Fiserv, Inc. 2024 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
Fiserv is a global payments and financial technology provider serving merchants, banks, credit unions, financial institutions, corporate clients and public-sector organizations. The filing covers the unaudited three months ended March 31, 2024, compared with the same period in 2023.
Effective in 2024, Fiserv realigned its reportable segments into Merchant Solutions and Financial Solutions; 2023 results were recast for comparability. The company states that most of its offerings are recurring and non-discretionary in nature.
Key Financial Metrics
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Total revenue | $4.883 billion | $4.547 billion | Up 7% |
| Processing and services revenue | $4.000 billion | $3.673 billion | Up 9% |
| Product revenue | $883 million | $874 million | Up 1% |
| Operating income | $1.181 billion | $934 million | Up 26% |
| Operating margin | 24.2% | 20.5% | Up 370 basis points |
| Net income | $752 million | $576 million | Up 31% |
| Net income attributable to Fiserv | $735 million | $563 million | Up 31% |
| Diluted EPS | $1.24 | $0.89 | Up 39% |
| Operating cash flow | $831 million | $1.130 billion | Down 26% |
| Capital expenditures | $420 million | $339 million | Up 24% |
Net income attributable to Fiserv represented approximately 15.1% of revenue, compared with 12.4% in the prior-year quarter. The effective tax rate was 16.7%, compared with 17.4%.
- Merchant revenue: $2.253 billion, up 13%; operating income of $769 million and a 34.1% margin, up from 29.7%.
- Financial revenue: $2.285 billion, up 3%; operating income of $1.008 billion and a 44.1% margin, up from 42.4%.
- Small Business revenue was $1.488 billion, up from $1.285 billion, supported by transaction volume, Clover and value-added services.
- Digital Payments revenue was $920 million, Issuing revenue was $761 million and Banking revenue was $604 million.
Liquidity, Debt and Capital Allocation
- Cash and cash equivalents on the balance sheet were $1.214 billion at March 31, 2024. Total cash and cash equivalents including settlement-related and restricted cash were $3.191 billion.
- Management reported $596 million of available cash; $618 million was unavailable, primarily because of joint-venture restrictions, foreign exchange controls or regulatory capital requirements.
- Total debt was $24.425 billion, consisting of $671 million of short-term and current maturities and $23.754 billion of long-term debt, compared with $23.118 billion at December 31, 2023.
- Fiserv issued $2.0 billion of senior notes in March 2024, including notes due 2027, 2031 and 2034. The proceeds were used for general corporate purposes, commercial paper repayment and share repurchases, and are expected to fund part of the July 2024 debt maturity.
- The company had no borrowings under its $6.0 billion revolving credit facility and reported $2.7 billion of available capacity after designated commitments.
- Fiserv repurchased approximately $1.5 billion of common stock during the quarter, or 10.2 million shares. Approximately 41.7 million shares remained authorized for repurchase at March 31, 2024.
- The company does not currently prioritize dividends, stating that operating cash flow is primarily used for capital expenditures, repurchases, acquisitions and debt repayment.
Material Changes Versus the Prior Comparable Period
- Revenue growth was led by Merchant, particularly Small Business, while Financial growth was driven by Digital Payments and Issuing. Banking revenue declined because of lower license and termination-fee revenue.
- Operating leverage and lower acquisition-related intangible amortization improved total operating margin by 370 basis points. Cost of processing and services declined to 33.9% of related revenue from 38.3%.
- Interest expense increased 29% to $261 million because of higher borrowings, the March debt issuance and increased variable-rate borrowings supporting Latin American settlement advances.
- Operating cash flow declined despite higher earnings, primarily because of increased working-capital use and $700 million of income taxes paid, up from $291 million.
- Foreign exchange movements reduced reported revenue growth; management quantified an 11% adverse impact from foreign currency exchange-rate fluctuations.
- Merchant credit-loss expense increased to $25 million from $15 million. The company held $34 million of merchant credit-loss allowance at quarter-end.
- Shares used for diluted EPS declined 6% year over year because of share repurchases.
Outlook, Risks, Contingencies and Unusual Items
The filing does not provide explicit quantitative full-year revenue, earnings or cash-flow guidance. Management indicates that liquidity needs are expected to be met through operating cash flow, cash, commercial paper and revolving-credit capacity.
- Fiserv expects to settle its terminated U.K. and U.S. defined-benefit pension plans in 2024. It expects to fund an estimated $25 million U.S. plan shortfall and recognize an estimated $150 million non-cash pretax pension settlement charge.
- The March 2024 U.K. pension annuity transaction resulted in an approximately $63 million after-tax loss recorded in accumulated other comprehensive loss. Total other comprehensive loss was $224 million, primarily reflecting foreign currency translation and pension effects.
- The company recorded a $12 million facility impairment and incurred $18 million of additional severance costs in Corporate and Other during the quarter.
- Argentina remains a significant risk because of high inflation, high interest rates and currency devaluation. Foreign-currency transaction losses from highly inflationary economies were $35 million, compared with $18 million in the prior-year quarter.
- Key operating risks include competition, technology changes, cybersecurity or operational failures, payment fraud and chargebacks, merchant defaults, regulatory and legislative changes, macroeconomic weakness, interest rates, foreign exchange volatility, supply-chain constraints, litigation and integration of acquisitions.
- Legal proceedings accrued were $34 million, with estimated potential exposure in excess of accruals ranging from zero to approximately $100 million. Management does not expect the proceedings to have a material adverse effect.
- Fiserv guaranteed $520 million of Lending Joint Venture debt. It had not been required to make payments under the guarantees and did not anticipate a default.
- Goodwill was $37.038 billion. The company performed an interim impairment assessment following the segment realignment and concluded that goodwill was not impaired.
- Disclosure controls and procedures were effective as of March 31, 2024, and no material change in internal control over financial reporting was reported.
Important Facts for Investors to Verify
- Reconcile the reported 7% revenue growth with the disclosed 11% foreign-exchange headwind and assess the sustainability of underlying Merchant growth.
- Monitor the effect of the $2.0 billion debt issuance, the July 2024 maturity refinancing and elevated interest expense on future cash flow.
- Assess whether the 26% decline in operating cash flow is temporary and whether higher capital expenditures and taxes continue to pressure free cash flow.
- Evaluate the expected $150 million pension settlement charge and approximately $25 million funding requirement expected in 2024.
- Track merchant credit losses, chargebacks, fraud exposure and the performance of Clover Capital and Latin American settlement-advance activities.
- Review the impact of Argentina’s currency and inflation conditions, including the potential effect on earnings and cash generation.
- Confirm the comparability of segment trends after the 2024 segment realignment and monitor the substantial goodwill and acquisition-related intangible balances.