FIS Q2 2018 Form 10-Q Summary
Business context and reporting period
Fidelity National Information Services, Inc. (FIS) provides financial technology, processing, software and outsourcing services globally. This unaudited Form 10-Q covers the three and six months ended June 30, 2018. Comparative 2017 figures are adjusted for the retrospective adoption of ASC 606. The company reports Integrated Financial Solutions (IFS), Global Financial Solutions (GFS), and Corporate and Other.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue | $2.106bn | $2.258bn | $4.172bn | $4.406bn |
| Gross profit / margin | $692m / 32.9% | $738m / 32.7% | $1.344bn / 32.2% | $1.395bn / 31.7% |
| Operating income / margin | $353m / 16.8% | $370m / 16.4% | $647m / 15.5% | $616m / 14.0% |
| Net earnings attributable to FIS shareholders | $212m | $139m | $394m | $269m |
| Diluted EPS | $0.64 | $0.42 | $1.18 | $0.81 |
| Operating cash flow | — | — | $823m | $528m |
Q2 adjusted EBITDA was $757m versus $751m; first-half adjusted EBITDA was $1.462bn versus $1.412bn. First-half capital expenditures, excluding capital leases, were $316m, implying approximate operating cash flow after these expenditures of $507m. Cash and cash equivalents were $683m at June 30, 2018, including approximately $428m held by foreign entities. Total debt, including current maturities, was approximately $8.9bn; $2.584bn of revolving-credit capacity remained available. Current assets were $3.494bn and current liabilities $2.534bn. The quarterly dividend was $0.32 per share.
Material changes versus prior comparable period
- Revenue declined 6.7% in Q2 and 5.3% in the first half. Management attributed the decreases primarily to the 2017 Capco/risk consulting and Public Sector and Education divestitures, lower institutional and wholesale license fees, and weaker card production. Q2 GFS revenue fell 17.2%; IFS revenue rose 3.4%.
- IFS adjusted EBITDA grew 5.6% in Q2 to $492m; GFS adjusted EBITDA fell 7.5% to $314m. Segment margins improved, with management citing divestiture effects, revenue mix and cost management.
- Operating margin rose year over year despite lower revenue. Interest expense decreased $18m in Q2 and $39m in the first half, primarily due to a lower average borrowing rate. Net earnings benefited from lower tax expense: the 2018 effective tax rates were 18% for Q2 and 17% for the first half, versus 48% and 43% in 2017.
- First-half operating cash flow increased $295m year over year, with management citing higher earnings, lower federal tax payments and improved receivables collections, partly offset by tax-payment timing and working-capital movements.
Outlook, management commentary, risks and unusual items
- Management expects cash on hand and operating cash flows over the next 12 months to fund operating needs, capital expenditures and mandatory debt service, and expects to continue quarterly dividends, subject to board discretion and debt covenants. No specific earnings or revenue guidance is provided in the supplied filing text.
- Management anticipated minimal full-year 2018 foreign-exchange impact, despite a $22m favorable currency impact on first-half revenue. Approximately $19.5bn of remaining performance obligations was expected to be recognized over time: about 35% in the next 12 months, another 25% in months 13–24, and the balance thereafter. This excludes anticipated renewals not yet contractually obligated.
- The Brazilian Venture agreement with Banco Bradesco remains in effect, but minimum targets have been met and the parties are negotiating their future relationship. The contract runs through September 2020 and permits termination or partial termination under specified conditions; management warned that the outcome could adversely affect future Brazilian revenue and earnings growth.
- Key stated risks include cybersecurity incidents, service or software implementation failures, technology and pricing competition, banking-industry consolidation, regulatory and privacy changes, international operations and foreign exchange, and acquisition integration. The filing reports no material changes to previously disclosed risk factors.
- Contingencies include Reliance Trust litigation with plaintiffs alleging approximately $125m in damages; FIS says loss is not probable and has recorded no liability. Brazilian tax claims have potential aggregate exposure of approximately $71m; no liability was recorded because loss was not considered probable. A $74m liability was recorded for assumed SunGard contingencies, mostly unclaimed-property and tax matters.
- FIS issued $1bn of senior notes in May 2018 and used net proceeds of $979m to partially repay its revolver; it also redeemed $750m of notes due October 2018. Integration and severance costs were $49m in Q2 and $106m in the first half. FIS repurchased $601m of shares in the first half; approximately $3.3bn remained under its authorization at June 30.
- ASC 606 changed the presentation of certain payment-network fees from gross to net and altered the timing of some license revenue. It reduced adjusted 2017 Q2 revenue by $83m and first-half revenue by $190m, while increasing Q2 2017 net earnings by $7m and reducing first-half net earnings by $1m. Thus, reported year-over-year comparisons use adjusted figures but still reflect divestitures.
Most important facts for investors to verify
- Whether underlying revenue trends improve after separating divestiture and ASC 606 effects, particularly in GFS and institutional/wholesale licensing.
- Whether IFS growth and cost savings can offset ongoing declines in other businesses, and whether margin gains persist.
- Debt, interest-rate exposure, revolver utilization and capacity to maintain dividends and share repurchases.
- Progress and financial implications of negotiations with Banco Bradesco, along with developments in the disclosed litigation and Brazilian tax claims.
- Whether cash-flow improvement is sustainable after considering tax-payment timing, working capital and capital expenditures.