FISERV INC quarterly report, Q1 FY2020

Business Context and Reporting Period

Fiserv, Inc. filed this unaudited Form 10-Q for the three months ended March 31, 2020. The company provides financial technology, merchant acquiring and processing, digital banking, card issuer processing, payments, e-commerce and Clover point-of-sale solutions. Following the July 2019 acquisition of First Data, Fiserv realigned its reportable segments to Merchant Acceptance, Financial Technology and Payments and Network. The 2019 segment results were restated for this realignment, but the consolidated comparison remains significantly affected by First Data being included only from July 29, 2019.

Financial Results and Key Metrics

Metric	Q1 2020	Q1 2019	Change
Total revenue	$3.769 billion	$1.502 billion	Up 151%
Operating income	$629 million	$373 million	Up 69%
Operating margin	16.7%	24.8%	Down 810 bps
Net income	$377 million	$225 million	Up 68%
Net income attributable to Fiserv	$392 million	$225 million	Up 74%
Diluted EPS	$0.57	$0.56	Up $0.01
Operating cash flow	$888 million	$373 million	Up 138%
Capital expenditures	$246 million	$98 million	Up 151%

Processing and services revenue was $3.075 billion, while product revenue was $694 million. Net income attributable to Fiserv represented a 10.4% revenue margin, compared with 15.0% in the prior-year quarter. Interest expense increased to $187 million from $57 million, primarily because of debt issued to finance the First Data transaction.

Acceptance: Revenue was $1.401 billion and operating income was $317 million, primarily reflecting First Data merchant acquiring operations.
Fintech: Revenue was $718 million, down 1%, and operating income was $204 million. The operating margin was 28.3%, up 30 basis points.
Payments: Revenue was $1.386 billion, up 113%, and operating income was $565 million. The operating margin was 40.8%, down 130 basis points.
Corporate and Other: Revenue was $264 million and operating loss was $457 million, including significant acquisition-related amortization and integration costs, partly offset by a gain on the sale of the Investment Services business.

Liquidity, Debt and Balance Sheet

Cash and cash equivalents were $896 million at March 31, 2020, compared with $893 million at December 31, 2019. Management reported approximately $1.2 billion of available borrowing capacity under the revolving credit facility.
Total debt was approximately $21.97 billion, including $338 million of current maturities and $21.63 billion of long-term debt. Debt carrying value excluding certain current amounts was approximately $21.3 billion; disclosed fair value of total debt excluding finance leases and other financing obligations was $22.0 billion.
The company had $2.251 billion outstanding under its $3.5 billion revolving credit facility, $1.750 billion of term loans, and $500 million outstanding under its receivables securitization facility.
Debt maturities include $302 million during the remainder of 2020, $556 million in 2021, $1.324 billion in 2022, $4.774 billion in 2023 and $3.838 billion in 2024. The company classified $850 million of notes due in June 2020 as long-term because it intended and believed it had the ability to refinance them.
Management stated that all financial debt covenants were satisfied during the quarter and expected continued compliance, but noted that future compliance depends on earnings and cash flow.
Cash flow from financing activities was an outflow of $1.134 billion, including $2.040 billion of debt repayments and $970 million of treasury stock purchases. The company repurchased $885 million of common stock during the quarter.

Material Changes Versus the Prior Comparable Period

First Data contributed approximately $2.275 billion of Q1 2020 revenue, substantially driving the 151% increase in consolidated revenue. The comparison is therefore not representative of organic growth.
Operating income increased in dollars but operating margin declined because of acquired intangible amortization, integration costs and other First Data-related expenses. Corporate and Other included approximately $480 million of acquired intangible amortization and $198 million of acquisition and related integration costs.
Amortization expense for identifiable intangible assets increased to $647 million from $95 million, and share-based compensation increased to $108 million from $19 million.
The company recorded a $431 million pretax gain on the February 2020 sale of a 60% controlling interest in its Investment Services business. It retained a 40% equity-method interest and received $584 million of net proceeds.
Q1 2020 included $48 million of restructuring charges, $40 million of employee termination costs and $8 million of share-based compensation related to accelerated vesting for terminated employees. Additional integration and termination costs are expected, but the company cannot yet estimate the total amount.
The company acquired MerchantPro Express and Bypass Mobile for an aggregate purchase price of $132 million, including estimated earn-out consideration of $37 million.
The company adopted the current expected credit loss standard on January 1, 2020, resulting in a $45 million cumulative-effect decrease to beginning retained earnings.

Guidance, Outlook, Commentary and Risks

The filing does not provide formal full-year revenue or earnings guidance. Management identified long-term priorities of realizing First Data integration value, improving revenue quality and earnings, expanding digital and payment solutions, and delivering innovation and integration benefits.

COVID-19 materially affected the business during the final two weeks of March 2020, causing a significant decline in payment volumes and transactions, particularly in merchant acquiring and other transaction-based businesses. Lower merchant acquiring and payment volumes continued into April, although volumes partially recovered near month-end as certain shelter-in-place restrictions eased. Management cannot predict the duration or ultimate financial impact of the pandemic.

Management limited discretionary spending, suspended certain employee benefits, and reassessed or deferred planned 2020 capital expenditures.
Key COVID-19 risks include merchant failures and chargebacks, slower customer collections, higher credit losses, cyber and payment fraud, supply-chain interruptions, workforce and data-center disruptions, contractual service failures, regulatory changes and weaker demand.
Merchant credit losses were $30 million in Q1 2020. Merchant credit loss reserves were $40 million at March 31, 2020, compared with $34 million at December 31, 2019.
The company maintained $56 million of litigation reserves and estimated additional possible exposure of approximately $0 million to $50 million. Management did not expect litigation to have a material adverse effect.
Goodwill totaled $35.695 billion. An interim assessment following the segment realignment found no impairment, but management warned that prolonged deterioration related to COVID-19 could require future impairment testing and potentially material charges.
A 1% increase in variable interest rates would increase annual interest expense by approximately $47 million. A 10% adverse movement in applicable foreign exchange rates would have affected reported pretax income by approximately $11 million.
On May 6, 2020, after quarter-end, the board announced that Frank Bisignano would become president and chief executive officer on July 1, 2020. Jeffery Yabuki would become executive chairman through December 31, 2020, subject to the transition arrangements described in the filing.

Investor Verification Priorities

Verify organic revenue, payment-volume trends and merchant performance separately from the reported First Data acquisition contribution.
Assess whether COVID-19-related declines in transaction volumes, merchant defaults, chargebacks and credit losses persisted or worsened after March 31, 2020.
Review debt refinancing and maturity management, particularly the $850 million notes due in 2020, revolving-facility utilization and covenant headroom.
Track integration savings against the continuing amortization, restructuring, severance and other First Data-related costs.
Evaluate the sustainability of liquidity after share repurchases, acquisitions, capital expenditures and debt repayments.
Monitor goodwill and intangible-asset impairment risk, including the sensitivity of valuation assumptions to prolonged economic weakness.
Review the effects of the Investment Services disposition, the retained 40% interest and the announced chief executive transition.