Weitz Funds' Analyst Corner - A Perspective on Fidelity National Information Services
Recurring Revenue Business
If a bank is open for business it will need to develop or hire a solutions provider such as FIS to build and run its internal systems. We estimate that over 80% of FIS’s revenue represents recurring revenue through a combination of 5 year contracts, per account and per transaction fees. As a result, FIS is more dependent on the number of accounts and transactions than the number of banks in existence. Historically, during bank consolidations FIS clients have been acquired at least as often as FIS clients have been the acquirers. Even if FIS loses a client to acquisition, large termination fees aid in the transition process. When financial institutions fail, it is important to note that the accounts of the bank often end up elsewhere in the banking system. As a result, during the great recession of 2008-2010, FIS’s revenue and earnings proved far more resilient that its banking customers’.
Emphasis on Global Organic Growth
FIS is the product of several acquisitions over the past 10 years which has allowed it to become a leader in providing banking and payment technologies to a global client base. In the past 24 months, management has made a concerted effort to integrate its sales teams, consolidate product offerings and emphasize innovation in order to gain new customers as well as increase its share of existing clients’ information technology spending.
In addition, FIS is the only provider of financial processing and payment technology to have a significant global presence. Fully 20 percent of company-wide revenue is derived outside the United States. In general, international banks are more likely to have older IT infrastructures and FIS is positioned to benefit as these firms modernize their systems.
Large Banks: Where the Money is
FIS is the market share leader with respect to large banking institutions. We estimate that FIS owns a 40% share of processing for banks with assets greater than $8b. FIS estimates that in total, large bank IT spending is as much as 5 times that of the small bank population. Much like FIS’ global competitors, large banks are battling increased regulation, lower profits and a more competitive environment with antiquated, proprietary IT systems that are often a product of several acquisitions over many years. These IT systems are no longer cost effective, require employees to learn outdated technology and make it difficult for banks to acquire customers and offer access to new products such as mobile banking. With its more modern, flexible and lower cost software and systems FIS is uniquely positioned to offer its large bank clients better outcomes.
Capital Allocation & Valuation
Since its acquisition of Metavante in 2009, FIS has aggressively repurchased its shares. During 2012, management was especially active, repurchasing 15% of its outstanding shares at a significant discount to our estimate of intrinsic value. In addition, the company has more than quadrupled its dividend to $.84 per share from $.20 per share in 2010. With a price of $39.62 FIS trades for approximately 11.5x our estimate of 2013 free cash flow per share. Our estimate of intrinsic value is above $50 and as such we believe the company’s shares represent an attractive investment for our shareholders.
By Barton Hooper, CFA.
Barton Hooper, CFA, joined Weitz in 2007. He graduated from the University of Missouri and previously spent four years as a research analyst at Oak Value Capital Management and Trilogy Capital Management. Barton has been a CFA charterholder since 1999.
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