FIS Marginally Tops Expectations - Analyst Blog

A leading provider of banking and payment technology to financial institutions and government organizations, Fidelity National Information Services Inc. (FIS) reported second quarter 2010 results that beat the Zacks Consensus Estimate of 45 cents by a penny.

Earnings

Earnings on a non-GAAP basis from continuing operations increased 15.0% year over year to 46 cents per share but was in line with management’s guidance range of 45 cents to 47 cents.

Including after-tax purchase amortization of $42.0 million, and $41.0 million in after-tax merger integration and recapitalization costs, earnings on a GAAP basis were 23 cents per share, down 25.8% from 31 cents reported in the year-ago period.

Fidelity pointed out that the results were in sync with their expectations. Strong global sales, higher market share, improving demand for professional services and stringent cost controls drove the results in the quarter.

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

Revenues from continuing operations (non-GAAP) upped 2.4% year over year to $1.29 billion. On a constant currency basis, revenues inched up 1.7% year over year. This was well above the Zacks Consensus Estimate of $1.28 billion but was in line with the company’s guidance of low single digits. Including $5.0 million of deferred revenues, GAAP revenues summed up to $1.29 billion.

Revenue growth in the second quarter was primarily driven by higher license sales and special services revenues. According to management, product pipeline remains promising. Fidelity has already signed 39 deals in the first six months of 2010, as compared with a total number of 50 in full-year 2009.

In second quarter 2010, EBITDA on a non-GAAP basis increased 7.2% year over year to $359.8 million. Fidelity achieved its cost savings target of $40.0 million in the quarter. As a result, EBITDA margin improved 140 basis points to 29.9% from 28.5% in the prior-year quarter.

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

Segment Results

Financial Solutions revenues rose 3.0% year over year to $458.3 million, boosted by higher professional services revenues and software license fees. EBITDA was $200.6 million, up 5.0% year over year and margin grew 90 basis points to 43.8%, primarily driven by increased cost savings.

Payment Solutions revenues of $630.6 million in the second quarter 2010 was flat compared to the year-ago period affected by a lower item processing and retail check activity that fully offset strong growth in electronic payment solutions. Excluding check business, revenues increased 4.5%. EBITDA climbed 4.0% year over year to $232.3 million, and margin improved 140 basis points to 36.8%.

International Solutions revenues totaled $200.7 million, up 8.0% year over year and 3.1% in constant currency. The strong results were driven by higher volumes from its Brazilian card processing operation. EBITDA in the segment spiked up 1.1% to $36.4 million. However, EBITDA margin was 18.1%, and 19.0% in constant currency, as compared with 19.4% in the prior-year quarter. The decline was primarily due to delays in converting the Bradesco portfolio.

Balance Sheet

As of June 30, 2010, cash and cash equivalents were $502.0 million as compared with $464.0 million at the end of March 31, 2010.

We believe Fidelity’s balance sheet is highly levered. Long-term debt (including the current potion) at quarter end was $2.96 billion, as compared with $3.10 billion in the previous quarter. Total debt, including term loan, revolver, Metavante term loan and senior unsecured notes increased to $5.58 billion. Total debt-capital ratio was 39.2% as of June 30, 2010, as compared with 26.5% at the end of March 31, 2010.

Recently, Fidelity completed an amendment and extension of its existing credit facility and refinancing of its Term loan B related to the acquisition of Metavante Technologies Inc. Fidelity raised more than $550.0 million of additional bank debt. The company also raised $1.5 billion in Term-Loan B and $1.1 billion in Senior-Unsecured Notes and paid off the Metavante term loan.

The company generated $183.5 million in adjusted cash from operations versus $299.5 million in the previous quarter. Capital expenditures totaled $76.0 million in the quarter, compared with $58.2 million spent in the previous quarter. Free cash flow (on an adjusted basis) dropped to $107.5 million versus $241.3 million in the previous quarter.

New Deals

Management believes Fidelity gained significant market share in the second quarter and expects this to continue by penetrating the mid-tier market. Fidelity believes its superior products and scale of operation provide a competitive edge in this market compared to its peers. Moreover, Fidelity expects demand for its professional services to spike going forward.

Recently, Fidelity signed a new core processing agreement with Sterling Savings Bank, a $10.0 billion institution based in Washington. Including Sterling, Fidelity has already signed eight new mid-tier processing agreements through the end of the second quarter.

Fidelity is also looking forward to broaden its footprint in Tier 1 market, and will soon provide bill payment services to one of the top banks in the country. This is the second deal for Fidelity with one of the top 25 banks in 2010.

Fidelity will likely expand its Brazilian operations by signing a definitive agreement with Banco Bradesco (BBD) in second half of 2010. In our opinion, such a deal will be beneficial for Fidelity on a long-term basis. This deal will support its international growth objectives, driving the top-line growth going forward.

New deal signings will help Fidelity achieve its growth target over the long term.

Guidance Reaffirmed

Fidelity reaffirmed it guidance for full-year 2010. The company projects adjusted earnings per share to remain at $1.91 to $2.01 for 2010, an increase of 17% to 23% 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 adjusted EBITDA margin expansion of at least 300 basis points for fiscal 2010.

Fidelity expects to repurchase 81-86 million shares using the $29.00 to $31.00 range of the Modified Dutch Auction Tender. This is expected to boost earnings by one cent to two cents in 2010.

Fidelity continues to expect robust second half result as compared with the first half based on an encouraging software sales, payment transaction growth, strong special services growth and lower consolidation impact. However, management apprehends some headwinds from delays in the Bradesco conversion, the slow pace of the economic recovery and uncertainty around the Financial Reform Bill.

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 (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.