Feb 14, 2008
Executives
Mary K. Waggoner - Sr.
VP, IR William P. Foley II - Chairman of the Board Lee A.
Kennedy - President and CEO Jeffrey S. Carbiener - EVP and CFO
Analysts
Julio Quinteros - Goldman Sachs David J. Koning - Baird Equity Research Wayne Johnson - Raymond James Brett Huff - Stephens Inc.
Roger S. Smith - Fox-Pitt, Kelton, Inc.
Daniel Perlin - Wachovia Securities
Operator
And ladies and gentlemen, thank you for standing by. Welcome to the Fourth Quarter Earnings Conference Call.
At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session; instructions will be given at that time.
[Operator Instructions]. As a reminder, this conference is being recorded.
I'd now like to turn the conference over to our host, Ms. Mary Waggoner, Senior Vice President of Investor Relations.
Please go ahead ma'am.
Mary K. Waggoner - Senior Vice President, Investor Relations
Thank you. Good morning, everyone.
Joining me today to review our fourth quarter and full year results are Bill Foley, Executive Chairman; Lee Kennedy, President and Chief Executive Officer; and Jeff Carbiener, Chief Financial Officer. In addition to being recorded, this call is being audiocast live over the Internet.
Telephone replay information is included in today's press release and a replay will also be available via our website. Today's discussion will contain references to non-GAAP and pro forma results in order to provide more meaningful comparisons between the periods presented.
As in the previous quarters, the 2007 and 2006 GAAP results presented in the press release have been adjusted to improve comparability. Reconciliations between GAAP and non-GAAP results and schedules showing historical detail are provided in today's press release, which is also available on our website.
Before 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 quarterly and annual guidance. Now, I'll turn the call over to our Executive Chairman, Bill Foley.
William P. Foley II - Chairman of the Board
Thanks, Mary. Good morning everyone and thank you for joining us this morning.
It was a very good quarter and an excellent year for FIS. Excluding eFunds, FIS generated strong 11% full year revenue growth and 13% EBITDA growth.
These excellent results were achieved despite unprecedented turmoil in the real market which demonstrates the strength of our technologies, products and people. Lee and Jeff will provide additional details on the fourth quarter and full year operating results later in the call.
This morning, I'll provide an update on two important strategic initiatives, the integration of eFunds and the spin-off of our lender processing business. We believe that the separation of LPS into a standalone public company and the acquisition of eFunds will strengthen our competitive position, increase operating leverage and drive higher value to our customers and our shareholders.
eFunds adds additional critical skill our EFT, ATM and debit card processing businesses and significant new product capability, including prepaid, gift card and risk management services. eFunds operating units have been merged into FIS and we expect to achieve sizeable cost synergies over the next two years.
The second major initiative is the proposed spin-off of Lender Processing Services. Last quarter we discussed the rationale for separating FIS into two publicly traded companies.
We believe that is even more compelling today, considering the excellent results generated by LPS in the fourth quarter and our strong competitive positions. We are on schedule to complete the spin-off of LPS by the end of June.
On January 7th, we filed a formal request for a tax free distribution of LPS and expect to complete and file the Form 10 in mid March. We are working on finalizing the credit and capital structures of both companies.
Yesterday we announced the senior level management teams for both organizations. The new Lender Company will be called Lender Processing Services or LPS.
LPS is widely recognized by our customers in the market which should allow for an efficient launch of the new public company. Jeff Carbiener who is currently CFO of FIS will serve as Chief Executive Officer of the Lender business and Jeff will remain CFO of FIS until the spin is completed.
Jeff has a strong operational and financial background and has demonstrated strong leadership skills since joining FIS in 2006. Jeff will be supported by a highly capable experienced management team.
Eric Swenson, Executive Vice President of Mortgage Information Services; and Dan Scheuble, Executive Vice President of Mortgage Processing Services, will report to Jeff and continue in their current role. Francis Chan, who currently serves as Chief Accounting Officer of FIS, will assume the role of Chief Financial Officer for LPS.
Parag Bhansali, who recently joined FIS, will head up Investor Relations. Parag was previously responsible for Investor Relations at Rayonier.
Lee Kennedy will remain as President and CEO of FIS. George Scanlon, who joined FIS earlier this month, will assume the position of CFO once the spin is complete and will report directly to Lee.
George most recently served as CFO for BFC Financial Corporation, and has very strong finance and accounting skills having served as CFO for Levitt Corporation, DataCore Software Corporation and as Controller for Ryder System. Gary Norcross who was previously President of ISS, our Community Institution business, will service Chief Operating Officer for FIS.
Gary will be responsible for all Global Banking businesses including integrated financial solutions, enterprise banking and international. Frank Sanchez will be responsible for all strategic development initiatives worldwide.
Frank has an extensive bank technology services background and prior to joining FIS, Frank was CEO of Sanchez Computer Associates, which was acquired by FIS in 2003. Frank and Gary will report to Lee.
Mary Wagonner will continue as Senior Vice President of Investor Relations for FIS. We remain very excited about the future potential of FIS and LPS.
Each has generated strong organic growth and excellent financial results. Both businesses have experienced...
seasoned management... have seasoned management teams and are leaders in their respective markets.
We will provide additional information on the progress of the spin as soon as it becomes available. Now I will turn the call over to Lee who will review fourth quarter and full year results.
Lee.
Lee A. Kennedy - President and Chief Executive Officer
Thanks Bill. Good morning everyone, and thanks for joining us this morning I will begin today's call with a review in a summary of our fourth quarter results including an update on key business initiatives.
