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Fidelity National Information Services, Inc. (NYSE:FIS)

Q1 2010 Earnings Call

April 27, 2010 5:00 pm ET

Executives

Mary Waggoner – Senior Vice President of Investor Relations

Frank Martire – President, Chief Executive Officer

Mike Hayford – Chief Financial Officer

Gary Norcross – Chief Operating Officer

George Scanlon – Executive Vice President of Finance

Analysts

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

Glenn Greene - Oppenheimer & Co.

Greg Smith - Duncan Williams Inc.

Daniel Perlin - RBC Capital Markets

Brett Huff - Stephens, Inc.

Kartik Mehta - Northcoast Research

Bryan Keane - Credit Suisse

John Kraft - D. A. Davidson & Co.

James Kissane - BofA Merrill Lynch

Tien-Tsin Huang - J. P. Morgan

David Parker - Lazard Capital Markets

Julio Quinteros - Goldman Sachs

Karl Keirstead - Kaufman Bros.

Operator

Ladies and gentlemen, thank you for standing by and welcome to the FIS first quarter earnings conference call. (Operator Instructions) I would now like to turn the conference over to Senior Vice President of Investor Relations, Mary Waggoner. Please go ahead.

Mary Waggoner

Thank you Shannon and thanks to everyone joining us on the line. Today’s earnings press release and supplemental Slide presentation have been posted to our website at fisglobal.com. A webcast replay of the audio portion of the call will also be available on the website later this evening.

Frank Martire, President and Chief Executive Officer, will provide an overview of first quarter results and operational highlights. Mike Hayford, Chief Financial Officer, will follow with the detailed financial report. Joining us for the Q&A portion of the discussion will be Gary Norcross, Chief Operating Officer, and George Scanlon, Executive Vice President of Finance.

Unless otherwise stated, references to revenue and EBITDA growth rates will be on a pro forma basis to include results from Metavante in all periods. 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 attached press release.

The discussion will also contain 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.

The presentation will begin with Slide number 4. I will now turn the call over to Frank Martire.

Frank Martire

Thank you Mary. Good afternoon and thanks to everyone joining us on the call. We are very pleased with the strong first quarter results. Revenue growth and earnings came in better than we had expected, thanks to higher software and professional services, solid transaction growth and prudent cost management.

First quarter revenue increased 3.8% to $1.3 billion, then grew 1.8% in constant currency. The EBITDA margin expanded 340 basis points to 28.8%, driven primarily by merger related cost savings and a modest improvement in revenue mix. Adjusted earnings came in at $0.41 per share, and free cash flow was strong at $241 million for the quarter.

We are meeting or exceeding all the major integration milestones, and are on track to achieve our targeted cost savings of $260 million. We exceeded our expectations for $43 million in realized savings in the first quarter, and we are confident that we will achieve the targeted incremental savings of $150 million for 2010.

During the quarter we successfully consolidated a number of regional data centers into our strategic command centers in Brown Deer, Wisconsin and Little Rock, Arkansas. And we also completed the disaster recovery in-sourcing project as scheduled by April 18. We are particularly pleased with the progress we have made in integrating our sales teams and executing our unified, go to market strategy.

This strong performance demonstrates our ability to integrate and successfully manage all aspects of our business. While we have a full agenda in 2010, our employees are doing a great job staying focused on serving our clients and driving operational excellence.

We continue to see evidence of increased confidence among our clients regarding the outlook for bank spending. Sales were strong in the first quarter, particularly for new core processing clients, and the community of banking in mid tier space, such as Cardinal Bank; First Federal Bank of the Midwest; and Boiling Springs Savings Bank of New Jersey.

Our success is being driven by the added value that we deliver to our clients including superior feature functionality, product breadth and a reputation for strong client engagement, all of which help our clients improve customer retention rates and compete more effectively. We continue to expand client relationships in the large and regional bank space, including two Top 100 banks that have chosen FIS as their new core processing partner. Also, we announced this morning Cole Taylor Bank, a $4 billion bank based in Chicago, has selected the IVS core processing platform in addition to our e-banking and bill payment solutions.

These examples clearly demonstrate the excellent job that our sales team is doing to identify and close new opportunities. We look forward to sharing more success stories with you in the future.

We are also excited about the revenue synergies we have obtained as a result of the combination. Approximately 30% of our new contract done in the quarter was generated by merger related cross sales. The resulting wins span multiple product offerings and include Touchpoint, NICE Network Services, loan origination software, business e-banking and bill payment. I’d like to highlight a couple more of the cross sale wins we were able to attain from the top 50 banks. The first is a long-term systematic user will convert to our bill payment platform in 2011. The second will implement a component of Touchpoint across its bridge network over the next 18 months.

On the international front, we remain enthusiastic about our new growth opportunities as we continue to leverage our product capabilities across the globe. As an example, we will begin providing prepaid card processing services for a large client in the Asia-Pacific region in the near future. And we are planning to further extend our product capabilities outside the U.S., including debit processing and non client basing back office support.

