Operating Performance
 
Electronic payment processor Fidelity National Information Services, Inc. (FIS) announced first quarter 2010 earnings that beat the Zacks Consensus Estimate of 39 cents by 2 cents. Earnings on a non-GAAP basis from continuing operations came in at 41 cents per share, up 36.7% from 30 cents per share in the year-ago period. This was above the company’s guided range of 37–40 cents per share.
 
The company said revenue and earnings were better than expectations, boosted by higher software and professional services sales, strong transaction growth, prudent cost management and impressive free cash flow.
 
Quarterly results include operations from Metavante Technologies, which FIS acquired on Oct 1, 2009. To facilitate comparison, the results assume that the merger was completed on Jan 1, 2009 and the year-ago quarter of 2009 was adjusted accordingly. In addition, FIS completed the sale of its ClearPar automated syndicated loan trade settlement business on Jan 1, 2010. The results of ClearPar are reported as discontinued operations.
 
The company benefited from cost-cutting efforts and operating efficiency gains, as well as higher revenue in each of its segments. Management’s expectations for $43 million in realized savings in the first quarter were exceeded. As a result, operating margin improved to 21.9% from 18.1% in the year-ago period.
 
Fidelity expects to achieve the targeted incremental savings of $150 million in 2010. Management said that the company is on track to achieve targeted cost savings of $260 million in the long term.
 
Adjusted EBITDA in the quarter was $362.7 million, an increase of 17.6% from the prior-year quarter. The EBITDA margin increased 340 basis points year over year to 28.8% in the quarter, driven by improved operating performance, including acquisition-related cost synergies, ongoing expense management across all operating segments and a modest improvement in revenue mix.
 
Consolidated adjusted revenue from continuing operations of $1.26 billion (excluding a $9 million negative impact of deferred revenue from purchase accounting) increased 3.8% from revenue of $1.21 billion (including the Metavante acquisition) reported in the first quarter of 2009. Metavante Technologies contributed $417.8 million to pro forma revenue in the year-ago period.
 
Revenue increased due to higher processing and services revenue, which was up 58.5% to $1.26 billion from $794.1 million in the year-ago period. Excluding a $24.2 million favorable foreign currency impact, total consolidated revenue increased 1.8%.
 
Segment Results
 
Segment-wise, Financial Solutions revenue increased 3.2% year over year to $443.5, driven by higher professional services and software license fees. The year-ago period included $163.6 million in revenues from the Metavante acquisition. EBITDA margin in the segment improved 390 basis points from last year to 41.8%, driven primarily by synergy benefits and a favorable revenue mix. However, the company does not expect to generate similar margin expansion in the second quarter of 2010.
 
Payment Solutions revenue increased 1% to $618.8 million, as growth in debit, government and healthcare solutions more than offset lower item processing and retail check activity. The year-ago period included $248.5 million in revenues from the Metavante acquisition.  Excluding the paper based check business, Payments revenue would have increased 4.2% year over year. The paper based check business, which generated approximately $120 million in revenue in the first quarter of 2010, is expected to continue to negatively impact the payments growth rate in the upcoming quarter by about 2% to 3% due to the secular decline in check usage.
 
EBITDA margin in the segment increased 340 basis points year over year to 37.1%, due to realized cost savings and a more favorable revenue mix, as well as improved profitability within retail check. However, the company expects less robust EBITDA margin in the second quarter, due to difficult year over year comparisons.
 
International Solutions revenue increased 14.9% to $195 million in U.S. dollars, and 0.6% in constant currency. The year-ago period included $5.7 million in revenues from the Metavante acquisition. The international growth rate was impacted by the loss of processing revenue for Santander in late January and the delay in converting Bradesco’s remaining card portfolio in the first quarter.
 
The EBITDA margin in the segment declined 150 basis points to 16.2% due to currency impact and a less favorable revenue mix. The company expects the international margin to ramp sequentially throughout 2010 and expects the full-year margin to be in the low 20% range.
 
Balance Sheet
 
Fidelity National exited the quarter with $464 million in cash and cash equivalents versus $430.9 million in the previous quarter. Total debt at quarter-end was of $3.10 billion versus $3.25 billion in the previous quarter. The company generated $271.6 million in cash from operations versus $209.4 million generated in the previous quarter. Capital expenditures totaled $58.2 million in the quarter, compared to $66.8 million spent in the previous quarter.
 
Due to lower capital expenditure, higher operating cash flow, growth in earnings, strong accounts receivable collections and a favorable impact from the timing and amount of tax payments, quarterly free cash flow improved to $241 million from $142.6 million generated in the previous quarter.
 
Guidance
 
Management expects second quarter revenue to be in the low single digit range with a margin expansion of approximately 100 basis points. Fidelity National expects 2% to 4% growth in adjusted revenues (1% to 3% growth in constant currency, due to the strengthening of the dollar against the euro and the British pound). Hence, the company expects a reduced currency benefit of approximately $30 million, compared to its previous guidance of $60 million for the full year 2010.
 
Fidelity National expects adjusted earnings per share to remain at $1.91 to $2.01 for 2010, which is an increase of 17% to 23% compared to $1.63 in 2009. The current Zacks Consensus Estimate calls for $1.96 in EPS for fiscal 2010, in line with the company’s guidance.
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