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Executives

Kirk Larsen - Treasurer and Vice President of Investor Relations

Frank R. Martire - President and Chief Executive Officer

Timothy C. Oliver - Senior Executive Vice President and Chief Financial Officer

Michael D. Hayford - Senior Executive Vice President and Chief Operating Officer

Analysts

Greg Smith – Merrill Lynch

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

Tien-Tsin Huang - JP Morgan

Brett Huff - Stephens Inc.

Timothy Willi - Avondale Partners

John Kraft - D.A. Davidson & Company

Kartik Mehta – FTN Midwest Securities

Metavante Technologies, Inc. (MV) Q2 2008 Earnings Call July 28, 2008 8:30 AM ET

Operator

Welcome to Metavante Technologies quarterly conference call. I need to remind everyone that today’s conference call is being recorded. Later in the call we will open the lines up for questions. (Operator Instructions) At this time I would like to turn the call over to Kirk Larson, Metavante Technologies' Treasurer and Vice President of Investor Relations.

Kirk Larson

Our results were released earlier this morning and have been posted into our website at www.metavante.com. A webcast of the audio portion of this call and all the charts that we reference during the call are available on that website. They will remain there for the next month. With me today our Frank Martire, President and Chief Executive Officer; Mike Hayford, Chief Operating Officer; and Tim Oliver, Chief Financial Officer.

Our agenda includes opening remarks by Frank and then Tim will review the second quarter results for 2008. We will leave ample time at the end of the call to take your questions and ask that you self-limit to two questions to allow broader participation. As a reminder our comments today will include statements related to the expected future results of Metavante and are therefore forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Our actual results may differ materially from our forecasted projections due to a wide range of risks and uncertainties that are described in our earnings release and detailed in all of our SEC filings. In addition to customary GAAP measures our presentation also includes certain non-GAAP financial measures. All information should be read in conjunction with our SEC filings.

With that I will turn the call over to Frank.

Frank R. Martire

I will keep my remarks brief to make sure that we leave plenty of time for Tim to walk you through the quarter and then to take your questions.

Our second quarter was very much a repeat of the first quarter, solid results that sustained the momentum we have built over the last several quarters. Revenue growth in the quarter was 7%, a strong result, even when considering the comparison to 2007’s slower start. Despite the persistence of this difficult selling environment that we began describing in late 2007, strong sales success in 2007, that came on line this year, plus adoption growth in our payment business, drove the strong results.

And importantly, the growth was balanced. Both our Financial Solutions segment and our Payment segment contributed similar rates of growth. And the two acquisitions we completed earlier this year added about a point of growth to our reported results.

Profitability was also strong. The combination of our leveragable businesses model and the success of last year’s cross actions at our image business drove operating margins higher by a little more than one half a point.

We expected our first half to benefit from seasonal strength and from a profitable revenue mix and it did. We are off to a good start but we are only at the mid-point of the year. We still have external challenges and we still need to execute well.

Duplicating our performance in the second half of 2008 will require success in selling both software and professional services in a difficult environment for our clients. We are carefully monitoring banks’ capital budget plans, their critical projects, and their spending decisions in this difficult environment. It presumes typical transaction volume growth and seasonality that could be impacted by consumer confidence and spending patterns and it requires further efficiency gains and volume leverage.

We are then reiterating the guidance that we provided 90 days ago. We are pleased with the first half results. As we shared previously, the second half of 2008 holds more uncertainty for Metavante and therefore, we think that maintaining our existing ranges strikes the prudent balance of the confidence inspired by the strong first half results. We are cautioned about the challenges our clients are facing and the current economic environment facing us.

In this tough environment it is more important than ever that we remain focused on what is and has always been most important, and that is taking care of our clients. To that end we are developing new products and capabilities to make them more successful. We are improving integration across our platform to make it more efficient. We are enhancing our client-focused organization to more effectively service and to sell to our clients. And we are attracting and retaining the very best people to help us get all of this done. And as we have shown, when we get all these things right, the financial returns will be there.

With that I will turn the call over to Tim so that he can walk you through some of the details.

Timothy C. Oliver

As Kirk said, my comments today will reference the charts provided on our website. These charts summarize the data provided as attachments to the earnings release and add some analytics. Since Kirk has already reviewed the cautionary language on both Safe Harbor and Reg G, I will move straight to Slide 1, it’s entitled Q2 Results: Summary.

