Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Mary Waggoner – SVP IR

William Foley – Executive Chairman

Frank Matire – President & CEO

Michael Hayford – CFO

Gary Norcross – Chief Operating Officer

George Scanlon – EVP Finance

Analysts

David Koning – Robert W. Baird

Brett Huff - Stephens, Inc.

Glenn Greene - Oppenheimer & Co.

John Kraft - D.A. Davidson & Co.

Dan Perlin – RBC Capital

Tien-Tsin Huang - JP Morgan

Greg Smith – Duncan Williams

Analyst for Julio Quinteros - Goldman Sachs

James Kissane – Bank of America

Bryan Keane - Credit-Suisse

Analyst for Andrew Jeffrey – SunTrust

Fidelity National Information Services, Inc. (FIS) Q4 2009 Earnings Call February 4, 2010 5:00 PM ET

Operator

Welcome to the FIS fourth quarter earnings call. (Operator Instructions) I would now like to turn the conference over to Mary Waggoner, Senior Vice President of Investor Relations for FIS. Please go ahead.

Mary Waggoner

Thank you and thanks to everyone for joining us on the line. Today’s earnings press release and supplemental slide presentation have been posted to our website at www.FISglobal.com. A webcast replay of the audio portion of this call will also be available on the website shortly after the call.

William Foley, Executive Chairman will open today’s discussion. President and CEO, Frank Matire will continue with an overview of the fourth quarter results and operational highlights. Michael Hayford, Chief Financial Officer will follow with the detailed financial report and will provide additional details regarding our outlook for 2010. Joining us for the Q&A portion will be Gary Norcross, Chief Operating Officer and George Scanlon, Executive Vice President of Finance.

Our fourth results include Metavante which FIS acquired on October 1, 2009. Unless otherwise stated, references on this call to revenue and EBITDA growth rates will be on a pro forma basis to include results from Metavante in all periods. On January 1, 2010 we completed the sale of the ClearPar business. ClearPar’s results will be reported as discontinued operations for all periods presented.

Today’s comments 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. The 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.

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

William Foley

Thanks Mary. 2009 was a very successful year for FIS. In addition to delivering strong operating results in a very challenging environment we successfully completed the most significant acquisition in our company’s history.

The combination positions FIS as the global market leader with unmatched scale, product capability and market breadth. We are extremely pleased with the manner and speed of which the integration is progressing just three months after finalizing the merger. We are off to a great start and we are highly confident we will achieve our synergy targets. Importantly our management team and employees around the globe remain highly focused on serving our clients and contributing to the continued growth and long-term success of FIS.

We remain very enthusiastic about the future and our ability to drive value in the marketplace. The new FIS is stronger, more competitive and better equipped to meet the needs of a changing industry and to take advantage of the resurgence in bank technology spending as market conditions improve throughout the world.

I am also pleased to report our board of directors today approved a three-year stock repurchase program under which FIS may repurchase up to 15 million shares of its common stock. Purchases may be made from time to time in the open market or in privately negotiated transactions through January 31, 2013.

Now Frank Matire will continue with an overview of the fourth quarter results. Frank?

Frank Matire

Thank you Bill. Good afternoon and thanks to those of you who are joining us on the call. I will keep my remarks brief to allow plenty of time for Mike to cover the financials and also to allow time for your questions.

I would like to begin by saying how pleased I am with all that we have accomplished in the short time since bringing our two companies together. There is a strong sense of pride and enthusiasm among our employees and the response from clients has been equally positive. Overall FIS delivered solid fourth quarter results as shown on slide four. We generated more than $1.3 billion in revenue and achieved 240 basis points of EBITDA margin expansion.

Adjusted earnings came in at $0.44 per share which was at the high end of our guidance and free cash flow was strong at $237 million for the quarter. Although many banks diverted buying decisions during 2009 due to increased credit costs and capital constraints others continued to invest in new technology in anticipation of a return to growth. This is evidenced of increased sales of our core processing solutions throughout the year. While we expect the overall business environment to remain challenging in the near-term we are somewhat encouraged by improving transaction trends and the recent pace of new customer signings.

We had several noteworthy sales in the quarter and I would like to highlight a few of them. First, Citi Bank which currently runs our core banking software in 30 countries around the world has expanded its license and maintenance agreement to include its North American banking operation. You may also have seen Citi’s recent announcement regarding the launch of new electronic tax payment and bill collection services for the State of California using our Pay Direct product.

