Fidelity National Information Services, Inc. (FIS) Q2 2008 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the FIS/LPS Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will a conduct a question-and-answer session, and instructions will be given at that time. [Operator Instructions]. As a reminder, this conference is being recorded today, August 5, 2008. I'd now like to turn the conference over to our host, Ms. Mary Waggoner, Senior Vice President, Investor Relations of FIS. Please go ahead ma'am.

Thank you and good afternoon. Joining me today are Executive Chairman, Bill Foley; and Executive from the FIS and LPS management teams. To facilitate our discussion of second quarter results, and the outlook for the remainder of the year, today's call will be divided into three components; consolidated FIS, FIS on a standalone or post-spin basis, and LPS on a standalone or post-spin basis. Bill Foley will begin with an overview of FIS' consolidated second quarter results on a historical basis. Lee Kennedy, President and CEO of FIS and George Scanlon, Chief Financial Officer will follow with the discussion of FIS on a segment and standalone basis. Then we will open up the lines for approximately 15 minutes to address your questions related to FIS. Next, we will shift to Lender Processing Services. Jeff Carbiener, CEO and Francis Chan, Chief Financial Officer, will then discuss LPS' second quarter results and full year outlook. We will conclude with a Q&A session to cover LPS. Our comments today will contain references to non-GAAP and pro forma results, in order to better... in order to provide more meaningful comparisons between the periods presented. Reconciliations between GAAP and non-GAAP results and schedules showing historical detail are provided in the FIS and LPS press releases, and are posted on the respective website. Both companies have included PowerPoint presentations to supplement today's discussion. The presentations are also available on the website. To facilitate your understanding of the FIS financial report, I'll provide a quick overview of the information provided in the consolidated release. Similar to last quarter, we're providing supplemental information to provide additional clarity. The historical or pre-spin FIS consolidated income statement, balance sheet and cash flow statements are presented on Exhibit A, B and C. Exhibit D includes additional detail on year-over-year comparisons for the quarter, for revenues, depreciation and amortization, and stock compensation expense. Exhibit E provides non-GAAP information along with the financial bridges to GAAP results, for EBITDA, EBIT, net earnings and cash flow. Exhibit F reports results for FIS, assuming that LPS had been discontinued in the second quarter of 2008 in the same format, we used for the 8-K filed last Friday, covering the prior five quarters. While we continue, I would like to remind you that some of the comments made on today's call will contain forward-looking statements. These statements are subject to the risk and uncertainties described in our earnings release and other filings with the SEC. The company expressly disclaims any duty to update or revise such forward-looking statements, including annual and quarterly guidance. In addition to being recorded, this call is being webcast live over the internet. Telephone replay information is included in today's press release, and a replay will also be available on the FIS and the LPS website. Now, I will turn the call over to our Executive Chairman, Bill Foley.

Thanks, Mary. Good afternoon, everyone and thank you for joining us today. I'll keep my remarks brief as we have lot of information to cover, and want to leave adequate time for questions and answers. FIS delivered another solid revenue and earnings growth quarter, despite continued economic volatility. Consolidated revenue increased 19% to $1.3 billion. Organic revenue, which excludes e-Funds, increased 6.8% driven by 8.2% growth in the Lender Processing Services segment, and 6.6% growth in Transaction Processing Services. Adjusted EBITDA increased 13%, and the EBITDA margin was 24.8%. Adjusted net earnings from continuing operations was $0.66 per diluted share, an increase of 15.89%. The strong performance of both businesses demonstrates the strength of our operating models, and that the advantage that come from having diverse revenue streams, and a broadly distributed customer base. We're particularly pleased with revenue growth in the quarter and remain encouraged with new sales and renewals, and a healthy sales pipeline. While the margin was negatively impacted by the revenue mix, declines in certain mortgage origination services, and higher corporate expense, we expect profitability to improve as we continue to build scale and focus on reducing our cost structure. Lee and Jeff will provide more specific details regarding the second quarter performance and the outlook for each of the businesses later in the call. In the quarter, we repurchased 5.8 million shares for a total cost of $226 million. The remaining authority under the current authorization is $24 million. Before I turn the call over to Lee, I'll provide a review of our strategic initiatives. As FIS completed the sale of Game Cash on April 1, on July 14, we announced the sale of the Australian Check business, which we expect to complete in the fourth quarter. Lee will provide an update regarding the domestic retail from risk management business, later in the call. Recently, we successfully launched the Lender Processing Services as a new public company, and we're off to a great start. LPS recently announced the acquisition of the McDash Analytics, which complements our existing portfolio of data and analytic services. Both FIS and LPS are performing well in this very challenging environment. And we expect that trend to continue, having reaffirmed guidance for the remainder of the year. Now, I'll turn the call over to Lee for a review of FIS' second quarter results. Lee?

Thanks, Bill. Good afternoon, everyone and thanks for joining us today. I'll begin today's FIS business review with a summary of second quarter results, continue with an update on key business initiatives, and finish with comments on our outlook for the reminder of 2008. George Scanlon will follow me, with the second quarter FIS financial report. Jeff Carbiener and Francis Chan will conclude today's prepared remarks, with a review of LPS operating results, and the outlook for the remainder of 2008. TPS second quarter revenue increased 26.6% over prior year. Excluding e-Funds, organic revenue increased 6.6%. EBITDA increased 26%, and the EBITDA margin was 24.9%. Second quarter term fees were $9 million below prior year. Excluding term fees, organic revenue grew 8% and the EBITDA margin increased 90 basis points over prior year. Term fees for the first and second quarters were $2.2 million, compared to $14.8 million for the same period last year, demonstrating excellent retention of our customer base. FIS adjusted net earnings came in at $0.36 per diluted share. The strong organic revenue growth was driven by 34.2% increase in international and a 4.5% increase in IFS, our community institutions business, partially offset by a 7.3% decline in EBS. The strong increase in international revenue was skewed by excellent new sales in Europe, with Middle East and Asia-Pacific. Our Brazilian card processing operation also generated excellent growth. This was the first full quarter of processing for ABN which converted to our base 2000 platform in late March. The organic growth rate of the Brazilian card market remains very strong. Bradesco and ABN added over 2 million new cards during the quarter. This record increase was in part driven by a significant increase in new account issuance by ABN following its successful conversion to our new Brazilian card platform. As of the end of the quarter, we were processing for 27 million cards, about 50% of which are active, which is well ahead of plan. Enterprise banking solutions revenue declined 7.3%, compared to prior year, which was in line with our expectations. The decrease was driven primarily by an $11 million year-over-year decline in software and professional services related to the completion of the first phase of the BoA touch point project and lowered check risk management volumes. Net of these two items, EBS core bank processing revenue was neutral to prior year. We expect year-over-year EBS growth rates to improve as comps moderate in the second half of the year. Overall, FIS achieved solid organic growth across all major core and payment processing channels. Our community in international business continued to generate solid new sales with long-term contracts. The vast majority of our core processing and payment services contracts are multi-year resulting in over 86% of our total revenue being repetitive and reoccurring. Our outlook for bank technology spending has not changed from the first quarter. Our sales pipelines are still strong and with the exception of longer sale cycles for some of our U.S. software products; all product lines are generating excellent solid new sales. We are encouraged with the strength of our overseas businesses. During the quarter, we signed significant core processing deals with three leading global banks including Government Savings Bank in Thailand, National Bank of Pakistan, which is Pakistan's largest Bank, and Augsburger Bank, which is one of Germany oldest and largest direct banks. Second quarter U.S. sales were also strong. During the quarter, we signed comprehensive core processing agreements with Commerzbank, which has an asset base of $50 billion, a New York Community Bank which has assets of $30 billion and is the nation's fourth largest thrift institution. New York Community Bank, which will convert its three holding company banks to a single FIS core processing solution, is currently operating on three different competitive core processing platforms. All the five core processing fields covered today with significant competitive wins for our company. The integration of e-Funds remains on schedule, and we're making good progress in achieving $35 million in cost savings for 2008. We're also on track to achieve $65 million in cost synergies by the end of 2009. Our e-Funds prepaid card business is performing well, and is now profitable. We've make good progress in boarding new customers and we are in the process of converting American Express' prepaid card portfolio to our operating platform. Overall, e-Funds is meeting our expectations, and we are confident that the acquired new product capability and increased scale has strengthened our competitive position. We continue to focus on improving overall operating efficiencies and reducing capital usage. The new organization structure implemented earlier this year has enabled us to better leverage sales, support, and development resources, across business unit lines and geographies. It has helped us close sales that we might not have closed in the past. Commerzbank and New York Community Bank are good examples of this. It has also enabled us to reduce and better leverage capital spending. Second quarter capital expenditures totaled $52 million, compared to $75 million in the first quarter. Year-to-date capital expenditures are tracking in line with our full year guidance, which was a 10% improvement over prior year. Before I turn the call over to George, I'll provide an update on the strategic review of our retail check business. The sale of our gaming business was completed on April 1st, and as Bill mentioned, we expect to complete the sale of our Australian check risk management business in the fourth quarter. We have completed the marketing process for our remaining check risk management business. This business generated approximately $275 million of revenue in 2007, and is expected to generate $260 million in 2008. Although, it reduces our overall growth rate, it generates smarter margins, good EBITDA and requires low capital investment. While we were encouraged with the strong interest in this business, the offers received were substantially less than what we believe the business is worth. As a result, we've decided that the sales at this time would generate more earnings dilution than we are willing to accept. Therefore, we will continue to operate the business for the foreseeable future and we will revaluate our options when market conditions improved. We are pleased with the progress that we're making in our domestic and international businesses, and especially with the success that we're having in increasing the organic growth rate and cash flow of our company. Although it is clearly a difficult market, the significant new sales wins covered today provide additional visibility into 2009 and demonstrate that our sales, product, and development teams are performing well and that there is continuing solid demand for our product and services. Based on what we know today, we remain confident that the revenue and pre-tax earnings guidance communicated at our May investor day. Although we are pleased with the strength of the second quarter results, the market remain challenging and we are not prepared at this time to increase our revenue and pre-tax earnings guidance for the remainder of the year. I will now turn the call over to George for the second quarter financial results. George?

