Value Line recently initiated coverage of Fidelity National Information Services (FIS) in its flagship product, The Value Line Investment Survey. The company provides banking and payments technology to financial institutions around the world. It serves more than 14,000 institutions in over 100 countries. International operations accounted for about 20% of 2011 sales. The company’s headquarters are in Jacksonville, Florida. It has roughly 33,000 employees, with most based in the United States.
Some of the primary services Fidelity offers include core processing, card issuer, and transaction processing services. Revenues are derived from a combination of recurring services (roughly 80% of yearly sales), professional services, and software license fees. Most contracts are multi-year, which contribute to the relative stability of its revenue stream.
The company operates in four reporting segments: Financial Solutions Group (FSG), Payment Solutions Group (PSG), International Solutions Group (ISG), and Corporate and Other. The largest segment is PSG, which accounted for 43% of total sales in 2011. This segment provides software and services for the electronic funds transfer (EFT), card processing, bill payment, and government and healthcare payments needs of customers in North America.
The next largest division is FSG, which represented 36% of 2011 sales. It provides software and services for the core processing, customer channel, treasury, and wealth management operations of financial institution customers in North America, including banks, credit unions, commercial lenders, and savings institutions.
The ISG group accounted for the remainder of Fidelity’s 2011 sales, as the Corporate and Other segment only consists of overhead and does not generate revenues. ISG provides core banking applications, channel solutions, card and merchant services, and check risk management services to the company’s customers in more than 100 countries around the world.
Over the years, the company has grown both organically and through acquisitions. In October of 2009, it purchased Metavante, which greatly expanded the scales of the company’s core processing and payment capabilities, and also added trust and wealth management processing services. In December of 2010, Fidelity acquired Capco, a global business and technology consultancy. This deal broadened the company’s ability to provide integrated consulting, technology, and large-scale transformation services. Fidelity has also made other, smaller purchases over the past few quarters, and we believe it will continue to be on the lookout for value-enhancing purchases in the future.
Primary competitors include internal technology departments within financial institutions and retailers, software or data processing departments of large companies, third-party payment processors, and independent computer services firms, among others. Specific competitors for financial and payment solutions include Fiserv (FISV) and Jack Henry and Associates (JKHY). In the core processing market, Fidelity competes with Open Solutions, International Business Machines (IBM – Free IBM Stock Report), Accenture (ACN), Alliance Data Systems (ADS), and DST Systems (DST), among others. Card Service challengers include MasterCard (MA), Visa (V), and third-party credit and debit card processors.
As the payment market continues to evolve from paper-based to an electronic-based one, Fidelity has been adapting and adding new services in response to this trend. Card transactions continue to rise, fueling continuing demand for card-related services. The proliferation of electronic transactions also increases the risk of fraud, boosting demand for the company’s risk management solutions. The downside to this trend is that the use of checks has declined as a percent of total payments, hurting the company’s check warranty and item-processing business.
While management remains cautious about the broader economic environment, banks will likely continue to invest in new technologies, which should support business prospects. We look for solid sales and earnings gains over the next few quarters, driven by solid organic growth and ongoing acquisition activity.
However, increased consolidation in the banking industry could pose concerns, as merged partners often combine their systems to a single platform. The larger firm could decide to perform some services in-house, too. Fidelity continues to expand and diversify its offerings in order to mitigate these concerns.
Subscribers interested in learning more about this security and monitoring company are advised to consult Value Line’squarterly reports for Fidelity National Information Services, as well as any supplemental reports and relevant articles that may arise as important news comes to light.
At the time of this article’s writing, the author did not have any positions in any of the companies mentioned.