The ongoing chaos in the mortgage market affected third-quarter earnings at the top two banking technology vendors.
Fidelity National Information Services Inc., whose stock was hammered during this summer's mortgage meltdown, announced plans Thursday to spin off its Lender Processing Services, whose Mortgage Servicing Package processes more than half of such loans in the United States.
Both Fidelity and Fiserv Inc. of Brookfield, Wis., said that they expected full-year results to come in at the low end of their earlier expectations. Also, both companies said they expect no improvement in the mortgage market next year.
William P. Foley 2nd, Fidelity's executive chairman, told analysts on a conference call Thursday that his Jacksonville, Fla., company developed the spinoff plan with the stockholders' interests in mind.
"Two separate, pure-play entities should enhance shareholder value," Mr. Foley said. "Shareholders should have the opportunity to optimize their holdings in the company that best meets their investment criteria."
He offered a variety of reasons for the spinoff, but he acknowledged that the mortgage market's turmoil "is a big piece of it."
Mr. Foley also said that an independent Lender Processing (whose post-spinoff name has not been determined; the press release announcing the plan called it simply Newco) would be able to pursue its own strategy of growth by acquisition, and that both companies would be better able to focus on their core businesses.
Fidelity National Financial Inc., the nation's largest title insurance company, got into financial services in April 2003 by acquiring the transaction processing and mortgage servicing businesses of Alltel Corp. — the core of what is now Fidelity Information Services.
"We thought there would be more cross-selling to mortgage lenders of various … [transaction processing] products and services," Mr. Foley said. "That hasn't really happened. For all those reasons, we thought this was a good time to do it. Why wait? Why not do it now?"
He also said that the problems in the mortgage market had hurt Fidelity's shares. They dropped from a peak of $57.80 in mid-July to $43.71 in early October; Fidelity's shares closed Thursday at $46.22, down 43 cents for the day. Volume of 4 million shares was more than double its three-month average.
Mr. Foley has pursued deal after deal in recent years, most recently the $1.8 billion purchase last month of eFunds Corp., a Scottsdale, Ariz., transaction processor. EFunds came up when he discussed the $1.6 billion of debt that the mortgage lender is expected to carry, to help pay down the debt from the eFunds deal.
Fidelity said that it plans to ask the Internal Revenue Service within 60 days to rule that the spinoff would be tax-free. It also plans to file a preliminary registration statement with the Securities and Exchange Commission in the first quarter. The spinoff is expected to be completed in mid-2008.
Lee Kennedy, its president and chief executive officer, told analysts that the mortgage market's struggles actually would benefit Lender Processing by concentrating more loan business among the big institutions that use the Mortgage Servicing Platform and by generating additional business for its default-management unit.
"The large institution, direct lender banks has become more dominant" recently, he said. "Many independent mortgage brokers have either ceased operation or significantly scaled back."
The surge in foreclosures also is generating sales leads for Fidelity's default-management service, he said. "We have a very full pipeline of large institutions that have traditionally operated their default businesses in-house."
Fidelity said its Transaction Processing Services unit, including eFunds, generated $3.3 billion of revenue over the last 12 months. Lender Processing — which offers origination, automated title and settlement, processing, default, valuation, risk management, tax, flood, and collateral protection services — generated $1.7 billion.
Third-quarter earnings at Fidelity grew 20.1% from a year earlier, to $245.3 million. Revenue grew 10.4%, to $1.2 billion.
Fidelity's cash earnings per diluted share of 63 cents fell a penny short of the average Wall Street estimate. The company said that it anticipates reporting full-year cash earnings of $1.90 a share, at the low end of its previous guidance, and that the figure reflects the sale of its Property Insight to its former parnet company Fidelity National Financial Inc. for $95 million in cash.
Fiserv said its third-quarter earnings grew 9.8% from a year earlier, to $120.9 million. Revenue grew 4.6%, to $1.2 billion.
Earnings from continuing operations — Fiserv's preferred method for reporting bottom line results— of 72 cents a share, topping the average Wall Street estimate by a penny.
Executives reiterated comments from early this month that they anticipate full-year results to come in at the low end of their previously estimated range of $2.74 to $2.82 a share.
Jeffery W. Yabuki, Fiserv's president and CEO, told analysts on its earnings call that its outsourced mortgage-closing services were hurt by the slump in originations, and that its insurance business disappointed, in part because of low levels of flood-claim processing.
Overall in the financial market, "the pipeline is as strong as it has ever been in terms of the businesses that generate the most margin for us," he said.
