Fidelity National Information Services, Inc. (FIS) — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Unaudited results are presented under U.S. GAAP; amounts below are in U.S. dollars.
Business context
FIS provides financial technology and processing services through Banking Solutions, Merchant Solutions, Capital Market Solutions, and Corporate and Other. Most revenue is recurring, particularly in Banking and Capital Markets. Segment comparisons were recast for a 2023 realignment.
Financial results and material changes
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $3.746bn | $3.719bn | $7.256bn | $7.210bn |
| Gross profit / margin | $1.558bn / 42% | $1.485bn / 40% | $2.900bn / 40% | $2.735bn / 38% |
| Operating income (loss) | $(6.316)bn | $374m | $(5.978)bn | $531m |
| Net income (loss) attributable to FIS common stockholders | $(6.596)bn | $277m | $(6.456)bn | $397m |
| Diluted earnings (loss) per share | $(11.14) | $0.45 | $(10.91) | $0.65 |
- Revenue grew 1% in both the quarter and first half. Q2 recurring revenue was $3.283bn. Management attributed growth mainly to Banking and Capital Markets, with higher Merchant transaction volumes in Q2.
- A $6.841bn impairment charge, principally goodwill in Merchant, drove the reported operating and net losses. The charge followed a valuation assessment using the agreed Worldpay sale price; the reporting unit’s carrying value was reduced to estimated fair value.
- Q2 segment revenue / Adjusted EBITDA: Banking $1.702bn / $724m; Merchant $1.312bn / $633m; Capital Markets $672m / $337m; Corporate and Other $60m / $(143)m. Banking Adjusted EBITDA margin fell to 42.5% from 44.5%; Merchant rose to 48.3% from 47.1%; Capital Markets rose to 50.2% from 49.2%. Adjusted EBITDA is a segment performance measure, not GAAP net income.
- Six-month operating cash flow was $1.719bn, down from $1.920bn. Capital expenditures, excluding certain financing obligations, were $546m versus $752m. Cash, cash equivalents and restricted cash at period-end were $4.361bn, versus $4.813bn at year-end 2022.
- At June 30, cash and cash equivalents were $1.982bn; available liquidity was $4.037bn, including $2.055bn of credit-facility capacity. Debt outstanding was $19.5bn, including $5.144bn short-term borrowings; management reported an effective weighted-average interest rate of 3.4%. Net interest expense was $153m in Q2 versus $47m a year earlier, reflecting higher rates and debt outstanding.
- Total assets were $53.574bn versus $63.278bn at December 31, 2022; goodwill fell to $27.681bn from $34.276bn, primarily due to the Merchant impairment. FIS stockholders’ equity declined to $20.266bn from $27.218bn.
Outlook, transaction, and management commentary
- Management expected 2023 revenue growth to be substantially slower than 2022 and margin compression versus 2022, citing slower economic growth, prolonged sales cycles, inflation, higher interest costs, currency movements, and Merchant growth pressures. It expected longer-term growth and margin improvement as conditions improve and management actions take effect. No specific full-year revenue or earnings guidance value is provided in the filing text.
- On July 5, 2023, after quarter-end, FIS agreed to sell a 55% interest in Worldpay Merchant Solutions to GTCR in a transaction valued at up to $18.5bn, including up to $1.0bn of contingent consideration. FIS expects approximately $11.7bn of net proceeds at closing and will retain a non-controlling 45% interest. Closing was expected by Q1 2024, subject to approvals and customary conditions. FIS planned to use proceeds for debt reduction, shareholder returns and general corporate purposes; Worldpay results are planned to be reported as discontinued operations beginning Q3 2023.
- Future Forward annualized run-rate cash savings exceeded $315m exiting Q2. Following the planned Worldpay separation, the target was revised from $1.25bn to $1.0bn in post-separation cash savings exiting 2024.
- FIS declared a $0.52 quarterly dividend payable September 22, 2023. Management said debt reduction would be prioritized over repurchases in H2 2023. Future dividends and repurchases remain subject to board discretion and other constraints.
Risks, contingencies, and unusual items
- The Worldpay transaction may be delayed, fail to close, or produce different proceeds, costs, benefits, or dis-synergies than anticipated. The held-for-sale valuation may also result in further impairment.
- Other risks include interest-rate and currency exposure, merchant chargebacks and defaults, cybersecurity and operational disruption, economic weakness, bank failures and client liquidity, and competitive and regulatory changes. FIS disclosed new risk factors concerning bank failures and the pending Worldpay sale.
- FIS disclosed consolidated securities litigation and shareholder demands related to Worldpay valuation, integration, and synergies; it said it intended to contest the matters. The filing also describes approximately $49m of potential Brazilian tax claims, for which FIS did not record a liability because it considered a loss not probable.
- Management stated that available liquidity and operating cash flows should fund operating needs, capital expenditures and mandatory debt service for the next 12 months and foreseeable future. Disclosure controls were concluded effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether the Worldpay sale closes on the anticipated terms and timeline, and the final net proceeds, contingent consideration, transaction costs, and retained-interest value.
- Whether Merchant performance, goodwill valuation, and any held-for-sale adjustments lead to further impairment.
- Progress toward the revised Future Forward savings target and the effect of separation costs or dis-synergies.
- Debt reduction, short-term borrowing levels, interest expense, available liquidity, and the company’s ability to maintain investment-grade ratings.
- Underlying segment growth and margins excluding the impairment, particularly Banking margin trends and Merchant volumes; also monitor litigation and the Brazilian tax claims.