FIS

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

Business Context and Reporting Period

This report covers the quarterly period ended June 30, 2007. 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). The reporting period includes the impact of the Certegy merger (completed Feb 2006) and reflects organic growth alongside strategic acquisitions.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 15.1% year-over-year for the quarter and 19.6% for the six-month period, driven by organic growth in both segments and the inclusion of an additional month of Certegy operations in the current year.
• Profitability: Net earnings surged 124% for the quarter and 97% for the six-month period compared to 2006. This significant increase is largely attributable to a $92.0 million pre-tax gain (approx. $58 million after-tax) from the sale of Covansys stock in Q2 2007.
• Operating Expenses: Selling, general, and administrative (SG&A) expenses decreased for the six-month period primarily due to a reduction in stock-based compensation ($17.2 million in 2007 vs. $32.8 million in 2006), as the 2006 period included a one-time charge for performance-based options vesting.
• Interest Expense: Interest expense decreased in the quarter due to favorable rates on a new credit facility but increased for the six-month period due to a $27.2 million charge to write-off unamortized debt issuance costs from refinancing.

Guidance, Outlook, and Risks

• Acquisition of eFunds (EFD): FIS announced a definitive agreement to acquire eFunds Corporation for approximately $1.8 billion in cash. The deal is expected to close in Q3 2007 and will be funded by cash on hand and a new $1.6 billion term loan tranche.
• Divestiture: FIS announced the sale of its Property Insight subsidiary to FNF for $95.0 million, expected to close in Q3 2007.
• Data Security Incident: On July 3, 2007, FIS disclosed the misappropriation of consumer data by a former employee. Approximately 8.5 million consumer records were stolen, including checking account and credit card information. While no evidence of fraud has been found, the company faces potential regulatory fines and reputational risk.
• Strategic Review: Management is evaluating strategic alternatives for its U.S. and Australian check services businesses.
• Debt Structure: The company refinanced its debt in January 2007 with a $2.1 billion term loan and $900 million revolving credit facility. The EFD acquisition is expected to increase the applicable interest margin on existing loans.

Investor Verification Checklist

• Covansys Gain: Verify the sustainability of earnings by excluding the one-time $92 million gain on the sale of Covansys stock to assess core operating performance.
• Data Breach Impact: Monitor for updates on the 8.5 million record data theft, specifically regarding regulatory fines, litigation costs, and potential loss of relationships with Visa/MasterCard.
• EFD Acquisition Integration: Assess the timeline and financing terms for the $1.8 billion eFunds acquisition and its impact on leverage ratios and interest coverage.
• Related Party Transactions: Review the $83.6 million in revenues from related parties (primarily FNF) for the six-month period to understand dependency risks.
• Stock Repurchases: Note the post-period repurchase of 949,000 shares for $47.4 million and the remaining authorization under the $200 million buyback program.