Fiserv, Inc. 2013 Second-Quarter Form 10-Q Summary
Business Context and Reporting Period
Fiserv is a global financial-services technology provider serving approximately 16,000 clients. Its Payments segment provides electronic payments, bill payment, card, digital banking and related services; its Financial segment provides account processing and other technology for banks, thrifts and credit unions. The filing covers the three and six months ended June 30, 2013, with comparisons to the same periods of 2012. Results are unaudited.
Most revenue is recurring and transaction-based under contracts generally lasting three to five years. Fiserv acquired Open Solutions Inc. on January 14, 2013, expanding its account-processing platform and client base.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2013 | Three Months Ended June 30, 2012 | Six Months Ended June 30, 2013 | Six Months Ended June 30, 2012 |
|---|---|---|---|---|
| Total revenue | $1,198 million | $1,087 million | $2,350 million | $2,184 million |
| Operating income | $273 million | $257 million | $484 million | $496 million |
| Operating margin | 22.8% | 23.6% | 20.6% | 22.7% |
| Income from continuing operations | $152 million | $162 million | $269 million | $294 million |
| Net income | $151 million | $161 million | $268 million | $293 million |
| Diluted EPS from continuing operations | $1.13 | $1.17 | $2.00 | $2.11 |
| Operating cash flow from continuing operations | Not separately provided | Not separately provided | $397 million | $380 million |
- Second-quarter processing and services revenue increased 12% to $1,015 million; product revenue was unchanged at $183 million.
- Six-month processing and services revenue increased 10% to $1,981 million, while product revenue declined 3% to $369 million.
- Payments revenue increased 5% in the second quarter and 3% for the six-month period. Financial revenue increased 16% and 13%, respectively, substantially reflecting Open Solutions.
- Second-quarter Payments operating margin increased to 28.7% from 26.4%; Financial operating margin declined to 31.9% from 32.5%.
- Six-month cost of processing and services improved to 52.8% of related revenue from 53.6%, but total expenses increased to 79.4% of revenue from 77.3%.
- Cash and cash equivalents were $320 million at June 30, 2013, compared with $358 million at December 31, 2012. Current assets were $1.454 billion and current liabilities were $1.173 billion.
- Total debt, including current maturities, was approximately $3.953 billion at June 30, 2013, compared with $3.230 billion at year-end 2012. Estimated fair value of total debt was $4.1 billion.
- The company had approximately $1.004 billion drawn on its $2.0 billion revolving credit facility. The facility expires August 1, 2017; Fiserv reported compliance with its debt covenants.
- Six-month capital expenditures, including capitalized software, were $110 million, compared with $101 million in 2012.
- Fiserv repurchased $254 million of common stock during the first six months and 2.331 million shares during the second quarter. Approximately 2.425 million shares remained authorized for repurchase at June 30, 2013.
Material Changes Versus the Prior Comparable Period
- Revenue growth was led by Open Solutions, which contributed $76 million of second-quarter revenue and $135 million of six-month revenue. Excluding the acquisition, six-month Financial segment revenue was flat, partly because a client migrated to its parent company’s platform.
- Operating income increased 6% in the second quarter but declined 2% for the first six months. Operating margin contracted 80 basis points in the quarter and 210 basis points year to date.
- Open Solutions merger and integration costs were $16 million in the second quarter and $56 million for the first six months. These costs reduced operating margin by approximately 130 basis points and 240 basis points, respectively.
- A $30 million first-quarter non-cash impairment charge resulted from replacing the Acumen platform with Open Solutions’ DNA platform.
- Acquisition-related intangible amortization increased by $15 million in the quarter and $23 million year to date. Management stated that these items reduced diluted EPS from continuing operations by $0.27 in the quarter and $0.50 year to date.
- The effective tax rate increased to 35.0% in the quarter and 34.6% year to date, from 27.5% and 30.6%, respectively, primarily because of lower discrete tax benefits than in 2012.
- Open Solutions increased goodwill by approximately $531 million and added approximately $571 million of acquired intangible assets on a preliminary purchase-price allocation.
- Fiserv sold its Club Solutions business for approximately $37 million in cash on March 14, 2013. The business is presented as discontinued operations, including a $2 million after-tax loss on sale.
Outlook, Commentary, Risks and Unusual Items
Management emphasized recurring, largely non-discretionary revenue, continued investment in payments and digital products, deeper client relationships, operational effectiveness and integration of Open Solutions. The filing does not provide a specific quantitative full-year revenue or earnings guidance range.
- Management expects liquidity needs to be funded through operating cash flow, cash on hand and available revolving-credit capacity. Capital allocation priorities include debt repayment, capital expenditures, acquisitions and share repurchases rather than dividends.
- Fiserv received a $122 million cash dividend from its 49% investment in StoneRiver Group. The investment balance was reduced to zero, and $38 million of the excess dividend was recorded in other long-term liabilities. Although Fiserv has no legal obligation to fund StoneRiver, management stated that it intends to provide support if needed based on future assessments.
- Future results may be affected by economic conditions, financial-institution technology spending, regulatory and legislative changes including Dodd-Frank, competition, client demand, pricing, privacy requirements, strategic initiatives and the ability to integrate Open Solutions.
- Contract termination fees can vary materially depending on the timing and size of financial-institution acquisitions. The filing does not quantify their contribution for the reported periods.
- Estimated 2013 amortization expense is approximately $210 million for acquired intangible assets and approximately $110 million for capitalized and purchased software.
- Management concluded that disclosure controls and procedures were effective as of June 30, 2013. Integration of Open Solutions controls and phased implementation of an SAP billing module are ongoing.
- Management stated that pending legal proceedings are not expected to have a material adverse effect, although ordinary-course litigation remains a contingency.
Important Facts for Investors to Verify
- Whether Open Solutions integration produces expected revenue synergies and whether merger, integration, amortization and impairment costs decline as planned.
- The sustainability of underlying organic growth, particularly in the Financial segment after excluding Open Solutions.
- Debt reduction plans, revolving-credit utilization, interest-rate exposure and compliance with leverage and interest-coverage covenants.
- The effect of higher tax rates and acquisition-related amortization on reported EPS and cash earnings.
- Whether StoneRiver requires financial support despite the absence of a legal funding obligation.
- Progress on the SAP billing-module implementation and related internal-control changes.
- Future effects of regulatory developments, client platform migrations, contract renewals, termination fees and financial-institution consolidation.