Jeff will follow with a detailed financial report and provide guidance for 2008. Overall we are pleased with fourth quarter result and the continued strength of new sales and customer implementations, Fourth quarter consolidated revenue increased 20%.
EBITDA increased 28.1% and cash earnings per share came in at $0.68 which is a 17.2% increase over prior year. Excluding eFunds, revenue increased 7.4% driven by 5.8% growth in Transaction Processing Services and 9.5% growth in Lender Processing Services.
EBITDA increased 12.5%, and the EBITDA margin was 27.2%. The increase in TPS revenue was driven by strong 21.2% growth in our international business.
Our Germany core and Brazilian card processing business generated excellent double-digit growth. During the quarter, we made substantial progress implementing the platforms necessary to process ABN's and Bradesco's card portfolios.
We remain on schedule to convert ABN in March and Bradesco in the third quarter of this year. We currently process over 7 million Bradesco cards on our Brazilian processing platform and will convert an additional 10 million accounts in the third quarter which are processed by Bradesco in-house.
We will also provide a wide range of back-offices services to ABN and Bradesco including Fraud Monitoring, Customer Service, Chargebacks, Collections, and Item Processing Services. The demand for our outsourcing services in other regions of the world is also strong.
I am pleased to announce a new 5-year consumer loan outsourcing agreement with the top three tier bank, headquartered in UK with operations in more than 50 countries. The bank's entire UK consumer loan portfolio will be outsourced to FIS and processed on our ALS platform.
Our strong system functionality, competitive pricing and regulatory compliance systems contributed to the bank's decision to choose FIS. This is the first time that a bank has outsourced the processing of consumer loans in the UK, and we are optimistic that we will sign additional outsourcing customers in the future.
We are also pleased to announce that we have reached an agreement with Ish Bank, Turkey, to provide a wide range of core banking services to its Turkish operations. Ish Bank, which has over 15 million customers, is Turkey's second largest bank.
This was a great competitor win for our company. Once installed, our core processing platform will service a foundation for transforming the bank's technology platforms which will improve the quality of service, reduce time to market for new products and increase operating efficiencies.
Ish Bank is our first banking customer in Turkey which is Europe's fastest growing market. During the quarter, we completed the installation of our new core processing system for TeamBank, Germany.
And in December Wal-Mart, Mexico, began using our integrated profile core processing platform. We believe this integrated system, which is the first of its kind, will have strong international appeal.
IFS or Community Bank and Credit Union business continues to generate excellent new sales results. Recent wins include a new item processing contract with Pacific Capital Bank, which is the largest independent bank in Central California.
We also signed new card processing agreements with pipeline data and Canadian based Home Trust. In addition, we expanded our card transaction processing relationship with CMG to include account servicing and collections.
In March, Arizona Federal Credit Union will offer our score card loyalty program to its 250,000 debit card customers. Our loyalty business continues to generate strong double-digit revenue and operating income growth.
In early December we signed an agreement with Digital Insight to market our newly enhanced premium BillPay service to Digital's internet banking customers. During the past two years we've added significant new functionality to our bill payment product line which has strengthened our product and service capabilities.
More than two-thirds of our existing BillPay institutions have converted to this new platform, which is highly competitive with other leading BillPay products. Although we have traditionally focused on the community bank and credit union markets, we are confident that premium BillPay will compete very well in the mid and upper tier markets as well.
The demand for our core processing and delivery platforms also remained strong. We continue to make progress in marketing our TouchPoint products and services to mid-market and tier 1 institutions.
We are pleased to announce the rollout of our TouchPoint sales and service platform with Bank of America, one of the world's largest financial institution. In time, TouchPoint will provide Bank of America with enhanced service and sales capabilities across delivery channels and lines of business, by providing a single consistent view of the customer relationship.
TouchPoint will enable the bank to better identify cross-selling opportunities, reduced time to market... to service new accounts and open new accounts and enhance the overall banking experience for its more than 59 million consumer at small business relationships.
During the quarter we finalized TouchPoint agreements with Bank of the West, and we are completing the rollout of RBC. In addition BB&T, the nation's 13th largest bank, and Standard Chartered Bank, will install our ACBS commercial lending platform to process and support complex, loan trading and syndications.
ACBS is one of our fastest growing global businesses. ABCS' (sic) [ACBS'] 2007 revenue and EBITDA grew in the strong double-digit range.
BB&T demonstrates the depth of the relationships that we have with tier 1 institutions. In addition to the new Commercial Lending deal FIS provides mortgage processing, consumer lending and card processing services to BB&T.
A number of our investors have asked us to comment on our view for 2008 bank technology spend. At this point in time, tier 1, 2 and 3 institutions continue to invest in the maintenance and developments and support of core systems, payment products, and delivery channels.
This is especially true with international markets, where we have established leading market positions. We are confident that we will be able to continue to generate solid revenue and earnings growth, driven by our strong recurring revenue base and the depth of our customer implementation queue.
I want to emphasize that the vast majority of our bank and payment service products and support are not discretionary in nature. FIS markets processing and support systems which enable institutions to accept, transfer and account for consumer deposits, consumer loans and transaction accounts.
A bank cannot operate without these services. These are not discretionary services; regardless of the size of the institution or the strength of the economy.
For IFS clients we are essentially the bank's internal IT department. The majority of EBS' revenue is generated from providing outsourced core processing services and not elective project work.
We estimate that approximately $50 million or less than 10% of EBS' core banking revenue is generated through discretionary software sales and project work. While it is reasonable to assume that some banks may slowdown non-mission critical projects or delay new product development, others will focus on lowering costs to outsourcing development and process and support.
