Fidelity National (FIS) Up 11.2% Since Last Earnings Report: Can It Continue?
It has been about a month since the last earnings report for Fidelity National Information Services (FIS). Shares have added about 11.2% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Fidelity National due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
Fidelity National Q3 Earnings Miss on Higher Interest Costs
Fidelity National reported third-quarter 2023 adjusted earnings per share (EPS) from continuing operations of 94 cents, which lagged the Zacks Consensus Estimate by 40.9%. The bottom line fell 7% year over year.
Revenues amounted to $2,489 million, which rose 3% year over year. The organic revenue growth was recorded at 4% in the quarter under review. Yet, the top line missed the consensus mark by 31.9%.
The quarterly results suffered a blow due to an elevated interest expense level. Nevertheless, higher recurring revenues as well as strong contributions from the Banking Solutions and Capital Market Solutions businesses partly offset the negatives.
Q3 Performance
The cost of revenues dipped 0.7% year over year to $1,523 million in the third quarter. Selling, general and administrative expenses of $484 million inched up 0.8% year over year. Interest expense more than doubled year over year.
Adjusted earnings before interest, tax, depreciation and amortization (EBITDA) of $1,070 million advanced 5% year over year. The adjusted EBITDA margin of Fidelity National improved 70 basis points (bps) year over year to 43% in the quarter under review.
Segmental Update
The agreement, inked this July by FIS, to divest a majority stake in the Worldpay Merchant Solutions business to private equity funds managed by GTCR remains on track to get completed in the first quarter of 2024, subject to regulatory nod and other customary closing conditions. As announced earlier, operating results from the unit are presented as discontinued operations from the third quarter of 2023.
Therefore, the three operating segments of Fidelity National are currently as follows:
Banking Solutions’ revenues were recorded at $1,756 million in the third quarter, which grew 3% year over year and surpassed the Zacks Consensus Estimate of $1,726 million as well as our estimate of $1,719.8 million. The organic revenue growth was 3%. The unit’s performance was aided by higher recurring revenues. Adjusted EBITDA margin improved 120 bps year over year to 44.6% on the back of cost efficiencies.
Revenues from Capital Market Solutions’ revenues improved 7% year over year to $677 million in the quarter under review but fell short of the consensus mark of $690 million and our estimate of $680 million. The organic revenue growth was recorded at 6% in the third quarter. Solid growth in organic recurring revenues aided the unit’s quarterly performance. Adjusted EBITDA margin of 49% deteriorated 80 bps year over year due to the timing of operating costs.
The Corporate and Other segment’s revenues dropped 29% year over year to $56 million, lower than the Zacks Consensus Estimate of $58 million and our estimate of $60 million. The business suffered due to divestitures of non-strategic businesses. Adjusted EBITDA loss was $45 million in the quarter under review.
Financial Update (As of Sep 30, 2023)
Fidelity National exited the third quarter with cash and cash equivalents of $466 million, which grew 2.2% from the figure at 2022 end. Total assets of $53.2 billion dropped 16% from the 2022-end level.
Long-term debt, excluding the current portion, was $12.7 billion, down 10.3% from the figure as of Dec 31, 2022. The current portion of long-term debt totaled $1,320 million while short-term borrowings amounted to $4,595 million.
Total equity of $19.5 billion fell 28.4% from the 2022-end figure.
FIS generated net cash from operations of $1,091 million in the third quarter, which advanced 24.3% year over year. Free cash flows were recorded at $907 million, which climbed 32.6% year over year.
Dividend Update
Fidelity National paid out dividends of $308 million to its shareholders in the third quarter.
Capital Deployment Targets
Management unveiled plans to pursue share buybacks of around $500 million in the fourth quarter of 2023. Additionally, it keeps an eye on returning a minimum of $3.5 billion to its shareholders through share buybacks by 2024 end. FIS reaffirms its aim to achieve a dividend payout ratio of 35%.
Update on Enterprise Transformation Program
FIS has achieved annualized run-rate Future Forward cash savings of more than $220 million as of Sep 30, 2023. The company reiterates its aim to achieve cash savings, post-separation of the Merchant Solutions business, of $1 billion by 2024 end.
2023 Guidance Introduced for Continuing Operations
Management anticipates revenues to lie within $9,810-$9,840 million for this year. The midpoint of the outlook indicates an improvement of 1.1% from the 2022 figure of $9,719 million. Corporate and Other revenues are estimated to lie within $200-$225 million.
Adjusted EBITDA is projected between $3,930 million and $3,970 million, the midpoint of which suggests a 0.3% dip from the 2022 figure of $3,961 million.
Net interest expense is forecasted to lie within $630-$645 million.
Adjusted EPS from continuing operations is estimated to lie in the $3.30-$3.40 band for 2023.
How Have Estimates Been Moving Since Then?
It turns out, estimates review have trended downward during the past month.
The consensus estimate has shifted -41.7% due to these changes.
VGM Scores
Currently, Fidelity National has a subpar Growth Score of D, though it is lagging a bit on the Momentum Score front with an F. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Fidelity National has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
Performance of an Industry Player
Fidelity National belongs to the Zacks Financial Transaction Services industry. Another stock from the same industry, Wex (WEX), has gained 3.3% over the past month. More than a month has passed since the company reported results for the quarter ended September 2023.
Wex reported revenues of $651.4 million in the last reported quarter, representing a year-over-year change of +5.7%. EPS of $4.05 for the same period compares with $3.51 a year ago.
For the current quarter, Wex is expected to post earnings of $3.72 per share, indicating a change of +8.1% from the year-ago quarter. The Zacks Consensus Estimate has changed +0% over the last 30 days.
The overall direction and magnitude of estimate revisions translate into a Zacks Rank #3 (Hold) for Wex. Also, the stock has a VGM Score of A.
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Fidelity National Information Services, Inc. (FIS) : Free Stock Analysis Report
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