Thank you, Lee and good afternoon everybody. As you know, we successfully completed the spin-off of LPS on July 2. We are acquired under accounting and disclosure rules to report LPS in our continuing operations at June 30th, which as the numbers reflected in the press release. As both companies are now operating independently, we also wanted to provide additional information to set the new foundation for understanding FIS operating results on a post-spin basis. Last Friday, we filed an 8-K to provide investors with a pro forma look as FIS assuming LPS was treated as a discontinued operation to the prior five quarters. Because the rules for discontinued accounting in the assumptions used in the carve out of LPS in our investor day presentations, we also provided a reconciliation back to the information we shared with you that day. The principal differences relate to the treatment of interest and corporate expenses, which are not fully allocable to discontinued operations and remain with FIS through June 30th. The slides I will use today to discuss our quarterly performance will be based on the assumption that LPS is treated as a discontinued operation for the quarter ended June 30th. We recognize the complexity of our reporting this quarter. We are hopeful that the information we provide will improve you understanding of FIS on a post-spin basis and unable you to improve your analysis. As Mary mentioned, similar to last quarter, we're also providing slides to better enable you to follow my commentary. These slides are available on our website for easy reference. I'll start with a couple of housekeeping items on page four. Consistent with our first quarter earnings report, Property Insight, which was sold in the third quarter of 2007 and three businesses sold or discontinued during the first half of 2008; FIS credit services, Certegy Game Cash and Home Financial Network are in all and will continue to be reported as discontinued operations by FIS. Beginning in the third quarter, both LPS and Certegy Australia will be reported as discontinued operations in accordance with GAAP. Financial results of Certegy Australia, the sale of which is expected to close in the fourth quarter of this year, are included in continuing operations for purposes of today's discussion, while LPS results are excluded to improve comparability for the separate companies. If you not turn the page five, we will discuss the second quarter financial results for post-spin FIS, which follow the format introduced on investor day. Second quarter revenue totaled $867.2 million, which is a 26.6% increase compared to the prior year quarter. e-Funds revenue of $137.2 million was in line with our expectations. Excluding e-Funds FIS revenue increased by 6.6% over the prior year and improved sequentially from the 4.5% growth rate we experienced in Q1 of '08. For comparative purposes, my comments pertaining to segment growth will exclude revenue from e-Funds. International revenue increased 34.2% to $192.3 million, fueled by strong growth in our core banking operations and our card business. The increase in card revenue in our Brazilian joint venture was driven by conversion of ABN AMRO in late March and augmented by strong new card issuances during the quarter. Higher account volumes in our European processing operation together with increased license and services revenue in key markets contributed to the increase in core banking. IFS revenue totaled $310.6 million, an increase of 4.5% compared to the second quarter of 2007, driven by growth across all major product lines. As Lee indicated, termination fees declined by $9 million compared to the 2007 quarter, the result of decreased consolidation activity, and strong customer retention. We have been asked by some of you to discuss the magnitude of termination fees to our quarterly results, and I added footnote one to the page to illustrate the impact. During the second quarter, we only had $1.6 million in term fees, in comparison to $10.6 million last year. So, if you normalize results, and exclude the impact of these term fees, IFS actually grew an exceptionally strong 7.9% this quarter. On average for FIS termination fees, account for less than 1% of consolidated revenue in any given year, and totaled $18.9 million in all of 2007. To date through June 30, we have realized only $2.2 million year-to-date this year. Enterprise revenue declined 7.3%, to $227.4 million in the second quarter. It's important to note that aside from the $11.2 million in revenue associated with last year's Banc of America touch point implementation, EBS core bank processing and services revenue is actually comparable to the first quarter of 2008 and the prior year quarter. Year-over-year comparisons were also negatively affected, as revenue from our check risk management business declined by approximately $6 million, compared to the prior year. The corporate other revenue line is new this quarter, and is comprised primarily of the managed operations or outsourced data processing services that we are providing to Fidelity National Financial. As discussed at our investor day, this revenue stream which was included with Lender Processing Services under the previous reporting structure is now part of FIS. Moving on to EBITDA, on page six, TPS EBITDA increased 25.9% to $216.1 million. The margin was 24.9%, compared to 25.1% in the prior year quarter, and 23.6% in Q1 of this year. Progress we made in reducing our cost structure is somewhat overshadowed by the lower termination fees, which carry a 100% margin. Growth in lower margin businesses including international, which is currently running in the low teens and to a lesser degree, pricing. Excluding the impact of term fees, margins would have been 24.8% in Q2 '08, compared to 23.9% in Q2 '07. Corporate other includes corporate overhead and our IT infrastructure, which supports our operations, and those of Fidelity National Financial. Corporate overhead included in this line was $33.4 million in the Q2 '08, compared with $23.8 million in Q2 '07. The increase is principally associated with higher stock option expense, and incentive accruals as well as the impact of the Leasing Group, whose assets were sold in the third quarter of last year. For the balance of the year, we expect corporate overhead to average $25 million for Q3 and Q4. Total depreciation and amortization was $97.9 million, versus $87 million in the second quarter of 2007, and was down slightly from the first quarter of 2008. We are expecting D&A to trend modestly higher in the third and fourth quarters, above the Q1 rate, as fully depreciated yet functional equipment remains in service for a longer period of time. Our strategy of more fully utilizing existing equipment is enabling us to reduce incremental capital spending. EBIT grow 29.6% over the prior quarter, and improved from the 19.8% growth in Q1 '08. Now, on to adjusted net earnings on page seven. Second quarter adjusted net earnings for standalone FIS totaled $70.8 million, or $0.36 per diluted share, compared to $0.29 in the 2007 quarter, and $0.28 in the first quarter of 2008. As indicated, adjusted net earnings exclude after tax integration, restructuring and spin related costs totaling $24.1 million, which were relatively higher this quarter, due to the restructuring and spin-off. Adjusted net earnings also exclude after tax purchase amortization of $23.1 million. Finally, we made adjustments for interest and corporate expenses, which were allocated to LPS in their carve out financials, but under GAAP had to remain with the parent under accounting for discontinued operations. I will reconcile this for you in a few minutes when we discuss guidance for the balance of the year. Effective tax rate in Q2 and year-to-date was 32.5%. And average outstanding shares were 194.4 million. The tax rate reflects the benefit of lower international tax rates, and certain other adjustments. Tax rate for the second half of the year for FIS is expected to approximate 35%, and we're working on strategies to lower that. Moving on to the balance sheet and free cash flow; as shown on page eight; free cash flows which is defined as operating cash flow minus capital expenditures, the $102 million year-to-date 2008. Capital expenditures in the second quarter totaled $52 million. The $27 million decline compared to the first quarter of 2008, is attributable to a reduction in international, principally associated with the ABN implementation in Brazil, and a continued focus on reducing non-strategic capital investments. We anticipate CapEx to increase in Q3, associated with e-Funds integration investment, and then decline in Q4, to below Q2 levels, and expect to meet our guidance for CapEx of between $240 million and $250 million for the year. During the quarter, we paid $9.5 million in shareholder dividends, and repurchased $5.8 million shares for a total investment of $226 million. No debt repayments were made this quarter. As indicated on page nine, FIS had approximately $4.3 billion in outstanding debt at June 30, at a weighted average effective rate at quarter-end including swaps of 5.9%. Also included is the amortization of upfront debt costs. In conjunction with the July 2nd spin-off of LPS, we retired the remaining $1.585 billion in term B debt, resulting in a current outstanding balance of $2.7 billion for FIS on a standalone basis. In connection with the retirement of this debt, we will write-off approximately $8.2 million after tax in debt origination costs in the third quarter. Our weighted average interest rate after the retirement of the Series B debt will approximate 6.3%. In the third quarter, we will make scheduled debt repayments of $13 million and at September we'll also draw against the revolver to repay $200 million in notes from the Certegy merger that are maturing and carrying a fixed rate of 4.75%. Turning to page 10, before we discuss guidance for the balance of the year, I wanted to make sure we were at the same starting point. At our investor day presentation, as some of the parts analysis, demonstrated how the guidance for the separated LPS and FIS entities equaled the consolidated earnings guidance we had established earlier this year. You may recall that for FIS, we showed adjusted earnings per share of $1.23 for 2007, with an expected range of $1.48 to $1.54 for 2008. The accounting rules for discontinued operations do not permit the full allocation of interest or corporate expenses to LPS. So, FIS will reflect those expenses in its continuing operations through June 30. These expenses have been allocated to FIS in their pro forma statements that Jeff and Francis will discuss later. We need to adjust our GAAP reported numbers for these amounts. As you can see, we have reconciled back to the $1.23 for 2007 and have provided the adjustments for the first and second quarters of 2008. For comparative purposes, the correct amounts to use for 2008 are earnings per diluted share of $0.28 and $0.36 for the second quarters respectively. As illustrated on page 11, the adjusted the corporate expense, also impacted the EBITDA margin in 2007. Accordingly, the relevant starting point is 24.6%. Now, I'll discuss our outlook for the remainder of the year as presented on page 12. As stated in today's press release, due solely to a lower than anticipated tax rate, we are revising our previously reported adjusted net earnings guidance of $1.48 to $1.54 per diluted share for full year 2008, to $1.51 to $1.57 per diluted share. Our assumptions include full year organic revenue growth of 4% to 6%, to imply that year-to-date average growth continues throughout the second half of 2008. We are projecting free cash flow of $315 million to $345 million, based on the current earnings guidance, and reiterate that capital expenditures will be within the $240 million to $250 million level. This guidance excludes after-tax adjustments of approximately $30 million in M&A, restructuring and integration costs, $18 million associated with the spin-off of OPS including retaining, corporate cost of $12.6 million and the $8.2 million write-down of debt insurance cost we will record in Q3. That concludes our prepared remarks for FIS. Now, we will open the line for questions on FIS standalone results before continuing with the LPS portion of the call. Question And Answer

