Business Context and Reporting Period
Fiserv, Inc. is a global financial-services technology provider serving approximately 13,000 clients. Its Payments segment provides electronic payments, card processing, bill payment, digital banking and related services; its Financial segment provides account processing and other technology services to financial institutions. Revenue is primarily recurring and transaction-based under contracts generally lasting three to five years.
This unaudited Form 10-Q covers the three and six months ended June 30, 2016, with comparisons to the corresponding 2015 periods. The filing was dated August 3, 2016.
Financial Metrics
| Metric | Three Months 2016 | Three Months 2015 | Six Months 2016 | Six Months 2015 |
|---|---|---|---|---|
| Total revenue | $1,363 million | $1,298 million | $2,694 million | $2,573 million |
| Operating income | $362 million | $326 million | $701 million | $640 million |
| Operating margin | 26.6% | 25.1% | 26.0% | 24.9% |
| Net income | $212 million | $127 million | $501 million | $305 million |
| Diluted EPS | $0.94 | $0.53 | $2.21 | $1.26 |
Processing and services revenue was $1,159 million in the second quarter and $2,281 million for the first six months. Product revenue was $204 million and $413 million, respectively. The second-quarter income tax rate was 34.2%; the six-month rate was 42.2%, elevated by $54 million of tax expense related to the StoneRiver transaction.
Net cash provided by operating activities was $687 million for the six months, compared with $600 million in 2015. Capital expenditures were $145 million, down from $203 million. Cash used in investing activities was $408 million, including $265 million for acquisitions. Cash used in financing activities was $291 million, including $633 million of treasury-stock purchases and $991 million of debt repayments, partly offset by $1,249 million of debt proceeds.
Cash and cash equivalents were $263 million at June 30, 2016, compared with $275 million at December 31, 2015. Available borrowing capacity under the revolving credit facility was $1.4 billion. Total debt, including current maturities, was $4.554 billion, compared with $4.293 billion at year-end 2015. The company reported compliance with all financial debt covenants.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue increased 5%, and six-month revenue increased 5%, primarily due to Payments segment growth.
- Payments revenue increased 9% in the second quarter and 8% for the first six months, driven by transaction volumes, new clients, additional products and $25 million and $38 million of acquired-business revenue, respectively.
- Financial segment revenue increased 1% in both periods, but operating income declined 3% in the quarter and 4% for the six months. Foreign currency, implementation timing, lower termination fees, product mix and increased innovation investment weighed on results.
- Operating margin expanded 150 basis points in the quarter and 110 basis points for the six months, reflecting scale efficiencies, expense discipline and operating-effectiveness initiatives.
- Interest expense declined $9 million in the quarter and $10 million for the six months, partly because 2015 included reclassification of losses on settled cash-flow hedges related to debt extinguishment.
- Share repurchases reduced weighted-average diluted shares to 225.6 million in the quarter and 226.5 million for the six months, from 240.4 million and 241.7 million, respectively, in 2015.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide explicit quantitative earnings or revenue guidance. Management identifies 2016 priorities as building high-quality revenue while meeting earnings goals, strengthening client relationships through digital and payment solutions, and delivering innovation and integration.
Management expects long-term benefits from growth in electronic transactions and digital channels, financial institutions outsourcing technology, and demand for solutions that improve efficiency, regulatory compliance and customer engagement. Recurring, generally non-discretionary revenue and client diversification are cited as sources of resilience.
Fiserv acquired Hewlett Packard Enterprise’s Convenience Pay Services business and certain ACI Worldwide Community Financial Services assets for an aggregate $265 million. Preliminary allocations included approximately $75 million of technology and customer intangibles and $180 million of goodwill. Acquisition-related activity included a $10 million non-cash impairment charge in the first quarter.
Fiserv owns 49% of StoneRiver Group. StoneRiver’s sale of a business interest generated Fiserv’s $146 million share of net gain in the first quarter, after a $44 million impairment loss. Fiserv also received a $140 million cash dividend funded by the transaction. Six-month diluted EPS benefited by approximately $0.39 from this item.
Key risks include competitive pricing, rapid technology change, cybersecurity breaches and operational failures, market conditions affecting financial institutions, legislative and regulatory actions, compliance requirements, and the ability to integrate acquisitions and achieve anticipated synergies. Pending litigation in the ordinary course is not expected by management to have a material adverse effect.
The company was assessing the potential effects of newly issued accounting standards covering credit losses, stock compensation, leases, financial instruments and revenue recognition. The filing states that market-risk disclosures had not materially changed since December 31, 2015. Disclosure controls were effective as of June 30, 2016, with no material change in internal control over financial reporting.
Investor Verification Checklist
- Verify the sustainability of Payments segment growth and whether Financial segment margin pressure persists.
- Separate recurring operating performance from the one-time StoneRiver gain, related tax expense and dividend.
- Review debt maturities, variable-rate exposure, covenant compliance and the increase in revolving-credit borrowings.
- Assess acquisition integration, preliminary purchase-price allocations and the $10 million software impairment charge.
- Evaluate the effect of share repurchases on EPS and remaining authorization of approximately 11.2 million shares.
- Monitor adoption impacts from the pending accounting standards, especially revenue recognition, leases and expected credit losses.
- Review cybersecurity, operational resilience, regulatory, litigation and client-concentration risks; the 50 largest financial-institution clients represented less than 25% of annual revenue.