Second, the Bank of Oklahoma is upgrading its existing branch sales and service platform to TouchPoint and is also implementing our Express Integration platform. Bank of America expanded its existing TouchPoint license agreement. We signed a new, long-term agreement with First National Bank of Omaha to provide [inaudible] trust and wealth management services in a new agreement with Capital One for commercial lending services.

Sales in Europe were also strong in the fourth quarter and included several new core banking licenses for Profile, Core Bank and Express as well as expanded services to existing core and card processing clients. In addition a new client in the middle east will begin using our debit switching service in the near future. We also achieved solid sales results in our North American payments business with over 400 new signings completed in the fourth quarter.

We are optimistic about the current sales pipeline as we head into 2010. The tone and tenor of our meetings with current and prospective clients is much more upbeat relative to what it was a year ago. Many banks we have spoken with believe the worst is behind us and they are looking forward to business growth in the latter half of the year. At FIS we are more focused than ever on helping all of our clients drive greater cost efficiencies, grow revenue and improve their overall operating results.

As Bill mentioned the integration is progressing nicely and we are on track to achieve the targeted cost savings. We have committed a significant amount of time and resources to make sure we get it done properly. However the only way we win in the long run is maintaining our focus on sales and most important client satisfaction. Our employees are rising to the challenge and I am very pleased with our progress to date. We are working to optimize our strategic development efforts in 2010 by directing investment spending and new product development to businesses with the highest growth potential. At the same time, we are working to improve internal processes in order to drive additional cost efficiencies.

Next I would like to provide you with an update on the Brazilian joint venture. As expected, Banco Santander completed the deconversion of its core portfolio in late January . As indicated in our third quarter call, we will continue to provide call center and cardholder support services for the remainder of the year. In addition we recently entered into a separate agreement with the bank to continue providing other back office services in Brazil through 2013.

Turning to Banco Bradesco, when we last spoke to you at the Analyst Day in December we indicated we expected to convert the bank’s remaining cards onto our software by the end of the first quarter. However, due to the recent deconversion of Banco Santander card portfolio in January we are now working to restructure our ongoing relationship with Banco Bradesco as a commercial arrangement.

Based on these negotiations we do not expect to convert the legacy card portfolio in the first quarter as originally planned. But we do expect these cards to be converted onto our software in either a license or an outsourcing environment. We will continue to process the 12 million cards already running on our platform and we will also continue to provide all call center, cardholder support and collection services for both card bases. We will definitely and certainly provide more details as they become available.

Now I will turn the call over to Michael who will cover the fourth quarter results. Mike?

Michael Hayford

Thanks Frank. As Frank stated my comments related to year-over-year growth will be on a pro forma basis to include Metavante results in the prior year. Looking at slide five in the supplemental deck, fourth quarter adjusted revenue increased 2.7% to $1.316 billion compared to $1.281 billion in the prior year, and increased 0.4% in constant currency. This includes an adjustment of $15 million to reflect the deferred revenue that was eliminated in purchase accounting in order to give you a comparable year-over-year number.

Revenue came in slightly higher than we anticipated and compares favorably to our strong performance in the fourth quarter of 2008. Growth in processing revenues combined with higher software equipment sales offset a decline in professional services revenue and lower termination fees. Adjusted EBITDA increased 11.5% driven primarily by the realization of targeted synergies and improved international performance. Excluding the $5.3 million favorable currency impact we achieved 10.4% growth in EBITDA.

The EBITDA margin expanded 240 basis points to 29.5% in the fourth quarter of 2009 compared to 27.1% in the fourth quarter of 2008 as we experienced strong year-over-year improvement in each of our operating segments. Prudent cost management including the merger related cost initiatives enabled us to achieve higher profitability on modest revenue growth.

If you turn to slide six I will provide additional detail on our fourth quarter segment results. Segment results are presented throughout the material on a pro forma basis as if the Metavante acquisition had been completed on January 1, 2008. The financial solutions revenue declined 1.3% to $453 million in the fourth quarter of 2009 compared to $458 million in the fourth quarter of 2008. Higher software and equipment sales coupled with increased commercial services revenue helped mitigate a $15 million or 20% decline in professional services.

Financial solutions EBITDA was comparable to prior year as cost reductions offset the decline in revenue. EBITDA margins increased 80 basis points to 43.7% compared to 42.9% in the prior-year quarter driven primarily by synergy benefits. As shown on slide seven, payment solutions revenue totaled $630 million which is a 1% decline compared to the prior year. Fourth quarter revenue was comparable to prior year excluding a termination fee.