Walking down the P&L on that page, revenue in the quarter was $425.0 million, an increase of 7% compared to last year’s second quarter. Organic revenue growth was 6% and can be attributed to increased volume in the payments transactions businesses and higher professional services activity.

The acquisitions of Nomad Payments Ltd., in the U.K., and RepayMe, which both closed earlier in the year in the first quarter, and are both now a part of the PSG segment, added about a point to total growth.

Segment operating income was $118.0 million, up 10% from last year. I will provide some color on the sources of margin expansion when I get to the segment detail.

Corporate and other costs were $26.0 million, basically flat with last year. As you know, this line is a collection of a number of uncorrelated and hard-to-model items that go in both directions, such as valuation adjustments for certain investments, incentive compensation, and various other items. There are a lot of puts and takes in this quarter but the net of these items resulted in an amount that was not only flat with last year, but was also very similar to Q1.

Intangible amortization was up slightly due to the additional intangibles that we added to our balance sheet with the acquisitions I spoke of earlier.

Interest expense increased $19.0 million from last year, due entirely to our new, more leveraged capital structure following our separation from M&I.

The tax rate you will calculate is about 37%, which is higher than the year-ago rate but lower than our first-quarter rate. The rate was higher than the second quarter of 2007 as a result of the expiration of the research and experimentation credit. The rate was lower than the first quarter due to a true-up of the R&E credit amount from 2007. Our modeling assumption is, to be clear for the full year, it remains at 37% and reflects our expectations that the R&E tax credit will again be approved in Washington for the tax year 2008.

And finally, our share count for the quarter is 120.0 million shares. The resulting math generates GAAP EPS of $0.31 a share and cash EPS of $0.36 a share. EPS was about $0.02 better than our expectations, with about half the difference coming from operations and the other half coming from items below the line, like interest expense and taxes. Compared to the first quarter of this year, EPS also improved by a couple of pennies, with lower interest and lower tax rate offsetting a less favorable revenue mix.

Moving to Slide 2 entitled Second Quarter 2008 Net Income Walk. This slide is a graphical depiction meant to provide you some context in thinking about net income relative to our prior year results. This chart starts with GAAP reported results in 2007. The next two red bars and the one green bar size the impact of things that are unrelated to operational performance and complicate comparison. They include the higher interest rate related to our more leveraged post-[inaudible] capital structure, the effect of the 37% tax rate compared to 35% last year, and the absence of the transaction costs related to our separation from M&I that were incurred in the second quarter of 2007 and obviously did not recur in 2008. After considering all these adjustments, you will calculate an improvement that approximates 21%.

Moving to Slide 3, titled Q2 Results: Total Company. This shows revenue and adjusted EBITDA for the trailing five quarters. The chart on the left depicts a steady upward trend in revenue. As I described earlier, revenue in the quarter was up 7% compared to the second quarter of last year. Excluding the effect of acquisitions revenue would have been up 6%.

The EBITDA chart on the right shows a similar upward trend with the one outlying data point being Q3 of last year. That point of aberration will become important when we discuss calendarization and outlook in a little bit. EBITDA for the quarter was up 9% compared to the second quarter of 2007.

Moving on to the next chart, titled Q2 Results: Financials Solutions Group. This shows the trailing five quarters of revenue into segment operating income for FSG. Revenue at FSG increased 6% compared to the second quarter of last year. Segment operating income decreased 7% compared to the second quarter of the prior year, resulting in margin contraction of 3.2%. This result is very similar to Q1 and really, the decline in operating income can be attributed to revenue mix, price, and planned increases in discretionary spending for new product development, which all combined, more than offset the benefit of the higher revenue.

Moving to Slide 5, Q2 Results: Payment Solutions Group, provides the same data for the other operating segment. PSG’s revenue increased 8% compared to last year’s second quarter. This revenue growth can be attributed to stronger demand from seasonal customers around the tax season, higher payment transaction volume in general, and the recent acquisitions of Nomad and RepayMe. Segment operating income increased 20% compared to last year, resulting in a very strong margin expansion of 2.9%. It can be attributed to two things. First, the benefit of action taken in the second half of last year to improve the cost structure and performance at our image business, and the operating leverage that accompanies strong growth in all of these businesses.

