Fidelity National Information Services Earnings: Holding Up Well Given Operational Issues

Fidelity National Information Services’ FIS, or FIS’, first-quarter earnings were nothing to get excited about in an absolute sense and remain weak relative to historical performance. Overall revenue was up 3% year over year on an organic basis, and the company saw margins contract. However, given the issues FIS is currently facing and the impending spinoff of the Worldpay business, results for the narrow-moat company were encouraging, in our view. We will maintain our $83 fair value estimate.

The merchant segment saw 2% year-over-year organic revenue growth. Volume growth was much healthier at 9% on a constant currency basis, but revenue was negatively impacted by mix. Management stated it remains on track to spin off this business, and we would like to see this completed on a quick timeline. We believe the root issue for this business has been underinvestment, and we believe this underinvestment will likely continue until Worldpay is an independent company.

The banking and capital market segments saw year-over-year organic revenue growth of 2% and 7%, respectively. The result for capital markets is encouraging and ahead of our long-term growth expectations. Growth in the banking segment was below our long-term expectations but better than we expected. Management stated that recent stress in the banking system has not been a material negative, and we see FIS’ banking business as very resilient. Still, we think these issues could be a bit of a drag going forward.

Adjusted EBITDA margins declined to 38.7% from 40.6% last year. Management has embarked on a cost-reduction effort and through the first quarter achieved annualized savings of $210 million against an ultimate target of $1.25 billion by the end of 2024. While we appreciate the efforts to restore margins, we think these savings will be at least partially offset by cost deleveraging from the spinoff.