Debit and credit transaction trends finished strong in the fourth quarter and improved sequentially throughout the year. Debit transactions increased 13.6% compared to the fourth quarter 2008 driven in part by incremental client wins, while credit transactions increased 3.6%. We also experienced improving trends in our loyalty, network solutions, government payments and bill direct product lines in the fourth quarter of 2009. Conversely our item processing and retail check businesses continue to be negatively impacted by declining check usage.

Payment solutions EBITDA increased 23% to $219 million and the margin improved 50 basis points to 34.8% compared to 34.3% in the fourth quarter 2008. Realized cost savings were offset by nonrecurring costs in the quarter and lower termination fees compared to the fourth quarter of 2008. EBITDA margin was also impacted by seasonally higher volumes in our healthcare business which carry a lower margin.

As you can see on slide eight, international generated top line growth of 24% on a reported basis and 8.4% in constant currency. Strong services revenue coupled with organic account and transaction growth across all regions drove 6.4% growth in financial solutions and 9.7% growth in payments in our international business. International EBITDA increased 90.2% compared to prior year and increased 74.3% in constant currency. EBITDA margins [ended] 960 basis points to 27.5% due to higher software sales, seasonably higher volumes and improved operating efficiencies.

We have included a slide in the appendix to provide information about our foreign currency exposure and exchange rate assumptions. Please turn to slide 9 for a reconciliation of adjusted net earnings. Note that the Metavante operations are included in the fourth quarter results while the first nine months include FIS on a pre-merger basis. All in all we are very pleased with the quarter and the strong operating performance.

Fourth quarter adjusted net earnings totaled $167 million or $0.44 per share which was on the high end of the guidance we had given to you on December 7th at Investor Day. As indicated these results exclude after-tax purchase amortization of $42 million, $82 million in merger related costs and $10 million related revenue adjustment and another $88 million in asset impairment charges. The impairment charges resulted primarily from write down of previously acquired trademarks and our global rebranding initiative.

Average shares outstanding increased to 377 million in the fourth quarter due primarily to shares issued in conjunction with the merger. The effective tax rate was 36%.

Slide 10 illustrates free cash flow which excludes merger and integration costs and payments. It was $237 million in the fourth quarter and $608 million for the year. During the quarter we received net proceeds of $18 million from the sale of the remaining receivables from our former Australian check business. Proceeds from the sale are included in cash from investing activities for the fourth quarter of 2009 and not in working capital. Uses of cash included a payment of shareholder dividend and reduction in debt outstanding.

Capital expenditures totaled $67 million in the fourth quarter and $308 million for the year which is $41 million lower than the combined CapEx in 2008. On slide 11 we had $3.3 billion in debt outstanding as of December 31, 2009. Approximately 78% of the debt is swaps at fixed rates. Net interest expense which totaled $35 million in the quarter was favorably impacted by the termination of higher cost, fixed rate swaps. The effective all in interest rate was 3.6% at quarter end including the swaps and related spreads as well as the amortization of debt issuance costs.

We have included a chart to bring more clarity to our interest expense assumptions for 2010. These assumptions are predicated on the current interest rate environment and the use of free cash flow primarily to repay debt. As illustrated on this chart we expect interest expense to decline sequentially from quarter one to quarter two as lower cost forward swaps replace existing swaps and then level off in quarter three and quarter four.

Now for a few additional comments regarding our outlook for 2010. As summarized on slide 12, we are reiterating the guidance we provided on our Analyst Day on December 7th. This guidance includes the information we shared today regarding our Brazilian card operations. We expect reported revenue growth of 2-4% and 1-3% growth in constant currency. We are projected margin expansion of more than 300 basis points for full year 2010 driven primarily by the incremental $150 million we realized in synergies.

As outlined earlier we expect to benefit from lower borrowing costs in 2010 and expect net interest expense to approximate $90-100 million for the year. We are projecting adjusted earnings per share of $1.91 to $2.01 which represents an increase of 17-23% compared to the $1.63 in 2009. Finally we expect to generate more than $750 million adjusted free cash flow which we are assuming will be used primarily to reduce outstanding debt and also to make period share repurchases.

While we do not plan to provide quarterly guidance on a regular basis we do want to assist in level setting the models as you think about the two companies on a newly combined basis. For the first quarter of 2010 we expect reported revenue to increase 1-3% in U.S. dollars and constant currency revenue to be comparable to Q1 of 2009. We expect the EBITDA margin to increased 200-250 basis points compared to the 25.4% in the first quarter of 2009. EBITDA margins are typically at their lowest point in the first quarter and increase sequentially throughout the year.

