FIS Q1 2018 Form 10-Q Summary
Business context and period. Fidelity National Information Services, Inc. (FIS) reported unaudited results for the three months ended March 31, 2018. FIS provides financial technology, processing and outsourcing services through Integrated Financial Solutions (IFS), Global Financial Solutions (GFS), and Corporate and Other. Comparisons below use 2017 figures retrospectively adjusted for the adoption of ASC 606 unless noted.
Key financial results
| Metric | Q1 2018 | Q1 2017, adjusted |
|---|---|---|
| Revenue | $2.066 billion | $2.148 billion |
| Gross profit / margin | $652 million / 31.6% | $657 million / 30.6% |
| Operating income / margin | $294 million / 14.2% | $246 million / 11.4% |
| Net earnings attributable to FIS common stockholders | $182 million | $129 million |
| Diluted EPS | $0.54 | $0.39 |
| Cash provided by operating activities | $354 million | $454 million |
| Capital expenditures, excluding capital leases | $172 million | $155 million |
- Revenue declined 3.8% year over year, primarily reflecting the prior-year PS&E divestiture and the 2017 sale of majority interests in Capco and risk and compliance consulting businesses. FIS cited continued growth in several banking, wealth, digital, derivatives and international payments offerings, plus $22 million of favorable currency impact.
- Adjusted EBITDA was $705 million, compared with $661 million. IFS revenue was $1.061 billion and adjusted EBITDA $451 million; GFS revenue was $927 million and adjusted EBITDA $305 million; Corporate and Other revenue was $78 million and adjusted EBITDA loss $51 million.
- Cash and cash equivalents were $725 million at quarter-end. Long-term debt, including current maturities and net of debt issuance costs, was approximately $9.1 billion. Current debt maturities were $1.036 billion. The $3.0 billion revolving facility had $475 million drawn and approximately $2.519 billion available, net of letters of credit.
- FIS paid a $0.32 per-share quarterly dividend and repurchased 4.1 million shares for $401 million during the quarter. Approximately $3.5 billion remained under its $4.0 billion repurchase authorization as of March 31.
Material changes and notable items
- Operating income increased $48 million and operating margin rose 2.8 percentage points. Management attributed margin improvement to integration and cost-management initiatives, synergies, and the Capco divestiture.
- Interest expense fell to $72 million from $93 million, primarily due to lower debt and a lower weighted average interest rate. Q1 2017 other income included an $85 million gain on the PS&E sale and approximately $25 million of debt redemption and refinancing charges, making the comparison less like-for-like.
- The effective tax rate was 15%, versus 35%. The 2018 rate reflected the reduction in the U.S. federal tax rate to 21%; the prior-year rate included a non-deductible goodwill write-off related to the PS&E sale. Certain 2017 tax-reform amounts were still provisional.
- ASC 606 was adopted January 1, 2018 using retrospective application. The standard reduced reported revenue for some payment-processing arrangements through net principal-versus-agent presentation, deferred recognition of certain term-license early renewals, and accelerated recognition of some software rental licenses. The 2017 comparative figures in this summary are adjusted; historical results under the former policy differ.
- Cash from operations declined $100 million, which FIS attributed mainly to federal estimated tax payments shifted into Q1 by Hurricane Irma relief timing and working-capital movements. Cash rose by $60 million during the quarter.
Outlook, risks and contingencies
- FIS stated that cash and expected operating cash flows should be sufficient over the next 12 months for operating requirements, capital expenditures and mandatory debt service. It expected to continue quarterly dividends, subject to Board discretion and contractual restrictions. Management anticipated minimal foreign-currency impact in 2018.
- Remaining performance obligations were approximately $19.5 billion at March 31, excluding anticipated renewals not yet contractually obligated. FIS expected to recognize approximately 35% in the next 12 months and a further 25% in months 13–24.
- The Brazilian Venture agreement with Banco Bradesco can be terminated or partially terminated after minimum targets are met; targets have been met and negotiations on the future relationship had begun. The agreement remains in effect during negotiations, but FIS warned that the outcome could adversely affect future Brazilian revenue and earnings growth.
- Brazilian tax authorities’ claims against the former Brazil operation represent approximately $71 million of potential exposure across 36 claims. FIS said a loss was not probable and recorded no liability. A separate Reliance Trust fiduciary-duty class action remained in pre-trial proceedings; FIS could not estimate potential loss and believed resolution would not materially affect its financial condition. The balance sheet included a $77 million liability mostly associated with SunGard-related unclaimed property and tax matters.
- Key stated business risks include cybersecurity incidents, technology and implementation failures, competitive and pricing pressures, regulatory change, banking-sector consolidation, international and currency exposure, and realizing acquisition integration savings. FIS reported no material change to the risk factors in its 2017 Form 10-K.
- After quarter-end, FIS repurchased an additional 2.1 million shares for $200 million in April. It also paid off $250 million of 2.0% notes due April 2018 on April 13 using revolving-facility borrowings.
Important facts for investors to verify
- Underlying revenue growth and margins excluding the effects of divestitures, foreign exchange, and ASC 606 presentation changes.
- Cash conversion and working-capital trends, including the timing of tax payments and the sustainability of operating cash flow.
- Debt maturities, revolving-facility usage, leverage, and the effect of future interest-rate changes.
- Progress and financial consequences of the Banco Bradesco negotiations, and the status of the Brazil tax claims and Reliance Trust litigation.
- Future share repurchases and dividends relative to debt reduction, capital investment, and operating cash needs.
- Conversion of the $19.5 billion remaining performance obligations into recognized revenue, and the assumptions underlying that estimate.