Fidelity National Information Services, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Amounts are in millions of dollars, except per-share data. Comparative 2017 results are adjusted for the adoption of ASC 606.
Business context
FIS provides financial technology, payment processing, banking, asset-management and outsourcing solutions. It reports Integrated Financial Solutions (IFS), Global Financial Solutions (GFS), and Corporate and Other. Most revenue is recurring and generated under multi-year contracts.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $2,084 | $2,096 | $6,256 | $6,502 |
| Gross profit / margin | $720 / 34.5% | $710 / 33.9% | $2,064 / 33.0% | $2,105 / 32.4% |
| Operating income / margin | $342 / 16.4% | $385 / 18.4% | $989 / 15.8% | $1,001 / 15.4% |
| Net earnings attributable to FIS common stockholders | $154 | $59 | $548 | $327 |
| Diluted EPS | $0.47 | $0.18 | $1.65 | $0.98 |
| Operating cash flow | Not provided by quarter | $1,288 | $1,079 |
Q3 revenue declined 0.6%; nine-month revenue fell 3.8%. Q3 and nine-month gross margins improved, while Q3 operating income and margin decreased, including the effect of a $95 impairment. Nine-month operating margin increased slightly. FIS attributed improved net earnings partly to lower other expense and lower tax expense; the comparison period included significant debt-extinguishment costs.
- Cash generation and investment: Nine-month capital expenditures, excluding capital leases, were $464; operating cash flow less these expenditures was approximately $824. Cash was $632 at September 30, 2018, versus $665 at year-end 2017.
- Debt and liquidity: Debt was approximately $9.0 billion, including $40 current and $8,998 long-term. The revolving facility had $582 drawn and $3,412 of remaining capacity; it was expanded to $4.0 billion and extended to September 2023. A new commercial paper program permits up to $4.0 billion; none was outstanding at quarter-end.
- Capital returns: FIS paid $0.32 per share in quarterly dividends and repurchased $1,066 of shares during the first nine months. Approximately $2.8 billion remained under its repurchase authorization.
- Segments: Q3 revenue and Adjusted EBITDA were IFS $1,090 and $496; GFS $916 and $355; Corporate and Other $78 and $(43). IFS revenue rose 5.0%; GFS revenue fell 6.1%, largely reflecting divestitures and foreign exchange.
Material changes and unusual items
- Revenue comparisons reflect the 2018 adoption of ASC 606, including net presentation of certain interchange and network fees, later recognition of some term-license renewals, and earlier recognition of certain software rental licenses. FIS restated 2017 comparatives; the accounting change reduced reported 2017 nine-month revenue by $292 and net earnings by $4 versus previously reported amounts.
- In September, FIS agreed to unwind its Brazilian Venture with Banco Bradesco. The transaction triggered $95 of Q3 impairment charges: $42 on a contract intangible, $25 on goodwill, and $28 on assets held for sale.
- FIS sold substantially all of its Certegy Check Services business on August 31, recording a $54 pretax loss. Prior-year comparisons also reflect the 2017 sales of the Capco/risk and compliance consulting businesses and the Public Sector and Education business.
- Foreign currency reduced Q3 revenue by approximately $30 and nine-month revenue by $9. FIS expected an approximately $55 adverse revenue effect from currency translation for full-year 2018.
Outlook, risks and contingencies
- FIS expected the Brazilian Venture transaction to close in the first half of 2019, subject to Brazilian regulatory approval. It forecast an annualized reported-revenue reduction of approximately $200, with minimal net-earnings impact, while cautioning that replacement earnings and costs are uncertain.
- Remaining performance obligations were approximately $19.5 billion at September 30, excluding anticipated renewals not yet contractually obligated. FIS expected to recognize about 35% over the next 12 months, another 25% over months 13–24, and the balance thereafter.
- Management stated that cash, operating cash flow and available borrowing capacity were expected to cover operating needs, capital expenditures and mandatory debt service over the next 12 months. It expected to continue quarterly dividends, subject to board discretion and debt covenants. No specific earnings or revenue guidance is provided in the filing text.
- Key risks include cybersecurity incidents, service interruptions or data loss, competition and pricing pressure, banking-industry consolidation, international and currency exposure, and execution of the Brazilian transition. Management said disclosure controls were effective and reported no material quarter-specific change in internal control over financial reporting.
- Contingencies include a Reliance Trust ERISA class action with plaintiffs alleging approximately $125 in damages; FIS said loss was not probable and could not be estimated more precisely. Brazilian tax claims total approximately $64 across 37 claims; FIS likewise said liability was not probable and recorded no liability. The balance sheet includes $66 of acquired SunGard contingencies, largely tax-related.
Investor verification priorities
- Track Brazilian regulatory approval, closing timing, actual revenue loss, replacement earnings and any further unwind costs.
- Reconcile reported earnings growth to recurring operating performance, particularly the $95 impairment, Certegy sale loss, prior-year debt charges, tax-rate changes and divestitures.
- Assess debt maturities, variable-rate exposure, use of the expanded revolver or commercial paper program, and the sustainability of share repurchases and dividends.
- Monitor organic and constant-currency growth by segment, especially GFS, and compare actual currency effects with the full-year $55 revenue headwind estimate.
- Review outcomes and disclosures for the Reliance Trust litigation and Brazilian tax claims, as well as implementation and comparability effects from ASC 606.