As a part of our ongoing effort to better serve our growing global client base, we recently established a new service center in the Philippines. This new facility further expands our capacity to provide back office and technology services to meet growing client demand. We expect to eventually house more than 1,000 people at this new location.

Turning to Brazil, I am pleased to report that in early April we began processing an additional 2 million cards for Banco Bradesco. These cards are managed to a Visa Vale, which is another one of our commercial clients. We expect to convert an additional 3 million cards for Visa Vale by the end of the second quarter.

Now I will provide an update on the joint venture. We received a partial payment from Banco Santander towards the settlement of its exit from the joint venture in January. The remaining payment will be made once all the details have been finalized. We continue to work closely with Banco Bradesco regarding the conversion of its remaining card portfolio. Importantly, all of the scenarios being discussed include FIS continuing as Bradesco’s card technology provider, and we fully expect to maintain our long-term relationship with the Bank. As we previously communicated, revenue will be impacted since the conversion did not occur in the first quarter as expected. However, we still anticipate full year revenue and earnings to fall within our guided range.

Although we are not in a position to provide more specific details at this time, I want to assure you that Banco Bradesco and FIS are working diligently towards a resolution. We remain enthusiastic about the growth potential in Brazil and for our international business overall.

To summarize the quarter, we’re off to a great start in 2010 and we are very pleased with our progress in executing on our overall plan. Most importantly, our management team and employees around the globe are doing an excellent job maintaining focus on our existing clients and also on developing new client relationships.

Now I’ll turn the call over to Mike, who will cover the first quarter results. Mike?

Mike Hayford

Thanks Frank. And as Mary stated earlier, my comments regarding year-over-year growth will be based on a pro forma basis to include Metavante results in the prior year.

I’ll begin with Slide 5. As Frank mentioned, first quarter revenue and earnings came in better than we had anticipated. Adjusted revenue increased 3.8% to $1.26 billion compared to $1.21 billion in the prior year, an increase of 1.8% in constant currency. Higher software sales, professional services, combined with solid transaction growth contributed to strong first quarter results. Adjusted EBITDA increased 17.6%, driven primarily by the realization of targeted synergies. EBITDA margin expanded 340 basis points to 28.8% in the first quarter of 2010 compared to 25.4% in the first quarter of 2009 as we experienced strong year-over-year improvement in FAC and PSE segments, including a favorable revenue mix in addition to the synergies.

On Slide 6, the Financial Solutions segment revenue increased 3.2% to $444 million in the first quarter of 2010 compared to $430 million in the first quarter of 2009. The growth was driven by higher software and professional services revenue. Financial Solutions EBITDA increased 13.9% to $189 million and the EBITDA margin increased 390 basis points to 41.8%. This was driven primarily by synergy benefits and the favorable revenue mix. We are not expecting a similar margin expansion year-over-year in the second quarter due to difficult comparisons from 2009.

As shown on Slide 7, Payment Solutions revenue totaled $619 million, which is a 1% increase compared to prior year. If you exclude our paper based check businesses, Payments revenue would have increased 4.2%. The improving transaction trends that we experienced in the fourth quarter of ’09 continued throughout the first quarter of 2010. Debit transactions increased 15.2% compared to the first quarter of 2009, and increased 11% on an organic basis. Credit transactions increased 3.4% compared to prior year. These favorable trends combine the strong growth in our Government and Healthcare business, offset a 10% decline in the paper based item processing and retail check. These paper based check businesses, which generate approximately $120 million in revenue in the first quarter of 2010, will continue to negatively impact our payments growth rate by about 2% to 3% due to the secular decline in check usage.

Payment Solutions EBITDA increased 11.1% to $230 million, and the margin improved 340 basis points to 37.1% compared to 33.7% in Q1 of ’09. Realized cost savings and a more favorable revenue mix and improved profitability within retail check drove the strong margin expansion. As with FSG, we expect less robust margin expansion in PSG in the second quarter due to the prior year comparisons.

On Slide 8, international revenue increased 14.9% on a reported basis and 0.6% in constant currency. As expected, the international growth rate was impacted by the loss of processing revenue for Santander in late January and the delay in converting Bradesco’s remaining card portfolio in the first quarter.

Software sales declined relative to the first quarter ’09 due to the timing. International EBITDA increased 5% compared to prior year and decreased 2.9% on a constant currency basis. The reported EBITDA margin declined 150 basis points to 16.2% compared to 17.7% in the first quarter 2009, due primarily to currency and lower license revenue. As is typical for the international segment, we expect the international margin to ramp sequentially throughout 2010 and expect the full year margin to be in the low 20s.

Now turn to Slide 9 for a reconciliation of adjusted net earnings. These results exclude after tax purchase amortization of $41 million, $13 million in merger related costs and $6 million related to the deferred revenue adjustment. First quarter adjusted net earnings totaled $154 million or $0.41 per share. The improved operating performance and more favorable product mix offset a higher tax rate and higher share count.

