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FIS > SEC Filings for FIS > Form 10-Q on 2-May-2013All Recent SEC Filings

Show all filings for FIDELITY NATIONAL INFORMATION SERVICES, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for FIDELITY NATIONAL INFORMATION SERVICES, INC.


2-May-2013

Quarterly Report


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: Condensed Consolidated Financial Statements (Unaudited) and the Notes thereto included elsewhere in this report. The discussion below contains forward-looking statements within the meaning of the U.S. federal securities laws. Statements that are not historical facts, including statements regarding our expectations, hopes, intentions, or strategies regarding the future, are forward-looking statements. These statements relate to, among other things, future events and our future results, and involve a number of risks and uncertainties. Forward-looking statements are based on management's beliefs, as well as assumptions made by, and information currently available to, management. Any statements that refer to beliefs, expectations, projections or other characterizations of future events or circumstances and other statements that are not historical facts are forward-looking statements. In many cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "potential," or "continue," or the negative of these terms and other comparable terminology.
Actual results, performance or achievement could differ materially from those contained in these forward-looking statements. The risks and uncertainties that forward-looking statements are subject to include without limitation:

          changes in general economic, business and political conditions,
           including the possibility of intensified international hostilities,
           acts of terrorism, and changes in either or both the United States and
           international lending, capital and financial markets;


          the effect of legislative initiatives or proposals, statutory changes,
           governmental or other applicable regulations and/or changes in
           industry requirements, including privacy regulations;


          the risks of reduction in revenue from the elimination of existing and
           potential customers due to consolidation in or new laws or regulations
           affecting the banking, retail and financial services industries or due
           to financial failures or other setbacks suffered by firms in those
           industries;


          changes in the growth rates of the markets for core processing, card
           issuer, and transaction processing services;


          failures to adapt our services and products to changes in technology
           or in the marketplace;


          internal or external security breaches of our systems, including those
           relating to the theft of personal information and computer viruses
           affecting our software or platforms, and the reactions of customers,
           card associations, government regulators and others to any such
           events;


          the reaction of our current and potential customers to future
           communications from us or our regulators regarding information
           security, risk management and internal audit;


          competitive pressures on product pricing and services including the
           ability to attract new, or retain existing, customers;

an operational or natural disaster at one of our major operations centers;

          and other risks detailed elsewhere in the "Statement Regarding
           Forward-Looking Information," "Risk Factors" section and other
           sections of the Company's Annual Report on Form 10-K for the year
           ended December 31, 2012, this Form 10-Q and our other filings with the
           Securities and Exchange Commission.

Other unknown or unpredictable factors also could have a material adverse effect on our business, financial condition, results of operations and prospects. Accordingly, readers should not place undue reliance on these forward-looking statements. These forward-looking statements are inherently subject to uncertainties, risks and changes in circumstances that are difficult to predict. Except as required by applicable law or regulation, we do not undertake (and expressly disclaim) any obligation and do not intend to publicly update or review any of these forward-looking statements, whether as a result of new information, future events or otherwise. You should carefully consider the possibility that actual results may differ materially from our forward-looking statements.

Overview

FIS is a leading global provider dedicated to banking and payments technologies. With a long history deeply rooted in the financial services sector, FIS serves more than 14,000 institutions in over 100 countries. Headquartered in Jacksonville, Florida, FIS employs more than 35,000 people worldwide and holds leadership positions in payment processing and banking solutions, providing software, services and outsourcing of the technology that drives financial institutions. FIS topped the 2012 and 2011 annual FinTech 100 list, is a member of the Fortune 500 U.S. and of Standard and Poor's (S&P) 500 Index. We have four


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reporting segments: FSG, PSG, ISG and Corporate and Other. A description of these segments is included in Note 12 to the Notes to Condensed 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

Our revenue is derived from a combination of recurring services, professional services and software license fees. Recurring services, which have historically represented approximately 80% of our revenue, are provided under multi-year contracts that contribute relative stability to our revenue stream. However, a significant portion of these recurring revenues are derived from transaction processing fees that fluctuate with the level of deposit and card transactions associated with consumer and commercial activity. Sales of software licenses and professional services are less predictable and a portion can be regarded as discretionary spending by our customers. We continually seek opportunities to enhance revenues and to manage our costs and capital expenditures prudently in light of any shifting revenue trends and in response to broader economic conditions.

We acquired Capco in December 2010 to broaden our capabilities to provide strategic and business transformation consulting. While Capco has generated increased revenues, the lower profit margin realized for professional services as compared to our other solutions has resulted in profit margin compression. The addition of Capco has also reduced the relative proportion of our recurring revenue stream.

As the payment market continues to evolve from paper-based to electronic, we continue to add new services responsive to this trend. Card transactions continue to increase as a percentage of total point-of-sale payments, which fuels continuing demand for card-related services. In recent years, we have added a variety of stored-value card types, internet banking, mobile banking solutions, 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 and merchant. The evolution to electronic transactions also intensifies the vulnerability to fraud, increasing the demand for our risk management solutions. At the same time, the use of checks continues to decline as a percentage of total payments, which negatively impacts our check warranty and item-processing businesses.

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. One of the current trends in the financial services industry from which we are benefiting is the migration by our clients to an outsourced model to improve their profitability.

While we are cautious regarding broader economic improvement, we expect banks to continue investing in new technology and believe we are well positioned to capitalize as the overall market continues to recover. We anticipate consolidation within the banking industry will continue, including additional bank failures and continuing merger and acquisition activity. As a whole, consolidation activity is detrimental to our business. However, consolidation resulting from specific merger and acquisition transactions may be beneficial or detrimental to our business. 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 and payments 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 we are providing services to both entities, or we are not the merging parties' provider of core or payment processing, or 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. It is also possible that larger financial institutions resulting from consolidation would have greater leverage in negotiating terms or could decide to perform in-house some or all of the services that we currently provide or could provide. We seek to mitigate the risks of consolidations by offering other competitive services to take advantage of specific opportunities at the surviving company.