Year-over-year margin comparisons can vary from quarter-to-quarter primarily due to changes in our revenue mix. Adjusted earnings are expected to approximate $0.37 to $0.40 per diluted share in the first quarter. Looking to the remainder of the year we face difficult revenue and EBITDA comparisons in quarter two due to the $23 million in termination fees realized in the second quarter of 2009 and also in quarter four as we anniversary the impact of favorable exchange rates.

That concludes our prepared comments. Operator you may open the line for questions.

Question and Answer Session

Operator

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

David Koning – Robert W. Baird

First of all what was the development in Brazil? Is this a segment you still feel comfortable can grow double digits even if you don’t get that platform conversion this year?

Gary Norcross

We do feel very strong on Brazil. We are pleased with the conversations we are having with both Banco Santander and Banco Bradesco and as Frank mentioned we fully expect our relationship with those financial institutions going forward but in general we are very bullish on Brazil and the things that are going on in those markets. We see a lot of opportunities for our products and frankly on an ongoing basis having full ownership of all of our Brazilian operations in the long-term we think will pay big dividends.

Frank Matire

The short time I have been involved I have been encouraged that we have a lot of nice opportunities there for growth.

David Koning – Robert W. Baird

Is it fair to say that you expect similar growth this year in both financial and payments or should there be some diversion between the two?

Michael Hayford

I think for 2010 again we expect the beginning of the year to still be a little bit slow. We expect it to ramp up in the second half. I think you will see similar growth rates.

Operator

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

Brett Huff - Stephens, Inc.

Could you go through the free cash again? In the press release it noted there was some timing issues. Could you just dissect that for us a little bit?

Michael Hayford

A couple of things happened. One was the improvement in days outstanding on our AR. We also had some timing related tax payments that hit fourth quarter. Those were the primary two changes that drove the higher cash flow.

Brett Huff - Stephens, Inc.

Can you tell us a bit about the margin? The margin was better than I expected in international. I remember that segment had contemplated above 20% margin but I didn’t realize it would get this high. I know there are some fluctuations based on the mix but any commentary on that going forward?

Michael Hayford

I think a couple of things. I think the team has been focused on a couple of the businesses and have done a tremendous job of improving the margin in the businesses that were underperforming. I also think the margin in the fourth quarter is higher than you would expect on a full-year basis so we had a very strong year. We also had timing in some sales that took place at the end of the year that drove the margin very strong. We are very pleased with the margin. We don’t expect it to stay that high going into 2010.

Brett Huff - Stephens, Inc.

Can you talk a bit about the conversations you are having why the deals closed in 4Q? What is driving banks to make decisions? Maybe comment on that in small, medium or large or however it makes sense?

Gary Norcross

What we saw throughout 2009 and I think we shared it in our investor update in December as well, we saw a lot of frozen activity in the early part of the year. There were a number of financial institutions towards the end of the year as they felt like they had weathered the economic storm and they did start to make buying decisions. We are really seeing that across the board. There is really two elements of institutions no matter what size, whether it is community, mid-tier or large institutions. Those that feel they have survived this economic crisis are now really starting to evaluate their long-term strategies and making some buying decisions. We certainly saw that play out across all of our segments whether it was community, mid-tier or large or even our international markets in Q4.

Operator

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

Glenn Greene - Oppenheimer & Co.

I also want to focus on the bank spending environment. Clearly the activity levels picked up and it sounds like you closed a lot of deals. Is this a reflection of you are going to get a conversion timeline and the revenue picks up in the back half of the year? Related to that, I noticed you did affirm your constant currency revenue growth of 1-3 even in the face of the situation in Brazil. Could you give us a bit of color on how you achieve that or is the revenue loss from the change in the relationship not that significant?

Michael Hayford

Let me start with the result question. Obviously as we look at Brazil we don’t have the answers yet in terms of the outcomes as Frank talked through what we are doing. We are excited about where it is going. We are excited about the potential to have a 100% owned business in Brazil we can sell into the rest of that market. We have obviously taken into account we think there is a potential for some negative revenue. It fits in terms of size it fits within that range we had previously given and we still plan to be in that range. As we look forward we are again a little bit of a revenue hit. We think the profitability will remain strong as we transition that to a wholly owned entity. So net/net we are optimistic about that business.