As shown on Slide 10, adjusted free cash flow totaled $241 million in the first quarter, driven by strong growth in earnings, higher account receivable collection and lower capital expenditures. CapEx totaled $58 million or 4.6% of revenue in the first quarter of 2010 compared to $71 million in the first quarter of 2009. We expect full year CapEx, including integration capital, to be between 5% and 6% of total revenues. Also, second quarter free cash flow is expected to be below first quarter due to the timing of our federal tax payments.

As indicated on Exhibit C of the press release schedules, our use of cash in the first quarter included reduction in debt outstanding and the payment of shareholder dividends. In addition we repurchased 1.4 million shares at an average cost of $22.97 per share. In late March, we completed the purchase of a merchant portfolio that we had previously processed on an agent basis. Other cash inflow during the quarter included proceeds from the sale of our [Clear Power] business and a $35 million partial settlement from Santander as Frank had referenced earlier in the call.

Now for a few comments regarding our outlook for the remainder of 2010. First, we are encouraged by the recent activity in Brazil. April 10 Visa Vale converted to Bradesco a portion of its portfolio to the FIS platform as Frank had reported. This past week it was announced that Banco Bradesco will be acquiring Santander’s portfolio of Visa Vale. And then just today, Banco Bradesco and Banco Brasil have announced the signing of a MLU to partially integrate their card operations and launch a new card brand in Brazil. While we still have work to do to formalize the go forward position in Brazil, we view these actions to be positive for FIS.

Second, we continue to be pleased with our sales success in the market. This is the second quarter of good sales following the solid results in the fourth quarter of 2009. Just a reminder that these sales typically take six to nine months to translate to revenue, as the conversion process starts when the contract is signed. And as a reminder, we will face difficult comparisons in the second quarter due primarily to a $23 million buyout that was recorded in the second quarter of 2009 at Metavante. That being said, we expect second quarter revenue to be in the low single digits with a margin expansion of approximately 100 basis points.

And third, due to the strengthening of the dollar against the euro and the British pound, we now expect a reduced currency benefit of approximately $30 million compared to our December guidance of $60 million for the full year 2010. Assuming exchange rates remain at the current level, reported revenue will likely come in closer to the low end of our recorded guidance range of 2% to 4% growth, with minimal impact on earnings per share. We have included a Slide in the appendix that provides additional information regarding foreign currency exposure together with our original and updated foreign exchange assumptions.

Our full year outlook remains the same at 1% to 3% revenue growth on a constant currency basis, and earnings of $1.91 to $2.01 per share. Operator that concludes our prepared comments.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from David Koning - Robert W. Baird & Co., Inc.

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

First of all, you mentioned segment margins won’t go up quite as much year-over-year in the second quarter, given a little tougher comparisons, but is it fair to say that given seasonality and just the cost savings that continue to ramp, that sequentially all margins should be up pretty nicely in all the segments?

Mike Hayford

Well again, yes, year-over-year the comparison’s going to drop a little bit, but we would expect with the synergies coming on board that we would continue to see margins hold steady. And then, I think as we’ve talked about it in the past, third and fourth quarter we’re expecting a little bit stronger than the first half of the year.

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

And then secondly, you mentioned free cash flow not being quite as strong in the second quarter, Q1 it sounds like some accounts receivable collections and a little lower CapEx helped, but is it fair to say that given such a strong start to the year that $750, I know you said greater than $750 is your full year guidance but I mean it seems like it could be quite a bit better than that.

Mike Hayford

Yes, David, I don’t know if I’d go there yet. I think first quarter we did a pretty good job of pulling in AR. That helped the working capital. And then we had positive timing in terms of payment of incentives year-over-year, and then again second quarter is going to be a drop just because of tax payments. So I think after second quarter we’ll have a little bit more clarity. The first and second quarter have a little lumpiness this year.

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

And then finally, just in the first quarter you mentioned a payment from Santander. Was that in revenue and maybe you can give us the amount of revenue in January from that?

Mike Hayford

No. We received a partial payment and as you know we haven’t fully resolved the joint venture down in Brazil with Santander and Banco Bradesco, so it’s held up, it’s in cash, but it’s held in escrow until we resolve and get signature. And then we would figure out, what does that mean? Does it come in as a gain? We have to say we have a lot of the balance sheet down as a joint venture, so we would have to based on the settlement determine the accounting at that point. But it is not in first quarter revenue.

Operator

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

Glenn Greene - Oppenheimer & Co.

I guess the first question I just wanted to drill down on the international margin trends in the quarter. It was a little bit worse than what I was thinking, but maybe it was in line with your expectations. I don’t know how it sort of came in, but just a little bit of color on how you sort of saw the international margins and what’s going to sort of drive the sequential improvement going forward.

Mike Hayford

Well, again we talked a little bit, we had strong margins fourth quarter, and they dropped off in first quarter. You know a lot of that is due to timing. We had a lot of software and professional services cleared in the fourth quarter, which as I think we talked about last call was a really good quarter for us. The currency’s not providing as much lift as we had expected just because of the strengthening of the dollar, but beyond that I’d just look at timing. International has a little bit more timing impact because of a softer professional services. And so I don’t think we would have any concern for the first quarter. It’s probably lower than we would have liked to see, but we expect that to bounce back going forward.

