee Kennedy

It remains very, very strong. I think as a general statement the quality and depth of all of our pipelines, not only internationally but domestically are as strong as ever so we’re in good shape relative to sales process and as soon as some of the spending loosens up we expect to be able to really capitalize on that so it will look very good for our company.

Operator

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

John Kraft - D.A. Davidson & Co.

Just a few follow-ups here, just to clarify you said that you expect that Q4 was a combined basis EPS would be flat.

Michael Hayford

No revenue, revenue relatively flat from 2008 for the combined entity.

John Kraft - D.A. Davidson & Co.

And then just to follow-up on too the lower item processing volumes, are you seeing an increasing deceleration or is there a client loss there.

George Scanlon

No, nothing specific other than the general overall market.

John Kraft - D.A. Davidson & Co.

And then lastly just to follow-up on the Bradesco migration, are those cards, those 12 million that haven’t migrated, are those contractually committed.

Lee Kennedy

Yes they are. They’re all committed through the agreement that supports the joint venture with some pretty strong penalties so, yes they are committed.

John Kraft - D.A. Davidson & Co.

Just not on a timeframe.

Lee Kennedy

No, there’s no timeframe on it that’s associated with this so they’re committed. As soon as Bradesco is ready, we’re hopeful that they’ll get that conversion rolling and we’ll get them on file. A lot of the activity has already converted over as we said in the past, the call centers, the support centers are already operating on our system and driving revenue, so this is in total, a sizable portion of the revenue stream, but certainly not to the degree that one would think.

John Kraft - D.A. Davidson & Co.

New York Community Bank, how much of that was recognized in Q3 license wise.

Lee Kennedy

Actually none of it.

George Scanlon

Actually none, we recognized the license revenue in Q3 last year, the majority of it anyway so year over year it was actually a negative.

Lee Kennedy

We actually expensed to make the conversion and support them so we really incurred more expense and didn’t pick up the revenue in that quarter.

John Kraft - D.A. Davidson & Co.

Well that was a nice implementation anyway.

Operator

Your next question comes from the line of Greg Smith - Duncan-Williams

Greg Smith - Duncan-Williams

Have you re-upped all of your swaps then at this point.

George Scanlon

No, obviously in connection with the closing of the deal, we had a billion dollar swap that we terminated. It was in the, it was scheduled for October 11 I think and we’ve managed our fixed to variable ratio down to 77% which is within our targeted range.

We have another $250 million in swaps expiring in early December so we’ll give a lot further clarity on the capital structure and what we see going forward including interest costs but we were able to bring down our average cost of debt through repricing swaps earlier this quarter.

Greg Smith - Duncan-Williams

I’m just trying to get at ballpark rate on the $3.4 billion, anything you can throw out there that we should be thinking about for 2010.

George Scanlon

You know, I think rather then piecemeal data about 2010, I think it would be better to see it holistically at the December 7 meeting but net, net as you know we incurred higher cost debt in connection with the deal as we had to renegotiate the Metavante facility so that was a bit of a negative. Our objective is to pay down that debt as quickly as possible and at closing we actually incurred about $300 million less in debt then we had originally anticipated.

So our debt balances are coming down. We’ll pay down the high cost debt balances and as we reprice the swaps I think directionally 100 basis points from where we’re at right now is achievable but we’ll give a lot better insight into that in about six weeks or so.

Greg Smith - Duncan-Williams

But why was the debt $300 million lower, I noticed that.

George Scanlon

Well we closed later, we generated cash flow, both companies had stronger earnings. We’ve been monitoring our capital spend in anticipation of getting together so it was really that combination and as we’ve said our objective is to pay down debt, get to investment grade, and be in a stronger financial position as we get to the second half of 2010.

Michael Hayford

The April 1 announcement assumed a July 1 close, so we obviously closed a quarter later.

Greg Smith - Duncan-Williams

And just using free cash flow in the meanwhile. And then just switching gears slightly, you gave the credit card and debit card volumes year over year, but do you have the percentage change for both just sequentially 3Q versus 2Q.

George Scanlon

Debit was flat, and I believe credit was up 3% if I’m not mistaken. Which is a pretty big improvement. We’ve seen favorable trends but its not going to materially effect the revenue line for the near future we don’t think.

