Fidelity National Information Services Inc. (FIS) reported second-quarter 2014 earnings from continuing operations of 75 cents per share, up 5.4% from the year-ago quarter. Earnings per share (EPS) beat the Zacks Consensus Estimate by 11 cents.
Revenues
Revenues increased 5.7% year over year (5% organic growth) to approximately $1.60 billion, slightly higher than the Zacks Consensus Estimate. The year-over-year increase was primarily driven by strong performance from the International Solutions segment.
International Solutions revenues grew 14.2% year over year (12% organic growth) to $346.8 million, driven by growth across all regions.
Revenues from Financial Solutions increased 7.2% year over year to $629 million (6% organic growth), driven by strong growth in consulting, professional and digital delivery solutions.
Payment Solutions revenues remained almost flat on a year-over-year basis to $623.6 million, driven by growth in network solutions, bill payment services, image and output solutions, offset by lower termination fees.
Margins
Gross margin contracted 100 basis points (bps) to 35% due to unfavorable business mix.
Selling, general & administrative expense (SG&A), as a percentage of revenues, decreased 20 bps from the year-ago quarter.
Adjusted earnings before interest, tax, depreciation and amortization (EBITDA) margin declined 60 bps on a year-over-year basis to 29.2% in the quarter. Segment-wise, International Solutions EBITDA margin decreased 90 bps and Payment Solutions contracted 160 bps, while Financial Solutions climbed 20 bps on a year-over-year basis.
Operating margin contracted 80 bps on a year-over-year basis to 22.7%. Higher margin financial solutions operating margin increased 60 bps. Payment and International Solutions operating margins contracted 170 bps and 70 bps, respectively.
Net income was $217.4 million or 75 cents per share as compared with $209.8 million or 71 cents per share in the year-ago quarter.
Balance Sheet & Cash Flow
Fidelity’s balance sheet remained highly leveraged at the end of the second-quarter 2014. As of Jun 30, 2014, cash and cash equivalents were $793.7 million compared with $737.7 million in the previous quarter. Total debt (including the current portion) at the end of the quarter was $4.92 billion compared with $4.78 billion in the previous quarter.
Fidelity generated $245 million in cash from operations versus approximately $23 million in the previous quarter. Free cash flow decreased to $149 million from $158 million in the previous quarter.
The company repurchased 2.8 million shares for $151 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% to 12% over 2013. This is higher than the Zacks Consensus Estimate of $2.59.
EBITDA is projected to grow in 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.
Fidelity’s licensing agreement with Visa (V) and MasterCard (MA) to offer EMV enabled debit cards to its NYCE partners is 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).
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