For example we recently find a large multi-year contract to provide technology infrastructure services through a large mid-western bank and are engaged in some more discussions with other institutions. The new long processing agreement which I previously mentioned in the UK is another good example of the growing trend towards outsourced processing and development.
Our newly announced TPS organization structure should drive higher sales and lower costs by creating stronger accountability and more efficient use of sales, operating and development resources across business unit lines and across all geographies. The new bank centric organization includes all TPS businesses worldwide.
This new organization will also enable us to manage capital investment more efficiently by further reducing duplicate development efforts. And finally, we are making good progress, integrating eFunds sales and operating organizations into FIS and we are confident that we will achieve at least $65 million in cost savings by the end of 2009.
eFunds will add significant product capability and scale to FIS, which will strengthen our competitive position and long-term growth potential. Now, I will move on to LPS.
Fourth quarter LPS revenue increased 9.5% over prior year. EBITDA increased 16.2% and year-over-year margins increase 190 basis points to 33.8%.
These results were particularly impressive given the significant weakness in the housing and mortgage markets that persisted throughout the quarter. Exceptional growth in appraisal and default services, more than offset lower volumes in title and settlement services.
While appraisals are typically tied to new loan origination and refinance activity, the trend towards outsourcing combined with strong market share gains, drove 17% growth in front-end appraisals during the quarter. We are encouraged with January's increase in open title and front-end services, which is being driven by lower interest rate.
We also believe that the increases in the lending caps for Fannie Mae, Freddie Mac and FHA confirming loans, which were approved yesterday, will draw... drive strong increases in refinance activity.
We are encouraged with the recent strength of the origination and refinancing activity overall. Fourth quarter Default Services revenue was also very strong; almost doubling over prior year.
These excellent results were driven by continued market share gains, increased foreclosure activity and excellent demand for our new desktop technologies. We believe that Defaults will continue to increase throughout 2008 and most of 2009 before moderating some more historical levels as we move forward towards 2012.
We are making good progress with the migration of Chase and Wachovia to our MSP platform and are achieving all milestones and benchmarks established by both institutions. We are on track to convert Chase's 500,000 subprime loans in May, and we will convert the remaining loan accounts in early 2009.
We expect to complete the conversion of Wachovia HELOC loans, also in early 2009. While the conversion dates are slightly later than originally anticipated it is not unusual for institutions to adjust conversion timelines to accommodate changing institution priorities and initiatives.
We are very pleased with the success that we are having selling additional products and services to our existing customer base. During the fourth quarter, additional product were sold to several of the nation's leading lenders including EMC, IndyMac, Lehman, WAMU, Wachovia, Countrywide, and Bank of America.
Last quarter we outlined several key competitive strengths that have enabled FIS to outperform the markets and our competition including the range and debt of our product capabilities, market leading integrated technologies and strong relationships with the nation's leading lenders. We also discussed the growing importance of processing fist mortgage and home equity loans on a single platform which enables lenders to improve portfolio risk management reporting and securitization capabilities.
There are also several significant market factors which are driving additional growth opportunities including the growing importance of reducing loan servicing costs, the increasing utilization of data and analytics to improve portfolio profitability, and the strong interest in bundled integrated products which reduce operating costs and allow lenders to provide a higher level of customer service. Our integrated core and ancillary product capability is a significant competitive advantage which should continue to generate strong growth opportunities for LPS.
An example of this is our new Desktop Workflow Management System which is a highly efficient, imaging, retrieval, expense, and communication management system that provides real-time connectivity between vendors, suppliers and portfolio investors. The desktop technology links our default customers to more than 10,000 vendors, service providers and investors to a single user interface.
The desktop system's streamlines complex work processes by automating labor intensive functions and eliminating the need to build multiple interfaces between various data and service suppliers. This system generates advanced reporting and performance metrics which significantly reduces the manual effort required to process default files, resulting in a nearly 70% improvement in efficiency.
Interest in our desktop system is strong. More than 50 implementations are scheduled throughout 2008 and the sales pipeline is extremely full.
While desktop was originally developed for Default Services, this unique technology will soon support other lender applications. This proprietary Workflow Management System is becoming a standard for the industry.
Overall, it was a good quarter and a great year for FIS. Excluding eFunds, consolidated full year 2007 revenue increased 11%, driven by10.5% growth in transaction processing services and 11.2% growth in lender processing services.
These strong results exceeded our initial revenue guidance of 7 to 9%. Excluding eFunds, EBITDA increased 13% which exceeded our guidance of 10 to 12%.
Our 2008 guidance of 14 to 16% revenue growth includes solid organic growth of 6 to 8% and cash EPS growth of 12 to 16%. We are making significant progress in integrating eFunds into our core businesses.
And we are on track to complete the spin-off of our lender processing business by mid-year. We believe that both of these strategic initiatives will drive additional value to our customers and also to our shareholders.
Now I will turn the call over to Jeff who will provide a more detailed financial review of fourth quarter results and our outlook and guidance for 2008. Jeff?
Jeffrey S. Carbiener - Executive Vice President and Chief Financial Officer
Thanks Lee, and good morning. Our fourth quarter 2007 results include approximately $140 million in revenue and approximately $45 million in EBITDA from eFunds.
For comparative purposes, my comments pertaining to revenue and EBITDA will focus on standalone FIS excluding eFunds. Also property insight which was previously included in LPS is now reported as the discontinued operation and earnings are now reported below the line.
