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Fidelity National Information Services Inc. (FIS - Analyst Report) reported fourth quarter 2011 earnings of 66 cents per share, which beat the Zacks Consensus Estimate by a penny. The better-than-expected result was driven by strong top-line growth during the quarter.

Quarter Details

Revenue in the fourth quarter climbed 7.0% year over year to $1.49 billion and was in line with the Zacks Consensus Estimate. Revenue increased 4.9% on an organic basis, driven by strong results from Financial Solutions and International Solutions.

Adjusted EBITDA increased 5.7% year over year to $470.0 million, driven by strong revenue growth in the quarter. However, EBITDA margin declined 30 basis points to 31.5% in the reported quarter.

Operating income enhanced 4.7% year over year to $366.5 million, riding on strong revenue growth and better-than-expected gross margin. However, operating margin contracted 60 basis points (bps) due to higher selling, general and administrative expense (up 100 bps), as percentage of revenue, in the reported quarter.

Segment Results

Financial Solutions revenue rose 5.9% year over year (2.1% organically) to $533.4 million, on the back of growth in account processing, higher services revenue, and the addition of Capco’s North American operations.

EBITDA declined 2.8% year over year to $213.7 million. Margin contracted 360 bps to 40.1%, reflecting a higher proportion of low-margin professional services, including Capco.

Payment Solutions revenues climbed 2.2% year over year to $642.0 million in the fourth quarter. Payment Solutions revenue increased 3.6% excluding a $4.2 million decline in check-related businesses. EBITDA increased 7.2% year over year to $257.1 million while margin expanded 180 bps to 40.0%.

International Solutions revenue increased 18.9% year over year (14.9% organically) to $318.8 million. The strong results were driven by higher volumes from Brazil card processing operation and the addition of Capco’s international operations.

EBITDA increased 14.1% year over year to $92.8 million. However, EBITDA margin decreased 120 bps to 29.1% in the quarter, reflecting a higher proportion of low-margin professional services, including Capco.

Liquidity

As of December 31, 2011, cash and cash equivalents were $415.5 million compared with $386.8 million, as of September 30, 2011. Fidelity’s balance sheet remains highly levered. Total debt (including the current potion) at the end of the quarter was $4.81 billion compared with $4.87 billion in the previous quarter.

Capital expenditure in the fourth quarter totaled $78.5 million versus $82.1 million in the previous quarter. Fidelity generated $308.3 million in adjusted cash from operations versus $275.5 million in the previous quarter. Free cash flow (on an adjusted basis) increased to $221.6 million from $193.4 million in the previous quarter.

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. We also believe that Fidelity’s expansion into emerging markets such as Brazil, India and China will drive organic revenue growth 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.

We maintain our Neutral recommendation on a long-term basis (for the next 6 to 12 months), primarily due to a highly leveraged balance sheet and intense competition from other major players such as Fiserv Inc. (FISV - Analyst Report). Moreover, the recently announced merger of London based banking software maker Misys Plc and Swiss financial services provider Temenos Group AG is also expected to provide significant competition to Fidelity going forward.

Currently, Fidelity has a Zacks #4 Rank, which implies a short-term Sell rating (for the next 1-3 months).

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