Fiserv, Inc. Form 10-Q Summary
Business Context and Reporting Period
Fiserv is a global payments and financial technology provider serving financial institutions, merchants and other clients through its Acceptance, Fintech and Payments segments. This report covers the three and nine months ended September 30, 2020, compared with the corresponding 2019 periods. Results include First Data from its July 29, 2019 acquisition, which significantly affects year-over-year comparability.
Fiserv realigned its reportable segments in the first quarter of 2020. Prior-period segment information was restated to reflect the Acceptance, Fintech and Payments structure.
Key Financial Metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Total revenue | $3.786 billion | $3.128 billion | $11.020 billion | $6.142 billion |
| Operating income | $542 million | $374 million | $1.336 billion | $1.131 billion |
| Operating margin | 14.3% | 12.0% | 12.1% | 18.4% |
| Net income attributable to Fiserv | $264 million | $198 million | $658 million | $646 million |
| Diluted EPS | $0.39 | $0.33 | $0.96 | $1.39 |
| Operating cash flow | Not separately provided | Not separately provided | $2.961 billion | $1.617 billion |
| Capital expenditures | Not separately provided | Not separately provided | $689 million | $431 million |
Q3 revenue increased 21%, operating income increased 45%, and diluted EPS increased 18%. Nine-month revenue increased 79% and operating income increased 18%, while net income attributable to Fiserv increased 2%. The nine-month diluted EPS decline primarily reflects the acquisition-related amortization and integration costs, as well as the substantially higher share count following the First Data transaction.
At September 30, 2020, cash and cash equivalents were $937 million, compared with $893 million at December 31, 2019. Total debt was approximately $21.259 billion, including current maturities and net of unamortized discounts and financing costs, versus approximately $21.899 billion at year-end 2019. Long-term debt was $20.894 billion. The company had $3.2 billion of available borrowing capacity under its $3.5 billion revolving credit facility and reported compliance with all debt covenants.
Fiserv generated $2.961 billion of operating cash flow during the first nine months, used $154 million in investing activities and used $2.785 billion in financing activities. Financing uses included $9.307 billion of debt repayments and $1.612 billion of treasury stock purchases. The company does not currently pay a common stock dividend and generally uses operating cash flow for capital expenditures, share repurchases, acquisitions and debt repayment.
Material Changes Versus the Prior Comparable Period
- First Data contributed $771 million of Q3 revenue and $5.067 billion of nine-month revenue, making acquisition effects the primary driver of reported growth.
- Acceptance revenue increased 44% in Q3, Payments revenue increased 20%, and Fintech revenue declined 1%. Acceptance and Payments were affected by COVID-19-related transaction-volume declines but volumes began recovering in May and improved through July.
- Q3 operating margin improved to 14.3% from 12.0%, while the nine-month margin declined to 12.1% from 18.4%, reflecting acquisition-related amortization, integration costs and the differing period of First Data ownership.
- Q3 cost of processing and services decreased to 44.0% of related revenue from 46.2%. Nine-month cost increased to 49.2% from 46.8%, partly because of integration costs and incremental amortization.
- The company recorded a $428 million pretax gain on the February 2020 sale of a 60% interest in its Investment Services business and a $36 million pretax gain on the July 2020 dissolution of the Banc of America Merchant Services joint venture.
- Fiserv issued $2.0 billion of senior notes in May 2020, using proceeds to repay $850 million of 2.7% notes due in 2020 and $1.1 billion of revolving-credit borrowings.
- Share repurchases totaled $1.4 billion during the first nine months, and approximately 7.5 million shares remained authorized for repurchase at September 30, 2020.
Outlook, Commentary, Risks and Unusual Items
The filing does not provide clear quantitative revenue, earnings or EPS guidance. Management’s stated long-term priorities are to realize First Data integration value, build recurring and higher-quality revenue, deepen digital and payment relationships, and pursue innovation and operating efficiencies.
- COVID-19 reduced merchant acquiring and payment volumes, increased uncertainty around consumer spending, and may continue to affect revenue, cash flow, liquidity and debt covenant compliance.
- Merchant credit losses were $35 million in Q3 and $89 million in the first nine months, compared with $17 million in each 2019 comparable period. Merchant credit loss reserves were $63 million at September 30, 2020, versus $34 million at December 31, 2019.
- First Data integration generated $181 million of restructuring charges and $105 million of employee termination costs in the first nine months. Management expects additional integration costs but cannot currently estimate them.
- Acquisition-related intangible amortization was $1.934 billion in the first nine months, and approximately $15.649 billion of identifiable intangible assets remained at September 30, 2020.
- The company adopted the current expected credit loss standard on January 1, 2020, producing a $45 million reduction to beginning retained earnings.
- Potential risks include chargebacks, merchant defaults, client credit deterioration, cybersecurity and fraud, operational or vendor disruption, regulatory changes, litigation, foreign-exchange volatility and the ability to realize First Data synergies.
- Legal reserves were $27 million at September 30, 2020, with estimated possible exposure in excess of recorded reserves ranging from zero to $60 million. A Federal Trade Commission matter was resolved during the second quarter with a $40 million payment previously accrued.
- Management warned that deteriorating economic conditions could affect goodwill valuations and potentially result in a material impairment charge in the fourth quarter of 2020.
Important Facts for Investors to Verify
- Separate organic performance from First Data acquisition, dispositions, foreign exchange and accounting-related effects.
- Track merchant payment volumes, chargebacks, merchant credit losses and reserve adequacy as COVID-19 conditions evolve.
- Assess progress toward First Data cost synergies and the level and duration of remaining restructuring, integration and amortization expenses.
- Review debt maturities, refinancing needs, variable-rate exposure and covenant headroom, particularly the $177 million due in 2021 and $1.346 billion due in 2022.
- Evaluate liquidity using operating cash flow, $937 million of cash, $3.2 billion of available revolver capacity and restricted or unavailable cash balances.
- Consider the sustainability of earnings excluding the $428 million Investment Services gain and $36 million BAMS gain.
- Monitor goodwill and intangible-asset impairment risk, as well as litigation, tax examinations and the $185 million of unrecognized tax benefits.