Fidelity National Information Services Inc. (FIS) reported third-quarter 2014 adjusted earnings from continuing operations of 80 cents per share, up 8% from the year-ago quarter. Earnings per share (EPS) beat the Zacks Consensus Estimate by 3 cents.
Revenues
Revenues increased 7% year over year (5% organic growth) to approximately $1.605 billion, slightly higher than the Zacks Consensus Estimate of $1.602 billion. The year-over-year increase was primarily driven by strong performance from the International Solutions segment.
International Solutions revenues rose 12% year over year (9% organic growth) to $358 million, driven by growth across all regions.
Revenues from Financial Solutions increased 9% year over year to $633 million (6% organic growth), based on strong growth in consulting, professional services, risk and compliance solutions and mobile banking.
Payment Solutions revenues remained grew 2% on a year-over-year basis to $602 million, driven by growth in network solutions, debit processing and software license sales.
Margins
Operating income increased to $384.9 million from $375.1 million in the year-ago quarter. Gross margin contracted 100 basis points (bps) to 24% due to unfavorable business mix. Adjusted EBITDA stood at $487.9 million, up from $469.6 million in the year-ago period. EBITDA margin contracted 90 bps on a year-over-year basis to 30.4%.
Balance Sheet & Cash Flow
Fidelity’s balance sheet remained highly leveraged at the end of the third quarter of 2014. As of Sep 30, 2014, cash and cash equivalents totaled $612 million, while debt outstanding totaled $5.0 billion. Fidelity generated $286.7 million in cash from operations versus approximately $331.1 million in the year-ago quarter. Free cash flow decreased to $200.7 million from $229.5 million in the year-ago quarter.
The company repurchased 2.7 million shares for $150 million during the quarter. As of Sep 30, 2014, the company had approximately $1.5 billion remaining under the existing share repurchase authorization.
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 $3.06 to $3.12. This is higher than the Zacks Consensus Estimate of $3.00.
EBITDA is projected to grow within the 4.5% to 6.5% range for the full year. Free cash flow is expected to be nearly same as 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 Fiserv (FISV) is a major concern in the near term.
Currently, Fidelity has a Zacks Rank #3 (Hold).
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