Operator

Your next question comes from the line of Julio Quinteros - Goldman Sachs

Julio Quinteros - Goldman Sachs

Real quickly on the, would you mind just going through the growth expectations by the old business line, so into the fourth quarter what you’re expecting for financial services and payment of the old FIS and the old MV just so we have those lined up correctly.

Michael Hayford

When we sit down on December 7 I think we can give more clarity. I think you can expect that payment and [inaudible] continue as you’ve seen here to date, that payment transaction volumes are down. We have a little bit of a mix differential between the two organizations. Legacy Metavante has more license payments, legacy FIS has more license in [inaudible] and license is being impacted a little bit more with the expending down.

But again year over year we’re expecting fourth quarter year over year to be relatively flat to last year, for the full year you can project that forward. We don’t see a lot of growth in the combined entity from 2008 perspective. So I think you can kind of look at payments and financial services group running about the same as they’ve done year to date.

Julio Quinteros - Goldman Sachs

And then maybe to get back to a little bit on the revenue growth side, the track record of FIS and other deals on the cost side I think is pretty straightforward and even on the revenue side you have done a pretty good job historically of getting to the revenue growth targets. The environment obviously into the next 12 months is very different then what we had seen in the past so to be very specific if the demand environment stays weak because of the sort of the context that the banks are dealing with, what are the two or three specific things that you are going to focus on to drive growth where possible.

Michael Hayford

The demand environment obviously has been a challenge with banks very focused on preserving capital and probably cutting back on projects, the software services have been impacted. We also talked about a little bit of headwind with FDIC and some of the actions they’ve taken on banks which year to date hasn’t been felt in our numbers but as we look forward creates a little bit bigger hole to climb out of.

I think you also heard a fair amount of optimism around sales and success not only year to date but what most companies have done in recent quarter driving sales. So I think you put it in combination, I think the international side as George pointed out has been driving a fair amount of activity. I think we see opportunities for institutions, we’ve talked about this in the past where when institutions are under stress it opens the doors for dialogue.

It opens the doors for looking at opportunities where FIS given the size of scale can provide some value. Services that maybe the bank had not considered outsourcing in the past and clearly Gary Norcross and his team, they’re going to take every avenue they can to get the word on the street, share the new FIS story and try to support the banks and help them through some difficult times.

And so its not that we’re not going to knock on the doors and push growth and we think sales will continue to be good, we’re looking at a macro environment which just hasn’t given us growth in the last 12 months and so we’re waiting for that to turn around.

Julio Quinteros - Goldman Sachs

Any sense on whether large banks versus small banks which you would expect to come back first if one versus the other.

Michael Hayford

It depends on the institution, some of the large and regional institutions are doing quite well and spending money and others are struggling a little bit more. I think we’ve seen community banks in general up until the last couple of quarters that were doing very well and I think they’ve been hit a little harder with commercial real estate and some of those portfolios.

So I think it depends on the institution and the region of the country and just how well that bank has performed.

Frank Matire

And notwithstanding a very difficult environment that we’ve been in for quite a while. We do have the opportunity to have several products, a lot of products, for a cross sell standpoint across the entire enterprise that we can make available.

Julio Quinteros - Goldman Sachs

And lastly on the, just to sort of hit too on the legislative front, Interchange we’ve been sort of hearing about and I think we kind of understand where that is and I guess we’re all waiting for that [JAO] study but I guess a couple of days ago we also had the introduction of overdraft. How are you thinking about what that means to the banks as they think about fees and revenue streams and potentially does that impact your business at all on the bank processing side.

Michael Hayford

On the Interchange we’re primarily fee or transaction based. We probably have a few businesses that are taking a piece of the Interchange that would have an impact. On the fee structure the banks have, its probably a minimal impact to us. Obviously we’re providing technology to banks that help them determine their sequence and their posting sequence for their payments coming in.

I know we’ve had a lot of dialogue with our clients. They’re going to find other ways to get their fee income relative to their [DDA] accounts of their checking accounts so if they have to go back and charge fees on a monthly basis or do some other activities, they’ll have to do that.