Slide 6, titled Free Cash Flow Walk, summarized the drivers of our $83.0 million of free cash flow through the first half of 2008. We are showing this metric year to date because it is more appropriate for cash flow because it is a zero-sum metric and is subject to timing effects that can distort things particularly in any 3-month period. In this quarter, for example, some of the timing benefit we experienced in our settlement operations in the first quarter of 2008 went the other way, so that the net impact of restricted funds for other people’s money on our free cash flow calculations for the first half of the year is now about $16.0 million of benefit. Second quarter cash flow was also negatively impacted by having two scheduled federal estimated tax payments in a single quarter. As the year progresses these timing issues tend to smooth themselves out and the result is more meaningful.

Looking at first half Cash Flow Summary: The Walk, as compared to prior year, there is really only one item that needs some explanation and that is other non-cash items. The $16.0 million swing from a negative amount last year to a positive amount in 2008 can be attributed to higher non-cash stock-based compensation expense, the non-cash first store gain in the first half of 2007, and the amortization of debt issuance cost in 2008.

Capital expenditures for the first half of the year were relatively similar to the previous year level. Though our first half CapEx is below our full-year guided run rate, our CapEx budget is typically back-end loaded. We still expect spending to increase in the second half and to end the year near our original guidance of $150.0 million to $160.0 million. The net result if free cash flow of, as I said, $82.0 million, or 115% of net income.

Slide 7, titled 2008 Outlook, summarizes our current guidance, which has not changed from what we provided you on this call in April. Starting with revenue, our organic growth in the first half was somewhat above our full-year guided range and we expected this to be the case. As I said on the last two calls, the combination of a slower start in 2007 and a more linear revenue profile in 2008, resulted in easier year-over-year comparisons in the first half versus the second half. Or to say it differently, our 2008 plan has always called for higher year-over-year growth in our first half.

That said, our performance in the first half was admittedly trending toward the higher end of our 4% to 6% range. Holding this range is meant to suggest that our optimism is tempered with caution and some caution seems prudent in this uncertain selling environment. Our ability to close and to-go or to-be sold revenue, particularly in software and professional services, will determine where in this range we ultimately fall.

Moving to segment operating income, we continue to expect modest margin expansion. For the first half of the year we delivered one point of margin expansion, probably slightly more than our definition of modest.

Our diluted earnings per share range of $1.15 to $1.20 and cash EPS range of $1.36 to $1.41 are the same ranges we communicated 90 days ago. Through the half-way point of the year, we are half way to the high end of each of these ranges. And we still expect free cash flow to be at least to net income.

While we don’t give quarterly guidance, I would like to give you some color on calendarization for the remaining two quarters of this year. Sequentially our third quarter is typically the year’s toughest quarter due to its lack of any national seasonal lift of volume, like the impact of tax seasons on Q1 and Q2 or the impact of holiday shopping and typical capital budgeting in Q4. And the comparison to last year’s results will be particularly difficult, especially on the earnings line.

If you remember, in Q3 of last year not only did we benefit from about 75% of the total of all termination fees we experienced in 2007, but we also benefited significantly from the reallocation, or true-up, of expenses between us and our former parent as we got ready to separate. The aggregate impact of these two items is about $10.0 million pre-tax.

Our fourth quarter, on the other hand, tends to be a strong quarter but it is reliant upon software and professional services sales, which as I just discussed, we are cautious about.

That concluded my prepared remarks. I thank you for listening. I think we have addressed many of your questions but I suspect we haven’t answered them all so I would ask the operator to launch the Q&A portion of the call now.

Question-and-Answer Session

 

Operator

(Operator Instructions) Your first question comes from Greg Smith with Merrill Lynch.

Greg Smith – Merrill Lynch

Can you talk just about the new failed activity in the quarter? Any way to comment or whether or not it was kind of in line with internal expectations?

Michael D. Hayford

When we were preparing for the call we went over and looked at what we’ve done year-to-date and even though we continue to hear and are cautious about the future, our success in the first and second quarter is consistent with expectations. It’s also very consistent with what we saw last year, so obviously our revenue has held up pretty strong, a little above where we expected it in the first half. And equally so, our sales have been pretty strong as well.

So we look at that as we say sales have probably outperformed what you hear in the market in terms of the noise and we continue to be a little cautious on the outlook but the teams are out there banging down the doors and we’re doing okay.

Greg Smith – Merrill Lynch

So really, because we hear a lot of caution from you, yet the numbers continue to look pretty good, correct me if I’m wrong, the message is you guys continue to actually perform pretty well and in line with at least your internal expectation, and the caution is just regarding the fact that things could get weaker, not that you’ve seen that yet, is that a fair way of thinking about it?

