Fiserv, Inc. — Q1 2023 Form 10-Q Summary
Business context and reporting period
Fiserv is a global payments and financial technology provider serving merchants, financial institutions and corporate clients. Its reportable segments are Acceptance, Fintech, and Payments. This unaudited Form 10-Q covers the three months ended March 31, 2023, compared with the same period in 2022.
Key financial metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenue | $4.547 billion | $4.138 billion | Up 10% |
| Operating income | $934 million | $846 million | Up 10% |
| Operating margin | 20.5% | 20.5% | Flat |
| Net income | $576 million | $682 million | Down 16% |
| Net income attributable to Fiserv | $563 million | $669 million | Down 16% |
| Diluted EPS | $0.89 | $1.02 | Down 13% |
| Operating cash flow | $1.130 billion | $815 million | Up 39% |
| Capital expenditures | $339 million | $331 million | Up 2% |
Processing and services revenue increased 9% to $3.673 billion, while product revenue increased 13% to $874 million. The income tax rate rose to 17.4% from 14.5%. Interest expense increased 20% to $202 million, and other expense increased to $20 million from $4 million.
Segment revenue and operating margin were as follows:
| Segment | Revenue | Revenue growth | Operating margin |
|---|---|---|---|
| Acceptance | $1.847 billion | 12% | 30.5% |
| Fintech | $792 million | 2% | 35.4% |
| Payments | $1.629 billion | 11% | 43.6% |
| Corporate and Other | $279 million | 14% | Not meaningful |
At March 31, 2023, balance-sheet cash and cash equivalents were $1.046 billion. Total cash and cash equivalents including settlement assets and other restricted cash were $2.876 billion. Total debt was approximately $22.4 billion, comprising $461 million of short-term and current maturities and $21.943 billion of long-term debt. The company reported $1.7 billion of available revolving-credit capacity after considering outstanding borrowings and designated capacity. Debt covenants were satisfied during the quarter.
Material changes versus the prior comparable period
- Revenue growth reflected higher merchant acquiring and transaction volumes, Clover and Carat growth, increased Payments debit and credit processing activity, new client onboarding, and higher Output Solutions volumes.
- Foreign exchange movements reduced reported revenue growth by approximately 3%; the impact was approximately 5% in Acceptance.
- Acceptance operating margin expanded 210 basis points to 30.5%, and Payments operating margin expanded 130 basis points to 43.6%, primarily from operating leverage and expense management.
- Fintech operating margin remained 35.4%, with continued investment in Finxact limiting margin expansion.
- Q1 2022 included a $147 million pretax gain from the sale of merchant contracts and $91 million of net gains from certain equity investment transactions. These items did not recur in Q1 2023, contributing to lower net income and EPS despite higher operating income.
- Income from unconsolidated affiliates changed from $106 million of income to a $12 million loss, including the absence of the prior-year investment transaction gains.
- Operating cash flow increased by $315 million, primarily from improved operating results and favorable working-capital changes, including higher receivable collections.
- Share repurchases increased to $1.5 billion from $500 million. The board authorized an additional 75 million shares for repurchase, with approximately 78.7 million shares remaining under authorizations at March 31, 2023.
- Fiserv issued $1.8 billion of senior notes in March 2023, consisting of $900 million due in 2028 at 5.45% and $900 million due in 2033 at 5.60%; proceeds were used for general corporate purposes, including repayment of U.S. commercial paper.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide explicit numerical full-year guidance. Management expects ordinary liquidity needs to be funded through operating cash flow, cash, commercial paper issuance, and revolving-credit capacity, and expects to remain in compliance with debt covenants.
Management highlighted continued long-term opportunities from digital payments, e-commerce, real-time payments, cloud-based banking, integrated merchant solutions, outsourcing by financial institutions, Clover, and Carat. The filing also notes intensifying competition and ongoing investment in technology, data, security and customer experience.
- Key risks include competition, changing customer demand, technology execution, cybersecurity or operational failures, chargebacks and fraud, merchant defaults, regulatory and card-network requirements, litigation, acquisition integration, personnel retention, rising interest rates, refinancing access, inflation, recessionary conditions, geopolitical developments, supply-chain disruption, and foreign-exchange volatility.
- Merchant credit-loss expense increased to $15 million from $8 million. The merchant credit-loss allowance was $33 million at March 31, 2023, compared with $29 million at December 31, 2022.
- Fiserv guaranteed debt of lending joint ventures with aggregate guaranteed borrowings of approximately $520 million. It recorded $38 million for non-contingent obligations and $21 million for estimated contingent credit losses; no payments had been required under the guarantees.
- Goodwill totaled $37.017 billion. No goodwill impairment had been recorded through March 31, 2023, although management identified interest rates, foreign exchange, strategic changes, weaker performance and merchant-alliance developments as potential impairment factors.
- Litigation accruals were $21 million, with estimated exposure in excess of accrued amounts ranging from zero to approximately $60 million. Management does not expect pending proceedings to have a material adverse effect.
- The company recognized a $3 million pretax loss from final working-capital adjustments related to the 2022 sale of Fiserv Costa Rica and Systems Integration Services.
- Cash availability is constrained in part by $640 million classified as unavailable, including cash held by joint ventures, foreign-exchange controls and regulatory capital requirements.
Important facts for investors to verify
- Reconcile reported revenue and earnings growth with the effects of foreign exchange, acquisitions, divestitures and the nonrecurring Q1 2022 gains.
- Monitor leverage, commercial paper refinancing, the 2023 senior-note maturities, variable-rate debt and available revolving-credit capacity.
- Assess whether Acceptance and Payments margin expansion can continue while Fintech investment, acquisition costs and higher interest expense persist.
- Track merchant credit losses, chargebacks, fraud exposure and the collateral supporting merchant-acquiring activities.
- Evaluate goodwill and acquired-intangible balances, including the preliminary purchase-price allocation for Merchant One.
- Consider the availability of cash, settlement-related balances and cash generated from operations when assessing liquidity; balance-sheet cash excludes settlement assets.
- Review the company’s share-repurchase pace and capital-allocation priorities relative to debt reduction and acquisitions.