Fiserv, Inc. 2017 Form 10-K Summary
Business context and reporting period
Fiserv provides financial-services technology to more than 12,000 clients, primarily in the United States. Its two operating segments are Payments and Financial. Services are primarily recurring, account- and transaction-based fees under contracts generally lasting three to five years. This filing covers the fiscal year ended December 31, 2017; fourth-quarter data is also presented.
Key financial metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total revenue | $5.696 billion | $5.505 billion | 3% increase |
| Processing and services revenue | $4.833 billion | $4.625 billion | 4% increase |
| Operating income | $1.532 billion | $1.445 billion | 6% increase |
| Operating margin | 26.9% | 26.2% | 70 basis-point increase |
| Income from continuing operations | $1.232 billion | $930 million | 33% increase |
| Net income | $1.246 billion | $930 million | 34% increase |
| Diluted EPS from continuing operations | $5.71 | $4.15 | 38% increase |
| Cash flow from operations | $1.483 billion | $1.431 billion | 4% increase |
| Capital expenditures | $287 million | $290 million | 1% decrease |
| Total debt | $4.900 billion | $4.562 billion | Increase of $338 million |
| Cash and cash equivalents | $325 million | $300 million | Increase of $25 million |
Payments revenue was $3.234 billion, up 5%, with operating income of $1.034 billion and a 32.0% margin. Financial revenue was $2.530 billion, up 2%, with operating income of $849 million and a 33.5% margin. Processing and services represented 84.8% of total revenue; product revenue represented 15.2%.
Fourth-quarter 2017 revenue was $1.516 billion, operating income was $425 million, income from continuing operations was $532 million, and diluted continuing-operations EPS was $2.50. Fourth-quarter income included a $275 million discrete tax benefit related to the Tax Cuts and Jobs Act.
Material changes versus the prior comparable period
- Revenue growth slowed to 3% in 2017 from 5% in 2016, while Payments growth slowed to 5% from 8%; Financial growth improved to 2% from 1%.
- Operating margin expanded primarily from operating leverage in recurring-revenue businesses, particularly card services and electronic payments. Acquisition-related costs and increased corporate expenses partially offset the improvement.
- The effective tax rate fell to 11.6% from 38.6%, principally because of the Tax Act and $48 million of excess tax benefits from share-based compensation recognized in income tax expense.
- Income from the StoneRiver unconsolidated affiliate declined to $32 million from $147 million. The 2016 result included a substantially larger gain from a StoneRiver business-interest sale.
- Fiserv completed four acquisitions for $384 million net of acquired cash, including Online Banking Solutions, PCLender, Dovetail and Monitise. It sold its Australian item-processing business for approximately $17 million and recorded a $10 million gain.
- Share repurchases totaled $1.17 billion in 2017, compared with $1.20 billion in 2016. Approximately 10.7 million shares remained under the repurchase authorization at year-end.
Liquidity, debt and capital allocation
Management expects operating cash flow, $325 million of cash and cash equivalents, and approximately $0.9 billion of available revolver capacity to fund operating needs, capital expenditures, debt service, acquisitions and repurchases. The company does not anticipate paying common-stock dividends in the foreseeable future.
Debt consisted primarily of $3.3 billion of senior notes, $1.1 billion drawn on a $2.0 billion revolving credit facility and a $540 million term loan. The term loan matures in October 2018, but management intends to refinance it on a long-term basis. The company was in compliance with its debt covenants at year-end. A 1% increase in variable borrowing rates would increase estimated 2018 interest expense by approximately $16 million.
Guidance, outlook, risks and unusual items
- Management’s 2018 priorities are to build high-quality revenue while meeting earnings objectives, deepen digital and payment relationships, and deliver innovation and integration.
- Management expects long-term growth from increased electronic transactions, digital banking adoption and financial institutions outsourcing technology rather than maintaining in-house systems.
- The Tax Act accounting was provisional in certain respects; further regulatory guidance or analysis could change reported tax estimates. The company recorded a $275 million net tax benefit in 2017.
- The company’s goodwill and intangible assets represented 73% of total assets at year-end. No goodwill impairment was identified in the fourth-quarter 2017 assessment, but a future impairment could materially reduce earnings.
- Key risks include intense competition, rapid technological change, client contract renewals, financial-institution consolidation, cybersecurity or operational failures, regulatory changes, acquisition integration, leverage, and economic conditions affecting financial-services clients.
- On February 7, 2018, Fiserv announced an agreement to sell a 55% interest in its lending solutions business while retaining 45%; closing was targeted for the first quarter of 2018 and remained subject to customary conditions.
- On January 10, 2018, Fiserv completed the sale of the Monitise retail voucher business for approximately $50 million. On February 21, 2018, the board declared a two-for-one stock split.
Important facts for investors to verify
- Separate recurring operating performance from the $275 million Tax Act benefit, StoneRiver gains, discontinued-operations income and other unusual items.
- Assess refinancing and interest-rate exposure associated with the $540 million term loan, the $1.068 billion revolver balance and substantial 2020 debt maturities.
- Monitor acquisition integration, goodwill and intangible-asset valuation, including the effect of acquisitions on future amortization.
- Verify completion and financial consequences of the lending-solutions joint venture and other announced dispositions.
- Evaluate cybersecurity, operational resilience, regulatory compliance and client-renewal risks given the transaction-processing nature of the business.
- Review the expected accounting impact of the new revenue-recognition standard, including the estimated $210 million increase to opening retained earnings and changes to commission and termination-fee accounting.