I think that helps us if we can of service to them. We can help upgrade the systems and create some more capacity capabilities for them. So I don’t think that’s going to hurt us at all. The Interchange I think is a minor potential impact. We’ll just have to watch that.

Julio Quinteros - Goldman Sachs

And what about on the overdraft legislation side.

Michael Hayford

Well the overdraft, that’s the fees I’m talking about on the check side where the banks may have to change their sequence of posting. We’ve heard various outcomes, the banks may have to find other ways to collect fee revenue or fee income from their clients. So from our perspective we don’t get a slice of that. We provide technology that enables to charge fees whether its overdraft protection or other ways and so its not going to have a negative effect, it may have a positive impact on helping to go in with services or other technology.

Operator

Your next question comes from the line of Kartik Mehta - Northcoast Research

Kartik Mehta - Northcoast Research

What I wanted to ask was how do you anticipate demand impacting revenue once banks decide start spending money and I guess what I was trying to get to is do you think there will be all this pent up demand that you could see some real strong growth for the first couple of quarters as banks come back or do you think this comes back in a more normalized manner.

Frank Matire

I think you have to be careful there. It’s a good question but its going to be more normalized. I think there is some pent up demand, no question about it because there are some things on the investment side that banks would like to do but don’t expect it to all happen all at once.

It will be over a period of time. And that’s okay but clearly it will come back and it will be the investment spending on the part of banks but I would see it as being gradual not something over night.

Kartik Mehta - Northcoast Research

And as you look at 2010 would you anticipate more bank failures or less compared to 2009, at least in terms of your customer base.

Frank Matire

I got to tell you, what’s happened in, there have been so many projections up and down and more recently we’ve seen quite a few. I don’t know really what to expect. I suggest there will be more bank failures. I think we all know that. To the degree, tough to tell right now.

Kartik Mehta - Northcoast Research

I just had one last question on the swaps, I think you mentioned that you thought 100 basis points lower, would that be just for the fourth quarter I’m assuming, not really what could happen in 2010 when you get everything else worked out.

George Scanlon

Well as I said, we’ll provide a lot more detail so everybody gets grounded from the same starting point, but with the fixed and variable floating we’ve got, I think we’ll pick up at least 80 basis points this quarter.

Operator

Your next question comes from the line of Wayne Johnson - Raymond James & Associates

Wayne Johnson - Raymond James & Associates

First of all, now with the flat revenue in the fourth quarter for the combined company does that include a benefit from foreign exchange.

George Scanlon

No that would be a constant currency, so we stripped out the benefit in the fourth quarter.

Wayne Johnson - Raymond James & Associates

And then for the fourth quarter excluding any cost synergies or the 40 or so that would be expected in the fourth quarter, would we still expect an uptick in margins.

Michael Hayford

I think we’ve looked at, full year based on where we had both expected to be at the beginning of the year and obviously we feel very strong, very good about where we are year to date, we feel very good about where we’re going to end. We’ve obviously shared that we expect to get a combined synergy number, the two companies together.

I think December 7 we can sit down and share with you what kind of margin expansion we have on the standalone business. Right now we’re running the companies combined so I don’t think we’ve gone back and looked at the individual fourth quarter margin expansion before synergies.

But clearly we’re going to have a strong fourth quarter in terms of earnings obviously because of the expense we’ve taken out year to date and we’re going to get that synergy pop going forward in the fourth quarter.

Wayne Johnson - Raymond James & Associates

I guess what I’m trying to get to is would you reiterate your guidance for the standalone company for the year.

Michael Hayford

So on the announcement on April 1 we said $1.62 was the Metavante expectation for the full year and for the old FIS its $1.63 and so as we’ve looked at where we are against that, how much goes to synergy, that’s the measurement that we use.

Wayne Johnson - Raymond James & Associates

And then just a question on the synergies, what percentage of the synergies are going to come out of cost of service and what percentage would come out of general and administrative expenses.

Michael Hayford

Again, when we sit down on the 7th we’ll go back, on the first we talked about what’s coming out of [PSG], what’s out [FSG], what’s out of corporate overhead, what’s out of infrastructure, we’ll sit down and give you some breakout on the 7th.

