Fiserv, Inc. 2019 Q3 Form 10-Q Summary
Business context and reporting period
Fiserv is a global financial-services technology and payments provider serving financial institutions, merchants, corporate clients and consumers. This unaudited Form 10-Q covers the three and nine months ended September 30, 2019. The July 29, 2019 acquisition of First Data materially changed the company’s scale, operating results, capital structure and reporting segments. First Data results are included only from the acquisition date.
Key financial metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Total revenue | $3.128 billion, up 122% | $6.142 billion, up 44% |
| Operating income | $374 million; 12.0% margin | $1.131 billion; 18.4% margin |
| Net income attributable to Fiserv | $198 million, versus $227 million | $646 million, versus $901 million |
| Diluted EPS | $0.33, versus $0.55 | $1.39, versus $2.16 |
| Operating cash flow | Not separately provided | $1.617 billion, versus $981 million |
- Payments revenue increased 10% in the quarter and 9% for the nine months; Payments operating margin was 33.3% and 32.6%, respectively.
- Financial revenue increased 4% in the quarter and 1% for the nine months; Financial operating margin was 32.9% and 33.3%, respectively.
- First Data contributed $1.614 billion of revenue and $396 million of operating income in both the quarter and nine-month period, reflecting the acquisition-date presentation.
- Capital expenditures were $431 million for the first nine months, up from $263 million. Free cash flow is not explicitly presented in the filing.
- Cash and cash equivalents were $1.028 billion at September 30, 2019, including $701 million classified as available. Liquidity also included $3.1 billion of unused revolving-credit capacity.
- Total debt was approximately $22.5 billion, consisting of $368 million of short-term debt and current maturities and $22.123 billion of long-term debt. The filing states that approximately $16.8 billion was fixed-rate debt and $5.6 billion was variable-rate debt.
- Interest expense, net increased to $164 million in the quarter and $279 million for the nine months, compared with $45 million and $134 million, respectively, primarily because of acquisition financing.
- Goodwill and intangible assets totaled approximately $52.0 billion, or 68% of total assets, at September 30, 2019.
Material changes versus the prior comparable period
- Fiserv completed the approximately $46.5 billion all-stock and debt-funded First Data acquisition, issuing 286 million Fiserv shares and repaying approximately $16.4 billion of First Data debt.
- Revenue growth was dominated by the First Data acquisition. Excluding First Data, Payments and Financial revenue growth was more moderate and was supported by recurring businesses, client migrations and the Elan acquisition.
- Operating margin declined from 25.2% to 12.0% in the quarter and from 31.0% to 18.4% for the nine months. The primary factors were acquisition-related expenses, acquired-intangible amortization, higher corporate costs and the absence of the prior-year Lending Solutions gain.
- Corporate and Other operating loss increased to $527 million in the quarter and $762 million for the nine months, including First Data acquisition and integration costs, acquired-intangible amortization and other corporate expenses.
- Net income and diluted EPS declined despite higher revenue, reflecting increased interest expense, transaction costs, amortization and new noncontrolling interests.
- Operating cash flow increased 65% to $1.617 billion, aided by depreciation and amortization, favorable working-capital movements and First Data contributions. This included a $183 million cash payment related to settled treasury locks.
- The company adopted the new lease standard on January 1, 2019, recognizing $383 million of lease liabilities and $343 million of right-of-use assets at adoption without a material income-statement or cash-flow effect.
Guidance, outlook, commentary, risks and unusual items
Management identified 2019 priorities of integrating First Data, delivering expected integration value and synergies, building high-quality revenue, expanding digital and payment solutions, improving operating effectiveness and maintaining disciplined capital allocation. The filing does not provide a clear quantitative earnings or revenue guidance figure.
- Management expects to realign business segments in early 2020 after finalizing the First Data integration and reporting structure.
- First Data purchase-price allocations remained preliminary and may change during the measurement period. Acquired intangible assets are expected to generate approximately $1.0 billion of amortization in 2019 and approximately $2.1 billion annually in 2020 and 2021.
- Merchant credit losses were $17 million for both the quarter and nine months, with a merchant credit-loss reserve of $35 million and collateral of $510 million at September 30.
- Fiserv and Bank of America announced dissolution of the Banc of America Merchant Services joint venture effective June 2020. Bank of America may require continued processing services through June 2023 at current pricing.
- Fiserv guarantees certain Lending Joint Venture debt, including $400 million of term-loan debt and $45 million of revolving-credit debt. No payments have been required under the guarantees.
- A 1% increase in variable interest rates would reduce pretax income by approximately $56 million over the next 12 months. A 10% adverse foreign-currency movement would affect pretax income by approximately $23 million.
- Key risks include difficulty integrating First Data, failure to achieve expected synergies, increased leverage and interest costs, cybersecurity and operational failures, merchant credit and fraud losses, regulatory and card-network requirements, client attrition or pricing pressure, technology changes, foreign-currency exposure, tax contingencies and goodwill or intangible-asset impairment.
- The company expects adoption of the CECL credit-loss standard on January 1, 2020 to accelerate recognition of credit losses and potentially increase reserves, but the ultimate impact was not yet clear.
- As of September 30, 2019, the company reported effective disclosure controls. Integration of First Data controls was ongoing.
Important facts for investors to verify
- Reconcile reported growth with the limited post-acquisition inclusion of First Data and review pro forma results for comparability.
- Assess debt paydown capacity, covenant headroom, refinancing requirements and sensitivity to variable interest rates.
- Verify the timing, amount and accounting treatment of First Data integration costs, anticipated synergies and preliminary purchase-price adjustments.
- Monitor goodwill and acquired-intangible balances, amortization expense and potential impairment risk.
- Evaluate merchant credit, chargeback, fraud, settlement and collateral exposures, including the $35 million reserve and $510 million collateral balance.
- Track the Banc of America Merchant Services dissolution, related client migration and potential effects on revenue and margins.
- Review tax examinations, the $145 million unrecognized tax-benefit liability and the expected impact of CECL adoption.