FIS 2020 Q2 Form 10-Q Summary
Business context and period. Fidelity National Information Services, Inc. (FIS) filed an unaudited quarterly report for the three and six months ended June 30, 2020. FIS provides technology and payment-processing services to merchants, financial institutions and capital-markets firms. Results include Worldpay from its July 31, 2019 acquisition, so year-over-year revenue and segment comparisons are not like-for-like. FIS reports Merchant Solutions, Banking Solutions, Capital Market Solutions, and Corporate and Other.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $2.962B | $2.112B | $6.039B | $4.169B |
| Gross profit / margin | $916M / 31% | $708M / 34% | $1.905B / 32% | $1.384B / 33% |
| Operating income / margin | $46M / 2% | $391M / 19% | $154M / 3% | $706M / 17% |
| Net earnings attributable to FIS common stockholders | $19M | $154M | $35M | $302M |
| Diluted EPS | $0.03 | $0.47 | $0.06 | $0.92 |
| Cash provided by operating activities | $1.231B | Not separately stated | $1.613B | $820M |
- Revenue and earnings: Q2 revenue rose 40% and first-half revenue rose 45%, primarily from Worldpay; pandemic-related processing-volume declines and unfavorable currency movements partly offset growth. Despite higher revenue, operating income and diluted EPS fell sharply. Higher acquired-intangible amortization, Worldpay expenses and acquisition/integration costs weighed on margins.
- Segment performance: Q2 revenue and adjusted EBITDA were Merchant $812M and $331M; Banking $1.479B and $608M; Capital Markets $629M and $287M; Corporate and Other $42M and $(69)M. Merchant and Banking processing volumes were affected by COVID-19; Banking also benefited from Paycheck Protection Program lending and card production. Capital Markets growth reflected managed services and Virtus.
- Cash and investment: First-half operating cash flow was $1.613B, versus $820M a year earlier. Investing used $946M, including $469M net cash for acquisitions and $567M of capital expenditures. Financing used $397M; dividends paid were $433M.
- Liquidity and debt: At June 30, FIS reported $1.183B of balance-sheet cash and $2.284B of available revolving-credit capacity, or $3.467B of available liquidity. Total debt was approximately $19.9B, including short-term borrowings; the weighted-average interest rate was 1.7%. The revolver had $2.284B of remaining capacity. The filing’s cash-flow statement reports $3.458B of cash and cash equivalents because it includes restricted cash, including merchant float.
Material changes and management commentary
- Worldpay’s inclusion substantially expanded reported revenue and raised acquired-intangible amortization and integration-related expenses. FIS said first-half revenue and expense synergies were ahead of previously announced targets.
- FIS reported that merchant spending and transaction volumes partially recovered as restrictions eased, while travel, hospitality and entertainment remained significantly affected. Management warned that weaker customer spending and delayed sales or implementations could hurt results in Q3 and beyond; the duration and scale were uncertain.
- FIS said elevated merchant credit extensions and consumer refunds eased during Q2 and had not materially affected liquidity or results through June 30. It nevertheless warned of potential merchant defaults and chargeback losses, for which it could not reasonably estimate a loss range.
- Management expected cash and operating cash flows over the next 12 months to cover operating needs, capital expenditures and mandatory debt service. FIS remained committed to reducing Worldpay-related leverage and continued to expect to reach its target leverage in 2021. It expected to continue quarterly dividends, subject to board discretion and other constraints; a $0.35-per-share dividend was scheduled for September 2020. Share repurchases were temporarily suspended to accelerate debt repayment.
- FIS reported approximately $21B of estimated future revenue from remaining Banking and Capital Markets performance obligations, excluding certain Merchant contracts and anticipated renewals. It expected about 35% of the disclosed amount to be recognized over the next 12 months.
- FIS reported $220M of run-rate annual expense reductions from its data-center consolidation program since inception and expected another approximately $30M of annual run-rate savings from planned consolidations by the end of 2021.
Risks, contingencies and unusual items
- COVID-19 could affect transaction volumes, customer spending, implementations, credit losses, merchant solvency, chargebacks and goodwill estimates. FIS’s June 30 qualitative assessment concluded goodwill was not impaired, but management warned prolonged economic weakness could lead to future impairment.
- A Reliance Trust fiduciary-duty class action proceeded to trial in March 2020; plaintiffs sought approximately $127M. A decision was expected in the second half of 2020. FIS said a loss was not probable and recorded no liability, while noting it could not estimate a potential loss range.
- FIS disclosed potential Brazilian tax claims totaling approximately $47M and recorded no liability, stating a loss was not probable. Its balance sheet also included a $553M liability related to the Worldpay tax receivable agreement.
- FIS recorded a $74M Q2 gain in other income, primarily reflecting foreign-currency remeasurement and fair-value changes on Visa preferred stock and the related contingent value rights liability. These valuations involve significant unobservable inputs.
- COO Stephanie Ferris notified FIS on August 1, 2020, of her intention to resign effective September 2, 2020. The filing said disclosure controls were effective and noted ongoing integration of Worldpay into internal-control processes.
Important facts for investors to verify
- Separate Worldpay’s acquisition-driven contribution from organic growth, and assess the continuing COVID-19 effects on merchant volumes and customer implementations.
- Track operating margins, acquired-intangible amortization, integration spending and whether reported synergies translate into sustained earnings and cash generation.
- Monitor leverage, debt maturities, refinancing needs and progress toward management’s 2021 leverage target; distinguish available liquidity from restricted cash.
- Follow merchant credit exposure and chargebacks, the Reliance Trust litigation, Brazilian tax claims, and the Worldpay tax receivable and Visa-related obligations.
- Confirm whether the scheduled dividend, data-center savings and remaining-performance-obligation expectations are achieved; the filing provides no specific consolidated revenue or EPS guidance.