ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with Item 1:
Consolidated Financial Statements and the Notes thereto included elsewhere in
this report. The discussion below contains forward-looking statements that
involve a number of risks and uncertainties. Statements that are not historical
facts, including statements about our beliefs and expectations, are
forward-looking statements. Forward-looking statements are based on management's
beliefs, as well as assumptions made by, and information currently available to,
management. Because such statements are based on expectations as to future
economic performance and are not statements of fact, actual results may differ
materially from those projected. The risks and uncertainties which
forward-looking statements are subject to include, without limitation: changes
in general economic, business and political conditions, including changes in the
financial markets; the effect of governmental regulations, including the
possibility that there are unexpected delays in obtaining regulatory approvals
for our merger with Metavante; the failure to obtain required transaction
approvals from FIS' and Metavante's shareholders; the effects of our substantial
leverage which may limit the funds available to make acquisitions and invest in
our business; the risks of reduction in revenue from the elimination of existing
and potential customers due to consolidation in the banking, retail and
financial services industries or due to financial failures suffered by firms in
those industries; failures to adapt our services to changes in technology or in
the marketplace; our potential inability to find suitable acquisition candidates
or difficulties in integrating acquisitions; significant competition that our
operating subsidiaries face; and other risks detailed in the "Statement
Regarding Forward-Looking Information," "Risk Factors" and other sections of the
Company's Form 10-K and other filings with the Securities and Exchange
Commission. All forward-looking statements included in this document are based
on information available at the time of the document. FIS assumes no obligation
to update any forward-looking statement.
Overview
We are one of the largest global providers of processing services to
financial institutions and businesses, serving customers in over 90 countries
throughout the world. We are among the market leaders in core processing, card
issuing services and check point-of-sale verification and guarantee. We offer a
diversified service mix, and benefit from the opportunity to cross-sell multiple
services across our broad customer base. We have four reporting segments:
Financial Solutions, Payment Solutions, International and Corporate and Other. A
description of these segments is included in Note 8 to the Notes to Consolidated
Financial Statements (Unaudited). Revenues by segment and the results of
operations of our segments are discussed below in Segment Results of Operations.
Business Trends and Conditions
A significant portion of our revenue is derived from transaction processing
fees. As a result, the number of deposit and card transactions can affect our
business and thus the condition of the overall economy can have an effect on our
growth. In light of current economic conditions, we are seeking to manage our
costs and capital expenditures prudently. We reduced both domestic headcount and
capital expenditures in 2009 from 2008 levels.
Card transactions continue to increase as a percentage of total point-of-sale
payments, which fuels continuing demand for card-related services. We continue
to launch new services aimed at accommodating this demand. In recent years, we
have introduced a variety of stored-value card types, Internet banking, and
electronic bill presentment/payment services, as well as a number of card
enhancement and loyalty/reward programs. The common goal of these offerings
continues to be convenience and security for the consumer coupled with value to
the financial institution. At the same time, the use of checks continues to
decline as a percentage of total point-of-sale payments. We have announced that
we are considering strategic alternatives for our remaining check businesses,
although no assurance can be given as to whether or when any disposal
transaction or other change with respect to those businesses will be
accomplished.
In many of the businesses of our Financial Solutions segment, we compete for
both licensing and outsourcing business, and thus are affected by the decisions
of financial institutions to utilize our services under an outsourced
arrangement or to process in-house under a software license and maintenance
agreement. As a provider of outsourcing solutions, we benefit from multi-year
recurring revenue streams, which help moderate the effects of year to year
economic changes on our results of operations. Generally, demand for outsourcing
solutions has increased over time as service providers such as us realize
economies of scale and improve their ability to provide services that improve
customer efficiencies and reduce costs.
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Consolidation within the banking industry may be beneficial or detrimental to
our businesses. When consolidations occur, merger partners often operate
disparate systems licensed from competing service providers. The newly formed
entity generally makes a determination to migrate its core systems to a single
platform. When a financial institution processing client is involved in a
consolidation, we may benefit by expanding the use of our services if such
services are chosen to survive the consolidation and support the newly combined
entity. Conversely, we may lose market share if a customer of ours is involved
in a consolidation and our services are not chosen to survive the consolidation
and support the newly combined entity. While it is difficult to mitigate the
risks of consolidations, we seek to do so through offering competitive services
and trying to take advantage of situations on a case by case basis depending on
the specific opportunities at the combined company.
We believe that we are in the midst of one of the most difficult times that
has ever existed for financial institutions, retailers and other businesses in
the United States and internationally. We expect there to be a significant
number of bank failures in the next few years, which may be offset to a degree
by somewhat decreased bank acquisition activity. However, we believe that our
potential exposure to bank failures and forced government actions that have
occurred to date is less than one percent of our revenues. Additionally, this
exposure does not consider any incremental revenues we may generate from
potential license fees or service associated with assisting surviving
institutions with integrating acquired assets resulting from financial failures.
In the current economy, we believe customers may turn more to outsourcing as a
means to reduce fixed costs and gain a competitive edge. However, although we
have lately seen an increase in requests for outsourcing proposals, it is not
yet certain how many of these requesting financial institutions will move
forward with their potential projects given current economic conditions.
Financial institutions may defer upgrades or other outsourcing projects until
conditions improve. We believe that software sales and to a lesser degree
professional services will be the most at risk as far as purchases that
financial institutions may defer, because in general they tend to be more
discretionary than outsourcing projects. The software sales and professional
services represented approximately 14% of our revenues during the year ended
December 31, 2008. We are addressing the foregoing trends and business
conditions in part by managing our costs and capital expenditures, as described
above, and by ensuring that the pricing and quality of our services continue to
deliver value for our existing and potential customers.
While we believe that we are well positioned to withstand the current
financial crisis, there are factors outside our control that might impact our
operating results that we may not be able to fully anticipate as to timing and
severity, including but not limited to adverse effects if banks are
nationalized, continued global economic conditions worsen, causing further
slowdowns in consumer spending and lending, and the impact on our ability to
access capital should any of our lenders fail.
Critical Accounting Policies
There have been no significant changes to our critical accounting policies
since our Form 10-K was filed on February 27, 2009, as amended by our Form
10-K/A filed on March 10, 2009.
Transactions with Related Parties
We are a party to certain historical related party agreements, which are more
particularly described in Note 3 to the Notes to Consolidated Financial
Statement.
Discontinued Operations
During 2008, we discontinued certain operations in our former Transaction
Processing Services and Lender Processing Services segments, which are reported
as discontinued operations in the Consolidated Statements of Earnings for the
three-month periods ended March 31, 2009 and 2008, in accordance with SFAS 144.
See Note 2 to the Notes to Consolidated Financial Statements for a detailed
description of discontinued operations.
Factors Affecting Comparability
On July 2, 2008, we completed the LPS spin-off. The results of operations of
the Lender Processing Services segment through the July 2, 2008 spin-off date
are reflected as discontinued operations in the Consolidated Statements of
Earnings, in accordance with SFAS 144, for all periods presented.
As a result of the above transaction, the results of operations in the
periods covered by the Consolidated Financial Statements may not be directly
comparable.
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Comparisons of three-month periods ended March 31, 2009 and 2008
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