Excluding eFunds, consolidated fourth quarter revenues increased 7.4% to $1.2 billion driven by 5.8% growth in TPS and 9.5% growth in LPS. For the year, consolidated revenue increased 11% driven by 10.5% growth in TPS and 11.2% growth in LPS.
The increase in TPS fourth quarter revenue to $735.3 million was driven by 21.2% growth in international and 5.2% growth in integrated financial solutions. The 21.2% increase in international revenue to $170.8 million was fueled by strong growth in our payment services businesses particularly our card operation in Brazil.
Payment services revenues now represent approximately 56% of total international revenues. On an annual basis, international revenue increased 33.2% driven by strong growth across all regions in both card and core processing.
The 5.2% increase in IFS fourth quarter revenue to $297.9 million was driven by solid growth in our eBusiness, credit cards and item processing product lines. Growth in these same product lines also drove the full year IFS revenue increase of 6.6%.
New sales activity remained strong as the total contract value of new customer signings was up 15% during the fourth quarter and 17% for the year. EBS revenue of $267.1 million decreased 2% compared to the fourth quarter of 2006.
Growth in the existing customer base was offset by a reduction in implementation revenue due in part to the startup of the TouchPoint projects for BAway [ph] in Q4 last year, lower project-specific revenue and lower retail volumes and Check services. Excluding Check from all periods, fourth quarter EBS revenue was on par with the prior year quarter and $6 million higher than the third quarter of 2007.
As we have discussed in previous quarters, when revenue growth was extremely strong, EBS is the customer channel most subject to variability and quarterly results. On an annual basis, overall EBS revenue increased 4% which was in line with our original expectations.
Lender Processing revenue increased 9.5% to $454.8 million driven by 13.4% growth in information services and 8.7% growth in mortgage processing revenues. A strong demand for appraisal and default services again more than offset the declines in origination-oriented products such as tax, 1031 Exchange, and title and closing services.
LPS revenue increased 11.2% on an annual basis, nearly twice the growth rate we originally anticipated and well above the 14% decline in 2007 origination and refinance activity as reported by the MBA. Market share gains and the ongoing trend towards outsource generated a 17% increase in traditional appraisal services.
A combination of new customer signings, increased foreclosure activity and strong demand for the desktop services that Lee described, drove an increase of more than 90% in default and related technology services in the fourth quarter. We continue to see significant volume increases in foreclosure activity where we have more than 40% market share and increasing demand for backend REO asset management services where we have relatively low penetration.
Based on current market projections, demand for our outsourced default services is expected to remain strong for the foreseeable future. Mortgage processing revenues of $100.5 million increased 8.7% over the fourth quarter of 2006.
Adjusting for non-account base fees, mortgage processing revenue increased by approximately 1%. The average number of loans processed declined to $26.9 million compared to $8 million in the prior year quarter.
As we discussed on the third quarter call, the climb was driven by the acquisition of ABN's $1.5 million loan portfolio by Citibank. Although we anticipate that mortgage processing revenues will decline marginally in 2008, market share gains by existing processing customers, a strong pipeline of home equity loan prospects and a conversion of $6 million loans was Chase and Wachovia are expected to drive strong growth in the number of average loans processed in 2009 and beyond.
Additionally, it is important to emphasize that much of the growth in our Information Services businesses continues to be driven by the strong mortgage processing relationships we have with the most of the nation's top lenders. Moving to EBITDA; excluding eFunds, EBITDA increased 12.5 % to $324.4 million and the margin was 27.2 % which is a 120-basis point improvement compared to the fourth quarter of 2006.
On an annual basis, the consolidated EBITDA margin was 26.2%, compared to 25.8% in 2006. Transaction processing EBITDA increased 7.6% to $192.8 million and the EBITDA margin improved 40 basis points to 26.2% compared to 25.8% in the prior-year quarter.
The margin improvement was driven by our better results in our IFF and International businesses, somewhat offset by margin degradation and our retail check business. Excluding check from both periods, TPS margins improved 200 basis points during the quarter.
For the full year of 2007, the overall TPS EBITDA margins improved 80 basis points to 25%. Lender processing EBITDA of a $163.8 million increased 16.2% compared to the fourth quarter of 2006 and the EBITDA margin was 33.8%, a 190-basis point improvement compared to the prior-year quarter.
Strong revenue growth along with margin expansion in the fall were the most significant factors that drove margin improvement during the quarter, while non-account based fees within mortgage processing also contributed to the increase. EBITDA margin for the year was 33% compared to 33.7% in 2006.
Corporate expense totaled $31.1 million compared to $27.9 million in the fourth quarter of 2006. The increase is primarily due to the eFunds acquisition.
Now, I'll turn to cash earnings. Including eFunds, fourth quarter cash earnings, which we define as net income plus after-tax purchase amortization, totaled $133.3 million or $0.68 per diluted share compared to $0.58 in the prior year.
During the quarter, we incurred after-tax merger integration cost of $1.4 million, which was more than offset by $7.6 million in after-tax other income related to the wind down of the former Certegy pension and retirement plans. The net impact of $6.2 million has been excluded from cash earnings.
After-tax purchase amortization increased to $31.1 million compared to $27.6 million in the prior-year quarter, driven primarily by the acquisition of eFunds. Overall, eFunds was neutral to fourth quarter cash earnings.
Moving onto free cash flow; free cash flow, which we define as net income plus depreciation and amortization minus capital expenditures was $141.4 million for the fourth quarter. Capital expenditures totaled $98.6 million, which includes $7 million in capital that we expect to recoup from our bank partners in the Brazilian card joint venture.
