Business Context and Reporting Period
Company: Fidelity National Information Services, Inc. (FIS)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three and six months ended June 30, 2008
Business Overview: FIS is a leading global provider of technology solutions and processing services to the financial services industry. At the time of this report, the company operated two primary segments: Transaction Processing Services and Lender Processing Services (LPS).
Significant Event: On July 2, 2008, immediately following the reporting period, FIS completed the spin-off of its Lender Processing Services segment into a separate publicly traded company, Lender Processing Services, Inc. (LPS, Inc.).
Key Financial Metrics
| Metric (in thousands) | Three Months Ended June 30, 2008 |
Three Months Ended June 30, 2007 |
Six Months Ended June 30, 2008 |
Six Months Ended June 30, 2007 |
|---|---|---|---|---|
| Revenues | $1,339,038 | $1,125,034 | $2,629,990 | $2,196,474 |
| Gross Profit | $376,074 | $322,573 | $738,471 | $621,632 |
| Operating Income | $174,123 | $179,369 | $345,901 | $338,237 |
| Net Earnings | $71,907 | $148,004 | $142,407 | $207,507 |
| Diluted EPS (Continuing Ops) | $0.38 | $0.74 | $0.73 | $1.03 |
| Cash from Operations (6mo) | $242,832 | $243,087 | ||
| Debt (Total) | ||||
| Cash & Equivalents | $207,035 | $207,035 |
Note: Debt figures represent the balance as of June 30, 2008, prior to the subsequent retirement of $1.585 billion in Term Loan B debt associated with the LPS spin-off.
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 19.0% ($214.0 million) for the quarter and 19.7% ($433.5 million) for the six months compared to the prior year. This growth was primarily driven by the inclusion of the eFunds Corporation acquisition (completed Sept 2007) and organic growth in International and Integrated Financial Solutions channels.
- Profitability Decline: Despite revenue growth, Net Earnings from continuing operations decreased significantly (50% for the quarter, 29% for the six months). This was largely due to a one-time $92.0 million gain on the sale of Covansys stock recorded in the prior year (2007) which was absent in 2008.
- Expense Increases: Selling, General, and Administrative (SG&A) expenses rose sharply ($55.8 million increase for the quarter). Drivers included incremental costs from the eFunds acquisition, restructuring charges related to the LPS spin-off ($5.6 million), and accelerated stock-based compensation ($14.1 million for eFunds awards).
- Interest Expense: Interest expense increased to $62.8 million (quarter) and $125.2 million (six months) due to higher average debt balances from the eFunds financing, partially offset by lower interest rates.
Outlook, Risks, and Unusual Items
- LPS Spin-Off: The most significant event is the July 2, 2008 spin-off of the Lender Processing Services segment. Pro forma financials indicate that post-spin-off, FIS will retain the Transaction Processing Services segment and retire $1.585 billion of debt. Pro forma net earnings for the six months ended June 30, 2008, would have been $30.998 million ($0.16 diluted EPS) excluding the LPS segment.
- Discontinued Operations: The company reported losses from discontinued operations of $1.6 million for the quarter and a negligible gain of $0.034 million for the six months, related to the divestiture of Certegy Gaming Services, FIS Credit Services, and Homebuilders Financial Network.
- Related Party Transactions: Significant revenue ($72.7 million for the quarter) and expenses ($10.4 million for the quarter) were derived from transactions with Fidelity National Financial, Inc. (FNF). Many of these agreements, particularly regarding title agency services, ceased to be part of FIS results following the LPS spin-off.
- Litigation: The company is involved in various litigation matters, including a settled class action regarding employee data theft (awaiting final court approval) and ongoing disputes regarding the Driver's Privacy Protection Act (DPPA).
- Share Repurchases: The Board authorized a new $250 million share repurchase plan in April 2008. Through June 30, 2008, the company repurchased 6.0 million shares for approximately $236.2 million.
Investor Verification Checklist
- Spin-Off Impact: Verify the pro forma financial impact of the LPS spin-off on future revenue streams, specifically the loss of title agency commissions and related party revenues from FNF.
- Debt Reduction: Confirm the successful retirement of the $1.585 billion Term Loan B and the resulting reduction in interest expense in the subsequent quarter.
- eFunds Integration: Assess the realization of cost synergies from the eFunds acquisition, given the reported increase in SG&A and integration costs.
- Stock Compensation: Review the sustainability of stock-based compensation expenses, noting the one-time acceleration charges ($14.1 million) recorded in the period.
- Litigation Exposure: Monitor the status of the DPPA class action lawsuits and the final court approval of the employee data theft settlement.