[Operator Instructions] And our first question comes from the line of Jim Kissane from Bank of America Security. Please go ahead.

Thanks, and good job guys. Just, George, just want to make clear that $1.23 is the right number to use for the base in calendar '07, right for continuing operations of FIS?

Yes, that's correct, Jim.

Okay because the 8-K was confusing on Friday as it relates to that. The FX benefits in the quarter, can you break that out?

Yes, we estimate that's about $20 million in the quarter and we think that will level off toward the balance of the year, but we did enjoy the benefit of the currency appreciation.

Okay. And Lee in terms of the check business, do you see it stabilizing in terms of revenue over the next year or so?

Yes, actually we do. We think we're really... the downturn is going to slow. I think the profitability will remain fairly stable. We have a number of new models that we've introduced recently, Jim. We also have a series of larger retail merchants that have accepted price increases. So all-in-all, I think it's stable enough that we can kind on hold on to it for a while, and then we'll take a good look at the market as we move forward to see what we are going to do with that business.

Okay. And just an update on the e-Funds integration and the synergies being achieved?

Jim, that's right on track. We'll have $35 million by year end and over $60 million by the end of next year. So on an cost basis, it's working out quite well. We've already realized wins as a result of the combination. We've been able to leverage existing customers on the risk management side of e-Funds and sell additional products into that base, including bill payment, including loyalty card programs, including debit card processing. So, we're doing fairly well in that respect and overall I'd say it's been a good combination and exactly what we expected.

Okay, thanks Lee.

You're welcome.

Our next question comes from the line Julio Quinteros from Goldman Sachs. Please go ahead.

I like the accent there. It's great. On the business just in general, just want to make sure one thing on the post-spin income statement presentation on page 10. Some of these numbers don't match up with the Friday...with the Friday filings, so just to make sure the only component that's different there is the change in allocation related to these interest expenses. Is that correct?

Yes, I mean that's correct, Julio. We did provide for Q1 and Q2 '08 the $0.03 related to the allocation of corporate costs.

Okay.

And than Ridged from the $0.99 to the $1.23 which was the full year effect in 2007 of those allocations.

Okay, got it. Yes, that's just helpful. And then just in terms of the just want to go back to the commentary about the pricing environment, just relative to some of the competitors that have reported as well. Can you talk a little bit about what that environment looks like? Could it get worse from here? And then just in terms of what you are expected to be the key drivers for... of the growth in the core banking business that would be helpful? Thank you.