Timothy C. Oliver

Yes, that’s very fair. To be clear, we have not seen anything change in the last 90 days that would suggest that some decline is imminent. We listen to the same things that you all do and read the same papers you do and we just think it’s prudent to be cautious.

Greg Smith – Merrill Lynch

And what about the acquisition environment? We continue to look for you guys to maybe be doing a few more acquisitions here or there. How is pricing looking, what’s available, can you provide some commentary around that?

Michael D. Hayford

We talked about this the last couple of calls and I think what we said is the availability or the number of deals in the market continues to be high. I think our concern has been pricing expectations have also tended to be high. They tend to be maybe tied to the market 6-12 months ago, in terms of expectations. I think we’re starting, hopefully to see a little bit of movement. Again, the activity is very high. We’re obviously very interested, very focused. We believe we have the infrastructure and platform to do the deals as well as to integrate them and move successfully forward. So, we’re looking and we hope to get something, I guess, this year.

Frank R. Martire

We are going to stay in the market. I don’t know if you would use the word aggressive, but we are clearly going to be there. But we’ll always be prudent about what we do.

Operator

Your next question comes from David Koning with Robert W. Baird.

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

I guess first of all, if we look at the banking environment right now it looks like the toughest in several years and yet you put up very solid results. I’m just wondering if we did see a more stable environment over the last year or so, how much faster do you think growth would be? I’m just wondering if it even matters that much?

Michael D. Hayford

It’s actually a good question. We’ve talked historically and it’s very true even today, our biggest determiner of organic growth is not the revenue we’re bringing in the door, because that’s been fairly consistent and continues to be consistent. It’s more driven by the number of clients we loose due to the consolidation of the industry.

So one of the slight benefits of the market right now is there hasn’t been as much consolidation and I think that’s helped us. Our sales have been consistent, 2008 versus 2007, versus 2006. We’ve been very pleased with our sales. I don’t know if I could say if the banks were doing better we would be driving a lot more sales.

I think we talked last year about 1 point, 1.5 point, in terms of current year revenue. If how we would hold through this year in terms of software, personal service type activity. But as you know, the large bulk, high-80% of our revenue is recurring and it’s very much tied to the things that open the door so we have a strong stable business which does well in difficult times and probably won’t blow through the doors when the banks are having good times. So I think it has served us well.

Frank R. Martire

You know, I obviously concur with all Mike’s points, Dave, but a stable and a growth environment is a good thing, right? So without quantifying that, obviously that would be a nice environment to be in. We’re not quite there right now.

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

And then secondly, you answered a little bit on the M&A environment and with the kind of bankruptcies that could happen over the next year within the banking industry, how could that affect your business? What are the mechanics of bankruptcies, relative to just a typical M&A transaction, on your business?

Timothy C. Oliver

Well, bankruptcy vis-à-vis our client base, the banks that would go under or be taken over by the Fed, which we’ve seen a handful, to the extent that those are our clients, effectively it just shifts the ownership of who’s paying Metavante. So, we still would be doing processing for those institutions for them to serve their clients. We would be getting paid under our contract. And we’ve seen that happen in the past. We have no reason to expect that that wouldn’t happen going forward. So on the client side, again, it’s a service we provide that even if a bank has difficulty or gets taken over, we are going to continue to provide that service.

On the M&A side, again, I think we’re seeing the market loosen up a little bit. You know, we’ve talked for years, our vision, our strategy has been to provide a full service, provide an integrated suite and a broad base of functionality and we thinks it’s become more and more difficult for mono-line players to survive in this market because you can’t do that cross sell with those relationship. So our strategy has been to build a relationship at products, cross sell and grow, and we think there’s going to be some opportunities to add product mix to that over the next 12 months. Via the M&A route.

Operator

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

Tien-Tsin Huang - JP Morgan

First, on the professional services activity in the quarter, can you describe that a little bit more for us? What kind of work did you perform, how much did it contribute, and is it sustainable?

Michael D. Hayford

Well, the professional services we do is really tied to two types of work. One is when we deliver software. So for example, our image product or CSF product or the prime product, we deliver our software products to the market place. The professional service is tied to implementing those products. So those sales are generally tied to software. The other part of our professional services is really building out custom or enhancing product for a client.