Glenn Greene - Oppenheimer & Co.

And then, I don’t know what kind of color you can give us but it sounds like Bradesco, you know there’s a lot of things going on in the Memorandum of Understanding this morning that was announced and you know it sounds like you’ve converted or some part of the portfolio or a new portfolio and another one to come going forward. Could you just give us a little more color on sort of what’s happening with Bradesco? Maybe some sense for the timing, when you’ll get resolution on the JV and just some more overall commentary on your relationship with Bradesco, because I know it’s of concern to a lot of folks.

Gary Norcross

We continue to have very positive conversations with Bradesco as we move forward. The portfolio that was converted was part of one of our commercial clients, CBSS, also known as Visa Vale. And we converted that portfolio in early April, which we saw as a good sign. The announcement that you saw today where Bradesco and Banco do Brasil are pulling together under CLO and launching possibly a private brand in Brazil, and then further bringing in possibly CBSS and that overall combination we all view as very positive steps. As I said, we continue to have ongoing conversations with Bradesco in every situation. As Frank mentioned FIS is a part of the arrangement, whether they use our software or whether they stay part of the joint venture. We still have to work through those details, but we continue to have very positive conversations.

Glenn Greene - Oppenheimer & Co.

So you’re feeling good overall about the relationship?

Gary Norcross

I think we’re optimistic with what’s going on in Brazil. We like the strategy that Bradesco is pulling together with their overall payments initiatives in the country. You know the payments continue to grow in Brazil with 20% per year or so. We’re optimistic that we’ll have a favorable outcome.

Glenn Greene - Oppenheimer & Co.

And just quickly, could you remind us how much of a drag the Santander de-conversion was in the quarter?

Mike Hayford

Yes. Its $40 million a year, so you know Santander de-converted the end of January, so $10 million a quarter. Bradesco as we had originally planned to not come on board, so you could assume it’s a portion of that $10 million.

Operator

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

Greg Smith - Duncan Williams Inc.

Just hoping to get some comments on the interest expense. It seems like most of the swaps have now been re-done, but can we still expect a bit of a sequential decline in the interest expense in 2Q?

Mike Hayford

Yes, I think we have provided a little bit of that color but yes, I think we have one more swap that unwinds second Q and then I think we’ll flatten out third and fourth Q. But we’ll continue to give you a little bit of headlights into that.

Greg Smith - Duncan Williams Inc.

So there still is some benefit to come?

Mike Hayford

I think you guys have that date. We can get that to you, the last swap coming off.

George Scanlon

I think the swaps have been detailed in the 10-K and we had one expire for $850 million April 11. And so you’re going to see a reduction in interest expense the balance of the year.

Greg Smith - Duncan Williams Inc.

And then the internal revenue growth in the quarter, should we just take 1.8% the currency adjusted number? Is that essentially what you’re using as the internal revenue growth for the quarter?

Mike Hayford

Yes, for organic revenue I would continue to use constant currency. It’s just a little cleaner and you know we’ll keep you updated on our assumptions on foreign exchange. But the 1.8 for the first quarter is what we experienced.

Greg Smith - Duncan Williams Inc.

And then on the sort of legacy Metavante side, you guys had a pretty decent tax related payment processing business. Any comments on that? And can you remind me, does the majority of the revenues in that business come in 1Q or 2Q?

Mike Hayford

It’s a little of both. There’s a business that provides prepaid debit cards on tax refunds in the first quarter, and then the other business we have is to provide facilitated electronic tax payments for the IRS, and some municipalities and some states which is somewhat in the first quarter and then it’s pretty heavy in the second quarter. So it actually hits first and second quarter.

Operator

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

Daniel Perlin - RBC Capital Markets

Are you guys still actively looking at selling the majority of your check business?

Mike Hayford

No. We concluded that we could not adequately get a return on that and we feel we can operate it and get a good margin. We also believe there’s some technology that we can leverage, such as analytics and project caption across the rest of our payments business. We pulled that back inhouse and are operating it.

Daniel Perlin - RBC Capital Markets

Is there opportunities for incremental cost synergies as a result of doing that that maybe weren’t articulated in the Metavante merger?

Mike Hayford

I’d look at it as it had been on the blocks for a period of time and now we’re trying to make sure that the volumes, because the volumes are going to go down if there’s a secular decline in checks. We have to make sure we stay ahead of it to keep the margins, but I wouldn’t assume there’s more synergies.

Daniel Perlin - RBC Capital Markets

Is that like a margin that is pretty decent because that’s just a function of the guaranteed portion of the business that’s increasing as a result of the kind of dislocation that we see in the market?

Mike Hayford

Right.

Daniel Perlin - RBC Capital Markets

And then the cost synergies, I think Frank had said you exceeded $43 million estimate. Would you mind telling us what the number was in the quarter or?

Mike Hayford

No, I mean we had talked about $43. We exceeded it. You know we’re on track for the year. We’ve talked about the full year, we expect to end right around $212, so that’s incrementally $150 million. So we’re on track for that. We’re pleased with the start. The synergies are going to move around quarter-to-quarter, so as long as we stay on track I don’t think we want to get too precise there with you.