Gary Norcross

As you pointed out, we did have very strong sales in Q4. As you would expect with any major software purchases or project deployment there is a period of time for that to come into our revenue stream and typically you do see that in the 6 to 9 to 12 month period of time. So as we are looking towards the back half of 2010 we are counting on stronger revenues.

Glenn Greene - Oppenheimer & Co.

To follow-up on that if the activity levels continue to be reasonably healthy pace does it give you increased conviction that the growth levels in 2011, I know it is early and I am not going to pin you down but would it lead you to believe you could get back to say 3-5 constant currency growth?

Michael Hayford

We talked at Investor Day about long-term growth objectives which are obviously high single digits. We are not going to predict the 2011 at this stage where we will be. We do think the rest of the products, the industry reach both domestically and internationally that we are positioned when the banks do start to spend at the historical levels that we have seen in years past. 2009 was a challenge as I think everybody knows. 2010 we think is going to be a little better but is still not going to be where we would like it to bed. When we get to the end of 2010 we will factor in some view into the latter part. At this stage we don’t know either.

Glenn Greene - Oppenheimer & Co.

Could you tell us what the cost synergies achieved in the quarter were?

Michael Hayford

The cost synergies in the fourth quarter was $30 million.

Operator

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

John Kraft - D.A. Davidson & Co.

I know you are only one quarter into it but because cross selling is such an important piece of this puzzle in this industry nowadays can you talk about specifically the cross selling of the Metavante products into the legacy FIS client base and vice versa and logistically the timing of the sales rep training and so on and the progress?

Frank Matire

I will have Gary answer that in a little detail but here is what I will say to you. With all the efforts going on and like you said it is only one quarter on the synergies which we are doing very well on, we have maintained a clear focus with our clients on growing the revenue base and cross-selling to our clients and that has worked very well for us to keep that focus along with the synergies. I think Gary will give you a few examples.

Gary Norcross

A couple of things there. One, we are starting to see some very nice cross sales out of the Metavante products. We have mentioned them on a number of our calls. Certainly in the areas of payments in the network, some of our bill payment capabilities. Also some of the things we are seeing even in the wealth management area, trust services and the like. There is a lot of potential for those cross sales and we are starting to see that traction.

One of the things you mentioned was where we are with the sales force and the training of the sales force. Obviously to us we thought that was one of the most key areas we could focus on early on, getting all of our sales force up to speed on the breadth of our products and it is very important to drive that.

I am really proud of the job the team has done under Jim [Susserini’s] leadership. They were able to not only announce and launch our sales force shortly after October 1, the leadership of those various teams but they were able to roll those sales reps across the various territories. Since that time we have been having ongoing weekly education programs on the various products and that culminates next week with a large sales meeting in Orlando where we are bringing our entire sales force together to further educate them on the products and then push into this year.

Early signs of cross-sells are positive. I think that showed in our Q4 signings and we see a lot of opportunity going forward.

John Kraft - D.A. Davidson & Co.

You are talking about the decline in check and item volumes. What percent is that now and is it accelerating?

Michael Hayford

You mean the annual decline of check items?

John Kraft - D.A. Davidson & Co.

Exactly.

Michael Hayford

I think we are still mid single area. I don’t think it is really accelerating I think we have seen it the last two years and we expect that to continue.

Operator

The next question comes from the line of Dan Perlin – RBC Capital.

Dan Perlin – RBC Capital

Thanks for breaking out all these difficult comps and anniversaries but what I wanted to get to initially was the first quarter. Is the 37-40 more a function of the seasonality historically we might have seen with the business or is it more higher debt in the first half, you are starting off slow on the revenue growth, maybe there is lack of revenue we thought was coming from Bradesco and synergies are maybe more flat throughout the year? Which one is it?

Michael Hayford

I think it is much more a reflection the first quarter seasonality. I think typically we start out first quarter we have some business that is a little bit lower margin that is coming out of end of year. I think that is fairly normal the first quarter is going to be lower earnings.

Dan Perlin – RBC Capital

I am sure you are probably tired of talking about it but what exactly is happening in Bradesco? The conversion was planned. It seems like a problem child. It has been a long for this thing to have been converted and we are still kind of waiting. It was supposed to get converted in the first quarter. Now it is getting pushed. Where is it getting recognized in revenue or I am just a little funky on that one.

