Business Context and Reporting Period
Fiserv, Inc. filed an unaudited Form 10-Q for the three months ended March 31, 2017. The company provides financial-services technology, account processing, electronic payments, digital banking and related services to more than 12,000 clients. Operations are organized into Payments and Industry Products and Financial Institution Services.
Financial Performance and Position
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $1.394 billion | $1.331 billion | +5% |
| Operating income | $365 million | $339 million | +8% |
| Operating margin | 26.2% | 25.5% | +70 bps |
| Net income | $247 million | $289 million | -15% |
| Diluted EPS | $1.13 | $1.27 | -11% |
| Operating cash flow | $463 million | $509 million | -9% |
- Processing and services revenue increased 5% to $1.178 billion; product revenue increased 3% to $216 million.
- Payments revenue increased 6% to $794 million, with operating income up 15% to $259 million and margin expanding to 32.7% from 30.0%.
- Financial revenue increased 4% to $620 million, while operating income increased 1% to $196 million and margin declined to 31.6% from 32.6%.
- Net margin was approximately 17.7%, compared with approximately 21.7% in the prior-year quarter. The decline primarily reflected lower gains from the StoneRiver unconsolidated affiliate.
- Cash and cash equivalents were $308 million at March 31, 2017, and available borrowing capacity under the revolving credit facility was approximately $1.3 billion.
- Total debt was $4.638 billion, including $726 million drawn on the revolving credit facility, $629 million under the term loan and approximately $3.3 billion of senior notes. The company reported compliance with its debt covenants.
- Capital expenditures, including capitalized software costs, were $76 million, or approximately 5% of revenue.
Material Changes Versus the Prior Comparable Period
- Revenue growth was led by card services, output solutions, lending solutions and account processing businesses. Acquisitions contributed approximately $13 million to Payments revenue and $2 million to Financial revenue.
- Operating margin improved because of scalable Payments revenue, favorable revenue mix, operating efficiencies and the absence of a $10 million software impairment charge recorded in Q1 2016.
- Net income declined despite higher operating income because StoneRiver contributed only $26 million of pre-tax investment income in Q1 2017 versus $146 million in Q1 2016. The prior-year amount included a larger transaction gain and an associated $44 million impairment loss.
- Operating cash flow decreased by $46 million, primarily because StoneRiver dividends fell to $31 million from $140 million.
- Interest expense increased 5% to $42 million due to higher average debt and slightly higher variable interest rates.
- The company repurchased $389 million of common stock during the quarter and had approximately 17.0 million shares remaining under its repurchase authorizations at March 31, 2017.
- Corporate and Other operating loss increased by $9 million, primarily due to $8 million of higher severance costs.
Guidance, Outlook, Risks, Contingencies and Unusual Items
The filing does not provide specific quarterly or full-year financial guidance. Management’s 2017 priorities are to build high-quality revenue while meeting earnings objectives, strengthen client relationships through digital and payments solutions, and deliver innovation and integration.
- Management expects long-term opportunities from recurring, transaction-based revenue; increasing digital and payment volumes; financial institutions outsourcing technology; and demand for regulatory, efficiency and customer-engagement solutions.
- Management identified risks including competitive pricing, rapidly changing technology, financial-industry economic conditions, cybersecurity breaches, operational failures, legislative and regulatory actions, and the ability to integrate acquisitions and realize expected benefits.
- Fiserv acquired Online Banking Solutions, Inc. for $78 million net of cash acquired, with potential earn-out payments of up to $20 million. The preliminary allocation included approximately $30 million of technology and customer-related intangibles and $60 million of goodwill.
- StoneRiver’s Q1 2017 gain generated $26 million of pre-tax investment income and $31 million of dividends. These items were unusual and materially affected comparisons with Q1 2016.
- The company adopted ASU 2016-09, recognizing $25 million of excess tax benefits from share-based compensation in the income tax provision. This reduced the reported tax rate and increased comparability risk with the prior period.
- The company early adopted several other accounting updates without a material impact. It plans to adopt the new revenue standard on January 1, 2018 and expects potential effects on contract-cost capitalization, termination-fee timing and certain professional-services revenue.
- A $90 million term-loan principal payment is due December 31, 2017, and the remaining $540 million is due at maturity in October 2018. The revolving credit facility expires in April 2020.
- Management stated that pending litigation in the normal course of business is not expected to have a material adverse effect on the consolidated financial statements. Disclosure controls were assessed as effective.
Investor Verification Checklist
- Verify the sustainability of organic revenue growth after separating acquisition contributions and transaction-related StoneRiver gains.
- Assess whether Payments margin expansion can offset pressure in the Financial segment and higher corporate costs.
- Reconcile operating cash flow with recurring operations after excluding StoneRiver dividends and other unusual items.
- Review debt maturities, variable-rate exposure, covenant headroom and the company’s capacity to fund repurchases and acquisitions.
- Evaluate the effect of the $25 million share-based compensation tax benefit on the Q1 tax rate and earnings per share.
- Monitor the integration and performance of Online Banking Solutions and the potential $20 million earn-out.
- Review the planned 2018 revenue-recognition adoption and its effects on contract costs, termination fees and professional-services revenue.