FIS

Fidelity National Information Services, Inc. (FIS) - 10-Q Summary

Business Context and Reporting Period

This report covers the quarterly period ended September 30, 2008. FIS is a leading provider of technology solutions, processing services, and information-based services to the financial services industry. A material event during this period was the spin-off of Lender Processing Services (LPS) on July 2, 2008, which is now reported as discontinued operations. The company continues to operate primarily under the Transaction Processing Services segment.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 25.4% for the quarter and 25.2% for the nine-month period compared to 2007. This growth was driven primarily by the acquisition of eFunds (contributing ~$116.2 million in Q3 and ~$394.8 million in YTD) and organic growth in international channels.
• Profitability: Net earnings from continuing operations decreased significantly compared to the prior year periods due to the absence of a $114.9 million after-tax gain from the sale of Covansys stock recorded in Q3 2007. Operating income, however, increased 110% for the quarter and 25.5% for the nine-month period.
• Discontinued Operations: The 2007 results included significant earnings from the LPS segment (now spun off) and other divested units. In 2008, discontinued operations resulted in a net loss of $2.0 million for the quarter and earnings of $109.4 million for the nine months.
• Debt Reduction: In conjunction with the LPS spin-off, FIS retired the $1.585 billion Term Loan B. The company also repaid $200 million in secured notes and $100 million in eFunds notes during the period.

Guidance, Outlook, and Risks

• Outlook: Management expects cash flows from operations to be sufficient to fund operating requirements and debt service over the next twelve months. The company intends to continue paying a quarterly dividend of $0.05 per share.
• Goodwill Impairment Risk: Due to adverse economic conditions and the company's stock trading below book value, management is monitoring the carrying value of goodwill. An annual impairment test is scheduled for Q4 2008; no impairment was deemed necessary as of September 30, 2008.
• Market Risks:
  • Currency: Approximately 20% of revenues are denominated in foreign currencies (Brazilian Real, British Pound, Euro). A 10% stronger U.S. dollar would decrease international revenues by approximately $61.6 million for the nine-month period.
  • Interest Rates: A 1% increase in LIBOR would increase annual debt service by $5.3 million (net of swaps).
  • Industry Consolidation: Risks associated with failures or consolidations in the banking and financial services industry could reduce the customer base.
• Contingencies: The company is involved in litigation regarding the Driver's Privacy Protection Act (DPPA) and employee data theft. The data theft lawsuits were settled in 2008, while DPPA appeals are pending.

Investor Verification Checklist

• Discontinued Operations Impact: Verify the comparability of earnings by excluding the 2007 Covansys gain and the 2008 LPS spin-off effects.
• Goodwill Valuation: Monitor the Q4 2008 goodwill impairment test results given the stock price trading below book value.
• Debt Covenants: Confirm continued compliance with the Credit Agreement covenants, specifically the leverage and interest coverage ratios, amidst economic volatility.
• Foreign Currency Exposure: Assess the impact of exchange rate fluctuations on the Brazilian Real and other international revenue streams.
• Related Party Transactions: Review ongoing service agreements with FNF and LPS to ensure terms remain at arm's length.