The portfolio, the pricing to-date has been isolated to two specific product lines. It's been isolated to community bank core processing, and that's averaging the price compression on that is historically average in the low single-digit range and it continues to do that it. It also is centered around debit card processing. That's something not anything new with debit card processing, for the last ten years we have moderate price compression in that area and it's isolated specifically to transaction processing charges and processing the debit transactions, processes that surround debit card processing. And literally, have not been affected in terms of price compression at all. So figure low single-digits in that range for the debit card processing, consistent with what we've seen for a long period of time and then on the core processing side, community banks only low single-digit or so.

Okay. And just to kind of circle back to the first quarter, when you had a little bit of an update in terms of what you guys were seeing into a quarter. You guys took some aggressive step at that point in time to sort of help out there on the cost side. Can you just kind of give us an update in terms of whether that trend has continued and what the benefits are that we should expect to see for the rest of this year?

It actually had, it's pretty much Julio, the way it's operating today is very similar to what we saw in the first quarter. It was isolated to larger software licenses, larger tier 1 institutions. We think the exposure remains at about $60 million on an annual basis. And if you really back and look at the numbers on the performance of EBS this quarter, that's pretty consistent with that. And that's where the downside is. As far as the expense take out, that's on track and on target. We've taken out about $30 million worth of expense to compensate for that downturn in revenue and we've replaced that revenue to a large extent with lower... some lower margin revenue international that will ramp up as we get through... move through the remainder of the year, and then some other card processing revenue domestically, which has pretty strong margins, so the expense cuts are still offsetting the revenue run off that we talked about, the slow down on the larger tier bank side.

Okay, great. Thanks guys.

Welcome.

Our next question comes from the line of Dan Perlin from Wachovia Securities. Please go ahead.

Thanks. I want to circle back to an earlier question about the e-Funds cost synergies. I know you are still on track for the full year, but what should we be excepting in the back half or said in other way, what you guys are seeing in the first half?

It's ramped up towards the second half of the year. It took some time to get the expense out, so I think you should see a larger percentage of that in the second half of the year versus the six half or the first half of the year.

So more than 50%, you would be comfortable with?

I would be comfortable with that, yes.

And then what about other $30 million you guys called out last quarter. We identified cost savings you would expect?

Yes, that's cost savings within the operations in current businesses, within EBS and some international cost take out, some IFS cost take out and that pretty very much has been taken out already. We took... moved quickly on that so the expense cuts were made last quarter and end of this quarter and it ramps and you have an annualized number of about $30 million in cost savings just to move forward.

Okay. But the majority of that is already been achieved so we wouldn't expect that to ramp in the back half?

You'll have about... that's correct.

Okay. so we'll see more of a ramp, okay. And then the... I thought I heard you say international margins in the low teen. Did I hear that right?

Yes, that's right Dan, this is George. We did see as we said very significant growth in Brazil in the card processing operation and incurred start up costs in connection with the roll out of the ABN platform, which hurt margins in the quarter, but as you saw from the revenue, we feel very good going forward about that. But there is always some start up cost that you have to work through, in training people and getting the productivity up both from the people and the systems, and it's about a 90-day process that we're working through.

We're actually hired over a 1000 new employees in Brazil over the last six month to staff the three call centers that we operate for our client base. Surely, those call centers are new call centers that we established to prepare for the conversion of ABN and also Bradesco. So the learning curve will take a number of months to shake out, but as it does shake out and the operators and staff members become more efficient, you'll see increased leverage in our business.

And then I guess two questions on Bradesco; one is you're already processing I guess some Bradesco cards, but not 10 million that are going to be converted later this year?

Yes, we actually processing more cards currently than they'll convert in and the issuing rate is just very, very strong. It's well over $1 million cards per quarter. So we are going to start handling some of their call center activities over the next few months and move some of the activities and some of the services into Newco [ph] away from the back office of the banks, so it'll gradually start to convert the next few months and then wrap up sometime next year.

Okay. And then based on that, significant growth you are seeing in Bradesco, is there risk pushing off the card conversion to 2009?

There really isn't the growth that we have currently in Brazil is so far over what we expected that will more than compensate for any push one way or the other, a month or two of that conversion. The actual issuing rates of the two largest institutions that are currently on our system, are way, way higher than what we expected. So, we are pleased with the ramp up of volumes and the new accounts that are being added, that will keep us in really good shape.

Excellent. And then, one last question and I'll jump off. The... should we expect another accelerated stock comp charge in third quarter or should this be the last quarter? And then at the run rate that we should be looking at really the $11 million or the $13 million?

There actually... Dan there won't be an acceleration, that was associated with e-Funds options, and the actual run rate for FIS post-spin going forward, should be about $8.5 million.

Okay. So, in the back half of the year is like little over $16 million, $17 million.

That's about right yes.

Okay. So, that will come down quite a bit. And then, should we expect in the back half of the year, for there to be another adjustment for the corporate costs of LPS non-discontinued op, you had $12 million of it in the first half, does that just go away in the back half?

That does go away, and I incorporated that into my outlook when I said that we expect the corporate expenses to gravitate down to 25%.

Yes. Got it, Okay, I just wanted to make sure I understood it. Thank you very much.

You're welcome.

Our next question comes from the line of David Koning from Robert W. Baird. Please go ahead.

Yes. Hey guys, nice job. And just a couple of quick ones. I guess the tax rate for the year, looks like it'll average somewhere around the 34% range. Is that kind of the sustainable rate going forward that we should model into '09? I just want to kind of understand any puts and takes into '09 including that, and then it sounds like the stock comp is actually going to be a positive in '09, given you're not going to have that recurrence of that accelerated stock comp?

Yes, I guess two things Dave. One, we guided to a second half rate of 35%. And I think, at this point, that's the rate I would use. I mentioned that we're looking at some tax planning strategies, and the overall rate and our ability to take it down will depend on the amount of, among other things, foreign source income we've got. So, I would say at this point to use 35, and we'll update you guys in the balance of the year on that rate. But, we did enjoy a lower rate in the first half and the blended rate will be just north of 34% for the year, as we adjust it.

Okay, great. And just one follow-up, the free cash flow, it looks like it's going to be greater than earnings, it looks like the guidance is somewhere in the $1.60 to $1.80 range per share of free cash flow. Is that type of conversion sustainable going forward, meaning should free cash flow might be greater than say, over the next several years?

Well, I think if... one of the things that obviously we're trying to focus on, is lowering the capital intensity of our business and we're making progress on that. And still have more I think, opportunity. Also looking at working capital, and I think finally, strategically we have exited some businesses that were big consumers of working capital that were really hidden inside our cash flow. So, as we exit those businesses, and get that cash back into the system, I think we'll be perceived and in reality be a much more cash efficient company. But I think the answer to your question, it should be yes, it does depend on the mix of the businesses. But, overall, if we can bring the CapEx rate down to that 5% to 7% revenue target, which we talked about in investor day, we think we can sustain that.

Great, thank you.

I think we probably have time for one more question, so that we allow time for LPS.

And our last question comes from line of Greg Smith with Merrill Lynch. Please go ahead.

Hello. First on the check business, since it sounds like you are now keeping the U.S. retail check business, I mean the revenue is not actually impressive, they're falling by the amount you said. But, how do we get comfortable that the loss rates are manageable, and something won't come and bite us here in this kind of economic environment?