Michael Hayford

Again, what we are sharing with you is that Bradesco, which we had previously said was going to convert to the JV in the first quarter is not going to convert to JV in the first quarter. The reason for that is the joint venture with Santander Bradesco and ourselves, Santander has as we previously shared has elected to leave the processing. That leaves one party so as we talked through this with Bradesco we are looking at a different structure. At this stage we don’t expect them to convert in the first quarter. When we talk about the range of revenue there are outcomes where we expect to get a fair amount of revenue and stay fairly close to what we had anticipated. There is also outcomes where we would expect Bradesco to continue to have some relationships with us but maybe in a slightly different form and the revenue being lower. Because we don’t have that answer today we can’t give you much clarity. We still have a range of outcomes. We still believe that range is in a range of revenue we had anticipated and as soon as we get some clarity we will definitely share it.

Dan Perlin – RBC Capital

I think you said this already but just to be clear in your revenue guidance and earnings guidance you have taken into consideration the bracketing of the high end and the low end of that range with Bradesco, is that correct?

Michael Hayford

That is correct.

Dan Perlin – RBC Capital

As we look at the schedule you have for the interest rate swaps rolling off, is it a function…I know we are seeing the swaps roll off, but it is hard to know from this trajectory, are you still comfortable with the $200-300 million reduction in debt or are we moving more towards like $400-500 million of reduction in debt for the full year?

Michael Hayford

I think we have modeled $300-400 million reduction in debt. So we have mandatory pay downs and we plan to pay down some additional. Again you saw that we announced today a share repurchase approved by our board. In the second half of the year we will look at what is the appropriate action to take to either pay down debt or to buy shares. We do our budget we have to make an assumption one way or the other.

Dan Perlin – RBC Capital

You were dead on your cost savings this quarter and you gave us a schedule at the analyst day. Are those numbers still looking to be the same kind of $43 million in the first and $31 million in the fourth of cost savings? Are those still good?

Michael Hayford

Yes.

Operator

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

Tien-Tsin Huang - JP Morgan

I want to talk about the Citi North American win. Can you expand upon that? That is a pretty big, core win domestically. What can you share with us like what drove the decision to go with FIS, how capital intensive could it be, how long will the conversion take, etc. ?

Gary Norcross

We are very excited about the relationship with Citi Bank and signing that. That is really an expansion of a very global relationship we already have with Citi Bank. Citi Bank today already utilizes our systematics product suite in 30 countries and this is an expansion of the license agreement they already had to use in those countries to now bring that into North America. So it is a very exciting strategic win for us. It shows the capabilities of our systematic solution and abilities in that large financial institution space.

Tien-Tsin Huang - JP Morgan

I am not sure if you can share this but how deep is your general relationship with Citi within North America? I wonder if there is a chance to pick up some other business like bill pay or item processing, etc.

Gary Norcross

Absolutely. We do have a broad relationship with Citi today. We have one of our managing directors fully assigned to that account and we are already doing other business with Citi Bank as we speak. They actually run a number of our payment solutions through one of their companies called Citi Share and we see other opportunities of expanding that relationship in the future.

Tien-Tsin Huang - JP Morgan

Mechanically how would the Bradesco…if they choose to move forward with this commercial relationship instead how would their equity interest be converted? Would FIS need to buy out the stake? I am just trying to better understand the mechanics of that.

Michael Hayford

Until we get to the end of job I think it is hard for us even to predict different outcomes for you. Obviously where we are focused, as we shared, there is going to be some change but we are optimistic the outcome can be very good for us down in Brazil. It is hard for us to say what the structure would be until we get on the job and get it down on a piece of paper.

Operator

The next question comes from the line of Greg Smith – Duncan Williams.

Greg Smith – Duncan Williams

I think you said you were encouraged by some of the transaction activity during the quarter. Was that on the credit and debit card side?

Michael Hayford

Yes, I think we saw throughout 2008 in fourth quarter pretty strong debit and credit transaction volumes increasing.

Greg Smith – Duncan Williams

Can you give us any insight into what is going on in January so far? We have heard from obviously Visa and MasterCard but I just wanted to kind of corroborate that with you.

Michael Hayford

I don’t know we want to give numbers and rates. We have to track them daily and have volumes against our plan on a weekly basis. You can kind of expect when you get the data from Visa and MasterCard what is going through the networks. We are processing on the issuing side and the network side we see those transactions as well. So we would see similar volumes typically that you would hear from the two of them.

William Foley

We are encouraged by what happened in the fourth quarter and we are just hoping it maintains itself or even grows more in the first quarter.

Greg Smith – Duncan Williams

On the share buybacks it sounds like give your mandatory debt pay down that you are most likely to use those to kind of keep the share count flat. Is that fair or would you get more aggressive depending on the stock price?