The capital spend was higher than our anticipated run rate going forward, due to investments made to expand capacity in certain of the eFunds businesses and additional investments in advance of our first quarter 2008 conversion of the first Brazilian card portfolio. The uses of free cash flow during the quarter included $9.7 million in shareholder dividends and debt repayment of $46 million.
Working capital and other adjustments to cash provided by the operating activities were a net use of $27 million during the quarter, driven primarily by continued strong revenue growth in our Default Services products. At year end, we had approximately $355 million in cash and $4.3 billion, in outstanding debt.
In the fourth quarter, we instituted $2 billion in additional interest rate swaps. Currently $3.2 billion of our debt is covered by swaps to an average LIBOR rate fixed at 4.5%, swap spreads ranging from 125 to 175 basis points.
The weighted average effective rate on the outstanding debt during the quarter was 6.4%, including amortization of upfront debt costs. Moving to our outlook for 2008; we anticipate consolidated revenue growth of 14 to 16% and EBITDA growth of 15 to 7%.
Excluding eFunds, we expect consolidated revenue growth of 6 to 8%. Growth in both TPS and LPS is expected to fall within this range.
Overall, we expect to generate adjusted earnings of $2.15 to $2.25 per diluted share and adjusted cash earnings of $2.73 to $2.83 per diluted share, which represents an increase of 12 to 16% in cash EPS. This cash EPS guidance includes accretion of approximately $0.05 per diluted share from eFunds.
We are also projecting free cash flow of $655 million to $695 million in 2008. This assumes 280 to $300 million in capital expenditures, which is consistent with our previously disclosed target of $250 million plus ongoing eFunds capital.
Working capital needs are estimated at $75 million to $100 million. Our outlook is based on the following assumptions: within TPS, while we are not factoring the end of major change in overall bank technology spend, we are taking a more conservative view regarding customized new product launches and non-emission critical projects and forest initiatives as we described earlier.
Within LPS, we are expecting an overall market decline of 10 to 15% in a refined origination activity, based on the UN MBA projections 25 to 30% growth in the overall level of foreclosure activity, based on our internal modeling and a modest decline in mortgage processing revenues, primarily due to the deconversion of ABN's portfolio in the fourth quarter of 2007. We do expect approximately $35 million in cost synergies from the eFunds integration in 2008.
This $35 million excludes approximately $25 million of estimated non-recurring integration costs, which includes $14 million in non-cash expenses related to the acceleration of stock options. Also excluded is approximately $25 million in one-time integration capital.
The current time line for major portfolio conversions is for the ABN AMRO for Brazilian Card conversion to occur in March, followed by Bradesco in the third quarter; the conversion of the Chase sub-prime mortgage portfolio to occur in May 2008, followed by the larger Prime portfolio in 2009 and Wachovia home equity portfolio conversion to be completed in early 2009. We are anticipating net interest expense of approximately $237 million, based on average debt outstanding of $4 billion and an effective interest rate of 5.9%, which assumes a one month LIBOR rate of 3.75% and approximately $16 million in amortization of upfront debt costs and capital lease expense.
Our guidance assumes a lower average effective tax rate of 36.6% in 2008 driven by our increasingly efficient international tax structure. We are estimating average diluted shares outstanding of a $197.5 million and finally our guidance excludes one-time costs related to the LPS spend as well as incremental costs associated with operating LPS as a standalone company.
Now our fiscal estimates are generally in line with our expectations for revenue and for operating segment EBITDA and EBIT. The cash EPS estimates are higher than our guidance of $2.73 to $2.83 per diluted share.
Higher corporate expense and non-operating items such as purchase amortization, minority interest and income taxes, accounts for the majority of the variance compared to the analyst models. Our assumptions for these factors are as follows.
Our EBIT expectations are approximately $9 million or $0.03 per diluted share, lower than first call estimates. This difference is driven by a higher corporate expense of $130 million, including a $16 million increase in stock option expense.
Combined equity in earnings and minority interest are estimated at a net $8 million expense in 2008, driven primarily by increased operating income from the Brazilian Card joint venture. On average, analyst models include a smaller net reduction, resulting in a difference of approximately $0.05 per diluted share.
Total depreciation and amortization is expected to approximate $530 million, including $180 million in pretax purchase amortization. This translates into after-tax purchase amortization of a $140 million or $0.58 per diluted share.
Analyst models on average estimate a higher level of purchase amortization, resulting in a $0.09 per diluted share difference. These items which total $0.17 per diluted share are partially offset by a lower effective tax rate compared to most analyst models, which equates to $0.03 per diluted share for an overall net impact of $0.14 per diluted share.
So to summarize, the disconnect between our 2008 guidance versus consensus is tied primarily to four line items: The underestimation of stock option... stock compensation expense and minority interest expense and the overestimation of purchased amortization and the effective tax rate.
The annual impact of these variances on cash EPS is equitable throughout the year. Although, we do not typically provide quarterly guidance, we are making an exception with respect to the first quarter to help establish the starting point for the quarterly cash EPS distribution.
For the first quarter of 2008, we expect to generate earnings per diluted share of $0.42 to $0.45 and cash earnings per diluted share of $0.57 to $0.60. This guidance excludes the previously mentioned eFunds integration and LPS spending costs.
I'll conclude my remarks by providing a high-level summary regarding our outlook for 2009 revenue growth. The pipeline of major customer conversions scheduled throughout 2008 and into early 2009, including ABN AMRO, Bradesco, Chase and Wachovia will provide incremental revenue of approximately $120 million in 2009.
Based on what we see today, these contracts should help drive consolidated revenue growth in the higher single-digits in 2009. And we will now open it up for questions.
