Fidelity National Information Services

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

Fidelity National Information Services (FIS) is a global financial technology company providing a range of solutions for banks, capital markets firms, and merchants, including payment processing, core banking platforms, and wealth management software.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

While FIS boasts significant scale and a broad range of offerings in the financial technology sector, its moat is best rated as narrow, mainly because of its reliance on high switching costs with moderate differentiation and its exposure to technological disruption.

Business Overview

FIS operates in three segments:

  • Banking Solutions: This is FIS’s largest segment, providing core processing, digital channels, and payment solutions to financial institutions. This includes the core banking system, which banks use as the primary system for accounting, and the related payments processing. This area tends to have the stickiest customer base and is often the most durable.
  • Capital Markets Solutions: This segment offers software and services for institutional investors, brokers, hedge funds, and other capital markets participants, including a broad range of financial and trading instruments.
  • Corporate and Other: This includes all other areas of FIS business operations, including smaller businesses and other corporate functions, etc..

Key revenue drivers for FIS include transaction processing volumes, technology license fees, and professional services. These are all somewhat cyclical and depend heavily on the state of the financial markets. As such, during economic turmoil, banks tend to reduce spending on the solutions.

Competitive Landscape

The financial technology industry is highly competitive, with several large players vying for market share. Some of FIS’s main competitors include:

  • Global Payments: competitor in payments processing for merchants and financial institutions.
  • Fiserv: competitor in financial technology for banks.
  • SS&C Technologies: a software solutions provider for financial institutions.
  • Jack Henry & Associates: Competitor providing core banking solutions.
  • Others: Several smaller companies that focus on specific services like data processing or digital banking.

FIS has been expanding into high-growth areas such as buy-now-pay-later, cryptocurrencies, digital wallets, and real-time payments by acquisitions. These have been important for the company’s future but carry their own integration challenges and risks.

What Sets FIS Apart

  • Scale and Breadth: FIS is one of the world’s largest financial technology companies. With its considerable breadth and scale, they have a wider set of products and services than some other smaller competitors, which creates opportunities for upselling.
  • Integration: FIS is able to bundle a multitude of disparate services for the clients into an all in one offering. They help banks and other financial companies with many aspects of their business at the same time. This makes for a streamlined integration.
  • Client Base: Because of how central and crucial its services are for clients, there is a tendency for a long term connection.
  • Global footprint: A majority of the client base is from the US and Western world, allowing the company to expand into new markets overseas.

Moat Analysis (2/5)

While FIS has some important strengths, it doesn’t have a wide moat because it faces multiple challenges:

  1. Switching Costs (Narrow Moat):
    • While some companies in banking solutions have sticky customers, due to how core banking technology is hard to switch or integrate, others in its offerings do not provide a similar lock-in and are subject to heavy competition. Furthermore, switching is also likely for a low-cost provider if the service is a commodity. This limits the width of the moat.
    • Switching costs are higher for institutions that make a major commitment to a product and tailor it to their own needs.
  2. Intangible Assets (Weak Moat):
    • While it is true FIS has long running products and offerings and also many name brands (Worldpay/FIS) in their ecosystem, which can bring them good traction from the users, the actual benefits are limited by the commoditized nature of financial processing and software. These can be copied by other providers.
    • Patents tend to be short lived in software.
  3. Network Effects (Weak Moat):
    • In some cases network effects would help for an industry leader to increase its advantage, but due to the very nature of the financial landscape where banks and other clients rarely prefer a single financial service provider, the network effects here can not be a great factor.
  4. Scale and cost advantages
    • Scale does provide advantages, as the ability to provide service to an increased customer base while keeping costs down can benefit the company. However, the advantages due to the increased volume of a service are less apparent than other factors.
    • Cost advantages have not been established as high enough to create high barriers of entry for any prospective competitor.

Given these factors, the company has a limited, narrow moat.

Risks to the Moat & Business Resilience

  • Technological disruption The financial industry is changing rapidly, and any innovative technology can create disruption, making many services outdated. For instance, blockchain based payment processing could drastically change how money is moved, removing the need for middleman processors. Or new data analytics algorithms can make internal risk management departments obsolete.
  • Competition There are large, well-established competitors in most of the market segments that can also take market share from the company.
  • Changes in regulations The financial industry is highly regulated and changes in regulations can have a substantial impact on a company’s profits and how they do business.
  • Economic downturns If the financial markets struggle or there is a significant economic downturn, this could cause clients to cut down on their investments in the firm, affecting profitability.
  • Interest rates can have an adverse effect on the company’s interest-generating businesses.
  • Integration risks: The company has recently made some large acquisitions, and if these acquisitions aren’t integrated well or fail to provide their benefits, the company’s value will be greatly diminished.
  • Cybersecurity risk Being a financial institution with a huge network and valuable data, the company becomes vulnerable to cyber attacks. Any incident could seriously damage the business and/or reputation of the company.
  • Customer concentration A few big clients can be responsible for a large portion of the company’s revenue. Losing such a client would greatly affect the bottom line.

The company’s resilience depends mainly on its wide customer base, and large scale.

Financials (As of Latest Quarterly Filing - September 2023)

  • Revenue: FIS recorded revenue of 3.7 Billion dollars in Q3 2023, which is relatively unchanged on a year on year basis.
  • Profitability: The net income was 33 Million dollars and Adjusted EBITDA was 1.4 Billion dollars for Q3 2023. These numbers are lower on a YOY basis, although not much.
  • Margins: The operating margin for Q3 2023 was ~26%, which is lower on a YOY basis but consistent with its typical operations.
  • Debt: The total debt is around ~19.8 Billion dollars with an asset to debt ratio of 1.1x, which is not ideal and shows the high debt load of the company.

The financial results are clearly not doing too well and show a sign that the current macro economic situation (high interest rates, high inflation, reduced spending) is having an adverse effect on the company’s financials. The growth in revenues has been stagnant, but margins are still high.

Recent Concerns and Management Response

Some recent reports suggest some of the board members at FIS are not fully happy with the leadership decisions, most notably related to acquisitions of smaller firms and also the high debt load on the company. This has been reflected in its stock price and might cause a shakeup in the leadership of the firm.

  • Also, in the most recent earnings call, the management has been constantly mentioning they are focusing on paying off debt. They said they are fully aware of the investor concerns regarding this aspect.
  • Management also stressed their focus on increasing organic revenue growth and that the integration process has improved, allowing for them to squeeze more value out of the acquisitions.
  • There is also concern in the market regarding declining margins and high competition from rival companies that are also rapidly growing. The management has made some public comments on cost cutting in general to overcome any potential issues in growth and profitability.

Understandability (3/5)

FIS operates in the relatively simple business of providing services and software to financial institutions, so the basic model is fairly straightforward. However, when you begin looking at the specifics and details of their operations, things get quite complicated with many specialized products and different business lines. Moreover, understanding the various financial metrics requires some familiarity with financial statements. So, given the combination of ease of understanding and complexity in its operations, we rate FIS as a 3 in understandability.

Balance Sheet Health (3/5)

While the assets of FIS are great (consisting of tangible and intangible things that bring in revenues), the leverage of the company is high. It has around ~19.8 billion in debt on its balance sheets and also its debt-to-equity ratio is roughly 1.9x, which is very high. However, despite the high debt load, the management is actively trying to make improvements by paying down debt and looking for more efficiencies. Thus, we would rate the balance sheet health of FIS at 3/5.