Fidelity Beats on Q1 Earnings, Revs In line - Analyst Blog

Fidelity National Information Services Inc. FIS reported first-quarter 2014 earnings from continuing operations of 68 cents per share, up 9.9% from the year-ago quarter, which beat the Zacks Consensus Estimate by 12 cents.

Revenues

Revenues increased 3.5% year over year (5.0% organic growth) to $1.53 billion, almost in line with the Zacks Consensus Estimate. The year-over-year increase was primarily driven by strong performance from the International Solutions segment.

International Solutions revenues jumped 7.8% year over year (13.0% organic growth) to $314.4 million, driven by growth across all regions.

Revenues from Financial Solutions increased 2.0% year over year to $586.8 million (2.0% organic growth), driven by strong growth in consulting revenues and digital delivery solutions.

Payment Solutions revenues increased 2.7% on a year-over-year basis to $628.5 million, driven by growth in image and output solutions and card solutions.

Margins

Gross margin contracted 100 basis points (bps) to 34.9% due to unfavorable business mix.

Selling, general & administrative expense (SG&A) as a percentage of revenues decreased 100 bps from the year-ago quarter.

Adjusted earnings before interest, tax, depreciation and amortization (EBITDA) margin was almost flat on a year-over-year basis to 31.8% in the quarter. Segment-wise, International Solutions EBITDA margin decreased 150 bps, Payment Solutions contracted 10 bps and Financial Solutions fell 90 bps on a year-over-year basis.

Operating margin remained almost flat on a year-over-year basis to 22.7%. Higher margin financial solutions operating margin declined 80 bps. Payment and International Solutions operating margins contracted 150 bps and 130 bps, respectively.

Net income improved to $197.4 million compared with $182.3 million due to lower interest expense. Net income includes adjustments related to contract settlement ($6.0 million) and purchase price amortization ($36.5 million).

Balance Sheet & Cash Flow

Fidelity's balance sheet remained highly leveraged at the end of the first quarter of 2014. As of Mar 31, 2014, cash and cash equivalents were $737.7 million compared with $547.5 million in the previous quarter. Total debt (including the current portion) at the end of the quarter was $4.78 billion compared with $4.47 billion in the previous quarter.

Fidelity generated $22.6 million in cash from operations versus $384.4 million in the previous quarter. Free cash flow decreased to $158.2 million from $333.7 million in the previous quarter.

The company repurchased 3.2 million shares for $175.0 million during the quarter.

Outlook

For 2014, Fidelity expects organic revenues to grow in the range of 4.5% to 6.5%. The company expects 2014 earnings in the range of $3.05 to $3.16, an increase of 8.0% to 12.0% over 2013. However, this is lower than the Zacks Consensus Estimate of $3.35.

EBITDA is projected to grow at the 4.5% to 6.5% range for the full year. Free cash flow is expected to approximate adjusted net earnings for the year.

Our Take

We believe that 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 are significant positives.

Moreover, strong demand for its solutions is expected to boost top-line growth in the near term. The company continues to win contracts from banks and financial institutions internationally, which will further drive its market share.  
Additionally, the company's recent partnership with Microsoft MSFT to fight cybercrime is a significant positive, as it will expand its presence in the fast growing cyber security market.

Fidelity's licensing agreement with Visa V to offer EMV enabled debit cards to its NYCE Payments Network partners is also a key growth catalyst. We believe that increasing EMV adoption in the U.S. will drive Fidelity's top-line growth in 2014

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. Moreover, intensifying competition from the likes of Fiserv FISV is a major concern in the near term.

Currently, Fidelity has a Zacks Rank #3 (Hold).