Frank Martire

And Dan, we’re confident where we’re at at this point in time as we look forward.

Daniel Perlin - RBC Capital Markets

Now the other thing you mentioned was 30%, and I missed the actual color but it sounded like something about 30% of growth in sales came from cross sales this quarter. Or was that? I just missed what you said.

Frank Martire

It was cross sales related to the combination. Gary can probably speak to that.

Gary Norcross

Yes, Dan, that is what we’re trying to. A lot of people have focused on the Metavante combination from an expense take out standpoint. We wanted to highlight that we’re also seeing some revenue synergies out of the combination, so 30% of our sales in Q1 actually came from former Metavante products being sold into FIS clients, or former FIS products being sold into Metavante clients. So you know we really see that as a good sign. We’ve pulled our sales forces together and we feel we’re executing very well and I think Q1 was a good example of that.

Daniel Perlin - RBC Capital Markets

The CBSS deal with Visa Vale, was that something you guys had been working on for some time or is this something that kind of creeped up as a result of this discussion around the JV?

Gary Norcross

No, we have an ongoing commercial business in Brazil. You know the joint venture has commercial customers. CBSS is a very large one of those. They were owned by Banco do Bradesco, Banco Santander and Banco do Brasil. As you saw the announcement, Santander is now coming out of Visa Vale. But this was a commercial arms length arrangement we have through the joint venture from our processing arm, and we’re just through the natural course converting the cards onto our system. And so Banco Bradesco did convert in early April.

Mike Hayford

And that was a planned activity.

Daniel Perlin - RBC Capital Markets

And then you said there’s another $3 million to come on. Is that next quarter or is that just in the back half of the year?

Mike Hayford

Correct. We’re actually scheduled in Q2 to bring on those additional cards.

Daniel Perlin - RBC Capital Markets

And then just lastly on the international front you mentioned a large institution was going to launch prepaid in Asia. Is that something also that’s scheduled for second quarter or should we wait for kind of second half to get more details around that?

Frank Martire

Yes, I think you should look more towards the second half of this year as they come on.

Operator

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

Brett Huff - Stephens, Inc.

One of the questions I was trying to get a handle on, you talked about the sales momentum and I wanted to understand was there a particular geography? I think you said core sales was upside to kind of what you were expecting, or it was accelerating. Was there an equivalent geography focus or was it widely spread?

Gary Norcross

When you look at our success we had in FSG in the quarter, Brad, it was really across all of our major segments, especially in the U.S. markets. We saw strong wins in our community markets as Frank referenced. We saw some significant wins in the Top 100. So we saw good wins across the board. We also saw a number of key wins in our international market, so overall we had a very good quarter with regards to SFG sales.

Brett Huff - Stephens, Inc.

On the international, can you give us an idea of what the growth was, X any of the one time Santander stuff or what I kind of look at as one time? Can you give us sort of an underlying growth picture?

Frank Martire

Well, as we mentioned, the Santander partial payment of the settlement is not in the revenue numbers. We’re holding that in escrow until we fully negotiate that termination agreement or that agreement.

Brett Huff - Stephens, Inc.

The last question I had was in terms of CapEx it sounds like you’re still expecting CapEx to be relatively near where you guys were before. Is this just a timing question or were there particular investments that just got pushed or kind of what was the reason for the seasonality of CapEx?

Mike Hayford

I would say it was timing. You build a budget going into the year and then you try to manage to it, and we just didn’t spend the CapEx as fast in the first part of the year as we will throughout the whole year. So I’d put it in timing.

Operator

Your next question comes from Kartik Mehta - Northcoast Research.

Kartik Mehta - Northcoast Research

One of the things that you said gave you upside this quarter was software sales and I’m wondering that was one of the first things we saw decline as the economy went kind of south. I’m wondering if the increase in software sales is the result of the market getting better or you’re just executing better and as a result taking market share.

Frank Martire

No, I think it’s an improvement. I would say the market improvement helps us and it helps everybody, okay? But the reality is we’re getting the software sales but we’re also getting the outsource sales at the same time. So I think it’s a general improvement. And as Gary talked about, the core processing, the FSG sales has been really good for us. So we get an uptick there in the first quarter that we’re very pleased about. But both on the outsource and the software sales side.

Kartik Mehta - Northcoast Research

And then when you look at your regional bank and community bank customers, how much worry do you think they have about their commercial real estate portfolio? Is it enough of a worry that it’s causing them pause or are they starting to feel better about the economy and it’s not as much of a concern?

Frank Martire

You know I think you have to ask them the reality. I think they feel more comfortable in their position today than they clearly did a year ago, but it’s on an individual basis. But clearly there’s more confidence growing as each quarter goes on.

Kartik Mehta - Northcoast Research

Frank, just on that, do you think any difference in geographic demand as you look at your customers?

Frank Martire

Absolutely not. No. It’s across the country and it’s across all the regions globally.

Operator

Your next question comes from Bryan Keane - Credit Suisse.

