Fidelity Reaffirms Outlook - Analyst Blog

Second Quarter Guidance

Electronic payment processor Fidelity National Information Services, Inc. (FIS) reiterated its outlook for the second quarter of 2010.

Management expects second quarter adjusted revenues to grow in the low single digit range with an adjusted EBITDA margin expansion of approximately 100 basis points. This compares with $1.26 billion in revenues with an adjusted EBITDA margin of 28.5% reported in the year-ago period.

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 with its earlier prediction of $60 million for the full year 2010.

The company also offered guidance for the second quarter earnings. Fidelity National expects adjusted earnings per share to be in the range of 45 cents to 47 cents. The current Zacks Consensus Estimate is currently pegged at 46 cents per share for the quarter. Fidelity National is set to release its second quarter results after the close of market on Jul 20, 2010.

Full Year 2010 Guidance

During the first quarter call, Fidelity National reaffirmed it guidance for the full year 2010. The company expects adjusted earnings per share to remain between $1.91 and $2.01 for 2010, which is an increase of 17% to 23% compared with $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.

First Quarter Earnings

First quarter 2010 earnings beat the Zacks Consensus Estimate of 39 cents per share 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 cents to 40 cents per share.

Consolidated adjusted revenues from continuing operations of $1.26 billion increased 3.8% from $1.21 billion reported in the first quarter of 2009. The company benefited from cost-cutting efforts and improved operating efficiency, as well as higher revenues in each of its segments.

Revenues and earnings were better than expectations, boosted by higher software and professional services sales, increased processing and services revenues, strong transaction growth, prudent cost management and impressive free cash flow.

Earnings Estimate Revisions

Despite Fidelity National’s upbeat first quarter results and reaffirmed guidance for 2010, the overall trend in estimate revisions has been less favorable in the run up to the quarterly release. Over the last 30 days, 1 of 17 analysts covering the stock made downward earnings estimate revision for the second quarter, while 2 reduced their projections for the full year. Upward revision to the numbers for the second quarter and full year 2010 has been none in the last month.

High Leverage

Fidelity National’s growth in the recent years was primarily driven by acquisitions, funded partly in cash and the remaining in long-term debt. We believe the Metavante acquisition will offer both top-line growth and cost synergies with superior operating leverage. New customer signings, increased presence in international markets, incremental cross-selling opportunities and stabilization in end-market demand will also drive long-term growth.

However, Fidelity National’s balance sheet is highly levered. Fidelity National announced that it will repurchase $2.5 billion of its stock from the proceeds of the sale of $1.2 billion new debt to institutional investors. The company will also use the unsecured senior notes (debt), with maturity dates between 7 and 10 years, to repay its old debt related to the acquisition of Metavante Technologies.

Although share repurchases will boost earnings it also indicates a slowdown in the company’s future growth projects.

Most recently, Standard & Poor’s cut the rating of Fidelity National to BB (stable outlook) from BB+ as it is issuing debt to buy back stock. Moody’s Investors Service has assigned a Ba2 rating on the company.

As of Mar 31, 2010, long-term debt was $2.81 billion, with debt-capital ratio of 22.1%. We believe that the new debt will increase its long-term debt by at least $2.0 billion.

Such high debt may limit Fidelity’s expansion. Fidelity National also faces stiff competition from Fiserv Inc. (FISV), International Business Machines (IBM), Accenture Plc. (ACN), Alliance Data Systems (ADS), MasterCard Inc. (MA) and Visa Inc. (V).