Fiserv, Inc. 2017 Second-Quarter Form 10-Q Summary
Business Context and Reporting Period
Fiserv is a global financial-services technology provider serving more than 12,000 clients. Its principal businesses are Payments and Industry Products and Financial Institution Services, with revenue primarily generated from recurring account- and transaction-based contracts. This unaudited Form 10-Q covers the three and six months ended June 30, 2017, compared with the corresponding 2016 periods.
Financial Performance and Position
| Metric | Three Months Ended June 30, 2017 | Year-over-Year Change | Six Months Ended June 30, 2017 | Year-over-Year Change |
|---|---|---|---|---|
| Total revenue | $1.386 billion | 2% | $2.780 billion | 3% |
| Operating income | $372 million | 3% | $737 million | 5% |
| Operating margin | 26.8% | Up 20 bps | 26.5% | Up 50 bps |
| Net income | $221 million | 4% | $468 million | Down 7% |
| Diluted earnings per share | $1.02 | Up from $0.94 | $2.15 | Down from $2.21 |
Processing and services revenue increased 2% in the quarter and 4% year to date, while product revenue decreased 2% in the quarter and increased 1% year to date. The implied net margin was approximately 15.9% for the quarter and 16.8% for the first six months.
- Payments revenue increased 2% in the quarter and 4% year to date; six-month operating income increased 8%, with a 31.6% operating margin.
- Financial revenue increased 2% in the quarter and 3% year to date; six-month operating income increased 3%, with a 33.0% operating margin.
- Six-month net cash provided by operating activities was $691 million, compared with $687 million in 2016.
- Capital expenditures were $136 million, down from $145 million, and represented approximately 5% of revenue.
- Cash and cash equivalents were $299 million at June 30, 2017, compared with $300 million at December 31, 2016.
- Total debt, including current maturities, was $4.741 billion, up from $4.562 billion at year-end 2016. Estimated debt fair value was $4.9 billion.
- The company reported $1.2 billion of available borrowing capacity under its revolving credit facility and was in compliance with debt covenants.
- Total assets were $9.685 billion and shareholders’ equity was $2.391 billion at June 30, 2017.
Material Changes Versus the Prior Comparable Period
- Operating performance improved despite modest revenue growth. Total operating margin expanded 20 basis points in the quarter and 50 basis points year to date.
- Payments segment margin declined 60 basis points in the quarter but increased 110 basis points year to date. A $15 million charge related to two discontinued projects, including a $10 million write-off of capitalized costs, reduced Payments margins.
- Financial segment margin expanded 130 basis points in the quarter and 20 basis points year to date, aided by growth in lending solutions.
- Interest expense increased 10% in the quarter and 8% year to date because of higher variable rates and higher average debt.
- Year-to-date net income declined primarily because 2016 included a substantially larger gain from the StoneRiver investment. Fiserv’s share of StoneRiver gains was $26 million in 2017 versus $146 million in 2016.
- Year-to-date diluted EPS benefited by approximately $0.08 from investment gains in 2017, compared with $0.39 in 2016.
- The company repurchased $684 million of common stock during the first six months and purchased 2.45 million shares during the second quarter. Approximately 14.6 million shares remained authorized for repurchase at June 30.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
The filing does not provide specific quantitative financial guidance. Management emphasized recurring, non-discretionary revenue, continued demand for digital payments and outsourced financial technology, innovation, client relationship expansion, operational effectiveness, and disciplined capital allocation.
- Fiserv made a recommended cash offer to acquire Monitise plc for approximately $89 million, subject to conditions including shareholder approval. A related foreign-exchange hedge had a notional amount of approximately $69 million at June 30.
- Fiserv acquired Online Banking Solutions for $78 million, net of cash acquired, plus estimated contingent consideration of $15 million. The acquisition added cash-management and digital business-banking capabilities.
- The company sold its Australian item-processing business for approximately $17 million in cash and recognized a $10 million gain, with $5 million of related tax expense.
- StoneRiver dividends were $31 million in the first six months of 2017 versus $140 million in 2016, reducing a source of operating cash flow.
- Management identified risks from competition, rapidly changing technology, economic and financial-industry conditions, cybersecurity incidents, operational failures, regulatory developments, and acquisition integration, including the pending Monitise transaction.
- Legal proceedings are described as arising in the normal course of business; management does not expect any resulting liabilities to have a material adverse effect.
- The company early adopted several accounting standards without material impact. Adoption of ASU 2016-09 produced $31 million of year-to-date excess tax benefits recognized through the income tax provision.
- Fiserv plans to adopt the new revenue-recognition standard on January 1, 2018 and expects possible effects on contract-cost capitalization, termination-fee timing, professional-services revenue, disclosures, and retained earnings at adoption.
- The term loan requires a scheduled $90 million principal payment on December 31, 2017, with $540 million due at maturity in October 2018. The revolving facility expires in April 2020.
Important Facts for Investors to Verify
- Whether revenue growth and Payments margin performance improve after the discontinued-project charge.
- The final approval, purchase price, integration results, and financial contribution of the Monitise acquisition.
- The sustainability of operating cash flow given the sharp reduction in StoneRiver dividends.
- Debt repayment capacity, variable-rate exposure, and the 2017 and 2018 term-loan maturities.
- The effect of share repurchases on diluted share count and future EPS.
- The eventual cumulative-effect and disclosure impacts of the 2018 revenue-recognition adoption.
- Cybersecurity, operational, regulatory, competitive, and acquisition-integration risks identified in the filing.