Bryan Keane - Credit Suisse

I just want to follow up on the software and professional services increase. Can you guys quantify that, how much the increase was?

Mike Hayford

Software we think a little north of 20 and professional services was slightly south of 20, so right on 20%.

Bryan Keane - Credit Suisse

And do you guys expect that to continue to strengthen in 2Q?

Mike Hayford

Software is a little bit timing, right? So it’s a little bit hard to predict the software. Typically first quarter is not a super strong quarter, so I think we had a pretty easy comp last year. It typically builds throughout the year, fourth quarter was strong for us in software. Professional services you would expect to get continuity, so I think we would expect professional services to continue. I think to the general tone that Frank spoke to, we’re pleased to see that we’ve seen a couple of quarters now of buying and that there’s a little bit more confidence in our customer base to buy. But we continue to monitor that, and again software I don’t think we’d map out a trend yet until we see it really snap back.

Bryan Keane - Credit Suisse

The overall Financial Solutions revenue increased 3.2%. That was a little bit better than we had expected. Should we continue to see that kind of strength in that segment?

Mike Hayford

I’d say year-over-year second quarter we’re not expecting that simply because of the comparison to last year. You know we were pleased with the growth. I think we’re still looking at third and fourth quarters as we bring on the sales, how fast we can get them converted and turn them into revenue. So we’ll continue to watch that and see if we can keep that trend going, but that’s a good start to the year for us.

Bryan Keane - Credit Suisse

Two more questions, one on just the international segment. I think you guys were expecting that to be constant currency mid to high single digits. Should we still expect that for the year?

Mike Hayford

Yes, you know again that was our expectation. We still think we can get there. We’ve talked about the Santander hole, with Santander going away and Bradesco not converting so it’s a $40 million hole. We still think we can get that growth out of there and then depending on what happens with Brazil, you know we’ve got the Visa Vale business coming on. So I think we’re still very optimistic long-term on the international front.

Bryan Keane - Credit Suisse

Then finally, just on 2Q guidance I think you said low single digit revenue, about 100 basis points in margin expansion. Do you have an EPS range that you could help us with?

Mike Hayford

I think if you kind of look at the two of those you can kind of get to where we’re at, but I don’t want to get in the habit of Q to Q EPS guidance.

Operator

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

John Kraft - D. A. Davidson & Co.

Just a few clarifications left. Mike, regarding the debit transaction, I’m looking last quarter Q4. You said it was up 13%. Is that comparable to the 15% you saw this quarter or the 11%? Are we seeing acceleration or are we seeing it slip again?

Mike Hayford

We’re seeing it pick up.

John Kraft - D. A. Davidson & Co.

Going back to the conference call you had when first announced the Metavante acquisition, I think at one point you thought you could get as high as 70% cross sale growth from the Metavante acquisition. Is that still achievable?

Mike Hayford

We would say I think both companies were seeing strong cross sale as a total percent of sales, so I think FIS was 70, 75% I think and at Metavante we were in that same area of 60, 70%. So cross selling into an existing customer is always a better place to get new sales than going greenfield. So I think that’s what the 70 refers to. We talked specifically about firming up our long-term revenue growth guidance by 2 percentage points. So we had said long-term expect growth to be 6 to 9%. And rather than raising that 8 to 11, we said we’re going to stay at 6 to 9 and we think that cross sale lift of the two companies coming together will add and fill in in those ranges. And we estimated 2 percentage points a year.

John Kraft - D. A. Davidson & Co.

Is that 30% that was seen this quarter, I mean that’s just part of the way towards what you think you can get to.

Mike Hayford

Well, the 30% is specific to synergies where we’re selling a product into the other company’s base. So the cross sale total is much, much higher than that as we sell products across the board.

Frank Martire

Yes, three out of four of our sales or 75% of our sales come from cross sales or add on products into existing clients. What we were highlighting is the fact that we are seeing some now revenue synergies out of the combination, where we’re taking products that the other company did not have and selling those products into their client base. So that’s a real positive trend that we’re seeing and that we saw in Q1.

John Kraft - D. A. Davidson & Co.

And then just lastly on the Citi contract, could you give us an update on the timing of the implementation, the status there?

Mike Hayford

Again, Citi was a transaction. Citi is an inhouse customer. It’s a nice deal, because Citi is obviously a big name. But it’s not a number that’s going to move us. So we’re helping them. They’re starting the project already. We’re helping get it ready, but you’re not going to see anything move the needle in terms of our quarterly results.

Operator

Your next question comes from James Kissane - BofA Merrill Lynch.

James Kissane - BofA Merrill Lynch

Mike, could you break out what the software contribution was in the quarter? I think you had told Bryan it was up 20%, but maybe could you size the contribution?

Mike Hayford

Just a second.

James Kissane - BofA Merrill Lynch

And then since you’re looking, I think Mike you also sized the check business in your comments. Can you size the check and item crossing business combined?

Mike Hayford

That was the combined, that $120 was the combined with the paper based business. And we just gave you a little clarity there because that isn’t a secular decline. Obviously check is going down.

James Kissane - BofA Merrill Lynch

What’s the rate of decline there? Is that consistent?

