Fiserv, Inc. — Form 10-Q Summary
Business context and reporting period
Fiserv is a global provider of financial-services technology, including account processing, electronic payments, digital banking, and related services. It serves approximately 16,000 clients, with primarily recurring, transaction- and account-based revenue under generally three- to five-year contracts. The report covers the unaudited three months ended March 31, 2013, compared with the same period in 2012.
Operations are organized principally into Payments and Financial segments. On January 14, 2013, Fiserv acquired Open Solutions, adding approximately 3,300 clients, including 800 account-processing clients, and the DNA account-processing platform.
Key financial metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total revenue | $1,152 million | $1,097 million | Up 5% |
| Processing and services revenue | $966 million | $898 million | Up 8% |
| Product revenue | $186 million | $199 million | Down 7% |
| Operating income | $211 million | $239 million | Down 12% |
| Operating margin | 18.3% | 21.8% | Down 350 basis points |
| Income from continuing operations | $117 million | $132 million | Down 11% |
| Diluted EPS from continuing operations | $0.87 | $0.94 | Down 7% |
| Operating cash flow | $222 million | $234 million | Down 5% |
Payments revenue increased 1% to $617 million, while Financial revenue increased 10% to $549 million. Open Solutions contributed approximately $60 million of revenue in the quarter. Segment operating income increased 5% in Payments and 7% in Financial, although Financial’s margin declined to 29.3% from 30.2%.
Cash flow from investing activities was negative $74 million, including $58 million of capital expenditures and $16 million paid for acquisitions, net of cash acquired. Financing activities used $188 million, including $1.149 billion of debt repayments, $1.011 billion of new debt proceeds, and $67 million of share repurchases. Cash and cash equivalents were $356 million at March 31, 2013, compared with $358 million at December 31, 2012.
Total debt, including current maturities, was approximately $4.049 billion at March 31, 2013, compared with $3.230 billion at year-end 2012. Debt included approximately $1.1 billion drawn under a $2.0 billion revolving credit facility and approximately $2.95 billion of senior notes. The company stated that it remained in compliance with all financial debt covenants.
Material changes versus the prior comparable period
- Revenue growth was driven by recurring processing and services revenue and the Open Solutions acquisition, but product revenue declined because of lower software license and hardware revenue.
- Expenses increased 10% to $941 million, exceeding revenue growth. Merger and integration expenses related to Open Solutions totaled approximately $40 million.
- A $30 million non-cash impairment charge was recorded after management decided to replace the Acumen account-processing platform with Open Solutions’ DNA platform. The charge was included in cost of product and Corporate and Other.
- Acquisition-related intangible amortization reduced diluted continuing-operations EPS by $0.23 in Q1 2013 versus $0.18 in Q1 2012. Merger and integration costs reduced Q1 2013 diluted EPS by $0.19.
- Open Solutions added approximately $960 million of assumed debt and increased goodwill by approximately $531 million based on the preliminary purchase-price allocation.
- Fiserv sold its Club Solutions business on March 14, 2013, for approximately $37 million in cash. The business is reported as discontinued operations for all periods presented; it contributed no net income in either comparable quarter.
- Share repurchases totaled 801,000 shares during the quarter for $67 million. Approximately 4.8 million shares remained available under the repurchase authorization at March 31, 2013.
Guidance, outlook, commentary, risks, and unusual items
Management’s 2013 priorities were to build high-quality revenue growth, meet earnings goals, deepen client relationships, expand strategic solutions, and integrate Open Solutions. The company expects long-term benefits from financial institutions outsourcing technology and adopting digital payments, mobile banking, and related efficiency solutions.
Management stated that liquidity needs are expected to be met through operating cash flow, cash on hand, and available revolving-credit capacity. No specific quantitative earnings or revenue guidance was provided in the filing text.
Key risks include economic weakness and reduced client spending, financial-sector regulatory changes including Dodd-Frank-related requirements, integration of Open Solutions, changes in client demand, competitive pricing, strategic execution, privacy and other regulatory compliance, and migration of clients to competing or parent-company platforms. The company also noted that financial institutions remain cautious about information-technology spending.
Legal proceedings are described as arising in the ordinary course of business, with management not expecting them to have a material adverse effect on the financial statements. Disclosure controls were assessed as effective as of March 31, 2013. Integration of Open Solutions controls and phased implementation of an SAP billing module remain ongoing.
Facts investors should verify
- Whether Open Solutions integration produces expected revenue synergies and whether merger, integration, and platform-replacement costs decline.
- The effect of approximately $4.0 billion of debt, including the increase associated with Open Solutions, on leverage, interest expense, and covenant headroom.
- Whether recurring revenue growth offsets lower-margin product revenue and client migrations.
- The sustainability of Payments and Financial segment margins after acquisition-related amortization and unusual costs.
- The final purchase-price allocation for Open Solutions, including goodwill, intangible assets, and assumed liabilities.
- Future cash deployment among debt repayment, acquisitions, capital expenditures, and share repurchases.
- Potential impacts from regulatory changes, privacy requirements, litigation, and financial-institution technology-spending trends.