Well, it's all the matter of how we manage the models, and the outer ribbons that control the risk of the sale. And, we have a whole series of new models that we recently introduced and the results that we have on those models Greg are just... are very, very encouraging. We also, in addition to that, have a series of price increases that we're implementing with key major merchants, who we'll typically in the past been in the marginal position. They're now, with these price increases showing pretty significant improvements in profitability. So, the combination of those two items we're very comfortable that we're going to be able to maintain profitability in that business. The new models have a wide range of consumer attributes attached to the risk management systems that drive upon the sales terminals that we have in place. And they're proving to be very, very accurate in detecting fraud at the point of sales. So, so far so good, and it's a matter of making sure those models perform the right way, and so far, we're very comfortable, we're going to do that.

Okay. And then on the international margins, there was already some discussion on that. But, I mean, there is no structural reason, and nothing with the pricing of the business internationally, that would inhibit those margins from reaching kind of comparable U.S. margins. Is that a fair statement?

I don't think they're going to get quite to the U.S. card margins. I'll take the card business first, because we have so many cards that are operated on one system in the U.S. so you've got a whole lot of leveraging, you sell a lot of full service products attached to that to the core engines with a transaction processing and that drive those margins up. But certainly, when you look at the margins internationally, we're looking for middle double-digits somewhere in that range, maybe a little bit above, and we think that's very achievable.

Okay. And then, just a quick one to wrap up, just on, as far as the tax strategies, and if you are able to bring down that tax rate, that has a direct cash flow benefit correct? I mean, that's something that just would result all things being equal more cash flow, or on a free cash flow?

Yes, that's right. Lower tax rates are good for cash flow.

Okay. And any... do you have any kind of longer term target where that tax rate could go 2 to 3 years down?

I think as we obviously, coming out of a spin, and again I think it depends on our international growth, because we do benefit from a lower tax rate internationally. So, the first quarter or first half of the year, at 32.5 was probably lower, but we're hopeful as I said that the second half rate of 35, there is some opportunity to take that down. And then drive a sustainably lower rate over time. But, I would stay at 35 range right now.

If we have visibility into a significant number of new accounts that we recently signed that will start generating international revenue and profitabilities we move through 2009. If you add up Bradesco, when you add up Deutsche Bank, and you add up Augsburger and Pakistan and Thailand, and the ones that we recently announced, we're well over $100 million in revenue that will start to play in and feed in, as we hit 2009. So, that obviously, will be benefited on the... we will benefit from that on the tax side, because that's international business.

Okay. We will keep in our back pocket for now, thank you.

Very good. Thank you.

Thank you, I would now like to turn the call over to Parag Bhansali, Senior Vice President of Investor Relations of LPS. Please go ahead.

Thank you. Good afternoon, and welcome to the LPS portion of today's conference call. Joining me today to review LPS' second quarter results are Jeff Carbiener, President and CEO; and Francis Chan, Chief Financial Officer. Today's discussions will be based on LPS carve out financials, consistent with what was presented in the Form 10 and what will essentially be the basis for LPS as a standalone company going forward. Also, our discussion will contain references to non-GAAP and pro forma results, in order to provide a more meaningful presentation and comparison to prior period. Reconciliations between GAAP and non-GAAP results are provided in today's earnings release. This is also available on our website. We will be using a PowerPoint presentation to facilitate today's review of our second quarter results. These slides have also been posted to our website. Now, I'd like to take a minute to walk you through our earnings release and related exhibits. As you'll notice, all of the quantitative detail is in the exhibits accompanying the release, which also includes historically information. Exhibit A, B and C are the usual consolidated income statement, balance sheet and cash flow. Exhibit D includes supplemental financial information, with current and trailing five quarters for revenue, including segment level data, depreciation and amortization, capital expenditures and stock compensation expense. Exhibit E provides non-GAAP financial information, along with the financial bridges back to GAAP results for EBIT, net earnings and cash flow. Also, as you may know, we've 8-K last Friday, that provided historical LPS carve out information by quarter for the nine quarters, starting with first quarter 2008, going back to first quarter of 2006. This combined with a historical annual information in the Form -10, will provide you with extensive detail of LPS financial history. This expanded disclosure and presentation should facilitate your analysis and make it easier to understand the LPS story. Before I turn it over to Jeff, I would like to remind you the some of the comments made on today's call will contain forward-looking statements. The statements are subject to various risks and uncertainties describe in our earnings release Form 10 and our other filings with the SEC. The company expressly disclaims any duty to update or revise those forward-looking statements including quarterly and annual guidance. With that I will turn the call over to Jeff.