Operator

Your final question comes from the line of Bryan Keane - Credit-Suisse

Bryan Keane - Credit-Suisse

I just want to follow-up on the fourth quarter, you talked about revenues being flat on constant currency what about adjusted EPS, should that probably has a positive impact. Can you quantify that for us.

George Scanlon

You mean from a foreign currency perspective.

Bryan Keane - Credit-Suisse

No just overall company adjusted EPS, I assume the deal is accretive in the fourth quarter.

George Scanlon

With the shares outstanding I wouldn’t make that assumption at all that it will be accretive in the fourth quarter. We said it would be accretive in the first year and its going to take a while as we take the synergies out to offset the additional share count.

So I would not expect it to be accretive in the first quarter coming out of the gates.

Bryan Keane - Credit-Suisse

I was just wondering because the synergies to date, if you get $60 to $65 million out that might be a little higher then I expected for 2009 so I thought maybe that would be slightly accretive in the fourth.

George Scanlon

I think relative to the current standalone FIS Q4 expectations, I don’t think so, on an EPS basis.

Bryan Keane - Credit-Suisse

And then just looking at FIS on a standalone basis, it looked like the growth rates deteriorated a little in the third quarter in both financial and payment and got better in international, so just on financial and payment is it safe to say the market deteriorated a little bit or do you think maybe some of the associates were focused on the deal, I’m just trying to understand the market conditions.

George Scanlon

What I think I would emphasize and Lee will add color but just from a numbers perspective, we were down $22 million in the financial services segment, $15 million of that was software. We had our best quarter in software sales in that segment Q3 of last year. And again what I want to emphasize about software is that $15 million drops to the bottom line so we had to overcome that loss of $15 million in EBITDA as well.

The other piece was professional services with let’s say margins of 25%, 30% so all in while that revenue came up short and honestly that’s the most challenging part in the market right now is that discretionary spending, we overcame the majority of that loss of revenue through the cost actions we took.

On the payment side, we had about $10 million of one-time items last year that we highlighted a year ago in the guidance for the balance of the year mentioned [inaudible] so I think it made the payments comparisons look particularly worse. The check business was also down about 10% which accounted for 90 basis points of the shortfall.

But I think as everybody on the call has indicated the revenue environment is challenging. We’re not expecting any material changes in the domestic side of revenue. We do expect continued growth in international and we will benefit from a little tailwind from currency in the fourth quarter.

Lee Kennedy

And we have been very, very diligent to make sure that our people are not distracted through the combination and are concentrated on sales and executing business on a day-to-day basis. There has not been any drop off whatsoever in that area because of the combination.

Bryan Keane - Credit-Suisse

Okay because the financial segment at Metavante was up positive two and I get a lot of questions about what’s the long-term growth rate inside the financial segment so would love to just get your thoughts there.

Michael Hayford

So, again at the Metavante side, we’ve been very pleased with FSG performance in 2009 and you have to remember those are deals that were sold in 2008, one of them was actually sold in 2007, coming online and impacting positively 2009. [PSG] was down, the same challenge that George’s team has had at FIS, strong comps in third quarter last year.

And the environment is tough. I don’t think our two organizations are alone in having third quarter challenges growing revenue. I just want to add to Lee’s comments on distraction, the teams that support the clients, out selling have not been working on integration until we got the deal done.

So the rest of the team has been working on how to put the company together, products together, the infrastructure but the client facing teams, the sales teams, were not distracted in the third quarter at all by this combination.

Lee Kennedy

And if you take out the one-time software sales that we had last year which were very, very strong in the third quarter and then compare the core businesses, quarter to quarter year to year, you’ll see it come more in line with what you would have expected and what we would expected so I think there’s a little bit of noise in that because of how strong that third quarter was last year in terms of software license sales.

They were very large sales and very big sales.

George Scanlon

We’ll also provide additional color at the December 7th meeting about revenue growth and potential by segment.

Mary Waggoner

Thanks everybody for joining us today and we look forward to seeing you in New York on December 7th.

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Source: Fidelity National Information Services, Inc. Q3 2009 Earnings Call Transcript
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