Fidelity National Information Services, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Amounts are in millions, except per-share data. FIS provides financial technology, processing, software, and outsourcing services. Results include SunGard, acquired November 30, 2015; therefore, year-over-year comparisons reflect the acquisition and are not directly comparable as measures of organic growth.
Financial results and liquidity
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $2,181 | $1,555 |
| Gross profit / margin | $628 / 28.8% | $485 / 31.2% |
| Operating income / margin | $184 / 8.4% | $215 / 13.8% |
| Net earnings attributable to FIS common stockholders | $55 | $111 |
| Diluted EPS | $0.17 | $0.39 |
| Cash from operating activities | $385 | $231 |
| Cash and cash equivalents at quarter-end | $702 | $682 at December 31, 2015 |
| Total debt, including current portion | Approximately $11.3 billion | Approximately $11.4 billion at December 31, 2015 |
- Revenue rose 40%, primarily from SunGard, with contributions from global trading volumes, BPaaS, software renewals, digital solutions, and professional services. Reported revenue included $41 million of unfavorable currency impact and an $81 million purchase-accounting reduction for SunGard deferred revenue.
- Profitability declined despite higher revenue. Acquired-intangible amortization, integration and severance costs, and higher interest expense weighed on results. SunGard-related intangible amortization increased cost of revenue by $116 million; interest expense rose $56 million year over year, primarily due to acquisition financing.
- Cash from operations increased $154 million, primarily from the acquisition. Investing activities used $146 million; financing activities used $239 million. Capital expenditures excluding leases were approximately $145 million, and management expects 2016 capital spending of about 6% of revenue.
- At March 31, cash included approximately $482 million held by foreign entities. The revolving facility had $1.342 billion of borrowing capacity available, net of letters of credit. Management expects cash and operating cash flows to cover operating needs, capital expenditures, and mandatory debt service over the next 12 months.
Segment performance and material changes
- IFS: Revenue was $1,121 million, up 20.8%; operating income was $359 million and margin was 32.0%, versus 34.4%. Growth reflected SunGard, EMV card production, digital solutions, and regulatory-remediation services; margin was affected by mix and higher incentives and accruals.
- GFS: Revenue was $990 million versus $512 million; operating income was $187 million versus $46 million, with margin of 18.9% versus 9.0%. Growth reflected SunGard and trading, BPaaS, and license-renewal activity; currency reduced revenue by about $40 million.
- Corporate and Other: Revenue was $70 million versus $115 million; operating loss widened to $362 million from $150 million. The segment absorbed the $81 million deferred-revenue purchase-accounting adjustment, acquisition-related costs and amortization, and non-strategic businesses.
- Weighted-average diluted shares increased to 327 million from 287 million, reflecting the SunGard transaction. No share repurchases occurred in Q1 2016, compared with $150 million in Q1 2015. Quarterly dividends were $0.26 per share.
Outlook, risks, and unusual items
- Management’s integration target is $200 million of annual synergy run-rate savings by the end of 2017; achieving it is expected to involve one-time severance and other costs. The filing does not provide specific earnings or revenue guidance.
- Management expected the slowdown in global economic activity, particularly its effect on professional-services spending, to continue through at least the first half of 2016. It also expected unfavorable foreign-exchange effects to continue and anticipated a moderate increase in currency pressure on operating income.
- Key risks include SunGard integration costs or delays and failure to realize synergies; cybersecurity incidents and service interruptions; competition and pricing pressure; banking-industry consolidation; declining check use; regulatory change; and currency and interest-rate exposure. A 100-basis-point LIBOR increase was estimated to raise annual debt service by $22 million after swaps.
- SunGard purchase-price allocation remained provisional. Acquisition-related contingencies included a $153 million provisional liability at quarter-end, including $84 million of assumed unrecognized tax benefits; the liability subsequently decreased to approximately $125 million. The company also disclosed potential Brazilian tax claims totaling approximately $64 million for which it had recorded no liability, concluding a loss was not probable or reasonably estimable.
- A patent case involving DataTreasury remained pending appeal; FIS said it could not estimate a possible loss or range. The company reported disclosure controls as effective, while integration of SunGard into its internal-control framework was ongoing, with its assessment expected by year-end 2016.
Investor items to verify
- How much of revenue growth and segment improvement is recurring or organic, excluding SunGard and acquisition-accounting effects?
- Whether the $200 million synergy target is on track, and how integration, severance, and acquired-intangible amortization affect margins and earnings.
- Debt repayment and refinancing needs, available revolver capacity, interest-rate sensitivity, and the effect of foreign-held cash on liquidity.
- Whether the provisional SunGard purchase-price allocation and assumed contingencies change, and whether the disclosed legal and Brazilian tax exposures develop.
- Progress integrating SunGard’s accounting systems and controls, and any material cybersecurity, customer-service, or operational incidents.