Thanks Parag, and good afternoon. I'll will begin with the review of second quarter results including an update on our key business initiatives and will conclude with the outlook for the remainder of 2008. Francis Chan will follow with the detailed review of the financials. We are off to a solid start of the standalone public company. As you all know, LPS was spun off from FIS on July 2nd 2008, and while it entailed a significant amount of effort from many employees, the transition was smooth and virtually seamless. Operationally the LPS business is already ran autonomously; and from a corporate function standpoint, we have made all the changes in realignment necessary for us to operate as a standalone company. We are very excited about the prospects that lie ahead and our focus on enhancing shareholder value. Before I review the financials, I would like to note that while the broader economic environment is sluggish and the mortgage market in particular challenging, LPS is uniquely well-positioned to offer solutions to lending institutions to help them through this period and in fact enable them to realize much sort after efficiencies and cost savings. We are very pleased with our second quarter, and year-to-date revenue growth as consolidated revenues grew 8.3% during the quarter, and 10.5% year-to-date driven primarily by continued strong performance in default services. Operating income growth was 8.7% for the quarter and 12.5% year-to-date resulting an operating margins of 23.7% for the quarter and 23.5% year-to-date, which is the 40 basis points improvement over the last year. The growth in operating income was the primary contributor to the increase in adjusted earnings per share to $0.61 for the quarter and $1.16 year-to-date. The financial performance in the second quarter and year-to-date was in line with the expectations and trends discussed during Investor Day and subsequent road shows. Our revenue growth continues to be impacted by accelerating foreclosure activity and stable loan servicing accounts, which more than offset the impact of declining year-over-year origination and refinance volumes. Additionally, revenue growth was influenced in the current quarter by the annualization of a large appraisal contract signed in the second quarter of 2007, and another large customer that shut down its wholesale lending channel during the quarter. Although our operating margins are up for the year, they were flat in the second quarter as the positive margin impact from growth in default services was offset by margin contraction and a few of our origination base services. Specifically, volume declines drove margins down in our tax, flood, and the 1031 exchange businesses; and high margin loan originations offer sales were down during the quarter as would be anticipated in the current environment. We expect origination volumes to stabilize in the later part of 2008, which should have a positive impact on all our origination based services. While we are pleased with top and bottom-line results, as I noted earlier, we're dealing with difficult marketing conditions. Our results, however, reflect the strong balanced model that we able capitalizes on opportunities regardless of market conditions. Moving on to review the business segments, starting with technology, data, and analytics or TD&A. While TD&A revenues were essentially flat year-over-year and MSP we continue to resign all major customer contracts as they come up for renewal. Thus far in 2008, we have successfully renewed seven contracts representing only 12 million loans including our top two customers. We also continue to win new business with the signing of American Home Funding and Fannie Mae, and we successfully completed the conversion of Chase's subprime portfolio in early July. This conversion was a major milestone in the process to convert the larger Chase prime portfolio in mid 2009 and was viewed by the customer as a very high quality implementation. In our other TD&A services, strong demand continues for our work flow automation system or desktop as we signed agreement that should build more than $20 million in annualized revenues, once all services are implemented. Additionally, as I mentioned earlier, although sales of loan of origination platforms slowed in the first half of the year. We have begun to see some of improvement and recently signed a top tier bank to our power platform. The sales pipeline and TD&A remains strong with numerous opportunities in MSP including a number of first mortgage opportunities and a growing interest in utilizing MSP to service HELOC portfolios. Outside of MSP, we continue to see strength in the desktop sales pipeline driven by continued opportunities and foreclosure and REO as well as opportunity to expand desktop platform into the other areas in the lender servicing operations. In our data and our analytics areas, we recently announced the acquisition of McDash and the consolidation of all data and analytical services into one operating unit called the Applied Analytics. Lending institutions have indicated a strong desire for analytical and predictive to not only help with risk management, but with refining operational processes like loan underwriting. Our new capabilities and organizational alignment will better position us to leverage those opportunities. Moving on to other major segment, loan transaction services or LPS revenues for the quarter were solid 14.4% above last year. The business segment, loan facilitation services, which includes our origination and refinance related services had revenues to decline inline with the genera market decline. We continue to remain optimistic about the market beginning to stabilize later this year and into 2009. And while this is difficult time in the market to transport outsourcing and centralization of underwriting continue, and we remain well positioned to gain additional market share and drive greater product penetration, and usage of services within existing customers. Specifically during the quarter, we signed agreements to expend the services provided to regions financial, and to provide new services applied to our wholesale. Of all services more than made up the decline in loan facilitation services, as revenues grew 89.7% compared to last year, driven by strong growth and co-curricular activity and increasing demand for our services that support all activities over the foreclosure and REO lifecycle. Clients in this environment are constantly evaluating the scope, time line and economics of managing services in the default area and our comprehensive suite of default management services enables us to manage the outsourcing of these services and deliver meaningful efficiencies to our customers. Additionally, by leveraging our market leading positions in desktop and for closer services and the type integration of our other services like default title and REO management into our core technology platforms, we have continued to expand our market share across all of our default product lines. Specifically during the quarter, we signed a number of agreements including new or expanded default title agreements with three of the nation's top lenders. Bottom line: our ability to enable customers to complete services more easily, quickly, and less expensively creates a win-win situation. LPS has them and continues to outperform essentially all market metrics in the mortgage and real estate space. We remain focused on our key growth drivers and the favorable market dynamics such as the continued life of quality, the need for lenders to lower internal costs and the movement by lenders towards centralized lending. These dynamics combined with our market leading products position us well for continued growth. From a guidance stand point, we are reiterating 7% to 9% revenue growth in 2008. Additionally, we expect continued increase in foreclosure activity over the foreseeable future, stabilizing origination and refinance activity in late 2008, mortgage share gains and existing products, and continued expansion of our technology and plot capabilities to support an annual growth rate of 6% to 9% from long-term prospective. From the segment view, while we expect revenues and TD& A to be late in 2008, we also expect to see long-term growth rate, return to historical levels beginning in 2009 and beyond. This is based on continued mortgage share gains by existing customers, a strong pipeline of first mortgage and HELOC MSP prospects, significant opportunities and desktop data and analytics, and other TD&A services, and large conversion such as the Chase prime portfolio and Wachovia's HELOC portfolio currently scheduled for conversion in the late 2009 or early 2010 timeframe. In LPS, we expect strong growth trends in default to continue to offset weakness and loan facilitation revenues streams and drive growth in the low to mid teams for 2008. Additionally, the long-term origination refinance and default trends, and expected market share gains I mentioned earlier should support solid long-term growth in LPS. As we noted in prior calls, challenges in the mortgage industry continue to represent significant opportunities for LPS. It is also important to know that much of the growth in the loan transaction services businesses continues to be driven by the long standing and deep mortgage processing relationships, we have with most of the nation's top financial institutions. From an adjusted earnings standpoint, we are reiterating the guidance we gave at our investor day in late May. However, given a lower share account, this translates to $2.36 to $2.48 per diluted share as opposed to the earlier adjusted EPS guidance of $2.34 to $2.46 per share. Before I turn the call over to Francis, I want to emphasis again that LPS is well-positioned to not only weather these challenging times, but in fact benefit from them. Our strong market position in each of our businesses, combined with our balanced portfolio, should allow us to grow profitably as the standalone company, and deliver above of average returns to our shareholders. Now, I'll turn it over the Francis, who will review the financials in greater detail. Francis?

