Fiserv, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2017; comparable periods ended September 30, 2016. The financial statements are unaudited. Fiserv provides recurring account-processing, electronic-payments, digital-banking, lending, and related financial-technology services to more than 12,000 clients through its Payments and Financial segments.
Financial Performance and Position
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Total revenue | $1.400 billion | $1.380 billion | $4.180 billion | $4.074 billion |
| Operating income | $370 million | $369 million | $1.107 billion | $1.070 billion |
| Operating margin | 26.5% | 26.8% | 26.5% | 26.3% |
| Net income | $232 million | $214 million | $700 million | $715 million |
| Diluted EPS | $1.08 | $0.96 | $3.23 | $3.18 |
| Operating cash flow | Not separately provided | Not separately provided | $1.015 billion | $1.042 billion |
- Revenue mix: Processing and services revenue increased 3% in Q3 and 4% for the first nine months. Product revenue declined 9% in Q3 and 3% year to date.
- Segment performance: Q3 Payments revenue increased 3% and operating income increased 5%, with a 31.7% margin. Financial revenue declined 1% and operating income declined 2%, with a 33.1% margin. For nine months, Payments revenue and operating income increased 4% and 7%, respectively; Financial revenue and operating income increased 2% and 1%.
- Liquidity: Cash and cash equivalents were $325 million at September 30, 2017, compared with $300 million at December 31, 2016. Management reported approximately $0.8 billion of available revolving-credit capacity.
- Debt: Total debt was $5.111 billion, versus $4.562 billion at year-end 2016. Debt included $1.190 billion of revolving-credit borrowings, $629 million of term-loan borrowings, and approximately $3.3 billion of senior notes. The company was in compliance with its debt covenants.
- Capital allocation: The company spent $208 million on capital expenditures, paid $383 million for acquisitions net of acquired cash, and purchased $983 million of common stock during the first nine months.
- Balance-sheet trends: Goodwill increased to $5.612 billion from $5.373 billion and intangible assets increased to $1.888 billion from $1.833 billion, primarily reflecting acquisitions.
Material Changes Versus Prior Comparable Period
- Q3 revenue rose 1%, while operating income was essentially flat and operating margin declined 30 basis points because expense growth outpaced revenue growth.
- Nine-month revenue increased 3%, operating income increased 3%, and operating margin improved 20 basis points.
- Q3 net income increased 8% and diluted EPS increased 13%, despite higher interest expense. Nine-month net income declined 2%, principally because 2016 included substantially higher income from the StoneRiver unconsolidated affiliate.
- StoneRiver contributed $31 million of income in the first nine months of 2017 versus $146 million in 2016. The 2017 amount included the company’s share of a $26 million pre-tax gain on a StoneRiver business sale; 2016 included a substantially larger transaction-related gain.
- Operating cash flow declined 3% to $1.015 billion, mainly because StoneRiver dividends fell to $44 million from $140 million and working-capital changes were less favorable.
- Interest expense increased 10% in Q3 and 8% for the first nine months, reflecting higher average variable rates and greater average debt.
- Four acquisitions were completed for an aggregate purchase price of $383 million net of acquired cash, including Online Banking Solutions, PCLender, Dovetail, and Monitise. The company also sold its Australian item-processing business and recorded a $10 million gain.
- Payments operating margin benefited from transaction growth and operating leverage but was reduced by the Dovetail and Monitise acquisitions and a $15 million charge for two discontinued projects. Financial margin was pressured by lower contract-termination fees and software-license revenue.
Outlook, Risks, Contingencies, and Unusual Items
- The filing does not provide a specific numerical earnings or revenue forecast. Management’s 2017 priorities were to build high-quality revenue, meet earnings goals, expand digital and payments relationships, and deliver innovation and integration.
- Management expects long-term opportunity from increased electronic-payment volumes, digital-channel adoption, and financial institutions outsourcing technology. Revenue is largely recurring and contract-based, generally with three- to five-year terms and high renewal rates.
- Key risks include competition and pricing pressure, rapid technology changes, cybersecurity breaches or operational failures, regulatory and legislative changes, financial-services market conditions, and the ability to integrate acquisitions and realize expected synergies.
- A $90 million term-loan principal payment was due December 31, 2017; the remaining $540 million term-loan balance was due at maturity in October 2018. The revolving credit facility expires in April 2020.
- The company expects to adopt the new revenue-recognition standard on January 1, 2018 using the modified-retrospective method. Expected effects include capitalization of certain contract-acquisition costs, timing changes for termination fees and professional-services revenue, and expanded disclosures; management did not expect a significant impact on its most significant stand-ready processing revenue stream.
- The company early adopted several accounting standards in 2017, including the stock-compensation, goodwill-impairment, business-combination, and cash-flow standards, without a material immediate impact. The adoption of ASU 2016-09 produced $13 million of Q3 and $44 million of nine-month income-tax benefits from share-based compensation.
- Management stated that ordinary-course litigation is not expected to have a material adverse effect. Disclosure controls were considered effective as of September 30, 2017, with no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Reconcile the increase in total debt with acquisition spending, share repurchases, liquidity needs, and scheduled term-loan maturities.
- Assess the sustainability of operating cash flow excluding the unusually variable StoneRiver dividends and transaction-related gains.
- Monitor integration costs, margin effects, goodwill, and intangible-asset amortization from the four 2017 acquisitions.
- Evaluate whether Payments growth and operating leverage offset weakness in Financial segment margins, product revenue, and contract-termination fees.
- Review the January 2018 revenue-standard adoption adjustment and its effects on revenue timing, contract costs, retained earnings, and disclosures.
- Consider the impact of higher variable interest rates and refinancing requirements on future interest expense and covenant headroom.