Question And Answer
Operator
[Operator Instructions]. And we do have a question from the line of Julio Quinteros with Goldman Sachs.
Please go ahead.
Julio Quinteros - Goldman Sachs
That was close. It's Julio Quinteros from Goldman Sachs.
First of all, can you just walk us through the check services business and what's happening there? We had previously stripped that out.
I am trying to understand what the affect of that is across revenues and EBITDA and possibly even EPS? In other words, how much drag is in that, I am assuming it it's still in the numbers for calendar 08 at this point?
Jeffrey S. Carbiener - Executive Vice President and Chief Financial Officer
Yes. It is still in the numbers for calendar year 08 at this point in time.
And what we are seeing in the check business is a faster movement away from check writing into other forms, such as debit and other electronic forms of payment. And what we also saw in the fourth quarter I think is often with check writers, they are the first to feel the signs of any economic changes.
So, we will see check writing pullback. And in Q4, we saw our volumes scale back quite a bit from our previous run rates which impacted revenue.
And they have a heavy impact on margins because typically it is the good check writers that are pulling back and you still have your fraud. Therefore, your operating costs exist and you have margin degradation and that's really what we are looking at.
Now, when we look forward which those trends, Q4 is really where you feel the burns of it because if you look at check services profits, nearly 40% of the profit base is in Q4 because of the segment volume. So, looking forward, it doesn't have as much of an impact when you look into 08.
Julio Quinteros - Goldman Sachs
But... sorry, so what's the plan in terms of the divestiture?
Jeffrey S. Carbiener - Executive Vice President and Chief Financial Officer
Right now, we've taken the existing check business and we are evaluating the sale in three pieces. One is our gain cash business, one is our Australia business and the rest is our North American core business.
We are well down the road on the sales process on the first two pieces I mentioned and we are still in the process in the North American core business.
Julio Quinteros - Goldman Sachs
And just any sense on timing for new loans?
Jeffrey S. Carbiener - Executive Vice President and Chief Financial Officer
We expect the first two that I mentioned to close sometime... well either before the end of first quarter or slightly thereafter and the check business is still premature to tell.
Lee A. Kennedy - President and Chief Executive Officer
It's unclear at this time. It could take a little bit longer for that business to move forward.
Julio Quinteros - Goldman Sachs
Okay. And then just finally, I guess in the spirit of calling from Bombay here.
What's your plans here on the outsourcing and offshore front. Just want to get a sense for how much you guys have discovered as you have worked with eFunds in terms of opportunity for cost savings in driving more volumes here?
Lee A. Kennedy - President and Chief Executive Officer
This is an enormous potential for cost savings within our current operation, utilizing the BPO operation that we now have in place in India to provide processing the support for our U.S and some of our European operations, so really good upside. The plans aren't finalized yet, but we are still working through those.
But clearly if you look on a going forward basis, you are looking at tens of millions of dollars worth of expense savings if we are able to leverage those resources the right way and in a proper manner. As far as operating that business, we have also determined that there is also some pretty good significant opportunity to these relative to third-party relationships that we think we can leverage and bring into the fold where they buy our BPO services, as a result of some of those services, attached to some other services that we currently offer.
So overall, we are pleased with what we have seen. There is a good management team in place.
They have a wide range of capabilities, especially on the payment processing end of the spectrum and will use those pretty consistently, as we move forward.
Julio Quinteros - Goldman Sachs
Okay, do you not at this point... you don't have specific headcount targets or cost saving strategies that you think you might be able to generate?
Lee A. Kennedy - President and Chief Executive Officer
No we have some normal cost reductions that are in the plan and the guidance that Jeff just presented. But that's really just the very front stage of this.
We think on an ongoing basis, once we get our arms around that more completely, there will be additional savings on top of that.
Julio Quinteros - Goldman Sachs
Great, thanks guys.
Lee A. Kennedy - President and Chief Executive Officer
Welcome.
Operator
And our next question comes from the line of Dave Koning with Baird. Please go ahead.
David J. Koning - Baird Equity Research
Yes. Hi guys and you mentioned that the guidance for the year excludes any incremental corporate expense supposed to be on the lender on the business and any dilution from the check business.
I am just wondering, is there any range we can think of for those pieces, just so we can think of making kind of a...
Lee A. Kennedy - President and Chief Executive Officer
I think the target that we communicated in last call that we hope to on or around the $10 million range and separating the two companies still remains true, might be a little bit north of that but not very much. It should be consistent with that number the way things were shaking out today.
Jeffrey S. Carbiener - Executive Vice President and Chief Financial Officer
In terms of the dilution from the sales of the check business is rapidly overcome [ph] on what the potential sales prices are reported. We can actually quote what that number would be.
So it's also too early for us to talk about that.
David J. Koning - Baird Equity Research
Yes I can understand that. On the eFunds business, in Q4 it looks like an EBITDA margin around 30%.
Is that kind of a base line and that should actually ramp as you cut some of the costs?
Lee A. Kennedy - President and Chief Executive Officer
No absolutely not. eFunds is a very seasonal very much of transaction-oriented business and their margins tend to...
if you look at the history, their margins really spike up in Q4. If you look at their ongoing EBITDA margins or historical EBITDA margins I should say, they are in the low 20s, maybe around 22, 23%.
And that's what we view as being the carry forward that will build the cost synergies on top of.
David J. Koning - Baird Equity Research
Okay, great. And then just one quick final one; did you mention that fairly you expect a working capital drag you said 75 to 100 and is that related to mainly the default ramp?
Lee A. Kennedy - President and Chief Executive Officer
That's a good portion of it, yes.