Thanks Jeff, and good afternoon. We have slides that I'll refer to as you go through my comments. These slides have been posted to our website for easy reference. As you can see under the revenue slide on page 3, second quarter consolidated revenues increased 8.3% over the prior year. Technology data and analytics or TD&A revenues were essentially consistent year-over-year; our loan transaction services revenues grew 14.4%. Moving on to the business segments, starting with TD&A; revenue of $141.7 million for the quarter were consistent compared to last year. Mortgage processing revenues of $82 million, declined slightly, primarily due to the de-conversion of the ABN's $1.5 million loan portfolio in the fourth quarter of 2007. Average number of loans processed were $26.9 million, compared to $28.4 million in the prior year quarter. Other TD&A revenues of $59.7 million were up slightly, compared to the same period last year, mainly due to the continued strong demand for work flow automation tool, known as desktop, somewhat offset by lower revenues in the loan origination offerings. Moving onto our other segment, loan transaction services; revenues for the quarter of $322.3 million were a solid 14.4% above last year. Within this segment, loan facilitation, which includes front end origination related services revenues of $120.5 million, declined 29.6%, compared to last year, primarily due to lower appraisal volumes and lower revenues intact, flood, and our 1031 property exchange services. Offsetting a trend in originations, revenues for default services were $197.2 million and 89.7% increase, compared to last year. During the quarter, we saw a strong increases in proposes [ph] nationwide, and coupled with strong demand for our services. we continue to expand our market leading presence. To recap, despite difficult market conditions and a tough economic environment, our results reflect the highly diversified model that we believe will enable us to grow throughout the various cycles of ht industry. Moving on to the EBIT slide on page 4; operating income for the quarter of $109.1 million, increased 8.7% compared to the second quarter 2007. Margins increased slightly year-over-year, and improved 40 basis points sequentially. TD&A margins for the quarter declined compared to last year, primarily due to lower income from some of the higher margin loan origination software and data and analytics offerings somewhat offset by higher income in mortgage processing and desktop. Year-to-date margins however were 50 basis points higher, compared to last year. Loan transaction services margins for the quarter grew compared to the second quarter 2007 as lower income from some of our origination rated services, such as tax and our 1031 profit exchange businesses, were more than offset by higher income in default services. Depreciation and amortization for the quarter came in at $20.9 million, and was in line with our expectations. It was lower compared to the second quarter of 2007, consistent with lower capital expenditure trends, and decline purchase amortization. Corporate expenses net of non-recurring charges reached totaled $11.8 million were higher than in prior period, mainly due to higher incentive and stock-related compensation. Nowon the pro forma adjusted net earnings slide on page 5. On a pro forma basis, adjusted net income for the second quarter was $57.8 million or $0.61 per share compared to $51.5 million or $0.53 per share, up 15.1% on a per-share basis. These amounts exclude the after tax of restructuring charges, and purchase amortization, but include pro forma interest expense, as if our new $1.6 billion debt facilities were in place as of the beginning of the 2007. We will feel this presentation provides a more accurate depiction of our current and go-forward financial performances. Moving on to the free cash flow slide on page 6; pro forma adjusted free cash flow for the six months ended June 30, was $86.7 million, compared to $78.1 million for the same period in 2007. Year-to-date capital expenditures totaled $25.1 million, compared to $25 million in 2007. Note that the second quarter 2008 cash flow was below the first quarter due to a customer funded payment of $82 million, associated with a tax service business. $82 million were in inflow in the first quarter, and an outflow in the second quarter. Historically, these tax payments come in April, and are paid out in the same quarter and thus cash flow wouldn't seem as volatile as it did this year. Now I'd review the outlook for the remainder of 2008. As you can see on the guidance slide on page 7, based on current trends, we expect third quarter adjusted earnings to be in the range of $0.60 to $0.62 per diluted. Share since this third quarter will be our first quarter as a standalone public company, we are providing a more detailed guidance of this period. For 2008, we are reiterating our revenue guidance of 7% to 9%. Note that this implies a slight moderation in growth rate for the second half of 2008, which is due to the annualization of certain large appraisal contracts, and known volumes declines with certain of our customers. While we expect mortgage processing revenues to decline modestly in 2008, continued market share gains by existing customers, our strong pipeline of HELOC prospects along with the conversion of Chase's prime portfolio mid 2009, and Wachovia's HELOC portfolio, currently targeted for late 2009 or early 2010. We expect continued growth in this business over the next few years. As in a size, we successfully converted Chase's sub-prime portfolio in the early July. In the other TD&A segment, we expect revenues to be up slightly in 2008 so that for TD&A in total as we noted in our Investor Day, we expect revenues to be consistent year-over-year. Given the challenging and origination of refi [ph] markets against the backdrop of a sluggish economy, we expect loan facilitation services revenues to be down in 2008. We expect a decline for the remainder of 2008 to moderate as we annualize through easier comparisons due to the steeper declines from a year ago, especially in fourth quarter of 2007. However, as Jeff noted, market trends and dynamics, such as continued flight to quality, a trend to outsource, centralized lending and a need for lenders to lower internal costs will continue to benefit us. We remain confident that we are well-positioned to perform better than the market metrics and we'll continue to growth when the market stabilizes. On the default services side, we are well-positioned to expand on growth. We expect growth for the remainder to 2008 to moderate, as we bump into last year's strong growth periods. As we've noted in the past, based on our current projections, demand for outsource defaults services is expected to remain strong over the next few years. For the year, we continue to expect operating income growth to be in the range of 6% to 8%, which incorporates the incremental public company costs. Moving on to adjusted earnings, which incorporates the incremental public company costs, as well as interest expense on a new debt facilities. Our outlook for the full year 2008 remains unchanged, which now translates to $2.36 to $2.48 per diluted share, compared to our earlier guidance of $2.34 to $2.46 per diluted share solely due to the lower shares outstanding of $95.1 million shares for the current quarter, and $95.7 million shares for the full year. For free cash flow, we are reiterating the guidance of $193 million to $228 million for 2008. However, we expect to be lower-end of the guidance based on larger working capital adjustments, primarily due to our continued growth in default services. The other free cash flow assumptions are: one, the current earnings guidance, the estimated capital expenditures of $65 million to $75 million, which is more heavily weighted towards the second half of the year, and total depreciation and amortization of approximately $95 million. Finally, our guidance excludes $3.3 million after-tax restructuring and spin-related charges, which were incurred in the first half of 2008. On a go forward basis, we do not expect to incur these expenses. Now I'll turn the call over to operator, for the Q&A portion of the call. Question And Answer

Thank you. [Operator Instructions]. And our first question comes from the line of Greg Smith with Merrill Lynch. Please go ahead.

Yes, hi guys, nice start. Can you give you just us an update on how you think things may play out with Banc of America and Countrywide?

Yes. Sure, Greg. The deal is not closed, and we actually had a meeting with a senior management team that's going to run the combined company's mortgage operations going forward; that meeting occurred last week. And, we didn't give any update on the lean 2 decisions. They haven't made any final decisions at this point regarding MSP and appraisal. From our standpoint, it was good meeting, both sides did recognize; that's over each important customers and partners. We did discuss a number of new opportunities and we'll be attempting to finalize those opportunities over the coming months as we learn about the lean 2 decisions on the other offering. So, we still think that the statements we made back during Investor Day, and later I guess in Investor Day that this should not have an impact on either current or go-forward guidance are still valid.

Okay, excellent. And then what about an update on the appraisal situation with Andrew Hummer's [ph] proposal; where does that exactly stand and how do you see that playing out?

Well, I wish to put some of these things to bet. We get these questions every time. But what I'll say is that, there is still a ground floor of opposition against the current proposal from, you name it, Federal regulators, the Industry Congresses et cetera. And it makes us cautiously optimistic as to the outcome. But to be honest with you, we're not going to be comfortable until the final position is filed, and they haven't announced any specific time table for giving a final decision. What I would say, is with that January deadline looming, but if they don't make the call in the next couple of weeks, they're going to have to either extend the deadline or make it go away. But again, based on the amount of opposition we've seen from pretty much every angle coming at this thing, we feel petty good about, where it will shake out.

Okay, great, and then just lastly, where are default margins today?

Default margins have continued to increase from an operating standpoint, from an EBITDA standpoint not that big a gap and just a peer default margins you see within loan transaction services, not a whole lot of D&A. So, they're in let's just say the mid to high 20s.

Great, thank you.

And our next question comes from the line of Julio Quinteros, Goldman Sachs. Please go ahead.

Great. Jeff, I guess, since I have a chance to just kind of free on this bottom of default side, given the trajectory that we are seeing on default right now, what in the data would really suggest the default volumes from here would moderate? I mean, I understand that the year-over-year comps are tough. You had a tough comp to begin the year with and yet you still grew almost 90%. Can you just walk us through what the assumptions are for moderation from current levels?

Yes, I won't... I'm looking to give you exacts for default, but I mean just look at in terms of the sequential growth you saw in '07. From Q1 to Q2, you saw sequential revenue growth of what about $3 million, Francis?

Yes.

And then as you we advanced in the Q3 and Q4, that's when you really did start to see pretty explosive growth last year, I think we jumped up $19 million from Q2 to Q3. We picked another $23 million from Q3 to Q4. So just based on the absolute of dollars of increases we saw last year, that's what... and that's what's causing us to temper our growth somewhat. We certainly aren't.... we certainly do see continued foreclosure activity as a strength and we're continuing to pick up market share.

Okay. And then just in terms of the metrics that you guys have talked about in the past, is there any updated view in terms of what the mortgage default rate really should be for '08? I mean it seems like all the data we are seeing right now is actually higher?

Well, our models do show again. Let me give you specifics, but our models do show that default trends should continue to increase through '08. Our models actually show a continuous through '09 and '10, and starts to moderate in '11. So from our standpoint looking out, if we were to give you our projections for the next three years, I mean that's one of the reasons we feel comfortable with the 6% to 9% long term growth rate, as we don't see default trends slowing right now. And frankly on the origination side, we do think that just based on getting to easy year-over-year comps once we get to our comparison based over Q4 '07, in other words get off to Q4 of '08. We are estimating any radical increase in origination activity that puts us in a very favorable spot moving forward.

Okay. So, by the time... I guess I am just trying to sort of accept it. By the time the default part starts to decelerate, your expectation as the origination component would actually begin kick in again?

No it flattened or modestly increase. I guess the one thing I would say Julio was that when you are looking at the cycles as they pass, we... the cycle that we don't like is the cycle where you're seeing significant declines in origination based activity without the increases in default. Because just based on the sheer amount of origination and refinance activity when those numbers start to fall, they can fall in terms of $3 million, $4 million, and $5 million transactions per year.

