Fiserv, Inc. 2015 Q3 Form 10-Q Summary
Business context and reporting period
Fiserv provides payment processing, account processing, electronic payments, digital banking and related financial technology services to approximately 13,000 clients. Operations are organized into Payments and Financial Institution Services. The filing covers the unaudited three and nine months ended September 30, 2015, compared with the corresponding 2014 periods.
Key financial metrics
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Total revenue | $1.313 billion | $1.263 billion | $3.886 billion | $3.750 billion |
| Operating income | $342 million | $315 million | $982 million | $893 million |
| Operating margin | 26.0% | 24.9% | 25.3% | 23.8% |
| Net income | $218 million | $239 million | $523 million | $573 million |
| Diluted EPS | $0.92 | $0.95 | $2.18 | $2.25 |
| Operating cash flow | Not separately provided | Not separately provided | $955 million | $960 million |
Q3 net margin was approximately 16.6%; nine-month net margin was approximately 13.5%. Net income and EPS declined despite higher operating income, primarily because 2014 included substantially larger gains from StoneRiver, the company’s unconsolidated affiliate, and 2015 included an $85 million pre-tax loss on early debt extinguishment.
At September 30, 2015, cash and cash equivalents were $309 million. Total debt, including current maturities, was $4.235 billion, compared with $3.803 billion at December 31, 2014. Long-term debt was $4.230 billion and no borrowings were outstanding under the $2.0 billion revolving credit facility. The company reported compliance with its financial debt covenants.
Material changes versus the prior comparable period
- Q3 revenue increased 4% to $1.313 billion; nine-month revenue increased 4% to $3.886 billion.
- Processing and services revenue increased 6% in both Q3 and the first nine months, driven by new clients and higher transaction volumes. Product revenue declined 6% in Q3 and 4% year to date.
- Operating income increased 9% in Q3 and 10% year to date. Operating margin expanded 110 basis points in Q3 and 150 basis points year to date, reflecting scale efficiencies and operational effectiveness initiatives.
- Payments revenue increased 4% in Q3 and year to date, while Financial revenue increased 4% in Q3 and 3% year to date. Financial segment growth benefited in part from higher contract termination fee revenue.
- Foreign currency reduced reported revenue growth by approximately 70 basis points in Q3 and 50 basis points year to date.
- Operating cash flow decreased slightly to $955 million from $960 million, while capital expenditures increased 30% to $292 million. Capital expenditures included $62 million for Atlanta facility consolidation.
- The company issued $1.75 billion of senior notes, redeemed $1.1 billion of higher-cost notes, repaid $180 million of scheduled term-loan principal and repaid prior revolving-facility borrowings. The refinancing produced an $85 million pre-tax extinguishment loss.
- The company repurchased approximately $1.05 billion of common stock during the first nine months and 5.97 million shares during Q3. Approximately 6.94 million shares remained authorized for repurchase at September 30.
Outlook, commentary, risks and unusual items
Management emphasized recurring, transaction-based revenue, high client renewal rates, digital-channel adoption, electronic payment growth and continued outsourcing by financial institutions as long-term growth drivers. The company’s 2015 priorities were to build high-quality revenue, expand payment and channel relationships, and improve innovation and integration.
No quantitative revenue or earnings guidance is provided in the filing text. Management expects liquidity needs to be met through operating cash flow, cash on hand and available revolver capacity. The company’s policy is to use operating cash flow primarily for debt repayment, capital expenditures, acquisitions and share repurchases rather than dividends.
- Key risks include competition and pricing pressure, rapid technology changes, security breaches or operational failures, regulatory and legislative changes, financial-industry economic conditions, and acquisition integration risk.
- Product margins weakened because of additional output-solutions investments and lower-margin mix after reduced software-license revenue.
- SG&A included higher share-based compensation and incremental data-center and real-estate consolidation costs.
- StoneRiver gains were $32 million in Q3 2015 versus $85 million in Q3 2014; the company’s share of StoneRiver income declined by $54 million year to date.
- The company estimated approximately $12 million of interest expense would be recognized over the next 12 months from settled interest-rate hedge contracts.
- In October 2015, after quarter-end, the company used revolver borrowings to repay $300 million of senior notes due October 2015.
- Management stated that routine legal proceedings were not expected to have a material adverse effect. Disclosure controls were deemed effective, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Reconcile operating cash flow against capital expenditures, share repurchases and debt service to assess ongoing free-cash-flow capacity.
- Review total debt, refinancing activity, variable-rate exposure, covenant thresholds and the post-quarter-end $300 million note repayment.
- Separate recurring operating performance from StoneRiver gains, contract termination fees, debt-extinguishment costs and facility-consolidation spending.
- Monitor whether Payments and Financial segment margins can remain elevated as investments in output solutions and other initiatives continue.
- Assess the effect of foreign currency, product-revenue declines and technology, cybersecurity and regulatory risks on future results.
- Review the company’s annual report for detailed commitments, contingencies, customer concentration, acquisition matters and market-risk disclosures not repeated in this interim filing.