David J. Koning - Baird Equity Research
Great, thank you.
Lee A. Kennedy - President and Chief Executive Officer
Welcome.
Operator
And our next question comes from the line of Greg Wilkin [ph] with the Banc of America. Please go ahead.
Unidentified Analyst
Good morning gentlemen.
Unidentified Company Representative
Good morning.
Unidentified Analyst
Can you speak to some of the early traction you are seeing in terms of cross-selling opportunities as a result of the eFunds acquisition?
Lee A. Kennedy - President and Chief Executive Officer
Yes, absolutely. We have lot of opportunity center in around prepaid card, coupled with our loyalty products that we have in place, especially on the debit card end.
So by packaging eFunds capabilities with their current payment capabilities, we have a much more complete product range than currently exists in the marketplace. So we are seeing some really good traction there.
We are seeing some traction... strong traction on the debit card side of the business.
Now that we have additional volume and scale, we are able to price more effectively and more competitively. So we have been able to secure accounts that in the past just were out of our reach, because we didn't have the volumes scale available to us.
A wide range of opportunities are starting to gel and materialize on the risk side of the business, taking eFunds check authorization and risk management capability, used with financial institutions and coupling that with the analytics that we have in place on a similar product that used to reside within Certegy, that's created a very strong opportunity for us and the volume are increasing in the pipeline for that particular product, remains very, very full. So overall, good lift, good potential, no surprises on that and we are tracking as far as synergies and new product sales as a result of the combination.
Unidentified Analyst
Okay very helpful. Thank you.
Lee A. Kennedy - President and Chief Executive Officer
Thanks.
Operator
And our next question comes from the line of Wayne Johnson with Raymond James. Please go ahead.
Wayne Johnson - Raymond James
Yes, good morning. When we look back at 07, what percent of new business wins were the result of cross-selling between the traditional FIS business and Certegy and what should we expect that percentage to be in 08?
Lee A. Kennedy - President and Chief Executive Officer
Wayne, we don't track it that way. That's a hard number to precisely get to, but I'll kind of put it this way, the vast majority of the revenue lift in sales increase that IFF experienced in the last year was directly related to two things, it was related to the combination of the Certegysales force and the IFF sales force in better leveraging sales opportunities with more accountability, cross-selling better account responsibility overall and also it was generated through the integration of payment capabilities in the workflow processing platform.
So overall very, very strong lift; majority of new sales were generated from the combination of two organizations. Internationally, really, really strong lift in terms of the Brazilian marketplace, the item processing relationships that we have established throughout Brazil were a derivative of the card processing relationships we had.
We signed a number of TouchPoint applications internationally which were leveraged on some of the payments processing relationships, we had in place and also, we mentioned earlier, I mentioned the BB&T relationship was a direct result of cross-selling. So lots of revenue, lots of new sales and I will give you just a rough number, well over $2 billion in contract value was signed throughout 2006 and 2007 directly related to cross-selling additional products and services into the base that we had, so a big strong lift.
A: Wayne Johnson: Okay, great. That's really helpful.
And if I can just go back, real quick to the Bill Pay announcement with Digital Insight, that sounds like a great opportunity for you guys. Is this the most important takeaway, is the access to all of Digital Insight's customers to offer Bill Pay, is that the takeaway from that?
Lee A. Kennedy - President and Chief Executive Officer
That's a takeaway Wayne. They obviously have a very, very strong base.
They are large in the business. They have a dominant market share position in the bid market and small market institution base.
And yes, they will market our products and that is a takeaway. A: Wayne Johnson: And then why, if I understand...
if I remember correctly, didn't Digital Insight have a very strong relationship with Metavante?
Lee A. Kennedy - President and Chief Executive Officer
They actually represent a number of different bill payment providers. So they are not exclusive to anyone.
We're just added to the mix. A: Wayne Johnson: Terrific.
Alright, thanks very much.
Lee A. Kennedy - President and Chief Executive Officer
Welcome.
Operator
And our next question comes from the line of Brett Huff with Stephens Incorporated. Please go ahead.
Brett Huff - Stephens Inc.
Good morning everybody.
Unidentified Company Representative
Good morning.
Brett Huff - Stephens Inc.
Just a quick. I want to make sure I get the timeline right for the spin.
It sounds like the next data point that we are going to get is a filing in March and then after that, is there anything before the actual transaction is executed?
Jeffrey S. Carbiener - Executive Vice President and Chief Financial Officer
Right. What we need to do is we need to finish up the three.
You look back out for carve out for the LPS organization, which we expect to finish by the end of February which will then help us finish the filing of Form-10 in mid March. From that point of waiting for the SEC comments to come back on the filing.
I am waiting for our response back from the IRS. We expect the IRS response to come back by mid April.
We expect the SEC to come back at various points over the next couple of months. Our timeline currently projects we will complete it by the end of June.
So, we are going to have Q3 be our first linked quarter, there is some cushion built into that.
Brett Huff - Stephens Inc.
Okay, that's helpful. Thanks.
And the in the corporate expense in the guidance that you said is $130 million and it sounds like there was an incremental $4 million or $5 million from stock option expense versus last year. Is that the right way to look at that?
Jeffrey S. Carbiener - Executive Vice President and Chief Financial Officer
No. The increment from the stock comp expense is about $16 million.
Brett Huff - Stephens Inc.
Okay. So, that is incremental over and above last year?
Jeffrey S. Carbiener - Executive Vice President and Chief Financial Officer
Right. That's the majority of the increase in corporate expense for the...
in the guidance.