Michael Hayford

I think it is fair to say we would definitely like to keep the share count flat so you can assume that. Whether we do more repurchase depends on where we want to use our capital. Again, the assumption is mandatory with some pay down and I think we want to keep our flexibility in the second half of the year.

Greg Smith – Duncan Williams

Outside of Bradesco are there any large deals you are in discussion with that could actually move the dial in 2010 or are you so big and diversified at this point it is going to be hard for any single deal to really move the dial dramatically?

Frank Matire

We certainly can’t talk to specific deals but clearly we have enough of them on the table and any combination could move the needle right? We just have to see what comes. Just like the Citicorp deal which was a very nice deal for us. We are excited about the relationship we have with our banks.

Gary Norcross

As you have heard we had a very strong Q4 in sales and our pipeline is continuing to grow. We have been able to refresh the sales we had in Q4 and our pipeline and actually grow that so we have a number of opportunities that we are pushing across all of our markets.

Frank Matire

As the question was asked before we continue to build our relationships with these clients too and get larger relationships with them which is obviously a benefit to both of us.

Operator

The next question comes from the line of Analyst for Julio Quinteros - Goldman Sachs.

Analyst for Julio Quinteros - Goldman Sachs

I was hoping you might be able to provide a bit of color, based on what we have seen throughout the rest of our coverage universe there seems to be a sense that the bill payment types of businesses haven’t necessarily taken off in the way that many acquirers of those businesses essentially thought they would. I was hoping you could give us a bit of an update on what you are seeing with the bill payment business and whether your take on it has changed at all over the last few months seeing it as a combined company?

Frank Matire

I don’t know who you are referring to there but from our perspective bill pay has always been a very solid business. It is a still growing business. Transaction volumes are still growing as banks continue to get online banking adoption and also adoption of the bill pay side. I think if you looked at volumes you would see that it is still a very steep curve in terms of new names, new end customers as well as the number of transactions they each do. What you have also seen is all the providers be able to price down the cost curve as we have gotten volumes and have been able to get to scale. So we still think it is a great business. We still think it has potential. I think we would have a slightly different view of that.

Julio Quinteros - Goldman Sachs

Are you still seeing some degree of aftershocks? Over the last two years it is pretty basic people probably haven’t been paying bills as often as they were in the past just generally with people defaulting and delinquency rates going up. You are not really seeing any fundamental change in that and your long-term view of the business based on what you have seen in the last 2-3 years?

Michael Hayford

No and you have to remember bill pay is a transaction based service. So we get paid per bill whether it is somebody sending a $5 check or a $5,000 payment electronically. We are paid per transaction. The number of transactions continue to grow very strongly.

Operator

The next question comes from the line of James Kissane – Bank of America.

James Kissane – Bank of America

I hate to beat a dead horse here but could you possibly provide a little more insight into Bradesco’s rationale for taking a different path on the JV?

Gary Norcross

Basically what the situation was with the Joint Venture we had two key partners, Banco Santander and Banco Bradesco. When Banco Santander made the strategic decision to take their processing in-house Banco Bradesco approached us to discuss converting their arrangement into a commercial agreement because they didn’t feel it made viable sense to be the only bank as a member of the joint venture. Based on that we have had very positive conversations with both of these partners. The conversations have been upbeat and I think everybody feels we are going to get to a good conclusion at the end of the day. But these conversations continue to go forward. It was less about Bradesco’s desire to not do business with FIS. There is nothing further from that. It was more of a desire not to be the only owner in a joint venture. It made more sense to go on a commercial basis.

James Kissane – Bank of America

A bigger picture question, your philosophy on doing license deals versus more traditional service bureau deals?

Gary Norcross

We have a very high recurring revenue rate and clearly one of the things we have had a philosophy over the years is obviously not to mandate which way our clients take the service. Typically what you find in a lot of our applications is a high propensity to outsource that which is why we have such high recurring revenue and certainly payments is a great example of that but we are also willing to license our products where it makes sense.

Frank Matire

We sleep better at night obviously with the high recurring revenue that we have but some of our products gear themselves towards being software license or in-house or the clients running it themselves so we made those available so it works for us.

James Kissane – Bank of America

As you look at the long-term economics on a present value basis do you find much of a difference?

Michael Hayford

License is a high margin business. You do it up front one time and it is gone. You really want a recurring revenue stream. You want to build that relationship not only for that one product you sell but if you have that outsourcing relationship you are going to sell more products. When you look at the whole relationship outsourcing and the deeper relationship is going to have a higher return over time when you look at one transaction [a software] sale.