Mike Hayford

We think 8 to 10% a year checks are going.

Frank Martire

Yes, that does have some kind of regional impact, but pretty traditional. You can model around 8 to 10% of decline.

Mike Hayford

So software year-over-year increase of $5 million.

James Kissane - BofA Merrill Lynch

And then any termination fees in the quarter material at all?

Mike Hayford

No, not really. Again that’s why we called it out last year. We had a very significant one of $23 and so this year we just didn’t have anything material to compare.

James Kissane - BofA Merrill Lynch

And just as the FDIC goes in and takes over banks, how are you guys faring relative to the competition?

Mike Hayford

Well as the smaller ones roll up into the middle ones, we have a stronger position we think maybe in the middle mid tier banks, so on top of the other banks up to the very large top 30 banks. And so we pick up more of those accounts from those transactions. I think as we’ve described in the past, if you lose a name, if you lose a customer and even if another customer picks up the account you still come out negative on the revenue. So I think we’ve picked up our share of the accounts and transactions, but this just the general closures are a challenge to all of us.

Operator

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

Tien-Tsin Huang - J. P. Morgan

I want to ask about the constant currency revenue growth, negative 1.8 this quarter. If I recall you got it to about flat revenue growth from a guidance standpoint this quarter. What’s the delta there? It sounds like software and professional services were some of it. What was the rest of the delta?

Mike Hayford

As we said, we came in a little bit higher than we expected. We had a softer professional services. We had the transaction side and the payment side came in strong as we discussed. So quite literally across the board, PFC, FIC, international wasn’t quite as strong as the other two but we came in higher than we had anticipated.

Tien-Tsin Huang - J. P. Morgan

And then keeping the full year guidance the same despite the Q1 beat, is that conservatism or are you expecting some weakness in some of the other businesses going forward?

Mike Hayford

No, you know we’ve got a 1 to 3% range out there. We had a little stronger first quarter start. When we talk about the second quarter it can be a little more challenging year-over-year. We’ve talked about Brazil and the headwinds that causes against our plan. So I think we’re trying to give you a realistic expectation as opposed to being either conservative or aggressive.

Tien-Tsin Huang - J. P. Morgan

Bank spending overall, I mean it sounds like software is coming through. I’m curious, based on your conversations with the banks do you think bank spending has picked up a little bit relative to what you were communicating maybe a quarter ago?

Mike Hayford

Well again, we’ve seen two good quarters of sales. I think we’ve repeatedly said the confidence in the banks, the confidence in the people we work with whether they’re on the technology side or whether they’re on the business side is much stronger today than it was a year ago. And we’re seeing some of that kind of come through as a trend. Again, we’d like to continue to watch and see if banks are turning back, to what level. But we’re encouraged by the last two quarters, at least where we stand today.

Tien-Tsin Huang - J. P. Morgan

And then on the software in terms of again, do you think you’re taking some share there from a competitive standpoint? Or is it really coming from your install base?

Mike Hayford

I don’t know if we’re taking share. We’re winning our share of the deals. I think we’re doing maybe a better job winning, taking share in the Top 100 banks on outsourcing deals. We seem to be signing a pretty good number. I think on the software side, we’re winning our share. It’s a little bit harder to tell if you’re taking away or not, but I think we’re pleased competitively with how we’ve been doing the last two quarters.

Tien-Tsin Huang - J. P. Morgan

Just on the Brazil side, the number of cards on your systems now, can you update us on the number of cards and maybe the mix? I believe there’s a lot of private label. I just wanted to make sure.

Frank Martire

There is quite a lot of private label on that portfolio. It’s about 25 million cards in general, 23, 25 million in general of processing in the joint venture today. About half of those are Bradesco related at this point.

Operator

Your next question comes from David Parker - Lazard Capital Markets.

David Parker - Lazard Capital Markets

Just wondering if you could address pricing in general. Have you seen any change over the last quarter or two, especially just on your renewals and with the mid size clients?

Mike Hayford

I think pricing continues to be a challenge for us. When you renew the core deals, you just have a longer tail. You know you’re going to be challenge price and Gary and his team work hard to make pricing and to up sell new product. But I don’t see that letting up at all. I think on the payment side, we continue to see a lot of pricing challenge, particularly from Visa and MasterCard out there. I think we feel pretty good about our product capability, but that’s a challenge. You don’t compete against Vista and MasterCard. We don’t see pricing pressures slowing down. It’s something we live with and we think we have the scale to compete in the market.

Frank Martire

We’re not sure it’s any worse than it was selling IA back when we expected to stay there.

Gary Norcross

Just to build on that, you know pricing compression is part of the business. It’s our product portfolio set that allows us to offset that by to Mike’s point bringing in more products into the renewal.

David Parker - Lazard Capital Markets

If you could address the bill payment product, just what type of growth you’re seeing with the transactions. And also just specifically the competition. We had [Nocha] that released e-bits from a pilot to a commercial product. Do you see that as competition going forward and just the rest of your competitors?

