Fidelity National Information Services, Inc. — Q1 2010 Form 10-Q
Business context and reporting period
For the three months ended March 31, 2010. FIS provides banking technology, payment processing and related services through Financial Solutions Group (FSG), Payment Solutions Group (PSG), International Solutions Group (ISG), and Corporate and Other. The October 1, 2009 acquisition of Metavante materially expanded the business; accordingly, Q1 2010 results are not directly comparable with Q1 2009, which did not include Metavante.
Key financial metrics
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Revenue | $1,249.6 million | $794.1 million |
| Gross profit / gross margin | $342.4 million / 27.4% | $175.7 million / 22.1% |
| Operating income / operating margin | $183.8 million / 14.7% | $79.8 million / 10.0% |
| Continuing-operations earnings attributable to FIS | $94.7 million | $33.0 million |
| Net earnings attributable to FIS | $93.6 million | $33.0 million |
| Diluted EPS | $0.25 | $0.17 |
| Cash from operations | $271.6 million | $162.9 million |
| Capital expenditures | $58.2 million | $45.3 million |
At March 31, 2010, cash and cash equivalents were $463.9 million, total debt was $3,052.5 million (including $236.9 million current), and total assets were $13,834.0 million. Current assets were $1,593.2 million and current liabilities $1,258.7 million. Cash included approximately $238.6 million held in foreign jurisdictions. The company reported $700.0 million of combined undrawn Revolving Loan and accounts-receivable-facility capacity; no capital was outstanding under the AR Facility.
Changes versus the prior comparable period
- Revenue rose 57.4%, primarily from Metavante, with additional contributions from software and professional services, transaction volumes, and $24.2 million of favorable foreign-currency effects; paper-based retail check declines partly offset growth.
- Gross margin improved 530 basis points and operating margin 470 basis points. Management attributed improvement to Metavante-related synergies, cost containment and operating efficiencies.
- SG&A increased $62.7 million, including $17.3 million of integration and merger-related charges. Interest expense declined $2.9 million, reflecting lower rates after higher-rate swaps expired, partly offset by higher debt.
- FSG revenue was $443.5 million and operating margin 33.3%; PSG revenue was $618.8 million and margin 33.1%; ISG revenue was $195.0 million and margin 8.3%. ISG margin declined from 8.9%, primarily due to revenue mix.
- Operating cash flow increased $108.7 million year over year, primarily because of Metavante earnings. Investing activities provided $2.5 million, including $71.5 million of asset-sale proceeds, offset in part by $50.0 million for the merchant portfolio acquisition. Financing used $239.0 million, including $2,042.0 million of debt repayments, $32.2 million of share repurchases, and $19.5 million of dividends.
Outlook, commentary, risks and unusual items
- Management expected operating cash flows over the next 12 months to cover operating needs and debt service. It expected capital expenditures of approximately 5%–6% of 2010 revenue and said it expected to continue the quarterly $0.05 dividend, subject to board discretion and debt restrictions. No specific earnings or revenue guidance was provided.
- Management expected to realize Metavante cost and revenue synergies over 24 months. About 85% of revenue was described as recurring under multi-year agreements. Risks cited include weaker transaction activity or discretionary customer spending, bank failures and consolidation, technology and pricing competition, acquisition integration and synergy shortfalls, substantial leverage, and possible reduced access to capital.
- Debt maturities are concentrated in 2012: scheduled principal maturities were $1,920.0 million that year, including the Term Loan A balance. FIS reported compliance with credit-facility covenants. A 100-basis-point LIBOR increase was estimated to raise annual debt service by $3.1 million after swaps.
- Banco Santander stopped processing its card portfolio through the Brazilian venture in January 2010. FIS was negotiating its exit and the future relationship with Banco Bradesco. FIS received approximately $34.5 million in partial settlement proceeds, recorded as a deferred liability pending final resolution.
- FIS completed the $50.0 million merchant portfolio asset purchase, which is expected to increase retained revenue; customer relationship assets will be amortized over five years. ClearPar was sold on January 1, 2010 for $71.5 million; its results are reported as discontinued operations, including a $1.1 million after-tax loss in Q1 2010.
- FIS early adopted new multiple-deliverable revenue guidance prospectively from January 1, 2010. Adoption had no material impact; reported revenue would have been approximately $2.0 million lower under the prior guidance. The company repurchased 1.4 million shares for $32.2 million under a program authorizing up to 15.0 million shares through January 2013.
- Disclosed litigation included a Fair Credit Reporting Act class action, with prior subclass certification later reversed, and a Driver’s Privacy Protection Act appeal involving a subsidiary. A Metavante-merger shareholder settlement was approved in March and was described as not material. A Lehman-related swap dispute was settled, with no material financial impact reported.
Important facts for investors to verify
- How much of revenue and margin growth reflects sustainable organic performance versus Metavante acquisition contributions, favorable currency, and integration effects.
- Progress against the expected 24-month synergy plan, including integration costs and customer retention.
- Refinancing, repayment, and covenant plans for the large 2012 debt maturity concentration, as well as liquidity and interest-rate exposure.
- Final terms and financial consequences of Banco Santander’s venture exit and the renegotiated Banco Bradesco relationship, including treatment of the $34.5 million deferred liability.
- Whether the stated 2010 capital-spending outlook, recurring-revenue profile, dividend plans, and share repurchases remain consistent with cash generation and debt obligations.