Fiserv, Inc. 2016 Q3 Form 10-Q Summary
Business context and reporting period
Fiserv provides payment processing, account processing, electronic payments, digital banking, card services and related financial technology to approximately 13,000 clients. The company reports Payments and Financial Institution Services segments, with recurring account- and transaction-based fees representing most revenue. This unaudited filing covers the three and nine months ended September 30, 2016, compared with the corresponding 2015 periods.
Key financial metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Total revenue | $1.380 billion | $1.313 billion | $4.074 billion | $3.886 billion |
| Operating income | $369 million | $342 million | $1.070 billion | $982 million |
| Operating margin | 26.8% | 26.0% | 26.3% | 25.3% |
| Net income | $214 million | $218 million | $715 million | $523 million |
| Diluted EPS | $0.96 | $0.92 | $3.18 | $2.18 |
| Operating cash flow | Not separately provided | Not separately provided | $1.042 billion | $955 million |
- Q3 revenue increased 5%, while nine-month revenue increased 5%. Processing and services revenue rose 3% in Q3 and 4% for the nine months; product revenue rose 17% and 8%, respectively.
- Q3 operating income increased 8%; nine-month operating income increased 9%. Total operating margin expanded 80 basis points in Q3 and 100 basis points for the nine months.
- Net income declined 2% in Q3, primarily because the prior-year quarter included a $34 million after-tax benefit associated with StoneRiver. Nine-month net income increased 37%, helped by the 2016 StoneRiver gain.
- Cash flow from operations increased 9% to $1.042 billion for the nine months. Capital expenditures declined 24% to $223 million.
- September 30 cash and cash equivalents were $303 million, compared with $275 million at December 31, 2015. Management reported $1.3 billion of available revolving-credit capacity.
- Total debt was $4.630 billion, compared with $4.293 billion at year-end 2015. Long-term debt was $4.624 billion and current maturities were $6 million. The company was in compliance with its debt covenants.
- The company repurchased $933 million of common stock during the first nine months and had approximately 8.1 million shares remaining under its authorization at September 30.
Material changes versus the prior comparable period
- The Payments segment was the principal growth driver: Q3 revenue increased 8% to $772 million and nine-month revenue increased 8% to $2.284 billion. Payments operating margin improved to 31.2% in Q3 and 30.8% for the nine months.
- Financial segment revenue increased 2% in Q3 and 1% for the nine months, but operating income declined 4% in both periods. Management attributed the pressure to product mix, lower contract termination fees and investments in innovation-based solutions.
- Expense leverage improved. Total expenses as a percentage of revenue declined to 73.2% in Q3 and 73.7% for the nine months, supported by recurring-revenue scale and operating-efficiency initiatives.
- Fiserv acquired Hewlett Packard Enterprise’s Convenience Pay Services business and certain ACI Worldwide Community Financial Services assets for an aggregate $265 million. The acquisitions contributed $24 million of Q3 revenue and $62 million of nine-month revenue.
- StoneRiver, a 49%-owned unconsolidated affiliate, generated a $146 million pretax contribution in 2016, including a gain on the sale of a business interest net of a $44 million impairment. Fiserv received $140 million of related dividends. The comparable 2015 nine-month StoneRiver contribution was $35 million.
- Corporate and Other operating loss improved by $12 million in Q3 and $26 million for the nine months, partly because certain acquisition-related intangible assets became fully amortized. The company also recorded a $10 million non-cash impairment charge in Q1 related to replacing existing software with an acquired solution.
- Weighted-average diluted shares declined to 222.7 million in Q3 and 225.2 million for the nine months, from 237.0 million and 240.1 million, respectively, reflecting share repurchases and other share activity.
Outlook, commentary, risks and unusual items
Management emphasized continued investment in digital and payment solutions, innovation, client relationships, operational effectiveness and disciplined capital allocation. It expects long-term opportunity from growing electronic transaction volumes, digital-channel adoption and financial institutions outsourcing technology. The filing does not provide a specific numerical revenue or earnings forecast for 2016.
- Key disclosed risks include competition and pricing pressure, rapidly changing technology, financial-industry market conditions, cybersecurity breaches, operational failures, legislative and regulatory changes, and difficulties integrating acquisitions or realizing expected synergies.
- Results benefited materially from the non-recurring StoneRiver transaction gain and related dividends. The filing also includes a non-cash investment write-off of $7 million and the $10 million software impairment charge.
- The company expects to adopt ASU 2016-09 on share-based compensation in January 2017. Management was assessing the potential effect of several other new accounting standards, including revenue recognition, leases, financial instruments and credit losses.
- The term loan and revolving credit facility have variable interest rates based on LIBOR or a base rate. The term loan has a scheduled $90 million principal payment due December 31, 2017, with $540 million due at maturity in October 2018. The $2.0 billion revolving facility expires in April 2020.
- Management stated that ordinary-course litigation is not expected to have a material adverse effect on the consolidated financial statements. Disclosure controls were deemed effective as of September 30, 2016.
Important facts for investors to verify
- Determine the extent to which nine-month EPS growth of $1.00 per diluted share reflects the unusual StoneRiver gain, rather than recurring operating performance.
- Monitor Financial segment margins and contract termination fees, which declined from the prior year.
- Assess leverage, refinancing needs and exposure to variable interest rates given total debt of $4.630 billion and increased revolving-facility borrowings.
- Evaluate the sustainability of Payments segment growth and margin expansion after incorporating the 2016 acquisitions.
- Review the effects and transition method of upcoming accounting-standard adoptions, particularly share-based compensation and revenue recognition.
- Confirm future cash allocation among acquisitions, share repurchases, capital expenditures and debt repayment; the filing states that the company’s current policy is not to prioritize cash dividends.