We have a pretty solid professional services revenue base right now and we’ve got a couple of projects that we sold last year that came on line late last year and those are continuing to sustain us in 2008. As we look forward, part of our caution is tied to professional services around software sales, so to the extent that software sales hold through certainly fourth quarter, we’ll continue to drive very sound professional services. There is a little bit of risk, obviously, in that if the software doesn’t come through. But net-net, we’ve done a nice, solid PSO this year and we think it’s going to hold pretty solid through the end of the year.

Tien-Tsin Huang - JP Morgan

So just to be clear, it sounds like no issues of run-off that we should consider in Q3 or Q4 in professional services, absent any major changes in software sales?

Michael D. Hayford

That is correct. I think our projects and where we stand is very solid right now and, again, it’s just a little caution on the software side and a little PSO tied to that.

Tien-Tsin Huang - JP Morgan

In essence you mentioned price having an impact on margin. Can you be more specific there?

Timothy C. Oliver

I don’t think we can get too specific by product but what I would say is we come into every year expecting price compression of about 1 point to 1.5 points. And for the quarter it ran a little bit hotter than that. When we have renegotiations and extensions of contracts, depending on the lumpiness of that curve or how many take place in any one period of time, that may deviate from the 1 point to 1.5 points. But I think you will probably hear that as an explanation in almost every call that we have.

Tien-Tsin Huang - JP Morgan

But incrementally pricing going forward?

Timothy C. Oliver

In every year we come into, we expect pricing to be a mild headwind of 1 point to 1.5 points. And it’s every bit of that right now.

Michael D. Hayford

And I don’t know that we’ve seen dramatic changes in 2008 versus 2007 versus 2006. It’s a challenging market, there’s fewer and fewer providers providing service. The providers that are out there are all solid competitors so you fight to hold on to clients and you fight to get clients. So I don’t know that we would say the environment is different today than it was a year ago.

Tien-Tsin Huang - JP Morgan

Then just a quick one, Tim. On SG&A, I know you don’t give quarterly guidance, but as you called out you have a tough compare there. I think on the operating profit line, especially in FSG, should we think about that more as a sequential grower?

Timothy C. Oliver

I would. Their margin rate jumped around quite a bit last year. And you notice if you look at the trend line in the latter half of last year, depending on when buyouts sell and the rest, they started to invest some money in Temenos and their margin rates drops to look more like the rates we demonstrated in the first half of this year.

We do expect some mild improvement across the rest of the year from FSG. So, they will get a little bit more volume and they will convert that nicely. I would say that their margin rates thus far are spot on where we planned them to be for the first half of the year and we do expect a modest lift in the second half of the year. Or to say it differently, some of the pain result in the first half of the year, all of it was planned and self-inflicted. It was discretionary spending.

Operator

Your next question comes from Brett Huff with Stephens Inc.

Brett Huff - Stephens Inc.

You mentioned Temenos and I just wondered if you could give us an update on that. From what I recall is there was sort of staged development on some of that process and there might be some things coming up in the medium term that would be coming out as phases. Any update on that, or color?

Michael D. Hayford

The update consists of the first quarter the project is going well, it’s moving according to plan and then the other half of that is the selling environment and I think we mentioned that last quarter that we started to see a fairly significant shift heading into 2008 in terms of level of interest. And I would say that has continued in the second quarter.

Obviously we would like to get to the point where we’re announcing deals and talking about deals. We’re not doing that today but we’re still very encouraged by the level of interest.

The tiered question in terms of what’s coming out. You know, the customer side is where we put the focus on the project and actually that’s lining up very nicely with what we’re seeing in the market place. The first components of that are end of year delivery, heading into early 2009. So we’re at the phase now where we are very actively looking to sign a deal and then start implementing.

Brett Huff - Stephens Inc.

And just a little bit more color on what things or what pieces of software or products sold particularly well, whether it was as you expected, first of all, and then if you could give us a sense of, given banks are at least somewhat constrained right now, what are they buying?

Michael D. Hayford

Well, we had a balance across the board, year over year. We had strong sales as well as strong revenue in both segments. The things that banks are buying, again, we’re seeing a fair amount of interest in the global environment. We’re seeing a lot of interest in new products that will differentiate institutions. So, you know, the mobile banking platform that we have the partnership with Monetise is doing very well. Our health care team out there selling HSAs in the banks is doing very well. EIMC division is having a solid quarter as institutions continue to follow the transition from paper checks to electronic capture both at merchants and in branches.

