Business Context and Reporting Period
Fiserv, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2013. Fiserv provides financial-services technology, including account processing, electronic payments, digital banking, and related services to approximately 16,000 clients. Revenue is primarily recurring, account-based, and transaction-based.
Operations comprise the Payments segment and Financial segment. Fiserv acquired Open Solutions Inc. on January 14, 2013, adding approximately 3,300 clients and the DNA account-processing platform. The Club Solutions business was sold on March 14, 2013, and is presented as discontinued operations.
Key Financial Metrics
| Metric | Q3 2013 | Q3 2012 | First 9 Months 2013 | First 9 Months 2012 |
|---|---|---|---|---|
| Total revenue | $1,201 million | $1,107 million | $3,551 million | $3,291 million |
| Operating income | $280 million | $265 million | $764 million | $761 million |
| Operating margin | 23.3% | 24.0% | 21.5% | 23.1% |
| Income from continuing operations | $161 million | $140 million | $430 million | $434 million |
| Net income | $159 million | $139 million | $427 million | $432 million |
| Diluted EPS from continuing operations | $1.22 | $1.03 | $3.22 | $3.14 |
| Net cash from operating activities | Not separately provided | Not separately provided | $681 million | $542 million |
- Processing and services revenue increased 10% in both the quarter and first nine months, while product revenue was flat in the quarter and declined 2% year to date.
- Net income margin was approximately 13.2% in the quarter and 12.0% year to date, compared with approximately 12.6% and 13.1%, respectively, in the prior-year periods.
- Cash and cash equivalents were $321 million at September 30, 2013, compared with $358 million at December 31, 2012.
- Total debt, including current maturities, was approximately $3.931 billion at September 30, 2013, compared with $3.230 billion at year-end 2012. Estimated fair value of total debt was $4.0 billion.
- Capital expenditures, including capitalized software, were $171 million for the first nine months, up from $145 million.
- Fiserv repurchased $455 million of common stock during the first nine months and had approximately 10.4 million shares remaining under repurchase authorizations at September 30, 2013.
Material Changes Versus the Prior Comparable Period
- Total revenue increased 8% in both the third quarter and first nine months. Payments revenue increased 4%, while Financial revenue increased 13%, primarily because of Open Solutions.
- Open Solutions contributed $69 million of third-quarter revenue and $204 million of nine-month revenue. Excluding the acquisition, Financial revenue growth was flat, partly because a client migrated to its parent company’s platform.
- Operating income increased 6% in the third quarter but was nearly unchanged for the first nine months. Consolidated operating margin declined 70 basis points in the quarter and 160 basis points year to date.
- Corporate and Other operating losses increased by $21 million in the quarter and $96 million year to date, mainly because of Open Solutions integration costs, higher acquired-intangible amortization, and a $30 million non-cash impairment charge related to replacing the Acumen platform with DNA.
- Payments operating margin was 27.4% in the quarter, unchanged year over year, and 27.6% year to date, up from 26.6%. Financial operating margin was 33.3% in the quarter, up from 32.1%, and 31.6% year to date, unchanged.
- Operating cash flow increased 26% year over year, primarily because the prior-year period included an $88 million payment to settle interest-rate swap agreements, as well as lower tax and interest payments in 2013.
- Interest expense declined 15% in the quarter and 9% year to date, despite additional debt assumed with Open Solutions, reflecting lower average interest rates and the absence of certain prior-year hedge-settlement costs.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- Management expected the full-year 2013 effective income tax rate to be approximately 35%. The reported effective rates were 33.1% for the quarter and 34.1% for the first nine months.
- Management stated that liquidity needs are expected to be funded through operating cash flow, cash on hand, and available revolving-credit borrowings. The filing does not provide specific full-year revenue or earnings guidance.
- On October 25, 2013, Fiserv obtained a $900 million term loan maturing in October 2018 and used the proceeds to repay revolving-credit borrowings. The amended revolving facility also matures in October 2018, with $75 million remaining outstanding after repayment.
- The company was in compliance with its debt covenants through September 30, 2013. The revolving facility generally requires consolidated indebtedness of no more than 3.5 times adjusted EBITDA and adjusted EBITDA of at least three times consolidated interest expense.
- Fiserv owns 49% of StoneRiver Group. It received a $122 million dividend in 2013, including a $6 million return on investment. Although Fiserv has no legal obligation to fund StoneRiver’s liabilities or operating deficits, management stated that it may provide future support based on its assessment of circumstances.
- Key risks include economic conditions and client technology spending, regulatory and legislative changes including Dodd-Frank, integration of Open Solutions, client demand, competitive pricing, strategic initiatives, privacy and other regulatory compliance, and execution of system and billing-module implementations.
- Legal proceedings arise in the ordinary course of business; management does not expect resulting liabilities to have a material adverse effect on the financial statements.
Investor Verification Checklist
- Verify the sustainability of revenue growth excluding the $204 million year-to-date contribution from Open Solutions.
- Assess whether Open Solutions integration costs, the Acumen impairment, and higher intangible amortization continue to pressure margins.
- Reconcile reported debt, the post-quarter-end term loan, revolving-credit borrowings, maturities, interest rates, and covenant headroom.
- Evaluate the quality and recurrence of the $681 million year-to-date operating cash flow, including the effect of the prior-year $88 million hedge settlement and the StoneRiver dividend.
- Monitor client migrations, contract-renewal pricing, transaction volumes, and financial-institution technology spending.
- Review the 2013 tax-rate expectation and any discrete tax benefits included in the third-quarter rate.
- Confirm the status and economic impact of the share-repurchase authorization and the ongoing Open Solutions and SAP billing-module control implementations.