FIS 2023 First-Quarter 10-Q Summary
Business and period: Fidelity National Information Services, Inc. (FIS) provides financial technology and processing services through Banking Solutions, Merchant Solutions, Capital Market Solutions, and Corporate and Other. This unaudited report covers the three months ended March 31, 2023, compared with the same period in 2022. Segment comparisons reflect reclassified prior-period results.
Financial results
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $3.510 billion | $3.492 billion |
| Gross profit / margin | $1.341 billion / 38% | $1.250 billion / 36% |
| Operating income / margin | $337 million / 10% | $157 million / 4% |
| Net earnings attributable to FIS common stockholders | $140 million | $120 million |
| Diluted EPS | $0.24 | $0.20 |
| Operating cash flow | $632 million | $896 million |
| Capital expenditures | $279 million | $412 million |
Revenue rose 1%; higher gross profit reflected lower cost of revenue, including lower intangible amortization, while operating income also benefited from the absence of the prior-year $58 million asset impairment. Interest expense increased to $137 million from $43 million, primarily due to higher rates and debt outstanding. Other income/expense was a net expense of $11 million versus $61 million of income in Q1 2022. The effective tax rate was 25%, compared with 31%.
Segment results: Banking revenue grew 2% to $1.685 billion, but Adjusted EBITDA fell 4% to $676 million and margin declined to 40.1% from 42.6%. Merchant revenue declined 1% to $1.105 billion; Adjusted EBITDA fell 8% to $481 million and margin declined to 43.5% from 47.0%. Capital Markets revenue grew 6% to $663 million; Adjusted EBITDA rose 7% to $320 million and margin improved to 48.2% from 47.9%. Corporate and Other revenue fell 39% to $57 million; Adjusted EBITDA loss widened to $118 million from $111 million. Management cited foreign exchange, cost inflation, revenue mix, and segment-specific volume trends.
Liquidity, debt, and balance sheet
At March 31, 2023, cash and cash equivalents were $1.871 billion, total debt outstanding was approximately $20.0 billion, and available liquidity was $4.847 billion, including $2.976 billion of credit-facility capacity. Debt’s effective weighted-average interest rate was 3.0%; 38% was variable-rate. A 100-basis-point increase in rates on variable-rate debt would raise annual interest expense by an estimated $81 million. Cash from operations declined $264 million year over year, which FIS attributed to earnings and working-capital timing. Cash, cash equivalents, and restricted cash totaled $4.342 billion at quarter-end, down from $4.813 billion at year-end.
FIS said cash, operating cash flows, and borrowing capacity should fund operating needs, capital expenditures, and mandatory debt service for the next 12 months and foreseeable future. The company paid $309 million in dividends during the quarter and plans to prioritize debt reduction over share repurchases in 2023. The quarterly dividend was set at $0.52 per share. In January, FIS paid $173 million to acquire the Virtus founders’ remaining interest; it also exercised a Tax Receivable Agreement option involving fixed payments of $138 million.
Material developments, outlook, and risks
- Merchant separation: FIS announced plans on February 13, 2023 to spin off Merchant Solutions, potentially retaining up to 19.9%. Completion is targeted by early 2024, subject to approvals, tax-related conditions, financing, and other customary conditions. FIS expects one-time costs and revenue and expense dis-synergies, including higher interest expense after the separation; completion and benefits are not assured.
- Outlook and cost program: Management expects 2023 revenue growth to be substantially slower than in 2022 and margin compression versus 2022, citing slower economic growth, inflation, longer sales cycles, and continuing Merchant pressures. Future Forward targets $1.25 billion of cash savings by year-end 2024, before the expected effect of the spin-off; these are targets, not assured results.
- Merchant and goodwill: Merchant trends remained pressured, particularly in SMB, and management expected near-term continuation. FIS recorded a $17.6 billion Merchant goodwill impairment in Q4 2022. Its March 2023 interim review concluded goodwill was not impaired, but management noted macroeconomic, interest-rate, and currency changes could lead to future impairment.
- Banking sector and operating exposures: FIS said its revenue exposure to contract terminations involving banks that closed in March 2023 was nominal and that it continued to serve them during transition. The filing nevertheless identifies risks from bank failures, client liquidity and collections, uninsured deposits, and possible effects on credit-facility providers. Other risks include cybersecurity, service interruptions, merchant chargebacks/defaults, competition, foreign exchange, and interest rates.
- Legal and other contingencies: Putative securities class actions filed in March and April 2023 and a shareholder derivative action filed in April relate to disclosures about Merchant Solutions; FIS disputes the claims, but outcomes are uncertain. Brazilian tax authorities’ claims could total approximately $46 million; FIS has not accrued a liability because it does not consider loss probable. TRA liabilities were $172 million at quarter-end.
Important facts for investors to verify
- Progress, timing, approvals, financing, tax treatment, costs, and expected debt and dis-synergies of the proposed Merchant spin-off.
- Whether 2023 revenue and margin trends, especially in Merchant and Banking, develop as management expects.
- Operating cash flow, working-capital movements, debt reduction, variable-rate exposure, and availability of credit facilities.
- Achievement and realized costs of Future Forward savings, and the potential for further goodwill impairment.
- Developments in the securities litigation, Brazilian tax claims, TRA payments, and exposure to bank failures or merchant losses.