We’re seeing financial institutions going back to some basics, delivering in the branch, so we’ve got some branch initiatives that are underway.

But probably more important than just the branch products is the integration of the branch, the ETN and all the back office, etc. So are seeing an across the board, banks, who despite all the negative news in terms of loan quality, are actually having some pretty good underlying numbers in terms of commercial portfolio, retail portfolio, and they are investing in those types of products.

So, as I said, year to date everything is clicking. Our cautious outlook is more just what’s going to happen third and fourth quarter. But if things hold up, we’re pretty pleased so far.

Frank R. Martire

That’s why it’s so important to us, the introduction of new products and cross selling the products that we already have today. That makes a significant difference for Metavante.

Operator

Your next question comes from Tim Willi with Avondale Partners.

Timothy Willi - Avondale Partners

I just wanted to follow-up to the previous question. Maybe you could elaborate a bit more about how you perceive the overall health of the community banking industry. I mean, obviously you can pick up a paper or watch a news report and think that it’s going to implode and half your customers are going to go away, but if you draw on your experience over many cycles, is this significantly different or worse than other environments that you have faced? Do you believe that some of the hype might be overdone or is it a very realistic look at what’s going to happen with the strength of the industry and your customer base?

Michael D. Hayford

I think I’m just going to qualify this with we’re obviously not the experts in economics or predicting the economic outlook for our market, for the whole U.S. But we have been pleasantly surprised by the resilience of community banks, regional banks, even to some degree the larger banks. I think our answer has always been it’s not a class of institutions, it’s the individual institutions and depending on what markets they got into over the last two to three years whether they’re having challenges.

So the fundamentals that we see in community banks continue to be fairly strong. They’re squeezed, obviously, by spread. Some of them are taking hits on their loan portfolios, but individual institutions are doing quite well and some of them are continuing to invest. And obviously the ones that are strong are continuing to look at positive growth. We’ve seen a little bit of phenomena of community banking, or commercial banking in general, being back in vogue. Some of the specialized providers aren’t competing as hard for some of the business.

So underneath all the headlines and all the negative news about banking, we’re actually feeling better about it and feel it’s a little bit stronger than maybe the news. Again, outside the asset portfolios, which we can’t really judge. All that has coming into the backdrop what happens to the economy. So if the economy worsens, then I think all bets are off. The banks are going to continue to take hits on their loan portfolios and that might have more of a negative impact on it. But so far we’ve been pleased.

Frank R. Martire

I couldn’t agree more. You know, if you look at it, it’s just a difficult time in the banking environment. I’m stating the obvious. But they’re going to work their way through it and we have confidence they will and we will continue to grow together.

Operator

Your next question comes from John Kraft with D.A. Davidson.

John Kraft - D.A. Davidson & Company

Your results are certainly encouraging as is the commentary that things don’t appear to be getting any worse so I guess this is more of a hypothetical. Obviously you talked about the areas of potential weakness would be license. But what about as far as the sizing of your bank customer base, are you particularly worried about the larger banks, given their exposure to some of the riskier loans out there? How does that affect your opportunities?

Michael D. Hayford

Again, it’s hardly going to take the size of the bank, obviously some of the larger banks and some of the larger regional banks are the ones that have been hit the most, based on where they took their businesses over the last two or three years. But you also see some regional banks and large banks doing quite well. So without putting it into class, I think it is based on the institution itself.

We continue to see some transactional or near-term projects that might be deferred or delayed based on the environment within an individual bank. On the flip side, some of those same banks continue to look at long-term strategic initiatives and those are sales cycles that aren’t measured in days or months, are sometimes measured in quarters and years. But that activity has continued to be very strong and I think most of those institutions look at it and say they’re making a decision not for next year but a decision for the next couple of decades. And so those strategic initiatives, particularly the Temenos partnership, continue to be very active.

So it’s hard to pick by size institutions. Also we continue to look and say, again, our biggest risk to us isn’t institutions stopped buying because we haven’t seen that, we continue to see them invest, it’s more if the consolidation in the market place heats up, do we get impacted by losing clients. So that’s what we’re watching very actively.

Frank R. Martire

You know, John, as we talked about clients, too. Notwithstanding that software license sales could be impacted or deferred in the short term, they clearly talk about their strategy, where they want to be a year from now, two years from now and the products and the things they need to get there. So that has not slowed down.

