Fiserv, Inc. 2023 Q3 Form 10-Q Summary
Business context and reporting period
Fiserv is a global payments and financial technology provider serving merchants, financial institutions, corporations and public-sector clients. Its reportable segments are Acceptance, Fintech, and Payments. This unaudited filing covers the three and nine months ended September 30, 2023, compared with the corresponding 2022 periods.
Key financial metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Total revenue | $4.873 billion | $4.518 billion | $14.176 billion | $13.106 billion |
| Operating income | $1.503 billion | $855 million | $3.568 billion | $2.561 billion |
| Operating margin | 30.8% | 18.9% | 25.2% | 19.5% |
| Net income attributable to Fiserv | $952 million | $481 million | $2.198 billion | $1.748 billion |
| Diluted EPS | $1.56 | $0.75 | $3.54 | $2.68 |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $3.567 billion | $2.985 billion |
| Capital expenditures | Not separately provided for the quarter | Not separately provided for the quarter | $1.034 billion | $1.148 billion |
Q3 revenue increased 8%, including processing and services revenue growth of 9% and product revenue growth of 3%. Nine-month revenue also increased 8%. Q3 net income attributable to Fiserv increased 98%, while nine-month net income increased 26%.
- Q3 segment revenue growth was 12% in Acceptance, 4% in Fintech and 5% in Payments. Nine-month growth was 11%, 1% and 8%, respectively.
- Q3 operating margins were 35.9% for Acceptance, 36.7% for Fintech and 48.5% for Payments, compared with 32.4%, 34.1% and 45.6%, respectively, in 2022.
- Interest expense increased 36% in Q3 and 30% for the first nine months, reflecting higher fixed-rate debt issuance and increased variable-rate borrowings in Latin America.
- The effective tax rate was 19.8% in Q3 and 19.5% for the first nine months, compared with 22.5% and 19.7%, respectively, in the prior periods.
- Cash and cash equivalents on the balance sheet were $1.349 billion at September 30, 2023, compared with $902 million at December 31, 2022. Including settlement cash and other restricted cash, cash and cash equivalents were $3.005 billion.
- Settlement assets and settlement obligations were each $21.785 billion at September 30, 2023.
Material changes versus the prior comparable period
- Operating income benefited from revenue scale, expense management, lower acquisition-related amortization and lower severance costs. Q3 also included a $177 million pretax gain from the sale of the financial reconciliation business.
- Cost of processing and services declined to 32.7% of related revenue in Q3 from 39.2% in 2022, and to 35.0% from 40.8% for the first nine months.
- The company sold its financial reconciliation business on July 25, 2023 for $232 million of cash proceeds and recorded a $177 million pretax gain.
- Fiserv issued $1.8 billion of senior notes in March, €800 million of senior notes in May and $2.0 billion of senior notes in August 2023. Long-term debt increased to $22.657 billion from $20.950 billion at year-end 2022; total debt, including current maturities, was approximately $23.3 billion.
- The company repurchased $3.790 billion of common stock during the first nine months, including a $500 million privately negotiated repurchase from an affiliate of ValueAct Capital. Approximately 60.5 million shares remained authorized for repurchase at September 30.
- The company acquired the remaining 49% interest in European Merchant Services B.V. for $56 million and recognized a $27 million pretax expense related to a Canadian retroactive GST/HST tax law change.
- Foreign-currency translation and Argentine currency remeasurement continued to affect results. Argentina-related foreign currency losses were $38 million in Q3 and $88 million for the first nine months.
Liquidity, debt and capital resources
Fiserv generated $3.567 billion of operating cash flow in the first nine months and used $710 million in investing activities, including $1.034 billion of capital expenditures. Financing activities used $3.036 billion, principally reflecting $3.790 billion of treasury-stock purchases, partially offset by debt proceeds.
The company reported $1.7 billion of available capacity under its $6.0 billion revolving credit facility after considering designated capacity for commercial paper, upcoming debt maturities and letters of credit. Outstanding variable-rate debt was $1.618 billion, consisting primarily of Euro commercial paper and foreign lines of credit. The company stated that it was in compliance with all debt covenants and expected to remain compliant.
Outlook, commentary and risks
The filing does not provide a clear numerical full-year revenue, earnings or cash-flow guidance update. Management describes long-term opportunities from digital payments, e-commerce, real-time payments, Clover, integrated merchant solutions, outsourced financial-institution technology and continued client demand for secure, convenient digital experiences.
- Principal risks include intense competition, technology execution, cybersecurity or operational failures, fraud and merchant chargebacks, dependence on merchant alliances, regulatory and legislative changes, litigation, acquisition integration, personnel retention, higher interest rates, refinancing and liquidity conditions, inflation, geopolitical disruption, supply-chain constraints and foreign-currency devaluation.
- Merchant credit-loss expense increased to $25 million in Q3 and $62 million for the first nine months, compared with $18 million and $46 million, respectively, in the prior periods. The merchant credit-loss allowance was $35 million at September 30.
- The company guaranteed debt of lending joint ventures with aggregate guarantees of $520 million. It had recorded $33 million for non-contingent obligations and $21 million for estimated contingent credit losses; no guarantee payments had been required.
- Accrued litigation liabilities were $29 million, with estimated exposure in excess of accruals ranging from zero to approximately $90 million. Management does not expect pending proceedings to have a material adverse effect.
- Goodwill was $36.836 billion, with no accumulated impairment through September 30, 2023. Future interest rates, currency movements, operating performance or changes in merchant alliances could affect impairment assessments.
- Management stated that disclosure controls were effective as of September 30, 2023, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Determine the portion of the reported earnings increase attributable to the $177 million divestiture gain and other nonrecurring items.
- Assess organic revenue and operating-margin trends by segment, particularly Acceptance growth and the impact of foreign-currency translation.
- Review debt maturities, refinancing assumptions, commercial-paper availability and the effect of higher interest rates on future interest expense.
- Monitor merchant credit losses, chargebacks, fraud exposure and the decline in collateral available for merchant credit risk, from $1.5 billion at year-end 2022 to $0.9 billion at September 30, 2023.
- Evaluate the sustainability of substantial share repurchases relative to leverage, liquidity and capital-expenditure requirements.
- Track Argentine currency conditions, foreign lines of credit and other international liquidity exposures.
- Review the Canadian GST/HST matter, litigation exposure and the $520 million lending-joint-venture debt guarantees.
- Confirm whether subsequent filings provide numerical full-year guidance, additional debt repayments or material changes after September 30, 2023.