Fiserv, Inc. 2016 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
Fiserv is a global financial-services technology provider serving approximately 13,000 clients. Its principal segments are Payments and Financial Institution Services, with revenue primarily generated from recurring, account- and transaction-based contracts. This unaudited report covers the three months ended March 31, 2016, compared with the same period in 2015.
Key Financial Metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenue | $1.331 billion | $1.275 billion | Up 4% |
| Processing and services revenue | $1.122 billion | $1.067 billion | Up 5% |
| Operating income | $339 million | $314 million | Up 8% |
| Operating margin | 25.5% | 24.6% | Up 90 basis points |
| Net income | $289 million | $178 million | Up 62% |
| Diluted earnings per share | $1.27 | $0.73 | Up $0.54 |
| Operating cash flow | $509 million | $346 million | Up 47% |
| Capital expenditures | $72 million | $90 million | Down 20% |
- Payments revenue increased 8% to $749 million, while Payments operating income increased 18% to $225 million and margin expanded to 30.0% from 27.5%.
- Financial revenue increased 1% to $599 million, but operating income declined 4% to $195 million; margin fell to 32.6% from 34.3%, primarily because of lower higher-margin software license-related revenue.
- Cash and cash equivalents were $283 million at March 31, 2016, compared with $275 million at December 31, 2015. The company reported $1.5 billion of available revolving-credit capacity.
- Total debt was $4.449 billion at March 31, 2016, compared with $4.293 billion at December 31, 2015. The estimated fair value of debt was $4.6 billion.
- Shareholders’ equity was $2.684 billion, and total assets were $9.552 billion at quarter-end.
Material Changes Versus the Prior Comparable Period
- Revenue growth was led by recurring Payments businesses, increased transaction volumes, new clients, additional products, and $13 million of revenue from acquired businesses.
- Operating performance benefited from scale efficiencies, expense discipline, and operational-effectiveness initiatives. Total expenses declined to 74.5% of revenue from 75.4%.
- Net income included $146 million of income from the company’s 49% equity-method investment in StoneRiver Group. StoneRiver recognized a gain on the sale of a business interest; Fiserv’s share of the gain, net of an impairment loss, was $146 million, with $54 million of related tax expense. Management stated that this increased diluted EPS by approximately $0.39.
- Fiserv received a $140 million cash dividend from StoneRiver, funded by the sale transaction. The dividend was reported in operating cash flow.
- The company acquired Hewlett Packard Enterprise’s Convenience Pay Services business and certain assets of ACI Worldwide’s Community Financial Services business for an aggregate $265 million. Preliminary purchase accounting included approximately $75 million of technology and customer-related intangible assets and $180 million of goodwill.
- Acquisition-related integration activity included a $10 million non-cash impairment charge for software that management decided to replace with an acquired solution. A separate $7 million non-cash write-off of a cost-method investment reduced interest and investment income.
- Basic and diluted weighted-average shares declined to 223.5 million and 227.3 million, respectively, from 238.8 million and 243.0 million, reflecting share repurchases and other share activity.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
The filing does not provide specific quantified full-year revenue or earnings guidance. Management’s 2016 priorities are to build high-quality revenue while meeting earnings goals, strengthen client relationships through digital and payment solutions, and deliver innovation and integration.
Management expects long-term opportunity from increasing payment volumes, digital banking adoption, financial institutions outsourcing technology, and demand for solutions that improve efficiency and regulatory compliance. The company intends to use operating cash flow primarily for debt repayment, capital expenditures, acquisitions, and share repurchases rather than dividends.
- Key risks include competitive pricing and product actions, rapidly changing technology, financial-services market conditions, security breaches or operational failures, regulatory and legislative changes, and the ability to integrate acquisitions and realize expected synergies.
- Fiserv had approximately 14.0 million shares remaining under its share-repurchase authorization at March 31, 2016, after purchasing 3.483 million shares during the quarter.
- The company was in compliance with its debt covenants. Variable rates at March 31, 2016 were 1.68% on the term loan and 1.49% on revolving-credit borrowings.
- A $90 million term-loan principal payment is due December 31, 2017, with the remaining $540 million due at maturity in October 2018. The revolving credit facility expires in April 2020.
- Management stated that ordinary-course litigation is not expected to have a material adverse effect. Disclosure controls and procedures were effective as of March 31, 2016, with no material change in internal control over financial reporting.
- The filing notes that interim results are not necessarily indicative of full-year results.
Investor Verification Points
- Separate recurring operating performance from the nonrecurring StoneRiver gain and related dividend when assessing earnings quality and cash flow sustainability.
- Verify the final purchase-price allocations, goodwill, intangible assets, and integration results for the two acquisitions.
- Monitor Financial segment revenue mix, particularly the effect of lower-margin software license-related revenue on margins.
- Review debt maturities, variable-rate exposure, covenant compliance, and the company’s use of cash for acquisitions, repurchases, and debt reduction.
- Assess whether Payments growth, operating leverage, and digital-services demand continue after the quarter’s acquisition and transaction-volume contributions.
- Review the potential effects of pending accounting standards for revenue recognition, leases, financial instruments, and share-based compensation.