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Fidelity National Information Services Inc. (FIS - Analyst Report) reported fourth quarter 2010 earnings of 64 cents that beat the Zacks Consensus Estimate of 60 cents. Strong revenue growth and higher cost savings drove the results.

Operating Performance

Earnings on a non-GAAP basis from continuing operations increased 42.2% year over year to 64 cents per share from 45 cents reported in the prior-year quarter. Adjusted net earnings from continuing operations totaled $196.9 million compared with $168.9 million in the year-ago quarter.

Gross profit increased 13.6% year over year to $504.5 million. Gross margin was 36.1% compared with 34.2% reported in the prior-year quarter.

Operating income was $350.2 million, up 16.7% year over year. Operating margin was 25.1% compared with 23.1% in the prior-year quarter.

In the fourth quarter of 2010, EBITDA on an adjusted basis increased 14.4% year over year to $444.6 million, primarily driven by higher cost savings. As a result, EBITDA margin improved 190 basis points (bps) from the prior-year quarter to 31.8%.

The quarter results include operations from Metavante Technologies, which Fidelity acquired on October 1, 2009. For comparison, it is assumed that the merger was completed on January 1, 2009 and the year-ago quarter of 2009 was adjusted accordingly.


Revenues on a non-GAAP basis were $1.4 billion, up 7.6% year over year in the fourth quarter. Revenue increased 6.1% organically, primarily driven by strong results from Financial Solutions and International Solutions.

Segment Results

Financial Solutions revenues rose 11.3% year over year to $503.5 million, boosted by growth in professional services, increased processing revenues and the acquisition of Capco. EBITDA was $219.4 million, up 11.0% year over year, but the margin declined 10 bps to 43.6%.

Payment Solutions revenues of $600.6 million in the fourth quarter were down 0.2% year over year, affected by a lower item processing and retail check activity that fully offset growth in electronic payment solutions. EBITDA was up 9.5% year over year to $239.8 million, and EBITDA margin improved 340 bps to 38.2%.

International Solutions revenues totaled $268.2 million, up 25.0% year over year. The results were driven by higher volumes from its Brazil card processing operation, growth in professional services, higher license revenue and the acquisition of Capco. EBITDA increased 25.3% year over year to $81.3 million, while EBITDA margin was flat at 30.3% in the quarter.


As of December 31, 2010, cash and cash equivalents were $338.0 million compared with $389.4 million as of September 30, 2010.

Fidelity’s balance sheet is highly levered. Long-term debt (including the current potion) at quarter end was $5.19 billion compared with $5.10 billion in the previous quarter.

Capital expenditures in the fourth quarter totaled $86.7 million compared with $93.1 million in the previous quarter.

The company generated $308.3 million in adjusted cash from operations versus $313.5 million in the previous quarter. Free cash flow (on an adjusted basis) increased to $221.6 million from $220.4 million in the previous quarter.

2010 Results

Earnings on a non-GAAP basis increased 22.4% year over year to $2.02 per share, surpassing the Zacks Consensus Estimate of $1.98.

In fiscal 2010, revenue increased 4.2% year over year (3.2% organically) to $5.20 billion. This growth was primarily driven by strong results from International Solutions (up 12.5% year over year) and Financial Solutions (up 7.0% year over year), which fully offset the weakness in Payment Solutions (down 0.3% year over year).

EBITDA on a pro forma basis increased 13.9% year over year to $1.6 billion from $1.4 billion in the prior year, primarily due to cost savings. The adjusted EBITDA margin expanded 270 bps to 31.3% compared with 28.6% in 2009.

At the end of fiscal 2010, cost savings exceeded $300 million, resulting in the attainment of the planned $212 million out of the $260 million of EBITDA reduction.

Capital expenditures in the fiscal 2010 totaled $314.0 million compared with $212.5 million in the previous year.

The company generated $1.10 billion in adjusted cash from operations versus $820.0 million in the previous quarter. Free cash flow (on an adjusted basis) increased to $790.8 million from $607.5 million in the previous quarter.


Fidelity projects adjusted earnings per share from continuing operations of $2.24 to $2.34 for fiscal 2011, up 11.0% to 16.0%, compared with $2.02 in fiscal 2010. Currently, the Zacks Consensus Estimate is pegged at $2.32, roughly in line with the high end of the guidance.

Revenue is expected to grow 9.0% to 11.0% (4.0% to 6.0% organically) for fiscal 2011. We believe Fidelity’s increasing penetration into emerging markets such as Brazil and China will drive organic revenue growth over the long term.

EBITDA is projected to increase 7.0% to 9.0% and free cash flow is expected to approximate the adjusted net earnings in 2011. Fidelity expects $48.0 million of cost savings in fiscal 2011.


In December, 2010, Fidelity completed the acquisition of Capco. The acquisition was funded by a combination of overseas cash and the company’s revolving credit facility. The estimated purchase price is approximately $300 million plus some earn-out based on the performance of the business over the next five years.

Most recently, Fidelity announced the acquisition of GIFTS Software, Inc., a single-source provider of integrated funds transfer, Web-based cash management systems and anti-money laundering (AML) solutions. The terms of the deal were not disclosed.

Our Take

We maintain our Neutral rating on a long-term basis (for the next 6 to 12 months), primarily due to an increasing debt and intense competition from Fiserv Inc. (FISV - Analyst Report), International Business Machines Corp. (IBM), Accenture Plc (ACN - Analyst Report), Alliance Data Systems (ADS - Analyst Report), MasterCard Incorporated (MA - Analyst Report) and Visa Inc. (V - Analyst Report).

Increasing consolidation in the banking sector, challenging environment for Payments Solutions business and uncertain regulatory environment are the primary business headwinds in our view. However, continued market share gains, global expansion, a strong product portfolio and cost saving synergies will drive earnings growth going forward.

The first quarter is seasonally weak for the company; hence we remain cautious on a near-term basis.

Currently, Fidelity has a Zacks #3 Rank, which implies a short-term Neutral rating (for the next 1-3 months).

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