FIS 2017 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017. Although requested as 2017 Q4, this filing reports full-year results and selected quarterly data. Amounts are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Business context and reporting period
Fidelity National Information Services, Inc. (FIS) provides financial technology, processing, software and outsourcing services to more than 20,000 clients in over 130 countries. Its segments are Integrated Financial Solutions (IFS), Global Financial Solutions (GFS), and Corporate and Other. Most revenue is recurring and generated under multiyear contracts, though transaction volumes and software licensing can affect results.
Financial results and key metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Revenue | $9,123 | $9,241 | Down 1.3% |
| Gross profit / margin | $2,942 / 32.2% | $3,008 / 32.6% | Margin down 0.4 percentage points |
| Operating income / margin | $1,492 / 16.4% | $1,298 / 14.0% | Income up 15.0% |
| Net earnings attributable to FIS common stockholders | $1,319 | $568 | Up 132% |
| Diluted EPS attributable to FIS common stockholders | $3.93 | $1.72 | Up $2.21 |
| Cash from operations | $1,741 | $1,925 | Down $184 |
| Capital expenditures | $613 | $616 | Approximately flat |
Reported earnings growth was heavily affected by tax reform: the 2017 income tax provision was a benefit of $319 million, versus tax expense of $317 million in 2016. FIS reported a $782 million net benefit related to tax reform items. Operating income improved principally from integration and cost-management initiatives; it should be distinguished from the tax-driven increase in net earnings.
Fourth-quarter 2017 revenue was $2,329 million versus $2,445 million in Q4 2016. Net earnings attributable to FIS common stockholders were $988 million versus $207 million, and diluted EPS was $2.93 versus $0.63. The large earnings increase coincided with tax-reform effects; the filing’s quarterly data does not separately quantify the Q4-only tax-reform effect.
Full-year segment revenue and Adjusted EBITDA were: IFS $4,630 million and $1,868 million; GFS $4,138 million and $1,415 million; Corporate and Other $355 million and negative $215 million. Adjusted EBITDA is a company-defined non-GAAP measure. IFS revenue grew 2.3% and its Adjusted EBITDA margin rose to 40.3%; GFS revenue declined 2.6%, while its Adjusted EBITDA margin rose to 34.2%, reflecting higher-margin licenses, divestitures and synergies.
At December 31, 2017, cash and cash equivalents were $665 million, total debt on the balance sheet was $8,763 million, and total equity was $10,944 million. Cash included approximately $415 million held by foreign entities. FIS had $195 million outstanding on its revolving facility and $2,799 million of remaining capacity. Management stated that cash and expected operating cash flows should cover operating needs, capital expenditures and mandatory debt service for the next 12 months.
Material changes versus the prior period
- Revenue fell modestly year over year, principally because FIS sold its Public Sector and Education business and a majority stake in its Capco and risk-and-compliance consulting businesses. Growth in banking, wealth, payment, digital and post-trade solutions partly offset the divestitures.
- FIS sold Public Sector and Education in February 2017 for $850 million, recording an $85 million pretax gain; approximately $500 million of net proceeds after taxes and transaction costs was used to reduce debt.
- In July 2017, FIS sold a majority stake in the Capco and risk-and-compliance consulting businesses for approximately $469 million, recording a pretax loss of approximately $41 million. FIS retained a 40% equity-method interest in Cardinal; the preferred units held by the buyer carry a 12% annual dividend rate.
- Debt declined from $10,478 million at year-end 2016 to $8,763 million at year-end 2017. Financing actions included a European bond issuance, debt tenders and repayments; debt tender premiums and related write-offs contributed a $171 million pretax charge.
- Cash from operations decreased, mainly because of timing-related increases in trade receivables and deferred contract costs. The filing also reports more than $325 million in annualized SunGard cost-synergy run-rate savings exiting 2017.
Outlook, commentary, risks and contingencies
- FIS expected 2018 capital expenditures of approximately 7% of revenue and minimal foreign-currency impact on 2018 earnings. It did not provide a specific earnings or revenue forecast in the supplied filing text.
- Management’s strategy emphasizes IP-led financial technology, recurring outsourced services, digital and faster payments, innovation, global diversification and continued cost and margin improvement. Management identified digital payments as both an opportunity and a competitive risk.
- FIS will adopt the new revenue-recognition standard (Topic 606) effective January 1, 2018, using retrospective application with practical expedients. It estimated that retrospective application would reduce 2017 and 2016 revenue by approximately $455 million and $410 million, respectively, and reduce net income, excluding tax-reform effects, by approximately $35 million and $45 million. These estimates reflect accounting presentation and timing changes, not solely underlying business performance.
- Principal risks include cybersecurity incidents and service interruptions; privacy and regulatory changes, including GDPR; intense competition and technological disruption; bank consolidation and contract-renewal pricing pressure; foreign-exchange and emerging-market volatility; and acquisition integration and goodwill impairment risk. Goodwill was $13.7 billion, or 56% of total assets; the 2017 impairment assessment found no impairment.
- The Brazilian Venture agreement with Banco Bradesco, which generated $317 million of partner-attributable revenue in 2017, may be terminated or partially terminated after minimum targets were met. The parties were negotiating their future relationship; the agreement remained in effect at filing. A termination could reduce revenue and create employee-related claims involving approximately 11,000 venture employees.
- Contingencies include approximately $71 million of potential Brazilian tax claims that FIS said were not probable and for which it recorded no liability; $75 million of assumed SunGard liabilities, mostly for unclaimed-property and tax matters; and approximately 320 remaining labor claims from former Brazilian operations, against which a $9 million net accrual was recorded. A class action involving Reliance Trust had no estimable potential loss at the time of filing; FIS said it believed resolution would not materially affect its financial condition.
Most important facts for investors to verify
- How much of 2017 net earnings and Q4 EPS reflects the one-time tax-reform benefit, and what earnings look like excluding that benefit and other unusual items.
- Whether recurring organic growth and segment margins can offset revenue lost through the divestitures and ongoing pricing or transaction-volume pressure.
- Progress on the Banco Bradesco venture negotiations, including any changes to the agreement, revenue contribution or potential workforce liabilities.
- Debt maturities, refinancing needs and cash availability, including the concentration of cash held outside the United States and the impact of debt covenants.
- Actual results under Topic 606 compared with the company’s estimated revenue and net-income reductions, and whether its estimates change after adoption.
- Exposure to cybersecurity, privacy, regulatory and litigation events, and whether the disclosed Brazilian tax and labor contingencies or other claims develop materially.