Timothy C. Oliver

And to be clear, when we came into 2008 we had very reasonable, we thought, modest expectations for both profession service and software. We were aware of the market dynamics in the latter half of 2007 so we thought we made the right modeling assumptions on those two pieces of business. And our caution is not to suggest that somehow that either of those two phenomenons could dramatically impact our second half of the year. We are talking about on the margin and in our guided range, where we fall out relative to our first half performance in the second half. So it would be on the margin that those two things would impact us.

John Kraft - D.A. Davidson & Company

And then if I many follow up on the Temenos discussion, how widely do you plan, as far as your other ancillary products and services, how widely do you plan to integrate that platform and do you anticipate buying the suite of Metavante products?

Michael D. Hayford

Well, the answer to your first question is very widely so. The Temenos products will be literally plugged in to our environment and ramped with all our other products, whether it’s a front-end product, whether it’s a channel product like ebanking, all the payment products, all the back-end reporting. So extremely tightly integrated.

When we go to the market, I think the second half of your question, who’s going to buy will depend on how it’s deployed. So we will deploy it as a whole solution and in those cases I think we’ll have clients who buy many of the other wrap-around products, just like we have today. So we would expect to get multiple sales beyond the Temenos products.

In the in-house solution, or license solution, we would hope to cross sell products but I think that’s more one, or two, or three, as opposed to five, ten, fifteen cross sales. So it’s going to depend on the market place.

Operator

Your final question comes from Kartik Mehta with FTN Midwest Securities.

Kartik Mehta – FTN Midwest Securities

I wanted to find out if you see any difference in demand based on the size of financial institutions, is that having any impact on your sales or what you’re seeing going forward?

Michael D. Hayford

Not really. Depending on the institution, so you might have some institutions who are more impacted by the current market phenomena and they have pulled a few projects but we have some large clients, large institutions, who are very actively investing in the future and have not diminished those projects. We’ve got community banks adding products, regional bank. So, again, you can kind of read the banks that are struggling and you can see which ones may not be making large investments. We look at our portfolio of clients, we’ve got bank of all sizes who are continuing to spend on initiatives.

Kartik Mehta – FTN Midwest Securities

I’m just trying to better understand your cautionary outlook. I think it’s that you haven’t seen anything change in the past 90 days and I’m wondering, is your cautionary outlook just based on what we’re seeing in the banking industry because you see banks are struggling or is it because customers are now starting to tell you they might have to put off some projects.

Timothy C. Oliver

If you go back to the latter half of 2007, we said the customers started to delay projects, they started to kick the can on things that they didn’t need for next month. And that phenomenon has continued but it hasn’t worsened. And when we gave guidance for 2008 we said we were going to presume in 2008 that the market environment stay exactly the way it is in the latter half of 2007. And that’s been a very good assumption thus far in that the growth we’ve had is very balanced, it’s for the most part from a very powerful installed base and our customers are growing and transaction volumes are growing. Software sales for the year, we had modest growth assumptions for software, I think we will fall right on top of those very modest assumptions, meaning not much growth at tall year-over-year but stable software sales. And that’s exactly the way the year is playing out.

So the caution only is that we continue to make the assumption that things will not get worse. And while we’ve been right thus far, we want to make sure that if we’re wrong in the future, we told you what to be worried about. So we’ve not seen anything change in the short term, we’ve not seen anything change, really, in the last three quarters. And we’re heartened by that. But we don’t want to be the only folks who missed something. So we’ve not seen it, we’re cautious about it. And to be clear, as soon as we do see something on one of these calls, we would tell you right away.

Kartik Mehta – FTN Midwest Securities

So this is more of 2009 organic growth might end up at 4% or a little bit lower if things were to take a step downward.

Timothy C. Oliver

To be clear, we haven’t given guidance for 2009. And so we won’t go there yet. As Mike said earlier, the most important determinate of growth going into any given year is what volume we need to make up for that’s been lost through the customer consolidation. And thus far this year, that has not been all that difficult a trend. So, I would suggest that if 2009 looks a lot like 2008, from an environment perspective, then you shouldn’t be too worried about 2009 being any different than 2008. In other words, don’t jump to that conclusion yet.

I think we’ve exhausted everyone’s questions. I guess we can terminate the call.

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Source: Metavante Technologies, Inc. Q2 2008 Earnings Call Transcript

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