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Fidelity National Information Services Inc. (FIS - Analyst Report) reported fourth-quarter 2012 non-GAAP earnings of 68 cents per share, up 4.6% from the year-ago quarter. Including stock-based compensation of 5 cents, earnings came in at 63 cents per share, lagging the Zacks Consensus Estimate of 68 cents per share.

Quarter Details

Revenues increased 2.7% year over year to $1.50 billion but marginally missed the Zacks Consensus Estimate of $1.51 billion. The year-over-year increase was primarily driven by strong performance from its Financial Solutions segment.

Revenues from Financial Solutions increased 8.4% year over year to $578.4 million (6.4% organically). International Solutions revenue inched up 0.7% year over year to $320.9 million. Organically, the segment grew 5.9% from the year-ago quarter.

Payment Solutions revenue decreased 1.2% on a year-over-year basis to $601.3 million. Excluding check-related business, Payment Solutions revenue increased moderately, driven by continuous increase in electronic transactions and growth in network solutions.

Fidelity’s fourth quarter was primarily driven by better-than-expected margin expansion, which offset the sluggish revenue growth. Non-GAAP gross profit increased 3.7% year over year to $553.0 million. Gross margin expanded 40 basis points (“bps”) to 36.9% on the back of favorable business mix.

As far as expenses are concerned, selling, general & administrative expense (“SG&A”) on a non-GAAP basis increased 4.2% year over year to $181.4 million in the reported quarter. Including stock-based compensation of $24.7 million, SG&A expense came in at $206.5 million.

Operating income on a non-GAAP basis increased 3.5% from the year-ago quarter to $371.2 million. Operating margin expanded 10 bps to 24.7%. Including stock-based compensation of $24.7 million, operating income came in at $346.5 million with an operating margin of 23.1%.

Net income from continuing operations on a non-GAAP basis increased 3.5% from the year-ago quarter to $201.4 million. Including stock-based compensation of 16.3 million, net income from continuing operations came in at 185.1 million.

Fidelity’s balance sheet remained highly leveraged at the end of the third quarter of 2012. As of Dec 31, 2012, cash and cash equivalents were $517.6 million compared with $576.6 million in the previous quarter. Total debt (including the current potion) at the end of the quarter was $4.39 billion compared with $4.53 billion in the previous quarter.

Fidelity generated $328.7 million in cash from operations versus $255.4 million in the previous quarter. Free cash flow increased to $365.0 million from $193.2 million in the previous quarter.

Outlook

For fiscal 2013, Fidelity expects revenues to grow in the range of 4% to 6%. Organic revenue growth is expected in the range of 3% to 5%. Fidelity also expects its earnings per share to be between $2.77 and $2.87.

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, we believe that Fidelity’s expansion into emerging markets such as Brazil, India and Asia-Pacific will drive organic revenue growth going forward. Additionally, the company’s favorable EPS outlook for fiscal 2013 also bodes well with the company’s future growth prospects.

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 DST Systems (DST - Analyst Report) are the headwinds for the company.

Currently, Fidelity has a Zacks Rank #2 (Buy).

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