Fiserv, Inc. 2016 Form 10-K Summary
Business Context and Reporting Period
Fiserv is a global provider of financial-services technology, serving more than 12,000 clients primarily in the United States. Its two reportable segments are Payments and Industry Products and Financial Institution Services. Offerings include account processing, electronic payments, card processing, bill payment, digital banking, lending, item processing and related technology services.
This filing is the Form 10-K for the fiscal year ended December 31, 2016. The filing also presents unaudited quarterly information; fourth-quarter 2016 revenue was $1.431 billion and net income was $215 million.
Key Financial Metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Total revenue | $5.505 billion | $5.254 billion | Up 5% |
| Processing and services revenue | $4.625 billion | $4.411 billion | Up 5% |
| Product revenue | $880 million | $843 million | Up 4% |
| Operating income | $1.445 billion | $1.311 billion | Up 10% |
| Operating margin | 26.2% | 24.9% | Up 130 bps |
| Net income | $930 million | $712 million | Up 31% |
| Diluted EPS from continuing operations | $4.15 | $2.99 | Up 39% |
| Operating cash flow | $1.431 billion | $1.346 billion | Up 6% |
| Capital expenditures | $290 million | $359 million | Down 19% |
Processing and services represented 84% of revenue, reflecting the importance of recurring account- and transaction-based fees. Product revenue represented 16%; software license revenue was less than 4% of total revenue. The effective income tax rate was 38.6%, compared with 35.7% in 2015.
At December 31, 2016, cash and cash equivalents were $300 million, total assets were $9.743 billion, shareholders’ equity was $2.541 billion and long-term debt, including current maturities, was $4.562 billion. Available borrowings under the revolving credit facility were approximately $1.4 billion.
Material Changes Versus the Prior Comparable Period
- Payments revenue increased 8% to $3.090 billion, driven by new clients, higher transaction volumes, and $86 million of revenue from acquired businesses. Payments operating income increased 12% to $943 million, and segment margin improved to 30.5% from 29.3%.
- Financial revenue increased 1% to $2.477 billion. Financial operating income was $823 million, compared with $826 million in 2015, and segment margin declined to 33.2% from 33.8% because of product mix, lower international revenue and additional innovation spending.
- Total expenses grew 3%, slower than revenue growth. Cost of processing and services declined to 47.8% of related revenue from 49.4%, reflecting operating leverage, efficiency initiatives and lower amortization.
- Fiserv acquired Hewlett Packard Enterprise’s Convenience Pay Services business and ACI Worldwide’s Community Financial Services business for an aggregate $265 million. The acquisitions contributed $86 million of 2016 revenue and $173 million of goodwill.
- Net income benefited from Fiserv’s 49% StoneRiver investment. Fiserv recognized $147 million of equity income, including its $146 million pretax share of a StoneRiver transaction gain net of related expenses, compared with $32 million in 2015.
- Share repurchases totaled $1.20 billion in 2016, compared with $1.47 billion in 2015. Approximately 20.5 million shares remained authorized for repurchase at year-end.
Liquidity, Debt and Capital Allocation
Operating cash flow funded capital expenditures, acquisitions, share repurchases and debt-related activities. Fiserv’s stated policy is to prioritize operating cash flow for capital expenditures, share repurchases, acquisitions and debt repayment rather than dividends. The company has never paid a common-stock dividend and does not anticipate paying one in the foreseeable future.
Debt consisted primarily of $3.3 billion of senior notes, $647 million drawn under a $2.0 billion revolving credit facility and $629 million under a term loan. Scheduled debt maturities include $95 million in 2017, $540 million in 2018 and approximately $1.94 billion in 2020. Fiserv was in compliance with its debt covenants. Moody’s and S&P rated its senior unsecured debt Baa2 and BBB, respectively, with stable outlooks.
Guidance, Outlook, Risks and Unusual Items
Management’s 2017 priorities were to build high-quality revenue while meeting earnings objectives, deepen client relationships with emphasis on digital and payment solutions, and deliver innovation and integration. The filing does not provide a clear numerical revenue or earnings forecast.
- Growth opportunities include increasing electronic payment volumes, adoption of digital channels, outsourcing by financial institutions, product integration and acquisitions.
- Key risks include intense competition, rapid technological change, client contract renewals, financial-services industry consolidation, economic conditions, cybersecurity incidents, operational failures, software defects and regulatory developments.
- Goodwill and intangible assets represented 74% of total assets at year-end. No goodwill impairment was identified in the fourth-quarter 2016 assessment, but a material impairment could adversely affect earnings.
- StoneRiver-related gains and dividends materially affected 2016 results. The company also recognized a $44 million impairment of its StoneRiver investment in connection with the transaction.
- Acquisition and integration activity included a $10 million non-cash impairment charge related to replacing existing software with an acquired solution.
- Subscriber funds, excluded from the consolidated balance sheet, averaged approximately $1.2 billion during 2016 and totaled approximately $1.9 billion at year-end.
- A 1% increase in variable borrowing rates would have increased estimated 2017 annual interest expense by approximately $13 million.
- Management and Deloitte & Touche reported effective disclosure controls and internal control over financial reporting, with unqualified audit opinions.
Important Facts for Investors to Verify
- Separate recurring organic growth from the $86 million of acquired revenue and assess the sustainability of Payments segment growth.
- Evaluate the effect of the $146 million StoneRiver-related pretax gain and related tax expense on reported earnings and EPS.
- Review debt maturities, refinancing needs and sensitivity to variable interest rates, particularly the 2020 maturities.
- Assess whether operating-margin improvement can continue despite acquisition dilution, technology investment and regulatory and cybersecurity costs.
- Monitor goodwill and intangible-asset valuation, given their significant proportion of total assets.
- Review the implementation effects of upcoming accounting standards, including revenue recognition, leases, credit losses and share-based compensation.
- Confirm contract renewal rates, client concentration, transaction volumes and the effect of financial-institution consolidation on future revenue.