The Dodd-Frank Act and associated Durbin Amendment were passed and signed into law in 2010. The Dodd-Frank Act represents a comprehensive overhaul of the regulations governing the financial services industry within the United States, established the new Federal Consumer Financial Protection Bureau and will require this and other federal agencies to implement many new regulations. Regulations under the Durbin Amendment, released by the Federal Reserve in June 2011, mandate a cap on debit transaction interchange fees on cards issued by financial institutions with assets greater than $10.0 billion. This legislated interchange fee cap has the potential to alter the type and/or volume of card-based transactions that we process on behalf of our customers, but has had an insignificant impact thus far. As we continue to monitor the market participants' actions, we believe we are competitively positioned to offset or take advantage of any potential shifts in payment


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transaction volume as we offer multiple payment solutions and options to our clients. The network exclusivity provisions of the Durbin Amendment, which require all debit card issuers to have at least two unaffiliated networks for purposes of processing signature debit and PIN debit transactions, favorably impacted transaction volumes in our NYCE PIN debit network in 2012; however, market participants' actions may positively or negatively impact transaction volumes in the future. In order for our products and services to comply with these regulations and enable our customers to effectively compete in the marketplace, we may need to make additional capital investments to modify our solutions. Further, the requirements and impacts of the regulations could result in changes in our customers' business practices that may alter their delivery of services to consumers and the timing of their investment decisions, which could change the demand for our software and services as well as alter the type or volume of transactions that we process on behalf of our customers.

Notwithstanding challenging global economic conditions, our international business continued to experience growth across all major regions during the three months ended March 31, 2013, including Europe, Brazil and Asia. The majority of our European revenue is generated by clients in Germany, France and the United Kingdom. Those countries encountering the most significant economic challenges, including Spain, Italy, Greece, Ireland and Portugal, account for less than 1% of our international revenue base and less than 0.5% of our consolidated revenue.

Information Security

Globally, attacks on information technology systems continue to grow in frequency, complexity and sophistication. Such attacks have become a point of focus for individuals, businesses and governmental entities. The objectives of these attacks include, among other things, gaining unauthorized access to systems to facilitate financial fraud, disrupt operations, cause denial of service events, corrupt data, and steal non-public information. FIS is not immune to such attacks. As part of our business, we electronically receive, process, store and transmit a wide range of confidential information, including sensitive customer information and personal consumer data. We also operate payment, cash access and prepaid card systems. FIS, like any large financial technology service provider, is subject to attempted cyber-attacks on a regular basis. A successful cyber-attack on an FIS system that resulted in sensitive information being compromised, fraud losses or other adverse consequences could have a material adverse effect on the company.

As a Multi-Regional Data Processing Servicer (MDPS), FIS continues to be examined by and have regular interaction with the federal agencies that regulate financial institutions. These regulators have the authority to take actions that could have a material adverse effect on FIS, if they believed that it was necessary to do so in order to protect the safety and soundness of the financial institutions they regulate. FIS regularly reports to its regulators regarding the company's continual efforts to enhance its information security and risk management technology, programs and procedures.

Due to the increasing frequency and sophistication of cyber-attacks, we will continue to make substantial investments in our network security in order to protect our information technology systems and data, as well as the information technology data of the clients that we process.

2011 Cyber-Incident. As previously disclosed, in the first quarter of 2011 we experienced a cyber-incident during which intruders gained unauthorized access to the FIS network. During the incident, the intruders moved across a number of information technology environments, viewed and downloaded FIS and FIS client-related information, and ultimately executed approximately $13 million in unauthorized ATM transactions through one of our prepaid card platforms, resulting in a loss to FIS. We are aware of no evidence that any of our clients or their customers suffered any direct financial loss as a result of the 2011 cyber-incident.

Since the incident, we have taken significant steps to improve our information security, including:

Hiring of a new Chief Information Security Officer and Chief Risk Officer;

Increasing the monitoring of servers within our environment to identify potential unauthorized activity and implementing enhanced fraud monitoring and network controls;

Expanding risk assessment coverage of internet-facing products and services;

Hiring additional cyber security, incident response and risk management staff with significant industry experience;

Improving our inventory of technology, data and information security assets worldwide;

Enhancing layers of network security, including intrusion prevention, firewall restrictions, employee access restrictions, and transaction monitoring to detect fraudulent activity; and

Enhancing network segmentation to separate production environments.


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In 2012, we commissioned an investigation into the 2011 cyber-incident. The investigation report was recently completed and, among other things, supports conclusions previously reached by third party consultants and federal law enforcement, including:

The 2011 cyber-incident was perpetrated by a sophisticated criminal ring whose intent was to execute an ATM cash-out theft from a prepaid card platform;

The 2011 cyber-incident was contained in April 2011 as a result of counter-measures taken by FIS; and

There was no evidence of participation in the cyber-incident by any FIS insider.

During the course of this investigation, the investigators provided us with additional information indicating that a limited amount of data affecting a specific group of clients may have been accessed or, in some cases, was accessed during the 2011 cyber-incident. We have communicated this information to the affected clients and advised them of the steps that we have taken to improve our information security. We do not expect that this additional information and the communication thereof to our clients will have a material adverse effect on the Company.

FIS is continuing to cooperate with federal law enforcement in its ongoing investigation of this event. Although we believe that our investigation of the 2011 cyber-incident has been comprehensive, it is possible that additional information regarding the 2011 cyber-incident could be discovered that would have a material adverse effect on the Company.

Critical Accounting Policies
There have been no significant changes to our critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2012.

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