Business Context and Reporting Period
Fiserv, Inc. filed this Form 10-K for the fiscal year ended December 31, 2018. The filing also provides unaudited fourth-quarter 2018 data. Fiserv is a financial-services technology provider serving more than 12,000 clients through its Payments and Financial segments. Approximately 85% of 2018 revenue came from recurring processing and services contracts, generally with three- to five-year terms.
Financial Performance and Position
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total revenue | $5.823 billion | $5.696 billion | Up 2% |
| Processing and services revenue | $4.975 billion | $4.833 billion | Up 3% |
| Product revenue | $848 million | $863 million | Down 2% |
| Operating income | $1.753 billion | $1.532 billion | Up 14% |
| Operating margin | 30.1% | 26.9% | Up 320 bps |
| Net income | $1.187 billion | $1.246 billion | Down 5% |
| Diluted EPS from continuing operations | $2.87 | $2.86 | Up $0.01 |
| Cash flow from operations | $1.552 billion | $1.483 billion | Up 5% |
| Capital expenditures | $360 million | $287 million | Up 25% |
| Total debt | $5.959 billion | $4.900 billion | Up $1.059 billion |
Payments revenue increased 7% to $3.467 billion, while Payments operating income increased 9% to $1.122 billion and margin rose to 32.3%. Financial revenue declined 5% to $2.395 billion, and Financial operating income declined 6% to $798 million; margin decreased to 33.3% from 33.5%.
At December 31, 2018, Fiserv had $415 million of cash and cash equivalents and reported $850 million of available borrowing capacity under its revolving credit facility. Shareholders’ equity was $2.293 billion, compared with $2.731 billion in 2017. Goodwill and intangible assets represented approximately 70% of total assets; no goodwill impairment was identified in the fourth quarter.
Fiserv repurchased approximately $1.91 billion of common stock during 2018 and did not pay dividends. Approximately 26.0 million shares remained authorized for repurchase at year-end.
Fourth-Quarter 2018 Data
| Metric | Q4 2018 | Q4 2017 |
|---|---|---|
| Revenue | $1.551 billion | $1.516 billion |
| Operating income | $431 million | $425 million |
| Income from continuing operations | $286 million | $532 million |
| Diluted EPS from continuing operations | $0.71 | $1.25 |
Fourth-quarter 2017 results included a $275 million discrete income tax benefit related to the Tax Cuts and Jobs Act, making the year-over-year net income and EPS comparison unfavorable despite higher revenue and operating income in Q4 2018.
Material Changes Versus the Prior Comparable Period
- Revenue growth accelerated in Payments but was more than offset at the segment level by the disposition of the Lending Solutions business, which reduced Financial revenue growth by approximately 9 percentage points.
- Operating margin benefited from scalable recurring-revenue growth, expense management and product mix, partly offset by client-focused investments and acquisition-related costs.
- Fiserv recorded a $227 million pretax gain from selling a 55% interest in its Lending Solutions business and retained 45% interests in two joint ventures.
- Fiserv acquired Elan Financial Services’ debit processing, ATM Managed Services and MoneyPass network for approximately $660 million, funded using revolving credit capacity.
- The company issued $2.0 billion of senior notes, repaid a $540 million term loan and approximately $1.1 billion of revolving borrowings, and retired $450 million of 4.625% senior notes. The transactions generated a $14 million pretax loss on early debt extinguishment.
- Fiserv adopted ASC 606 using the modified retrospective method. The adoption increased opening retained earnings by $208 million, primarily from deferring previously expensed sales commissions. Reported 2018 revenue and net income were $50 million and $51 million higher, respectively, than they would have been without adoption.
- The effective tax rate increased to 24.3% from 11.6%, principally because 2017 included the significant tax benefit from federal tax reform. Fiserv recorded approximately $19 million of additional 2018 tax expense from subsequent IRS guidance.
Guidance, Outlook, Risks and Unusual Items
Management’s 2019 priorities were to build high-quality revenue while meeting earnings goals, deepen digital and payments relationships, and deliver innovation and integration. Management also expected to devote significant resources to completing and integrating the proposed First Data transaction. The filing does not provide a clear numerical 2019 revenue or earnings guidance range.
On January 16, 2019, Fiserv announced an all-stock agreement to acquire First Data for an equity value of approximately $22 billion. Closing was expected in the second half of 2019, subject to shareholder, regulatory and other customary conditions. Fiserv arranged a $17 billion bridge facility, subsequently replaced $5 billion of that commitment with a term loan facility, leaving $12 billion of bridge commitments expected to be refinanced with debt securities.
The transaction could materially increase leverage. Fiserv had approximately $6 billion of debt at year-end 2018, while First Data had approximately $18 billion; Fiserv expected to incur approximately $17 billion of acquisition-related debt financing. Key risks include failure to obtain approvals, termination fees of up to $665 million, integration costs, failure to achieve expected synergies, customer or employee attrition, higher interest expense, variable-rate exposure and potential regulatory restrictions or divestitures.
Other principal risks include cybersecurity incidents, operational outages, software defects, competitive pressure, client contract renewals, financial institution consolidation, evolving privacy and payments regulation, intellectual-property claims, goodwill impairment and adverse economic conditions. Fiserv also guaranteed $385 million of Lending Joint Venture debt facilities maturing in 2023; no payments had been required under the guarantees at year-end.
Deloitte & Touche issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management reported that disclosure controls and internal controls were effective as of December 31, 2018.
Investor Verification Checklist
- Verify the final terms, regulatory approvals, financing structure and closing status of the First Data acquisition.
- Assess pro forma leverage, interest expense, refinancing needs and covenant compliance after the transaction.
- Separate recurring operating performance from the $227 million Lending Solutions gain and other acquisition, integration and tax-related items.
- Reconcile 2018 results with 2017 after considering the non-comparable adoption of ASC 606 and the $275 million 2017 tax benefit.
- Monitor Financial segment revenue and margin following the Lending Solutions disposition.
- Evaluate the sustainability of cash flow after capital expenditures, acquisitions, share repurchases and debt service.
- Review cybersecurity, regulatory, client-renewal and operational-continuity disclosures, as these risks could materially affect results.