Business Context and Reporting Period
Company: Fidelity National Information Services, Inc. (FIS)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009
Business Overview: FIS is a global provider of processing services to financial institutions and businesses, operating in four segments: Financial Solutions, Payment Solutions, International, and Corporate and Other. The company reported results during a period of significant financial market instability, noting that while it expects bank failures, its direct exposure is less than 1% of revenues.
Key Financial Metrics
| Metric (in millions) | Q1 2009 | Q1 2008 |
|---|---|---|
| Processing and Services Revenues | $797.8 | $830.3 |
| Gross Profit | $203.5 | $181.6 |
| Gross Margin | 25.5% | 21.9% |
| Operating Income | $81.9 | $51.2 |
| Operating Margin | 10.3% | 6.2% |
| Net Earnings (Continuing Ops) | $34.0 | $10.7 |
| Net Earnings (Total) | $32.7 | $70.3 |
| Diluted EPS (Total) | $0.17 | $0.36 |
| Cash Flow from Operations | $162.9 | $168.2 |
| Cash and Equivalents (End of Period) | $272.0 | $328.0 |
| Total Debt (Current + Long-term) | $2,460.5 | $2,514.5 |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased by $32.5 million (3.9%) primarily due to unfavorable foreign currency adjustments ($34.9 million impact) and declines in Financial Solutions and Payment Solutions segments. Excluding currency effects, International revenue grew 11.5%.
- Profitability Improvement: Despite lower revenue, Operating Income increased by $30.7 million (60%). This was driven by a 3.6% increase in gross margin due to cost reductions and improved efficiency, and a significant decrease in stock-based compensation ($14.1 million reduction related to prior eFunds acquisition charges).
- Discontinued Operations: The prior year (Q1 2008) included $59.6 million in earnings from discontinued operations (primarily the Lender Processing Services segment prior to its spin-off). Q1 2009 included a $1.3 million loss from discontinued operations.
- Interest Expense: Decreased by $6.8 million due to lower borrowing rates under the credit facility.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Metavante Merger: On March 31, 2009, FIS entered into an agreement to acquire Metavante Technologies, Inc. in a tax-free reorganization. The deal involves an exchange ratio of 1.35 shares of FIS stock for each Metavante share. Completion is expected in Q3 2009, subject to shareholder and regulatory approvals. A $175 million termination fee applies if the deal fails under specified circumstances.
- Capital Expenditures: Management expects to spend approximately 5% to 7% of 2009 revenue on capital expenditures, reflecting a reduction from 2008 levels.
- Dividends: A quarterly dividend of $0.05 per share was paid. Management expects to continue this, subject to Board discretion and debt covenants.
Risks and Contingencies
- Merger Risks: Risks include failure to obtain regulatory approvals, inability to realize anticipated cost savings, and integration challenges. Two putative class action lawsuits were filed in April 2009 challenging the Metavante merger; FIS intends to defend vigorously.
- Financial Crisis Impact: Management anticipates significant bank failures in the coming years. While direct exposure is estimated at less than 1% of revenue, broader economic conditions could lead to deferred software sales and professional services (approx. 14% of 2008 revenue).
- Litigation: Ongoing class action lawsuits include matters related to the Fair Debt Collection Practices Act (FDCPA) and the Driver's Privacy Protection Act (DPPA). The company believes no single action will have a material adverse effect, though outcomes are uncertain.
- Liquidity: One financial institution participating in the credit facility failed, reducing available capacity by an immaterial amount. The company remains in compliance with all debt covenants.
Investor Verification Checklist
- Merger Completion: Verify the status of shareholder and regulatory approvals for the Metavante acquisition and monitor for any litigation outcomes that could block the deal.
- Currency Sensitivity: Assess the impact of foreign exchange rates on the International segment, which accounts for a significant portion of revenue volatility.
- Debt Covenants: Confirm continued compliance with leverage and interest coverage ratios given the high debt load ($2.46 billion) and potential economic downturns.
- Discontinued Operations: Ensure future comparisons exclude the LPS spin-off results to accurately gauge organic growth.
- Cost Structure: Monitor whether the improved operating margins are sustainable or if they were driven by one-time reductions in stock-based compensation.