Fidelity National Information Services Inc. has closed two important deals in Brazil since March, and wants to use the model that it is applying there to expand its payments processing business in other countries.
The Jacksonville, Fla., company's Brazilian operations include both credit card and check processing capabilities, mirroring its U.S. business. The company raised its full-year earnings guidance Wednesday, and executives said that about half of the increase was related to its Brazilian operations.
Lee Kennedy, Fidelity's president and chief executive officer, said on an earnings conference call that he plans to apply the Brazil strategy in Asia, other South American countries, and in European markets where Fidelity has customers.
The initiative in Brazil has been two-pronged. Fidelity said this month that it had established an item-processing and business-process outsourcing business there by acquiring a small check-processing outsourcer, Proservvi Empreendimentos e Servicos Ltda., and signing 10-year contracts with two of Brazil's four top nongovernment banks. In March, Fidelity announced a joint venture with two big Brazilian banks to provide credit card processing for those two banks and others, starting in 2007.
By pairing card and check processing, Fidelity is following the same path in Brazil as in the United States; the core software and item-processing provider merged with the St. Petersburg, Fla., card processor Certegy Inc. on Jan. 31.
Fidelity has high hopes for the Brazilian venture. Mr. Kennedy said Fidelity typically hopes for an internal rate of return in the mid-teens for acquisitions, but Jeffrey S. Carbiener, an executive vice president at Fidelity and its chief financial officer, said the return on Proservvi would be "very high" because the purchase price was low: $2.8 million in cash and $13.3 million in assumed debt.
Two of Proservvi's biggest customers had already agreed to shift their business to Fidelity because Proservvi could not meet their needs, Mr. Kennedy said, which made the company receptive to a buyout. "I don't want to say it was a fire sale, but the banks wanted somebody to come in" and expand on Proservvi's capabilities, he said. "We were able to come in at a very attractive price."
Fidelity also hopes to play up the synergies of having card and check processing capabilities by focusing on cross-selling both services to community banks in the United States, Mr. Kennedy said.
Offering Certegy's card products to Fidelity's core customers and vice versa, helped Fidelity land $12 million in new contracts in the second quarter, versus $5 million in the first quarter. Its current pipeline of prospective deals is worth $50 million, versus $17 million at the end of the first quarter.
"One branded service offering through one supplier - it's a very powerful thing," Mr. Kennedy said. "You'll see revenue flow from these as we move into the third quarter."
Fidelity reported Wednesday that its second-quarter net income grew 44%, to $66 million, compared with last year's second quarter. Earnings per share of 34 cents were in line with analysts' expectations, and revenue grew 36%, to $1 billion.
Fidelity raised its guidance, projecting 5% to 7% full-year revenue growth, up from an earlier 4% to 6%. It expects full-year earnings to come in between $2.06 and $2.12, up slightly from its earlier projection of $2.05 to $2.11. Mr. Carbiener said about half the increase could be attributed to Brazil.
Fidelity also offered some complicated pro-forma results to compare the second-quarter results to what it would have reported if the Certegy merger had been completed a year ago. On that basis, revenue grew 3.8% and net earnings grew 11.1%.
Fidelity continues to seek acquisitions. Mr. Kennedy said he sees opportunities "pretty much across the board. We haven't stopped looking at good opportunities and we're not going to stop looking at them."
He cautioned, however, that the company is barred from doing certain types of deals while it separates itself from its majority owner, the title insurer Fidelity National Financial Inc., also of Jacksonville.
William P. Foley 2nd, the technology company's chairman and the chairman and CEO of the title company, said the companies filed preliminary registration documents on July 18 with the Securities and Exchange Commission and expect to complete the deal early in the fourth quarter.
The companies announced the spinoff plan in April. Mr. Foley said then that he thought the existing holding company structure was not getting the two the kind of market recognition - and stock price - they deserved.
That may be an issue still, according to Gregory Smith, an analyst at Merrill Lynch. In a research note published Wednesday, he wrote that the Brazilian ventures should add $3 billion to the technology company's revenue over the next dozen years and boost its organic growth rate. He rates the stock a "buy."
The shares "seems to be pricing in little to no organic growth potential, in our view," Mr. Smith wrote. "We continue to believe there is a major disconnect between the stock price and underlying fundamentals."
