FIS Q2 2022 Form 10-Q Summary
Business context and reporting period
Fidelity National Information Services, Inc. (FIS) provides financial technology and payment processing services through Merchant Solutions, Banking Solutions, Capital Market Solutions, and Corporate and Other. This unaudited filing covers the quarter and six months ended June 30, 2022; comparisons are with the corresponding 2021 periods. Figures are in U.S. dollars unless noted.
Financial performance and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $3.719 billion | $3.475 billion | $7.210 billion | $6.699 billion |
| Gross profit / margin | $1.485 billion / 40% | $1.340 billion / 39% | $2.735 billion / 38% | $2.446 billion / 37% |
| Operating income / margin | $374 million / 10% | $363 million / 10% | $531 million / 7% | $463 million / 7% |
| Net earnings (loss) attributable to FIS common stockholders | $277 million | $341 million | $397 million | $(32) million |
| Diluted earnings (loss) per share | $0.45 | $0.55 | $0.65 | $(0.05) |
| Adjusted EBITDA | $1.599 billion | $1.520 billion | $3.016 billion | $2.827 billion |
Q2 revenue increased 7% and six-month revenue increased 8%. Q2 common-stockholder earnings fell despite revenue growth; six-month earnings improved from a prior-year loss. Adjusted EBITDA is a non-GAAP-style segment performance measure defined by FIS and excludes specified costs and items. Q2 interest expense was $47 million, versus $48 million; six-month interest expense was $90 million, versus $122 million.
Six-month operating cash flow was $1.920 billion, compared with $1.864 billion. Capital expenditures were $752 million, compared with $613 million. Investing cash flow included $645 million of proceeds from settling cross-currency swaps. Financing cash outflow was $1.602 billion; dividends paid were $574 million and treasury stock activity was a $378 million outflow. Cash, cash equivalents and restricted cash totaled $4.080 billion at period-end, including merchant float; balance-sheet cash and cash equivalents were $1.688 billion.
At June 30, 2022, debt outstanding was approximately $18.5 billion, and the reported weighted-average interest rate was 1.2%. Available liquidity was $3.247 billion, comprising $1.688 billion cash and $1.559 billion of revolving-credit capacity. Management said cash and operating cash flows should cover operating needs, capital expenditures, and mandatory debt service for the next 12 months and foreseeable future. Current liabilities include settlement payables, so the current-liability balance should be considered in that operating context.
Material changes and segment results
- Merchant revenue rose 11% in Q2 and 13% for six months, driven by higher card-present and card-not-present volumes, including Payrix. Adjusted EBITDA rose 4% and 9%, respectively, while margins declined to 47.1% in Q2 and 47.0% for six months, reflecting investment in e-commerce and Payrix sales channels.
- Banking revenue rose 5% in Q2 and 6% for six months, supported by recurring revenue and ramping large contracts. Adjusted EBITDA rose 2% and 3%; margins declined amid wage inflation, lower non-recurring and stimulus-related revenue, and onboarding costs.
- Capital Markets revenue rose 5% in both periods. Adjusted EBITDA rose 8% in both, and margins improved, which FIS attributed to expense management and operating leverage.
- Corporate and Other revenue was nearly flat in Q2 and declined 8% for six months. Six-month adjusted EBITDA was a $179 million loss, unchanged from the prior year.
Revenue growth was partly offset by unfavorable foreign exchange, particularly the stronger U.S. dollar against the pound and euro. The six-month period included $87 million of asset impairments: $29 million related primarily to a non-strategic business and $58 million primarily to real estate assets following office-space reductions. Platform modernization drove $137 million of incremental amortization expense for the six months. Goodwill declined by $1.326 billion from year-end, primarily due to foreign-currency translation; FIS reported no goodwill impairment in its interim assessment.
Outlook, management commentary, and risks
- FIS expects to use free cash flow through the end of 2023 primarily to return capital to shareholders. It expected approximately $3 billion of share repurchases in 2022, including approximately $300 million repurchased in the first half. Approximately 82.5 million shares remained authorized for repurchase at June 30.
- The quarterly dividend was raised 21% to $0.47 per share beginning in Q1 2022. Management described a plan to increase the annual dividend by approximately 20% per year over the next several years; future dividends and repurchases remain subject to board discretion, financial conditions, and other factors.
- Management cited inflation-related wage pressure, slower growth, rising interest rates, and dollar strength as potential or ongoing headwinds. It said the pandemic’s impact had lessened substantially in the first half, but further effects remain uncertain. The company continues a multi-year platform modernization effort, which entails near-term costs and accelerated amortization; management expects efficiency benefits over time.
- Interest-rate sensitivity: FIS estimated that a 100-basis-point increase in rates on variable-rate debt would raise annual interest expense by about $74 million. Foreign-exchange sensitivity analysis estimated a $121 million increase or decrease in six-month reported revenue for a simultaneous 10% move in specified major currencies.
- Contingencies include approximately $41 million of potential Brazilian tax claims for which FIS said a loss was not probable and recorded no liability. FIS also stated that it could not reasonably estimate possible future chargeback losses. A Visa-related contingent value rights liability was $528 million at June 30.
- After quarter-end, FIS issued $2.5 billion of senior notes on July 13, 2022, at stated rates of 4.5% to 5.6%, with maturities from 2025 to 2052; proceeds were used to repay commercial paper in Q3. On August 4, the company announced that CFO James Woodall would step down November 4, 2022, and Deputy CFO Erik Hoag would succeed him.
Comparability is affected by unusual prior-period items: 2021 Q2 other income included an approximately $225 million gain on the Capco-related Cardinal Holdings sale. Six-month 2021 other expense included an approximately $528 million debt-extinguishment loss, while 2022 results included investment fair-value gains. The 2021 six-month tax provision also reflected a one-time remeasurement of deferred tax liabilities.
Important facts for investors to verify
- Whether recurring revenue growth and contract onboarding continue to offset foreign-exchange headwinds, wage inflation, and Merchant and Banking margin pressure.
- How much of the expected 2022 repurchase plan is completed, and whether planned dividends and capital returns remain consistent with cash generation and debt priorities.
- The effect of the July 2022 higher-cost debt issuance on commercial-paper balances, borrowing costs, and refinancing needs.
- Progress and costs of platform modernization, including accelerated amortization and any eventual efficiency benefits.
- Developments in merchant chargebacks, the Brazilian tax claims, the Visa-related contingent value rights, and goodwill impairment assumptions.
- The CFO transition and any associated costs or changes in financial and capital-allocation plans.