Fiserv, Inc. 2019 First-Quarter Form 10-Q Summary
Business context and reporting period
Fiserv is a financial technology provider serving more than 12,000 clients worldwide through its Payments and Financial segments. The filing reports unaudited results for the three months ended March 31, 2019, compared with the same period in 2018.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $1.502 billion | $1.440 billion | Up 4% |
| Processing and services revenue | $1.293 billion | $1.238 billion | Up 4% |
| Product revenue | $209 million | $202 million | Up 3% |
| Operating income | $373 million | $608 million | Down 39% |
| Operating margin | 24.8% | 42.2% | Down 1,740 basis points |
| Net income | $225 million | $423 million | Down 47% |
| Diluted EPS | $0.56 | $1.00 | Down 44% |
| Operating cash flow | $373 million | $372 million | Essentially flat |
| Capital expenditures | $98 million | $77 million | Up 27% |
Net margin was approximately 15.0% in Q1 2019 versus approximately 29.4% in Q1 2018. Payments revenue increased 9% to $914 million, while Financial revenue decreased 3% to $598 million. Payments operating income increased 6% to $287 million, with a 31.4% margin. Financial operating income decreased 1% to $199 million, with a 33.3% margin.
Cash and cash equivalents were $452 million at March 31, 2019, compared with $415 million at December 31, 2018. Total debt, including current maturities, was $5.875 billion, including approximately $4.9 billion of fixed-rate senior notes and $1.0 billion of revolving credit borrowings. Available borrowing capacity under the revolving credit facility was $940 million. The company was in compliance with its debt covenants.
Material changes versus the prior comparable period
- Revenue growth was led by Payments, including a 5.5% contribution to Payments growth from the Elan debit card processing acquisition.
- Financial revenue declined primarily because the 2018 sale of a 55% interest in the Lending Solutions business removed that business from consolidated results.
- Operating income and net income declined substantially because Q1 2018 included a $232 million gain on the Lending Solutions transaction, compared with a $10 million gain in Q1 2019.
- Q1 2019 included $59 million of debt financing expense and $23 million of acquisition costs related to the planned First Data transaction.
- Interest expense increased 31% to $59 million, primarily due to the September 2018 issuance of $2.0 billion of senior notes.
- Share repurchases totaled $120 million in Q1 2019 versus $398 million in Q1 2018. Repurchases were deferred after January 16, 2019 pending completion of the First Data acquisition.
- Fiserv adopted the new lease standard on January 1, 2019, recognizing $383 million of lease liabilities and $343 million of right-of-use assets. Management stated that the adoption did not materially affect earnings or cash flows.
Guidance, outlook, commentary, risks and unusual items
Management identified 2019 priorities of building high-quality revenue while meeting earnings goals, expanding digital and payment solutions, delivering innovation and integration, and completing and integrating the proposed First Data acquisition. The filing does not provide specific quantitative full-year revenue or earnings guidance.
Fiserv announced an all-stock agreement to acquire First Data for an equity value of approximately $22 billion as of announcement. Closing was expected in the second half of 2019, subject to regulatory approvals and customary conditions. Fiserv had $17.0 billion of bridge financing commitments, of which $12.0 billion remained after $5.0 billion was replaced with term-loan commitments. No bridge or term-loan borrowings were outstanding at March 31, 2019.
Key risks include failure to close or integrate First Data, higher transaction and financing costs, customer or employee loss, regulatory or legal obstacles, cybersecurity incidents, operational failures, competitive and technological changes, economic conditions, regulatory developments, and the ability to achieve expected synergies. Fiserv also guaranteed $350 million of Lending Joint Venture debt; management reported no guarantee payments or calls through March 31, 2019.
In March 2019, Fiserv entered into $5.0 billion of Treasury Locks to hedge anticipated fixed-rate debt issuance. Their fair value was a $35 million liability at quarter-end; a 10-basis-point interest-rate change would affect fair value by approximately $50 million.
Important facts for investors to verify
- Closing timing, regulatory approvals, final financing structure and pro forma leverage related to the First Data acquisition.
- Whether Payments growth and Elan integration offset Financial segment pressure and transaction-related costs.
- The sustainability of operating cash flow as capital expenditures, lease obligations and acquisition financing increase.
- The effect of acquisition costs, debt financing costs and the absence of the prior-year $232 million gain on future earnings comparisons.
- Progress toward expected First Data synergies and integration objectives, including any customer, employee or regulatory disruptions.
- Exposure under the Lending Joint Venture debt guarantees and the potential impact of interest-rate movements on Treasury Locks and future financing.