FIS Q3 2021 Form 10-Q Summary
Business context and reporting period
Fidelity National Information Services, Inc. (FIS) provides payment, banking and capital-markets technology and processing services. This unaudited report covers the quarter and nine months ended September 30, 2021, compared with the same periods in 2020. FIS reports Merchant Solutions, Banking Solutions, Capital Market Solutions, and Corporate and Other.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $3.507B | $3.197B | $10.205B | $9.236B |
| Gross profit / margin | $1.329B / 38% | $1.093B / 34% | $3.774B / 37% | $2.998B / 32% |
| Operating income / margin | $138M / 4% | $231M / 7% | $600M / 6% | $385M / 4% |
| Net earnings attributable to FIS common stockholders | $158M | $20M | $126M | $54M |
| Diluted earnings per share | $0.26 | $0.03 | $0.20 | $0.09 |
| Adjusted EBITDA, segments | $1.585B | $1.357B | $4.412B | $3.761B |
For the nine months, operating cash flow was $3.697B versus $3.024B. Capital expenditures were $877M; operating cash flow less capital expenditures was approximately $2.820B. Balance-sheet cash and cash equivalents were $1.390B at September 30, 2021, versus $1.959B at year-end 2020. The cash-flow statement reports $4.036B at period-end because it includes restricted merchant float cash.
Debt outstanding was approximately $19.8B, including $3.484B of short-term borrowings and $16.296B of long-term debt including its current portion. Available liquidity was $3.381B: $1.390B cash and $1.991B of revolving-credit capacity. The weighted-average debt interest rate was 0.9%. FIS paid $724M in dividends and repurchased approximately $2.113B of shares during the nine months.
Changes versus the prior comparable periods
- Revenue grew 10% in both the quarter and nine-month period. Management attributed growth primarily to economic reopening and higher Merchant volumes, Banking sales and Capital Markets recurring and managed-services revenue; foreign exchange also helped.
- Segment revenue rose in Q3: Merchant 14%, Banking 8% and Capital Markets 11%. For nine months, growth was 20%, 8% and 7%, respectively. Segment Adjusted EBITDA increased across all three operating segments.
- Q3 operating income fell 40% despite higher revenue, principally reflecting a $202M asset impairment, accelerated amortization and higher compensation. Nine-month operating income increased 56%, and gross and operating margins improved year over year.
- Net income comparisons were affected by significant non-operating items. Q3 2021 included $126M of gains on equity investments. Nine-month 2021 other expense included a $528M debt-extinguishment loss, partly offset by an approximately $225M gain on the Cardinal Holdings sale. Interest expense declined following refinancing.
Outlook, commentary, risks and unusual items
- FIS said it expected to reach its target leverage by year-end 2021 and believed cash, cash flows from operations and available borrowing capacity would fund operating needs, capital expenditures and mandatory debt service over the next 12 months. No specific earnings or revenue guidance figures are provided in the filing.
- Management said Worldpay revenue synergies remained on track to meet or exceed current targets, expense synergies had exceeded the original target, and further expense synergies were expected during 2021. A $0.39-per-share quarterly dividend was declared, payable December 27, 2021; future dividends remain subject to Board discretion.
- Platform modernization initiatives resulted in $202M of software and deferred-contract-cost impairments and $102M of incremental amortization in Q3. The initiatives include retiring certain platforms and accelerating modernization over approximately three years.
- FIS stopped participating in deployment of a vendor’s point-of-sale devices after identifying unexplained device connections. It reported no evidence of data compromise and said it would fund device replacement, expected to finish in 2022; costs were not expected to be material. Device supply shortages could delay replacement.
- COVID-19 recovery supported Merchant activity, but travel and some regions remained weak. Key exposures include merchant defaults and chargebacks, cybersecurity and service interruptions, integration and platform execution, foreign exchange and interest rates, and banking-industry consolidation. FIS said a reasonable estimate of potential future chargeback losses could not be made.
- Brazilian tax authorities’ claims create approximately $42M of potential exposure; FIS said a liability was not probable and recorded none. Goodwill was not impaired in the interim assessment, but management noted that further pandemic-related deterioration could affect future impairment estimates.
Important facts for investors to verify
- Underlying operating trends and margins excluding the $202M impairment, accelerated amortization and other identified unusual items.
- The quality and sustainability of non-operating investment gains, including the $126M Q3 equity-security gain and Cardinal sale gain, and the impact of the $528M refinancing loss.
- Progress toward the year-end leverage target, debt maturity and refinancing requirements, and liquidity available after settlement-related and restricted cash needs.
- Execution and cost of the Platform initiatives and POS-device replacement, including any supply delays, customer disruption or security developments.
- Merchant recovery, chargeback exposure and the potential effects of COVID-19, currency movements, cybersecurity incidents and banking-sector consolidation.