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Fidelity National Information Services Inc. (FIS - Analyst Report) reported first quarter 2012 earnings (including stock based compensation) of 51 cents per share, which was in-line with the Zacks Consensus Estimate. However, the reported earnings increased 13.3% from 45 cents reported in year-ago quarter. The quarterly result was aided by top-line growth during the quarter.

Quarter Details

Revenues in the first quarter climbed 4.6% year over year to $1.45 billion and squeaked past the Zacks Consensus Estimate of $1.44 billion. Revenues increased 5.3% on an organic basis, driven by strong results from Financial Solutions and International Solutions.

Financial Solutions revenue rose 7.0% year over year to $538.9 million, on the back of growth in account processing and higher services revenue. Payment Solutions revenue increased 2.6% year over year to $630.6 million.

Excluding the check-related business, Payment Solutions revenue was up 4.2% from the previous-year quarter. Revenue growth in the segment was supported by increase in electronic transactions.

International Solutions revenue increased 3.2% year over year (7.1% organically) to $276.8 million. Revenue was positively impacted by higher volumes of electronic transactions and services in Brazil and Europe. Additionally, Capco’s international operations contributed to the increase.

Gross profit for the quarter was $499.8 million, up 10.7% from the previous-year quarter. Gross margin expanded 190 basis points (bps) to 34.5% on the back of higher revenue base and prudent business mix.

Operating income (including stock based compensation) rose 5.3% year over year to $292.7 million, riding on strong revenue growth and better-than-expected gross margin. Operating margin was 20.2% for the quarter compared with 20.1% in the prior-year quarter.

Exiting 1Q12, cash and cash equivalents were $481.7 million compared with $415.5 million in 4Q11. Total debt (including the current potion) at the end of the quarter was $4.84 billion compared with $4.81 billion in the previous quarter.

Fidelity generated $203.8 million in adjusted cash from operations versus $308.3 million in the previous quarter. Free cash flow (on an adjusted basis) slumped to $136.4 million from $221.6 million in the previous quarter.

2012 Guidance

For fiscal 2012, Fidelity expects organic revenue growth to range between 3% and 5%. Management expects EBITDA to grow in the range of 5%-7%. Margins are expected to expand by 40-80 bps.

Moreover, management expects EPS in the range of $2.47-$2.57 for fiscal 2012. The Zacks Consensus Estimate is pegged at $2.53 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. We also believe that Fidelity’s expansion into emerging markets such as Brazil and Europe 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).

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

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