Gary Norcross

We continue to see strong growth in our bill payment channel. I think Frank referenced in the call a very nice sale in the Top 100 space of our bill payment solution. The Nocha release frankly, we’re always going to see new competitions in the payment space. We think we’ve got the scale necessary to compete and we’re rolling out new capabilities all the time as well. So we feel very good about that business.

Operator

Your next question comes from Julio Quinteros - Goldman Sachs.

Julio Quinteros - Goldman Sachs

I wanted to go back to some of the questions I think Khartik was asking about, the drivers of growth and how do we think about the health of the end market that you guys are selling into? Maybe approach it a little bit differently. If you guys stepped back today and looked at that client base, what are the priorities for spending and ultimately for the services that you guys have? What are they going to come back to the table with first and say we need a new blank. Is it a core system? Is it an ATM system? Is it a mortgage system? Where are the priorities in terms of spending as you guys talk to your clients? If you could sort of segment that between the large financials and the small ones, that would be really helpful.

Gary Norcross

I think the first thing you’ve got to do is separate between clients who are still working through economic challenges and struggling with survival, and ones who think they’ve weathered that storm and are now looking to invest in technology. So when you look at those two pockets of clients, the ones who are starting to spend and starting to look at technology improvements really across the board, whether it’s the large financial institution space as Frank mentioned, several to Top 100 wins on core processing, or even the mid tiers and smaller institutions, we are seeing quite a bit of demand on the core processing front. And I think it’s not totally surprising for us, but it is a little more demand on core processing than what we expected. So I think a number of our clients are looking to improve their foundational elements, putting in the next generation of technology to be able to take share in this market.

But we also continue to see strong demand across our payment channels as well.

Julio Quinteros - Goldman Sachs

And so those core wins sound like they were on the large financial side. What about on the small community bank side?

Gary Norcross

Well, we actually had a number of them and we highlighted two in the Top 100, we highlighted Cole Taylor in the release today, which is a nice mid tier win. We had several in the mid tier. We also had several, we had a lot of competitive take always in the community marketplace as well. So I would tell you across the board, we saw some nice wins there.

Julio Quinteros - Goldman Sachs

Does it feel to you like at this point, given just the dynamics of technology and what we’re seeing in terms of changes and everything from cloud computing to virtualization, etc., that it is sort of trickling all the way through and perhaps forcing guys to start thinking about if we really want to be effective going forward, we need better legs to stand on which means the core has to be kind of looked at finally, or is this still a little bit too early to start beginning to think that way?

Gary Norcross

Well, I think to Mike’s point we have two strong quarters of sales. Obviously we want to continue to monitor it and see if these trends continue. But I do think in general financial institutions, after they’ve come through this economic crisis the ones that have come through it are taking a very hard look at their technology and wanting to improve their infrastructure and technology layer so they can compete more effectively in the market.

Julio Quinteros - Goldman Sachs

And maybe just to kind of go back to the two bucket commentary, is there any way to generally put some parameters around what percentage are in the bucket still challenged versus those that have come through it?

Gary Norcross

There’s really not. I mean in fairness we’ve seen two strong quarters of sales, and as I said there’s a lot of speculation on how many institutions are going to be failed by the FDIC. But Frank’s point of you really need to talk to the financial institutions about that. We continue to serve all of our clients. I think we’re stacking up well against our competition and executing well on our sales channels at this point.

Operator

Your last question comes from Karl Keirstead - Kaufman Bros.

Karl Keirstead - Kaufman Bros.

I just had a question about the bookings [inaudible]. Two quarters of apparently good news, but it doesn’t seem to be having an expected dent in your [inaudible] and have constant currency growth rate, and I’d just like to go back to the question of why. Is it that there are offsets in the second half or are you seeing any kind of change or slow down in the rate at which new sales convert to revenues?

Frank Martire

No, again I think that we need those sales. We need them in the first quarter, because again we talked about if you looked at our plan for the year, our numbers ran up in the third and fourth quarter. And so we expect that to be as I said six to nine months to bring those sales on board, to start to book revenue. We get a portion of it that we booked in to revenue if its software related and special services, but a lot of the business is a conversion process. So I think it’s going forward as we expect. We obviously have the impacts of consolidation and in this case some of the FDIC actions, and we have the impact of pricing. So as we map that together, we’re right where we want to be. We’d like to see as we’ve said sales continue for some more quarters and get a ramp built up going into next year. So Karl, I think it is reflected in our forecasting in our budget for the third and fourth quarter and so into 2011.

Mary Waggoner

Thanks everyone for joining us this afternoon. Please feel free to give us a call should you have any additional questions.

Operator

Ladies and gentlemen, this conference will be available for replay beginning today at 7:00 PM Eastern running through Tuesday, May 11 at midnight Eastern Time. You may access the AT&T Executive Playback service by dialing 800-475-6701 and entering the access code of 152477. International participants should dial 320-365-3844 with the access code of 152477. Once again those numbers again, participants within the United States please dial 800-475-6701, international participants 320-365-3844, both with the access code of 152477. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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Source: Fidelity National Information Services, Inc. Q1 2010 Earnings Call Transcript
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