Business Context and Reporting Period
Company: Fidelity National Information Services, Inc. (FIS)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2007
Business Overview: FIS is a leading global provider of technology solutions, processing services, and information-based services to the financial services industry. The company operates through two primary segments: Transaction Processing Services (TPS) and Lender Processing Services (LPS). As of September 30, 2007, there were 193,964,594 shares of common stock outstanding.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sept 30, 2007 | Nine Months Ended Sept 30, 2007 |
|---|---|---|
| Processing and Services Revenues | $1,168,067 | $3,427,602 |
| Cost of Revenues | $838,912 | $2,470,143 |
| Gross Profit | $329,155 | $957,459 |
| Operating Income | $178,897 | $516,384 |
| Net Earnings (Continuing Ops) | $201,262 | $402,048 |
| Net Earnings (Total) | $245,304 | $452,811 |
| Diluted EPS (Total) | $1.25 | $2.30 |
| Cash and Cash Equivalents | $279,076 | $279,076 (End of Period) |
| Total Debt (Current + Long-term) | $4,320,876 | $4,320,876 (End of Period) |
| Net Cash Provided by Operating Activities | N/A | $256,406 |
Note: Total Net Earnings includes significant gains from discontinued operations and asset sales.
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 10.4% for the three months and 16.8% for the nine months compared to the prior year periods. Growth was driven by organic expansion in both segments and the acquisition of eFunds on September 12, 2007.
- Profitability: Operating income increased 10.1% (three months) and 27.7% (nine months). However, gross profit margins declined slightly (28.2% vs 28.3% for three months) due to lower-margin product growth in the LPS segment and a slowing real estate market.
- One-Time Gains: Net earnings were significantly boosted by a $274.5 million pre-tax gain on the sale of the company's investment in Covansys Corporation (closed July 2007) and a $66.9 million pre-tax gain on the sale of Property Insight, LLC (reported as discontinued operations).
- Debt Levels: Total debt increased substantially to approximately $4.3 billion from $3.0 billion at year-end 2006. This increase was primarily due to the incurrence of a $1.6 billion Term Loan B to finance the eFunds acquisition.
- Stock-Based Compensation: Expenses decreased by $10.1 million for the nine-month period compared to the prior year, largely due to the absence of a $24.5 million charge in 2006 related to the vesting of performance-based options.
Guidance, Outlook, and Risks
Management Commentary and Strategic Moves
- eFunds Acquisition: Completed on September 12, 2007, for approximately $1.79 billion. The acquisition expands FIS's presence in risk management, EFT services, and prepaid card processing. Results are included in the TPS segment.
- LPS Spin-Off: On October 25, 2007, the Board approved a plan to spin off the Lender Processing Services (LPS) division into a separate publicly traded company, expected to occur in mid-2008. This involves contributing LPS assets to a new subsidiary and exchanging debt.
- Check Services Evaluation: Management is evaluating strategic alternatives for its U.S. and Australian check services businesses.
Risks and Contingencies
- Data Breach: In July 2007, a former employee misappropriated approximately 7.4 million consumer records, including checking and credit card information. While no evidence of misuse beyond marketing has been found, the company faces potential class-action lawsuits and an FTC inquiry.
- Legal Proceedings: Pending litigation includes a class action regarding the Driver's Privacy Protection Act (DPPA) involving eFunds, with a proposed settlement pending court approval. The company is also cooperating with SEC and DOJ inquiries regarding prior allegations (Grace & Digital) which were largely dismissed or settled.
- Market Risks: The company is exposed to interest rate fluctuations on its variable-rate debt, though it utilizes interest rate swaps to hedge a portion of this risk. A 1% increase in LIBOR would increase annual debt service by approximately $20.1 million.
Investor Verification Checklist
- Acquisition Integration: Verify the progress of integrating eFunds and whether the anticipated cost savings and revenue synergies are being realized.
- LPS Spin-Off Execution: Monitor the regulatory approvals (SEC, IRS) and debt exchange mechanics required to complete the LPS spin-off in 2008.
- Data Breach Impact: Track the status of the FTC inquiry and class-action lawsuits resulting from the July 2007 data theft to assess potential liability and reputational damage.
- Debt Servicing: Review the company's ability to service its increased debt load ($4.3 billion) given the mandatory prepayment clauses tied to excess cash flow and asset sales.
- Real Estate Sensitivity: Assess the impact of the slowing real estate market on the LPS segment's margins, particularly in appraisal and tax services.