FIS Q3 2023 Form 10-Q Summary
Reporting period: Quarter ended September 30, 2023; filed November 7, 2023. Financial amounts below are in U.S. dollars. FIS reports continuing operations separately from Worldpay Merchant Solutions, which was classified as discontinued operations following the announced sale agreement.
Business context and reporting period
FIS provides technology and processing services to financial institutions and businesses. Following its July 2023 agreement to sell a 55% interest in Worldpay Merchant Solutions to GTCR, FIS recast Worldpay as discontinued operations and now reports Banking Solutions, Capital Market Solutions, and Corporate and Other. FIS expects to retain a non-controlling 45% interest in the standalone Worldpay joint venture.
Key financial metrics
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Continuing-operations revenue | $2.489 billion | $2.415 billion | $7.311 billion | $7.194 billion |
| Gross profit / margin | $966 million / 39% | $881 million / 36% | $2.701 billion / 37% | $2.548 billion / 35% |
| Operating income / margin | $475 million / 19% | $384 million / 16% | $1.136 billion / 16% | $839 million / 12% |
| Net income from continuing operations | $261 million | $222 million | $442 million | $505 million |
| Net income (loss) attributable to FIS, including discontinued operations | $(449) million | $249 million | $(6.905) billion | $646 million |
| Diluted EPS from continuing operations | $0.44 | $0.36 | $0.74 | $0.82 |
| Diluted EPS, including discontinued operations | $(0.76) | $0.41 | $(11.66) | $1.06 |
- Q3 continuing revenue increased 3% year over year; nine-month revenue increased 2%. Recurring revenue was approximately $2.040 billion for Q3 and $5.983 billion year to date.
- Q3 continuing gross profit increased 10% and operating income increased 24%. For nine months, gross profit increased 6% and operating income increased 35%. FIS attributed margin improvement mainly to lower intangible amortization and revenue growth.
- Q3 Adjusted EBITDA was $1.070 billion, compared with $1.022 billion. Nine-month Adjusted EBITDA was $2.915 billion, unchanged year over year. These are management’s non-GAAP segment performance measures.
- Segment revenue and Adjusted EBITDA: Banking Solutions, $1.756 billion and $783 million in Q3; Capital Market Solutions, $677 million and $332 million; Corporate and Other, $56 million and $(45) million. Banking revenue grew 3%, Capital Markets 7%, while Corporate and Other revenue fell 29%.
- Consolidated operating cash flow, inclusive of discontinued operations, was $2.810 billion for the first nine months, versus $2.798 billion. Investing cash flow was $(856) million and financing cash flow was $(2.658) billion. Cash, cash equivalents and restricted cash totaled $4.081 billion at period-end; this includes cash associated with discontinued operations.
- Available liquidity was $3.216 billion, comprising $466 million of cash and $2.750 billion of available credit capacity. FIS reported $18.7 billion of debt outstanding, a 3.5% effective weighted-average interest rate, and a 5.4-year weighted-average debt maturity. Debt at September 30 included $4.595 billion of short-term borrowings.
- Q3 net interest expense rose to $162 million from $78 million; nine-month expense was $464 million versus $169 million, primarily due to higher interest rates. A 100-basis-point rise on variable-rate debt outstanding at September 30 was estimated to increase annual interest expense by $48 million.
Material changes versus the prior comparable period
- Continuing revenue growth was modest, while margins and operating income improved. FIS cited strong recurring growth in Banking and Capital Markets and lower amortization costs.
- Banking Q3 Adjusted EBITDA increased 6%, helped by Future Forward savings; nine-month Banking Adjusted EBITDA declined slightly, with revenue mix partly offsetting savings. Capital Markets Q3 Adjusted EBITDA increased 5% and nine-month Adjusted EBITDA increased 7%.
- Reported losses were dominated by discontinued-operations charges: a $6.8 billion Worldpay goodwill impairment recorded in Q2 and a $1.549 billion held-for-sale valuation allowance recorded in Q3. The valuation allowance primarily reflected deferred tax liabilities that FIS will retain and that are excluded from the disposal group. Q3 discontinued operations produced a $709 million after-tax loss; the nine-month loss was $7.345 billion.
- FIS recorded no additional Worldpay goodwill impairment in Q3. The held-for-sale valuation allowance remains subject to remeasurement before closing.
- FIS stockholders’ equity fell to $19.477 billion from $27.218 billion at December 31, 2022, primarily reflecting the year-to-date loss. The company’s accumulated deficit was $22.808 billion.
Outlook, management commentary, risks and contingencies
- Management expected 2023 revenue growth to be slower than 2022 and net earnings to decline; it anticipates longer-term revenue and margin improvement as conditions improve and planned actions take effect. The filing does not provide a specific numerical earnings or revenue forecast.
- The GTCR transaction was expected to close in Q1 2024, subject to regulatory approvals and customary conditions. FIS estimated net proceeds of approximately $12.0 billion, subject to closing adjustments, and plans to use proceeds primarily to reduce debt and return capital to shareholders while maintaining investment-grade ratings.
- Future Forward had generated more than $220 million of annualized run-rate cash savings exiting Q3 on a continuing-operations basis. FIS continued to expect $1.0 billion of post-separation cash savings exiting 2024, more than two-thirds of which it described as annualized run-rate savings.
- FIS planned to repurchase approximately $500 million of shares in Q4 2023 and stated a broader goal of repurchasing at least $3.5 billion by year-end 2024. A $0.52 quarterly dividend was payable December 22, 2023, subject to board discretion and applicable restrictions.
- Risks include slower economic growth, inflation and wage pressure, higher interest expense, foreign-exchange volatility, cybersecurity and operational disruptions, merchant chargebacks, bank or client liquidity problems, and potential disruption or failure to complete the Worldpay sale. Management said current exposure to recent U.S. bank failures was limited and revenue exposure from potential contract terminations at affected banks was not material.
- Shareholder securities litigation alleges disclosure issues concerning Merchant Solutions, including Worldpay valuation, integration and synergies; FIS filed a motion to dismiss and said it intends to defend the case. Related shareholder demands were under review by a board committee. Brazilian tax authorities’ claims against a subsidiary could total approximately $45 million; FIS said a loss was not probable and recorded no liability.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether the Worldpay transaction closes on the expected timetable and terms, including final proceeds, closing adjustments, retained 45% interest, and post-sale commercial arrangements.
- How the Worldpay valuation allowance and any further held-for-sale remeasurement affect reported results before and at closing.
- Underlying growth and margins in Banking and Capital Markets, including the sustainability of recurring revenue and Banking revenue tied to federally funded pandemic relief programs.
- Actual delivery of Future Forward savings, the stated $1.0 billion post-separation target, and the planned debt reduction and share repurchases.
- Debt maturities, refinancing and commercial-paper funding needs, liquidity availability, and the impact of interest rates and foreign-exchange movements.
- Developments in shareholder litigation and demands, Brazilian tax claims, and merchant chargeback or other contingent exposures.