Brett Huff - Stephens Inc.
Okay.
Lee A. Kennedy - President and Chief Executive Officer
We actually issued... just to clarify that, we actually took options down to a much, much lower level because of competitive pressures that we are facing.
So, it really went 3, 4 levels down into the organization and that's good obviously for retention and for competitive purposes.
Brett Huff - Stephens Inc.
Okay. And then lastly, you had outlined some of the services that you are expecting, the Brazil deals and the Brazil clients to bring.
It sounds like there may have been some incremental additional things that you're selling to those folks or are there incremental things than we've know about before?
Lee A. Kennedy - President and Chief Executive Officer
Well, there is a wide range of product and services that we are currently exploring with the partners that we have in Brazil. We are not ready really to talk about those but I think it's safe to say that as you look on a going forward basis, we will have a full range of card processing back-office services available.
In fact the two major banks will utilize those, all the way from call center handling for the consumer, to fraud and risk management to collection services on the back end. Then in addition to it, we are in the process of implementing a wide range of imaging platform that will be utilized by the banks in processing of checks.
That will bring a brand new technology to the banks in Brazil. So we think that's going to create a very strong competitive demand and add a lot of incremental revenue opportunities going forward, so very receptive.
They view FIS as the right partner. They like our wide range of product capability and we do everything in our power to make sure that we sell additional products into that base.
Brett Huff - Stephens Inc.
That's all I have. Thank you.
Lee A. Kennedy - President and Chief Executive Officer
Thank You.
Operator
[Operator Instructions]. And we do have our question from Wayne Johnson with Raymond James.
Please go ahead.
Wayne Johnson - Raymond James
Yes. Good morning again just a quick follow up.
On the check services, what are the plans for eFunds' check services? Is that going to be included in the divestiture plans for the checks services you guys were already offering prior to that acquisition?
Lee A. Kennedy - President and Chief Executive Officer
Yes, the scan piece of that will migrate over with the POS piece that we had within Certegy. So it's all going to be combined Wayne.
Jeffrey S. Carbiener - Executive Vice President and Chief Financial Officer
Yes. It's already reporting up to the Check Services Group.
Just to put in perspective that scan piece of business is only about $10 million in revenue by the time we took it over.
Wayne Johnson - Raymond James
Terrific. Okay, great.
Thank you very much.
Operator
And we do have a question from Roger Smith with Fox-Pitt, Kelton. Please go ahead.
Roger S. Smith - Fox-Pitt, Kelton, Inc.
Hi, thanks a lot. I am just trying to go through the LPS numbers here and looks like derivative processing revenues were up by some non-account based revenues with termination fees.
Can you tell us how much that was? And then the second question that I am trying to get on in the modeling side is, if 10% decline in originations are in the mortgage processing business in 2008, can we sort of back out this termination fee and then use this fourth quarter as a run rate to build ourselves down that level and then, on the Information Services with that 25 to 35...
25 to 30% increase in default, how should we think about that piece of the LPS growing?
Lee A. Kennedy - President and Chief Executive Officer
Okay when you are looking at the non-account based fees, the net impact for that you will see in Q4 is about $7 million.
Roger S. Smith - Fox-Pitt, Kelton, Inc.
Okay.
Jeffrey S. Carbiener - Executive Vice President and Chief Financial Officer
And overall growth rate down from a $7 [ph] 1% rate that we were talking about and I think in our prepared remarks, we talked about and looking forward, we would expect the mortgage processing revenues for 08 to be slightly down as we complete out the conversions that will occur in'09, which will then accelerate growth in 09. So that's the mortgage processing piece of the business.
Our current trends on the Information Services business, we were at 13.4% in Q4. We expect to be able to maintain a low double-digit growth in that sector rolling into 2008 based on the market trends we talked about from a foreclosure standpoint, and also based on our ability to not shrink at the same level that market's shrinking from an origination and re-fi.
And we expect to continue to gain from the trend to outsource and from our strong customer relationships that continue to take share as we help these guys lowers their cost base and that's factored into our plan and that's what is helping drive our ability to forecast low double-digit growth in that Information Services.
Lee A. Kennedy - President and Chief Executive Officer
And we will give you further update as we go forward on whether or not the spike or the increase in our front-end origination volumes that we mentioned in January continues. We believe it will and that will obviously be a real benefit to us if it does.
Roger S. Smith - Fox-Pitt, Kelton, Inc.
Great. Thanks very much.
Lee A. Kennedy - President and Chief Executive Officer
Welcome.
Operator
And our last question comes from the line of Dan Perlin with Wachovia. Please go ahead.
Daniel Perlin - Wachovia Securities
Thanks. In the past I think you had broken out at least directionally, the EBITDA margins within some of the lender businesses.
So I think you had said default services EBITDA margins were in kind of mid-20s percent in the previous... in the third quarter.
Can you give us an insight of what it looks like this quarter and what you might expect it to be?
Jeffrey S. Carbiener - Executive Vice President and Chief Financial Officer
We think...
Daniel Perlin - Wachovia Securities
Go ahead.
Jeffrey S. Carbiener - Executive Vice President and Chief Financial Officer
We continue to expand our margins in default services businesses like I talked about in my remarks. We are approaching 30% from an EBITDA margin standpoint and that's really because we are...
Lee had mentioned the desktop solution. I mean we are blending technology with data with services and it's the combination of the three that's helping us to expand our margins.
Daniel Perlin - Wachovia Securities
Okay.
Mary K. Waggoner - Senior Vice President, Investor Relations
Thank you all for joining us this morning. Please remain on the line for the telephone replay information.