Frank Matire

A good point though is with many of our clients we have both. We have the outsourced relationship and then they may have a product license they have along with it.

Operator

The next question comes from the line of Bryan Keane - Credit-Suisse.

Bryan Keane - Credit-Suisse

On Bradesco you said the range of revenue outcome remains the same. Can you just remind us what that range is?

Michael Hayford

The total guidance range is 1-3% on constant currency. It is 2-4% as reported. Again, let’s put Brazil and Bradesco in context. Our international revenue stream is approximately 17%. This is 2009 numbers. 17% of our total revenue. Brazil is around 37% of that international. So when you talk about Bradesco and you put it in context it is one relationship out many and obviously as we look at it although you don’t want to lose any customers or any revenue stream it fits in the scheme of what we are doing that we can still hit our plan that we laid out for 2010.

Bryan Keane - Credit-Suisse

The margin implications for going into a commercial agreement, did the margins change from what you thought originally with the JV?

Michael Hayford

A couple of things. One is in a commercial relationship we have talked about our expectations we would be 100% owner of the business down there. The business has started to reach scale and start to turn a profit so if you look at it as a 50% owner our margin is always going to be reduced because we are only booking half of the profits so we do expect that margins for FIS are going to improve under the new structure.

Bryan Keane - Credit-Suisse

Turning to Banco Santander just remind us how much revenue it generated in 2009 and now they are off of the books how much further the processing piece is so how much less in 2010 on an annual run rate?

Michael Hayford

Banco Santander we had talked about as about $40 million per year. So that is the $40 million U.S. we have anticipated coming off in 2010.

Bryan Keane - Credit-Suisse

But there is some existing business that stays?

Gary Norcross

The $40 million number is the net.

Bryan Keane - Credit-Suisse

I couldn’t hear you, how much will be continuing with FIS?

Gary Norcross

$70 million.

Bryan Keane - Credit-Suisse

Banco Santander is there a term fee with that relationship breaking up and will there also be a term fee with Bradesco?

Michael Hayford

We expect the JV FIS has contributed capital and made investments to get that going. As Banco Santander and Banco Bradesco exit, we would expect to get repaid or get returned on our investments we made. When we get those things done we will announce that and share that but you should expect that we will get our capital contributions repaid in some form.

Bryan Keane - Credit-Suisse

Was there already a Banco Santander term fee paid and do we know how big that is?

Michael Hayford

We haven’t reached agreement with Santander or Bradesco at this time.

Operator

The next question comes from the line of Analyst for Andrew Jeffrey – SunTrust

Analyst for Andrew Jeffrey – SunTrust

I was just hoping you could provide a little more color to the dynamic between debit and credit. Do you have a sense or can you tell from what you are seeing whether debit is replacing credit or this is just a dynamic where the adoption is higher and experiencing higher growth?

Michael Hayford

I think one of the phenomenon we are seeing is debit seems to be a necessity. You use it at the grocery store, pay for gas, etc. Credit tends to be purchasing things. I think with the economy being tighter the debit trends might be a little stronger. I don’t think we would say debit is replacing credit.

Gary Norcross

We are seeing different types of transactions and different dollar volumes of transactions due to some of the economic issues but we are not seeing a trend where we feel debit is replacing credit transaction volume and we saw a nice growth in both of those in Q4.

Frank Matire

That is why it is so important we have all those products and all those offerings.

Analyst for Andrew Jeffrey – SunTrust

To go back to the bank purchasing decision in your negotiations with them are the cycle times starting to accelerate as well? Is it taking less time to get deals closed?

Gary Norcross

I think it is a little too early to say whether cycle times are coming down. Certainly cycle times elongated in the first half of last year and as I said we certainly had a very nice Q4 and we have a very strong pipeline. I would share with you the pace of the activity is certainly picking up in our sales channel.

Mary Waggoner

Thank you everyone for joining us today. As a reminder a replay of the webcast will be available on our website shortly after the call.

Operator

Ladies and gentlemen this conference will be available for replay beginning today at 7 p.m. ET running through February 18th at midnight ET. You may access the AT&T Executive Playback Service by dialing 800-475-6701 and entering the access code 141855. International participants should dial 320-365-3844 with the access code of 141855. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Fidelity National Information Services, Inc. Q4 2009 Earnings Call Transcript
This Transcript
All Transcripts