Fiserv, Inc. 2015 Q2 Form 10-Q Summary
Business context and reporting period
Fiserv is a global financial-services technology provider serving approximately 13,000 clients, primarily through recurring account- and transaction-based contracts. Its principal segments are Payments and Industry Products and Financial Institution Services. The unaudited filing covers the three and six months ended June 30, 2015, compared with the same periods in 2014, and the balance sheet is compared with December 31, 2014.
Key financial metrics
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $1,298 million | $1,253 million | $2,573 million | $2,487 million |
| Processing and services revenue | $1,109 million | $1,051 million | $2,176 million | $2,078 million |
| Product revenue | $189 million | $202 million | $397 million | $409 million |
| Operating income | $326 million | $307 million | $640 million | $578 million |
| Operating margin | 25.1% | 24.5% | 24.9% | 23.2% |
| Net income | $127 million | $166 million | $305 million | $334 million |
| Diluted EPS | $0.53 | $0.65 | $1.26 | $1.30 |
| Operating cash flow | Not separately provided | Not separately provided | $600 million | $569 million |
Q2 net margin was approximately 9.8%, compared with approximately 13.2% in the prior-year quarter; six-month net margin was approximately 11.9%, compared with approximately 13.4%. The decline primarily reflects the $85 million pre-tax loss on early debt extinguishment and higher interest expense.
- Cash and cash equivalents were $530 million at June 30, 2015, versus $294 million at December 31, 2014.
- Total debt, including current maturities, was $4.236 billion, versus $3.803 billion at year-end 2014. Estimated fair value of debt was $4.3 billion.
- Long-term debt was $4.231 billion and current maturities were $5 million. A $300 million senior-note maturity in October 2015 was classified as long-term because management intended and was able to refinance it.
- Capital expenditures were $203 million for the first six months, up from $150 million, including spending related to the Atlanta facility consolidation.
- During the first six months, Fiserv repurchased $535 million of common stock and had approximately 12.9 million shares remaining under its authorization.
- Total assets were $9.588 billion and shareholders’ equity was $3.143 billion at June 30, 2015.
Material changes versus the prior comparable period
- Q2 revenue increased 4%, while six-month revenue increased 3%. Foreign-currency movements reduced reported growth by approximately 50 basis points in both periods.
- Processing and services revenue increased 6% in Q2 and 5% for the six-month period, driven by new clients, higher transaction volumes, card services, biller and bill-payment businesses, and digital channels.
- Product revenue declined 6% in Q2 and 3% for the six-month period.
- Q2 operating income increased 6% and six-month operating income increased 11%. Operating margin expanded 60 basis points in Q2 and 170 basis points for the six-month period, reflecting scale efficiencies and operational-effectiveness initiatives.
- Payments revenue grew 5% in Q2 and 4% for the six-month period; its operating margin expanded to 29.7% and 28.6%, respectively. Financial revenue grew 2% and 3%, with operating margins of 34.5% and 34.4%.
- Interest expense increased 20% in Q2 and 10% for the six-month period, partly because losses on settled cash-flow hedges were reclassified following debt extinguishment.
- Fiserv issued $1.75 billion of senior notes in May 2015, consisting of $850 million of 2.7% notes due 2020 and $900 million of 3.85% notes due 2025. Proceeds were used primarily to redeem $1.1 billion of higher-cost notes and repay other borrowings.
- The revolving credit facility was amended and extended to April 2020; there were no outstanding borrowings under it at June 30, 2015. The company reported compliance with all financial debt covenants.
Outlook, commentary, risks, contingencies, and unusual items
Management identified 2015 priorities of building high-quality revenue while meeting earnings goals, expanding client relationships with emphasis on payment and channel solutions, and delivering innovation and integration. Management expects long-term demand to benefit from outsourced technology, electronic payments, digital channels, and increasing transaction volumes. The filing does not provide a specific quantitative earnings or revenue guidance range.
- Key risks include competition and pricing pressure, rapid technology change, economic and market conditions affecting financial institutions, security breaches or operational failures, regulatory and legislative changes, and acquisition execution and integration.
- The $85 million pre-tax early-debt-extinguishment loss reduced Q2 and six-month diluted EPS by approximately $0.25 per share.
- Acquisition-related intangible amortization reduced diluted EPS by $0.13 in Q2 and $0.26 for the six-month period. Estimated 2015 amortization includes approximately $190 million for acquired intangibles and $115 million for capitalized and purchased software.
- Fiserv owns 49% of StoneRiver Group, L.P. Six-month income from the investment was $1 million, down from $4 million, and the company received no dividend in 2015 versus $45 million in 2014.
- Ordinary-course litigation is not expected by management to have a material adverse effect on the consolidated financial statements. The filing text does not identify a material pending legal contingency.
- The company expects to recognize approximately $12 million of interest expense over the next twelve months related to settled interest-rate hedge contracts.
- Management concluded that disclosure controls and procedures were effective as of June 30, 2015, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether recurring Payments and Financial segment growth and margin expansion continue after the second-quarter period.
- The refinancing or repayment plan for the $300 million senior notes due October 2015 and the company’s future debt leverage and interest burden.
- The effect of continued share repurchases on diluted share count, capital allocation, and per-share earnings.
- Whether higher capital expenditures and facility-consolidation costs remain elevated.
- The impact of product-revenue declines, output-solutions investments, and lower-margin software-license activity.
- Future contributions from StoneRiver as its portfolio is monetized.
- The eventual effect of pending accounting standards, including revenue recognition, consolidation, and debt-issuance-cost presentation.