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Fidelity National Information Services Inc. (FIS - Analyst Report) reported third quarter 2013 earnings from continuing operations of 74 cents per share, up 18.1% from the year-ago quarter, and beat the Zacks Consensus Estimate by 13 cents.

Revenues

Revenues increased 4.5% year over year (5.0% organic growth) to $1.50 billion, which was in line with the Zacks Consensus Estimate. The year-over-year increase was primarily driven by strong performances from its Payment Solutions and International Solutions segments.

Revenues from Financial Solutions increased 2.3% year over year to $578.6 million (1.0% organic growth), driven by strong growth in consulting revenues and digital delivery solutions.

International Solutions revenues jumped 8.9% year over year (12.0% organic growth) to $321.7 million. The strong growth was driven by robust performance across all regions. The strong organic growth was driven by double-digit increase in revenues in most of the regions.

The company continues to win clients in North America including the likes of Bank of Montreal (BMO - Snapshot Report), which chose Fidelity’s check imaging software. The company’s solutions were selected by Northern Trust and Bremer Bank and its agreements with SunTrust and ING Direct extended.

Fidelity stated increasing growth potential in Europe, particularly strong opportunities in Central and Eastern Europe. The company’s solutions continue to maintain their popularity among clients in Europe as well as Asia. This is quite evident from the recent renewal by Barclays (BCS - Snapshot Report) and core processing upgrade wins in China and Thailand.

Payment Solutions revenues increased 4.4% on a year-over-year basis to $601.7 million. The increase was driven by strong growth in card loyalty programs, electronic bill payment services and document output solutions.

Margins

Gross margin expanded 80 basis points (bps) to 37.6% due to favorable business mix. Selling, general & administrative expense (SG&A) as a percentage of revenues increased 10 bps from the year-ago quarter.

Adjusted earnings before interest, tax, depreciation and amortization (EBITDA) margin improved 50 bps on a year-over-year basis to 31.3% in the third quarter. This reflects favorable revenue mix and stringent cost management.

Operating margin expanded 80 bps from the year-ago quarter to 25.0%. Financial, Payment and International solutions operating margins expanded 210 bps, 220 bps and 140 bps, respectively.

Net income margin from continuing operations increased 150 bps from the year-ago quarter to 14.5%.

Balance Sheet & Cash Flow

Fidelity’s balance sheet remained highly leveraged at the end of the third quarter of 2013. As of Sep 30, 2013, cash and cash equivalents were $811.6 million compared with $653.1 million in the previous quarter. Total debt (including the current potion) at the end of the quarter was $4.82 billion compared with $4.76 billion in the previous quarter.

Fidelity generated $311.1 million in cash from operations versus $157.3 million in the previous quarter. Free cash flow increased to $229.5 million from $115.3 million in the previous quarter.

The company repurchased 2.7 million shares for $125.0 million and paid dividends worth $64.0 million.

Outlook

For fiscal 2013, Fidelity expects revenues (reported and organic) to grow in the range of 4.0% to 5.0%. Fidelity expects its 2013 earnings to be in the range of $2.80 to $2.87 (prior outlook was $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.

Moreover strong demand for its solutions such as Cardless Cash Access solution and Active Analytics suite is expected to boost its top-line growth in the near term. The company continues to win contracts from banks and financial institutions in the overseas market, which will further drive its market share going forward.  

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 - Analyst Report), Global Payments and DST Systems is a major concern in the near term.

Currently Fidelity has a Zacks Rank #3 (Hold).

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