Fidelity Beats by a Penny - Analyst Blog

A leading provider of banking and payment technology to financial institutions and government organizations, Fidelity National Information Services Inc. (FIS) reported third quarter 2010 earnings result that beat the Zacks Consensus Estimate of 51 cents by a penny, mainly attributable to growth in financial services segment that witnessed increasing demand.

Earnings

Earnings on a non-GAAP basis from continuing operations increased 13.0% year over year to 52 cents per share from 46 cents reported in the prior-year quarter. Adjusted net earnings from continuing operations totaled $176.7 million compared with $89.2 million in the year-ago quarter.

Strong global sales, higher market share, improving demand for financial services and stringent cost controls drove the results in the quarter.

In third quarter 2010, EBITDA on an adjusted basis increased 14.7% year over year to $426.6 million. As a result, EBITDA margin improved 320 basis points from the prior-year quarter to 33.1%.

Management believes Metavante integration is proceeding as scheduled and expects to achieve cost savings of $260.0 million in the long term.

Current quarter results include operations from Metavante Technologies, which Fidelity acquired on October 1, 2009. For comparison, it is assumed that the merger was completed on January 1, 2009 and the year-ago quarter of 2009 was adjusted accordingly.

In addition, Fidelity completed the sale of its ClearPar automated syndicated loan trade settlement business on January 1, 2010. The results of ClearPar are reported as discontinued operations.

Revenues

Adjusted revenues from continuing operations (non-GAAP) were up 3.3% year over year to $1.29 billion. Revenue growth in the third quarter was primarily driven by financial solutions and international solutions sales, partially offset by payment solutions revenues. However, revenues were slightly below the Zacks Consensus Estimate of $1.30 billion.

Segment Results

Financial Solutions revenues rose 10.5% year over year to $485.5 million, boosted by higher professional services revenues, account processing revenues and software license fees. EBITDA was $218.8 million, up 16.9% year over year and margin grew 250 basis points to 45.1%, primarily driven by increased cost savings.

Payment Solutions revenues of $600.6 million in the third quarter were down 1.9% year over year, affected by a lower item processing and retail check activity that fully offset growth in electronic payment solutions. EBITDA inched up 2.3% year over year to $230.9 million, and margin improved 150 basis points to 38.4%.

International Solutions revenues totaled $199.4 million, up 2.3% year over year. The results were driven by higher volumes from its Brazil and Asia Pacific card processing operation.

EBITDA in the segment declined 4.1% to $46.5 million while EBITDA margin was down to 23.3% from 24.9% in the prior-year quarter. The decline was primarily due to delays in converting the Bradesco portfolio.

Liquidity

Balance Sheet metric deteriorated in the quarter. As of September 30, 2010, cash and cash equivalents were $389.4 million as compared with $502.0 million at the end of June 30, 2010.

We believe Fidelity's balance sheet is highly levered. Long-term debt (including the current potion) at quarter end was $5.10 billion, as compared with $2.96 billion in the previous quarter. During the quarter, the company completed a $2.5 billion recapitalization including the repurchase of 86.2 million shares at $29 per share.

The company repaid approximately $400 million, resulting in debt outstanding of approximately $5.1 billion as of September 30. Capital expenditures in the third quarter totaled $93.1 million, compared with $76.0 million spent in the previous quarter.

The company generated $313.5 million in adjusted cash from operations versus $183.5 million in the previous quarter. Free cash flow (on an adjusted basis) increased to $220.4 million from $107.5 million in the previous quarter.

Guidance

Fidelity slightly raised its guidance for full year 2010. The company projects adjusted earnings per share from continuing operations of $1.95 to $1.99 for 2010, compared with previous projection of $1.91 to $2.01. This is an increase of 20% to 22% compared with $1.63 in 2009.

Management continues to forecast 2% to 4% growth in adjusted revenues (1% to 3% growth in constant currency). The company expects revenues to come in at the high end of the guidance range. The company expects to generate adjusted free cash flow of over $700 million.

Recommendation

We maintain a Neutral rating on a long-term basis (for the next 6 to 12 months), primarily due to an 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).

However, continued market share gain, global expansion, a strong product portfolio and cost saving synergies will drive earnings growth going forward. New deal signings will help Fidelity achieve its growth target over the long term.

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

 
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