First-quarter earnings surged for Fidelity National Information Services Inc., largely as a result of the September acquisition of the Scottsdale, Ariz., transaction processor eFunds Corp.
But the ever-morphing Jacksonville, Fla., technology vendor is likely to shrink again in June when it completes its planned spinoff of its mortgage servicing business, Lender Processing Services Inc., which generated 36% of the company's revenue in the quarter.
Though executives cautioned that Fidelity could take a hit from the slumping economy, Lee Kennedy, its president and chief executive officer, said it views the market turmoil as an opportunity.
"The good thing about our business is a lot of our businesses are transaction processing-based, so if an institution wants to operate on a day-to-day basis or a mortgage lender wants to serve its customers or issue loans or service loans, the services that we provide are not really discretionary," Mr. Kennedy said on a conference call with analysts and investors last week.
Fidelity said its earnings increased 18.4% from the same quarter last year, to $70.5 million. Revenue increased 20.5%, to $1.3 billion.
Excluding eFunds, revenue increased 7.3%. Revenue for Transaction Processing Services, which provides core processing and payment software and services to financial institutions, increased 4.5%.
The earnings fell short of the average analyst estimate and at the low end of Fidelity's earlier projections, largely because of slow software sales to big banks and a slight contraction in consumer spending.
As a result, the company said, its full-year results could come in below its earlier expectations; revenue could grow 13% to 16% for the year, rather than its previous projection of 14% to 16%.
Several banking companies delayed software purchases in the first quarter, but Mr. Kennedy said the sales are expected to close later in the year. Already this quarter "there is a little bit of uptick, but not enough to make us feel comfortable that the concern is going away."
And with the economy appearing to be in or near a recession, Fidelity also noticed a slowdown in consumer spending.
"It was enough to take notice of, but it is isolated to our card processing business primarily," Mr. Kennedy said. "We're not saying it is going to continue, but we're watching it."
Jeffrey S. Carbiener, an executive vice president and Fidelity's chief financial officer, said income in the transaction processing unit dipped because of lower-than-usual termination, and because the results for the first quarter of last year included revenue from reissuing payment cards in response to the massive data breach at the Framingham, Mass., retailer TJX Cos. Inc.
However, not receiving revenue because of lost processing customers and compromised cards "was actually a good thing," Mr. Carbiener said.
Lender Processing Services' revenue grew 12.6% to $464.1 million. Fidelity attributed that increase to growth in default and appraisal services. Thirty-five of the nation's top 50 mortgage lenders process loan payments on the Fidelity platform.
The company had acknowledged last month that state and federal investigations of the mortgage lending business "could have adverse consequences" on its operations, such as stronger regulation in areas such as appraisals, default management, loan closings, and regulatory reporting.
"We are encouraged by the recent public positions taken by the Comptroller of the Currency and the Office of Thrift Supervision, which we believe supports the continuation of bank and third-party appraisal providers," Mr. Kennedy said.
During the first quarter Fidelity sold two businesses — FIS Credit Services and Certegy Gaming Services' casino ATM operations — and it decided to shut down a small, unprofitable business serving residential home builders.
Executives also said they have begun taking cost-cutting steps, including the elimination of several hundred jobs, to produce $30 million of savings this year, though many of these efforts are related to the integration of eFunds and the planned spinoff of Lender Processing Services.
Though Fidelity broke out eFunds' revenue contribution in detail, Mr. Carbiener said he could not talk about the unit's contribution to the parent company's profits.
"Our approach to any acquisition is to immediately break up the product sets within the acquired companies and place them under the appropriate business unit," he said. "It really disappears."
Gary Prestopino, an analyst at Barrington Research Associates Inc., downgraded Fidelity's stock Friday to "market perform," from "outperform." In a note to clients, he cited "the lack of any near-term catalyst and uncertainty regarding the outlook for software sales."
Tien-tsin Huang, an analyst at JPMorgan Securities Inc., maintained his "overweight" rating for the stock. "While LPS does have the mortgage stigma, we think fear is an opportunity," he wrote in a research note.
