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Fidelity National Information Services Inc. (FIS - Analyst Report) reported first quarter 2013 earnings of 62 cents per share, up 8.5% from the year-ago quarter and beat the Zacks Consensus Estimate by a penny.

Quarter Details

Revenues increased 4.6% year over year to $1.48 billion slightly ahead of the Zacks Consensus Estimate of $1.47 billion. The year-over-year increase was primarily driven by strong performance from its Financial Solutions segment.

Revenues from Financial Solutions increased 6.8% year over year to $575.3 million (4.6% organically), driven by strong growth in consulting revenues, global commercial services and eBanking solutions.

International Solutions revenues climbed 5.3% year over year to $291.6 million. Organically, the segment grew 10.8% from the year-ago quarter. Payment Solutions revenues increased 2.5% on a year-over-year basis to $611.8 million. The increase was driven by strong growth in network solutions, electronic bill payment and output solutions.

Gross margin expanded 160 basis points (“bps”) to 35.9% on the back of favorable business mix. As far as expenses are concerned, selling, general & administrative expense (“SG&A”) as percentage of revenues increased 30 bps from the year-ago quarter.

Operating margin expanded 130 bps from the year-ago quarter due to modest growth in SG&A and better gross margin base. Net income as percentage of revenues jumped to 12.3% from 11.1% in the year-ago quarter.

Fidelity’s balance sheet remained highly leveraged at the end of the first quarter of 2013. As of Mar 31, 2013, cash and cash equivalents were $590.6 million compared with $517.6 million in the previous quarter. Total debt (including the current potion) at the end of the quarter was $4.60 billion compared with $4.39 billion in the previous quarter.

Fidelity generated $207.5 million in cash from operations versus $328.7 million in the previous quarter. Free cash flow decreased to $147.7 million from $365.0 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 expects its earnings to be between $2.77 and $2.87 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. Moreover, we believe that Fidelity’s expansion into emerging markets such as Brazil, India and Asia-Pacific 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. 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 #3 (Hold).

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