Fidelity National Information Services Inc. (FIS) reported second quarter 2013 earnings from continuing operations of 71 cents per share, up 34.0% from the year-ago quarter and beat the Zacks Consensus Estimate by 6 cents.
Quarter Details
Revenues increased 3.8% year over year (3.7% organic growth) to $1.51 billion, which lagged the Zacks Consensus Estimate of $1.53 billion. The year-over-year increase was primarily driven by strong performances from its Financial Solutions and International Solutions segments.
Revenues from Financial Solutions increased 4.2% year over year to $587.0 million (2.7% organic growth), driven by strong growth in consulting revenues, global commercial services and eBanking solutions.
International Solutions revenues climbed 5.6% year over year (7.9% organic growth) to $303.5 million. The strong growth was driven by robust performance in Latin America (Brazilian card joint venture), higher revenues from consulting services in Europe and incremental revenues from new client implementations in Asia.
Payment Solutions revenues increased 2.8% on a year-over-year basis to $623.1 million. The increase was driven by strong growth in card loyalty programs, electronic bill payment services and output solutions.
Gross margin contracted 60 basis points (“bps”) to 36.2% due to unfavorable business mix. Selling, general & administrative expense (“SG&A”) as a percentage of revenues declined 60 bps from the year-ago quarter.
As a result, operating margin remained flat year over year. Net income as percentage of revenues increased to 13.8% from 13.6% in the year-ago quarter.
Fidelity’s balance sheet remained highly leveraged at the end of the second quarter of 2013. As of Jun 30, 2013, cash and cash equivalents were $653.1 million compared with $590.6 million in the previous quarter. Total debt (including the current potion) at the end of the quarter was $4.76 billion compared with $4.60 billion in the previous quarter.
Fidelity generated $157.3 million in cash from operations versus $207.5 million in the previous quarter. Free cash flow decreased to $115.3 million from $147.7 million in the previous quarter.
Outlook
For fiscal 2013, Fidelity expects revenues to grow in the range of 4% to 6%. Organic revenue growth is expected in the range of 3% to 5%. Fidelity expects its 2013 earnings to be between $2.77 and $2.87 per share.
Recommendation
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 will drive growth over the long term.
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, competition from Fiserv (FISV), Global Payments (GPN) and DST Systems (DST) is a major concern in the near term.
Currently, Fidelity has a Zacks Rank #4 (Sell).
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