Fidelity Beats On Strong Top-Line Growth

| About: Fidelity National (FIS)

Fidelity National Information Services Inc. (FIS) reported third quarter 2011 earnings of 62 cents per share, beating the Zacks Consensus Estimate by a penny. The better-than-expected result was driven by strong top-line growth in the quarter.

Non-GAAP earnings per share (EPS) from continuing operations increased 19.2% year over year, on the back of the net effect of lower share count, higher revenue and lower tax rate.

Operating Performance

Gross profit increased 10.6% year over year to $504.4 million. Gross margin was 35.4% in the quarter, flat year over year. In the reported quarter, EBITDA on an adjusted basis spiked 2.7% year over year to $438.0 million.

EBITDA margin, however, plunged 240 basis points (bps) year over year to 23.8%. The year-over-year decline was attributable to a higher mix of low margin professional service revenue, lower license revenue and increasing costs.

Operating income was $338.9 million, slightly down from $339.6 million in the prior-year quarter. Higher selling, general and administrative expense (SG&A) (up 19.2% year over year) was responsible for the decline in operating margin. Adjusted net earnings from continuing operations totaled $188.8 million compared with $176.7 million in the year-ago quarter.


Revenues on a non-GAAP basis in the third quarter climbed 10.8% year over year to $1.43 billion. Revenues rose 4.1% organically, driven by strong results from Financial Solutions and International Solutions.

Segment Results

Financial Solutions revenues rose 7.8% year over year (0.6% organically) to $523.2 million, boosted by growth in account processing, higher services revenue, and the addition of Capco’s North American operations.

EBITDA stood at $224.0 million, up 1.9% year over year, but margin declined 250 bps to 42.8%, reflecting a higher proportion of low-margin professional services, including Capco.

Payment Solutions revenues of $603.7 million in the third quarter inched up 0.5% year over year. Payment Solutions revenue increased 2.0% excluding a $6.4 million decline in the check-related businesses. EBITDA decreased slightly on a year-over-year basis to $229.6 million while EBITDA margin declined 40 bps to 38.4%.

International Solutions revenues totaled $297.7 million, up 49.3% year over year (21.9% organically). The strong results were driven by higher volumes from Brazil card processing operation and the addition of Capco’s international operations.

EBITDA increased 44.1% year over year to $67.0 million. However, EBITDA margin decreased 80 bps to 22.5% in the quarter, reflecting a higher proportion of low-margin professional services, including Capco.


As of September 30, 2011, cash and cash equivalents were $386.8 million compared with $427.3 million, as of June 30, 2011.

Fidelity’s balance sheet is highly levered. Total debt (including the current potion) at the end of the quarter was $4.87 billion compared with $4.88 billion in the previous quarter.

Capital expenditures in the third quarter totaled $82.1 million versus $68.0 million in the previous quarter. The company generated $275.5 million in adjusted cash from operations versus $263.0 million in the previous quarter. Free cash flow (on an adjusted basis) decreased to $193.4 million from $195.3 million in the previous quarter.


Fidelity projected adjusted earnings per share from continuing operations between $2.24 and $2.30 for fiscal 2011. Currently, the Zacks Consensus Estimate is pegged at $2.29, roughly in line with the high end of the company’s guidance.

Revenue is expected to grow in the range of 10.0% (5.0% organically) for fiscal 2011. EBITDA is projected to increase 4.0% to 5.0% and free cash flow is expected to exceed the adjusted net earnings in 2011.

We believe Fidelity’s expansion into emerging markets such as Brazil, India and China will drive organic revenue growth over the long term.


We believe Fidelity’s commanding position in the financial services market, increasing international exposure, recurring revenue model, diversified product portfolio, cost synergies from acquisitions and a loyal customer base will drive growth over the long term.

However, increasing consolidation in the banking sector, challenging environment for the Payments Solutions business and uncertain regulatory environment are the primary headwinds, in our view.

We maintain our Neutral rating on a long-term basis (for the next 6 to 12 months), primarily due to increasing debt and intense competition from Fiserv Inc. (FISV), International Business Machines Corp. (IBM), Accenture Plc (ACN), Alliance Data Systems (ADS), MasterCard Incorporated (MA) and Visa Inc. (V).

Currently, Fidelity has a Zacks #3 Rank, which implies a short-term Hold rating (for the next 1-3 months).