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Fidelity National Information Services Inc. (FIS - Analyst Report) reported fourth-quarter 2013 earnings from continuing operations of 76 cents per share, up 12.0% from the year-ago quarter, which beat the Zacks Consensus Estimate by 9 cents.

Revenues

Revenues increased 5.2% year over year (5.0% organic growth) to $1.58 billion, which was slightly higher than the Zacks Consensus Estimate. The year-over-year increase was primarily driven by strong performances by the Financial Solutions and International Solutions segments.

Revenues from Financial Solutions increased 4.3% year over year to $603.5 million (4.0% organic growth), driven by strong growth in consulting revenues and digital delivery solutions.

International Solutions revenues jumped 11.3% year over year (13.0% organic growth) to $357.1 million. The strong growth was driven by double-digit growth in Latin America and continued growth in Europe and Asia.

Payment Solutions revenues increased 2.8% on a year-over-year basis to $618.3 million. Revenues from check-related businesses were $110.3 million, down 4.0% from the year-ago quarter.

Margins

Gross margin expanded 60 basis points (bps) to 37.5% due to favorable business mix. Selling, general & administrative expense (SG&A) as a percentage of revenues increased 80 bps from the year-ago quarter.

Adjusted earnings before interest, tax, depreciation and amortization (EBITDA) margin decreased 60 bps on a year-over-year basis to 30.8% in the fourth quarter. This reflects higher SG&A expense in the quarter.

Operating margin contracted 10 bps from the year-ago quarter to 24.6%. Higher margin financial solutions operating margin declined 40 bps. However, payment and international solutions operating margins expanded 180 bps and 10 bps, respectively.

Net income margin from continuing operations increased 70 bps from the year-ago quarter to 14.1%.

Balance Sheet & Cash Flow

Fidelity’s balance sheet remained highly leveraged at the end of the fourth quarter of 2013. As of Dec 30, 2013, cash and cash equivalents were $547.5 million compared with $811.6 million in the previous quarter. Total debt (including the current portion) at the end of the quarter was $4.47 billion compared with $4.82 billion in the previous quarter.

Fidelity generated $384.4 million in cash from operations versus $311.1 million in the previous quarter. Free cash flow increased to $333.7 million from $229.5 million in the previous quarter.

The company repurchased 2.5 million shares for $126.0 million during the quarter.

Outlook

For fiscal 2014, Fidelity expects revenues to grow in the range of 4.5% to 5.0%. The company expects 2014 earnings to be in the range of $3.05 to $3.16, an increase of 8.0% to 12.0% over 2012. However, this is lower than the Zacks Consensus Estimate of $3.35.

Recommendation

We believe 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 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 (GPN - Snapshot Report) and Equifax (EFX - Analyst Report) is a major concern in the near term.

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

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