Right.

When you're looking at default, exploding from '06 to '07, it's going from 600,000 transaction to 1.2 million. So when you start to see that default trend turn down out in the 2011 time frame, it's going to be coming down in terms of hundreds of thousands of transactions. You don't need a whole lot of lift on the origination of refi site to offset that. And with the way we've been gaining market share on the origination of refi site. We feel pretty good about ability offset that degradation when it does occur.

Understood. And then just in terms of the components within loan facilitation settlement appraisal and the other origination services as we used to have those disclosed, can you just give us a sense for where the year-over-year drags were and may be just some majors for growth rates and each one of those components?

I don't think we want to get into all of the details of each of those components. But I think as we've talked about in the past, we've got a component that is for example our tax services, our tender exchange, our flood. Those really kind of trend with the market metrics and especially with our tax services that were more focused on the subprime. We really saw some decreases inline with our...in the case of tax assets worse than in really market matrix for the focus on subprime portfolio. Going foreword, as Jeff mentioned, we do into some easier comps, just because of the huge decline, in late loss the 2007.

I think if you are looking at the changes in the revenue growth on LPS versus prior quarters... we've always... we've always struggled with that bucket that Francis describing as all other, which is taxable at IPEX [ph]. That's always moved with the market and now things changed there. We continue to outperform the market on our settlement service side. Our revenue growth or deceleration in revenues with under 10% versus a very poor market. The real change was on the appraisal side this quarter. And I think we've given you guys good visibility into that, because we knew the BoA was going to age out in Q2. We knew that one of our large customers had given us the heads up that they were shutting down the wholesale operation. So that's really the group that came off and started running with the statistics. I will tell you though in looking forward on appraisal, I think once this New York AG situation resolved itself, assuming it resolves itself the way we think it will, it will unlock the market. Because you have some lock in the market right now, folks are just waiting lenders are waiting to decide on what they want to do from a long-term standpoint on appraisals until the things sorts out; they don't make a move and then have to pull back on it.

Okay. Jeff, sorry just to that point and so the biggest surprise in terms of the quarterly quarter drag on the appraisal side was the hostel [ph] operation that was shut....effectively shut down in the quarter.

Well,we had mentioned that even thought it's early as...

Okay.

Yes.

In the Investor Day, so I wouldn't say it was a surprise. It's just now we've moved to a point, where appraisal right now was moving more to market metrics?

Got it, great. Thanks.

Our next question comes from the line of Thomas Eagan [ph] from JPMorgan. Please go ahead.

Well, thanks. Just one quick question for Francis. You went over that cash inflow and outflow in the first quarter and second quarter pretty quickly and I missed it. Could you just explain that to us again and is that the reason we see the big swing in working capital between 1Q and 2Q?

Yes,that is the primary reason for the working capital change Q1 and Q2 and, and it's... it was $82 million and what that relates to its that one of our services in our tax business is to pay property taxes of the behalf of our customers. Generally this we received a payment and we process that we received the cash and we processed the payments in April in back in Q1 or in close to the March 31. We actually received the cash ahead of time this year. And therefore as inflow at the end of first quarter and obviously subsequent to that again we dispersed those property tax payments and so net-net you really... in past historically that's all in the second quarter and therefore I think in this case into the whole six months, it's a better depiction, because it's just a little noise; it's in and out and it's $82 million.

Yes, so adjust for the $82 million and you have seen $40 million free cash flow in Q1. You have seen $47 million in free cash flow in Q2. The one comment I'll make clearly is the real proof of how we're going to operate is how cash flow is started to flow in and from a point in time, we became a standalone entity. And what I'll say is that we started off with day one of spin. We bought no cash over with us, no one restricted cash. We did bring a small amount of restricted cash and we started out with our revolver and what Francis said about $25.7 million of draw down on the revolver to fund our debt insurance costs. And over our first 30 days of operations, we've not had to draw down anything additionally on that revolver not from day one forward, so we've have been cash flow positive since day one. We've already paid down the 25.7 million revolver and started to build up a cash balance, so we feel good about our cash flow out of the box.

Got it. Thank you.

[Operator Instructions] And our next question comes from the line of Nik Fisken from Stephens Incorporated. Please go ahead.

Hey, good afternoon everybody.

How are you doing?

I'm doinggreat. On that free cash flow, can you kind of walk us through what you think you are going to do with it as we go forward?

Yes. One of our primary objective is obviously to kind of pay down debt. We'll have dividends above $0.40 per share, $10 million a quarter. And beyond that we do have some CapEx requirements. We targeted $65 million to $75 million for the year. And beyond that, I think it would be... we want to maintain the flexibility.

Yes. Really, we've signed up for mandatory debt pay downs of about $140 million per year. So that's the target. the $40 million in dividends that Francis mentioned obviously the CapEx for these that he is talking about. Those are the main uses that we've guided forward to this point. To be honest with you, if you look at our free cash flows as we're checking them out this year. If we apply the growth rate that we have long-term growth rates that we have talk about, the 50 basis point margin expansion we think we can achieve through over the next few years 2009 to 2011 will generate a significant amount of cash flow and we haven't guided market for the complete use of cash flow. We are holding that until we see how the market reacts to our stock to what options are. We'll make the best use of the cash as it comes available.

And on the earlier question on the Bank America, Countrywide; was the topic of discussion more how can we keep all and get Countrywide's MSP business or kind of walk us just some of the other products you were talking about?

Well, you have to go back and look at overall relationship with BoA. We've shown schedules in the past that show that we have about 29 different product categories. BoA already uses us for 23. Countrywide uses us for 16. They're both top five revenue producers for us. Last year, they were both top five organic growers for us. So, our conversation with those entities are how do we expand all of our business relationships. They've clearly seen that we demonstrate value and helping them with front end centralized settlement and closing services. We help them with some ongoing front end services like flood processing. We helped them with obviously on the servicing side with BoA. We provide certain default products to both Countrywide and BoA. So we help them across to gamete of mortgage services. So we are consistently talking to them about how we can add value across the whole gamete. So no, what is focused and how do we retain in MSP business. We clearly talked to them how we think we can give them a good value to stay in our system, because we think that we are the most efficient out there. We clearly have the most scale with our $27 million loans versus any individual player in the marketplace, but we'll work with them as they ask us to work with them, and we'll be a good partner, and we'll expand revenue relationships in other areas regardless.

Okay. Thanks.

Our next question comes from the line of Andrew Hope [ph] from OSS Capital. Please go ahead.

Hi actually it's Tim. Could you guys clarify how you expect to the New York AG issue to be resolved and how you kind could expect it will impact LPS?

What I would project right now is that's I know based on what I've seen come down from again the Federal regulators and everybody who's thrown up proposition to this particular proposal, my best guess into today is that we will be allowed operate in the marketplace and provide appraisal services as well as that the settlement services. You'll see the major banks continue to be able to provide appraisal services on an in-house basis. But we'll all have to operate to a code of conduct, and certify that code of conduct. That's my best estimate, but that... again, that's coming from me, that's not coming from the regulators themselves; that's my best shot.

Great, thanks.

And there are no further question. And [indiscernible]with any closing remarks.

Thanks everyone for joining us. And if there are other questions, feel free to give us a call.

Thank you.

Ladies and gentlemen, that does conclude our conference for today. We thank you for your participation, and for using AT&T Executive Teleconference. You may now disconnect.