Fiserv, Inc. 2015 Q1 Form 10-Q Summary
Business Context and Reporting Period
Fiserv is a global financial-services technology provider serving approximately 14,500 clients. Its principal segments are Payments and Financial Institution Services, with recurring, account- and transaction-based revenue generally supported by three- to five-year contracts. The filing covers the three months ended March 31, 2015, compared with the same period in 2014. Financial statements are unaudited.
Key Financial Metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total revenue | $1,275 million | $1,234 million | Up 3% |
| Processing and services revenue | $1,067 million | $1,027 million | Up 4% |
| Product revenue | $208 million | $207 million | Approximately flat |
| Operating income | $314 million | $271 million | Up 16% |
| Operating margin | 24.6% | 21.9% | Up 270 basis points |
| Net income | $178 million | $168 million | Up 6% |
| Diluted EPS from continuing operations | $0.73 | $0.65 | Up $0.08 |
| Operating cash flow | $346 million | $292 million | Up 18% |
| Capital expenditures | $90 million | $70 million | Up 29% |
Processing and services represented 83.7% of revenue, compared with 83.2% in the prior-year quarter. Income before taxes was $274 million, compared with $230 million. The effective tax rate increased to 35.1% from 28.5%, primarily because the prior-year period benefited from favorable resolution of certain tax matters.
At March 31, 2015, cash and cash equivalents were $296 million. Total debt, including current maturities, was $3.852 billion, compared with $3.803 billion at December 31, 2014. The balance sheet reported current maturities of $95 million and long-term debt of $3.757 billion. Management stated that liquidity needs are expected to be met through operating cash flow, cash, and available revolving-credit borrowings.
Payments revenue was $696 million and operating income was $191 million, with a 27.5% operating margin. Financial revenue was $593 million and operating income was $204 million, with a 34.3% operating margin.
Material Changes Versus the Prior Comparable Period
- Revenue increased $41 million, driven principally by a $40 million increase in processing and services revenue.
- Payments revenue increased 3%, including 5% growth in processing and services revenue from new clients, higher transaction volumes, card services, and digital channels.
- Financial revenue increased 3%, reflecting growth in account processing and lending businesses.
- Total expenses declined $2 million despite higher revenue. Processing and services cost declined to 50.8% of related revenue from 52.7%, reflecting operating leverage and efficiency initiatives.
- Selling, general and administrative expense declined to 18.7% of revenue from 19.6%, largely because of lower employee severance expense.
- Operating income increased $43 million. Management attributed the improvement to scale efficiencies, operational effectiveness initiatives, and lower severance costs.
- Operating cash flow increased $54 million, primarily from higher earnings and favorable working-capital changes.
- Capital expenditures increased $20 million; approximately $10 million related to an Atlanta facility consolidation plan and was offset by a landlord reimbursement in working-capital activity.
- The company purchased $290 million of common stock during the quarter and reported 15.967 million shares remaining under its repurchase authorization at March 31, 2015.
- Weighted-average diluted shares declined to 243.0 million from 258.6 million, supporting the increase in diluted EPS.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management expected the full-year 2015 effective income tax rate to be approximately 35%. The filing does not provide clear full-year revenue, operating-income, or EPS guidance.
Management cited long-term opportunities from outsourced financial-technology solutions, electronic payments, digital channels, growing transaction volumes, and clients' need to address regulatory and operating-efficiency requirements. The company continues to prioritize high-quality revenue, client-relationship expansion, payment and channel solutions, innovation, integration, operational effectiveness, and disciplined capital allocation.
- Key stated risks include competitive pricing, rapidly changing technology, financial-services market and economic conditions, security breaches, operational failures, legislative and regulatory changes, compliance requirements, acquisitions and integration, and strategic initiatives.
- Fiserv owns a 49% interest in StoneRiver Group, L.P. Income from the investment was zero in Q1 2015 versus $4 million in Q1 2014, partly because the prior year included the company's share of a gain on a StoneRiver subsidiary sale. Management also noted declining contributions as StoneRiver monetizes its portfolio.
- Amortization of acquisition-related intangible assets reduced diluted EPS from continuing operations by $0.13 in both quarters. Acquisition-related intangible assets had a net book value of $1.974 billion at March 31, 2015.
- The company was in compliance with all financial debt covenants during the quarter. The $300 million of senior notes due October 2015 was classified as long-term because management intended and was able to refinance it through the revolving facility.
- On April 30, 2015, after quarter-end, the company amended and restated its $2.0 billion revolving credit agreement, extending maturity from October 2018 to April 2020. Related subsidiary guarantees were released, and similar amendments were made to the term loan and senior-note guarantees.
- Management stated that ordinary-course legal proceedings are not expected to have a material adverse effect, although litigation liabilities could arise.
- Disclosure controls and procedures were effective as of March 31, 2015, and no material change in internal control over financial reporting was reported.
Important Facts for Investors to Verify
- Whether revenue growth in recurring processing and services businesses continues to offset the company's relatively flat product revenue.
- Whether operating-margin gains from scale and efficiency initiatives are sustainable after accounting for continued investments in biller, output, digital, and other solutions.
- The timing and funding of the $300 million senior-note maturity in October 2015 and compliance with leverage and interest-coverage covenants.
- Actual full-year tax expense relative to management's approximately 35% tax-rate expectation.
- The effect of continued share repurchases on diluted share count, leverage, and capital allocation.
- Future cash requirements for capital expenditures, debt repayment, acquisitions, and the Atlanta facility consolidation.
- Exposure to cybersecurity, operational, regulatory, competitive, and technology risks identified in the filing.
- The effect of StoneRiver's portfolio monetization on future investment income.