Fiserv, Inc. 2018 Q3 Form 10-Q Summary
Business context and reporting period
Fiserv is a global financial-services technology provider serving more than 12,000 clients. Its principal segments are Payments and Financial. The filing covers the three and nine months ended September 30, 2018; results are unaudited and compared with the corresponding 2017 periods.
Fiserv adopted ASC 606 revenue recognition on January 1, 2018 using the modified retrospective method. The 2018 and 2017 periods are therefore not fully comparable under identical accounting policies. The adoption increased opening retained earnings by $208 million, primarily from capitalized sales commissions.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | First 9 months 2018 | First 9 months 2017 |
|---|---|---|---|---|
| Total revenue | $1,412 million | $1,400 million | $4,272 million | $4,180 million |
| Operating income | $356 million | $370 million | $1,322 million | $1,107 million |
| Operating margin | 25.2% | 26.5% | 31.0% | 26.5% |
| Net income | $227 million | $232 million | $901 million | $700 million |
| Diluted EPS | $0.55 | $0.54 | $2.16 | $1.62 |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $981 million | $1,015 million |
Q3 processing and services revenue increased 2% to $1,223 million, while product revenue declined 6% to $189 million. For the first nine months, processing and services revenue increased 3% to $3,668 million, while product revenue declined 2% to $604 million.
Q3 Payments revenue increased 6% to $844 million and operating income increased 6% to $267 million. Financial revenue declined 7% to $574 million and operating income declined 8% to $187 million, primarily because of dispositions. First-nine-month Payments revenue increased 7% to $2,523 million, while Financial revenue declined 4% to $1,780 million.
At September 30, 2018, cash and cash equivalents were $673 million. Total debt, including current maturities, was $5.275 billion, compared with $4.900 billion at December 31, 2017. The company reported $2.0 billion of available revolving credit capacity and $2.661 billion of shareholders’ equity.
Material changes versus the prior comparable period
- Q3 revenue increased $12 million, or 1%, but operating income decreased $14 million, or 4%, and operating margin declined 130 basis points.
- First-nine-month revenue increased $92 million, or 2%, and operating income increased $215 million, or 19%. The increase was substantially affected by a $227 million pretax gain from selling a 55% interest in the Lending Solutions business.
- First-nine-month net income increased $201 million. Diluted EPS increased $0.54, including an estimated $0.36 per-share benefit from the Lending Solutions transaction.
- Q3 selling, general and administrative expense increased 7% to $305 million. Product costs rose faster than product revenue, partly because of product-development spending and lower-margin mix.
- Operating cash flow decreased 3% to $981 million, while capital expenditures increased 26% to $263 million.
- Fiserv issued $2.0 billion of senior notes in September 2018, repaid a $540 million term loan and approximately $1.1 billion of revolving borrowings, and tendered $246 million of 4.625% notes due 2020. The remaining $204 million of those notes was retired in October 2018.
- Share repurchases totaled approximately $1.23 billion during the first nine months, and 5.55 million shares were repurchased during Q3.
Outlook, risks, contingencies and unusual items
Management’s stated 2018 priorities were to build high-quality revenue while meeting earnings goals, deepen digital and payments relationships, and deliver innovation and integration. The filing does not provide a specific quantitative earnings or revenue guidance range.
Management expects long-term opportunity from recurring, generally non-discretionary processing activity, digital-channel adoption, increasing transaction volumes and financial institutions outsourcing technology. Contracts generally run three to five years and have high renewal rates.
- The company recorded a $19 million tax expense in Q3 related to new IRS guidance and further analysis of the Tax Cuts and Jobs Act. The accounting for certain Tax Act elements remained incomplete at September 30, 2018.
- Fiserv retained 45% interests in the Lending Joint Ventures and guaranteed $350 million of their senior unsecured debt and up to $35 million of revolving facilities. No guarantee payments had been required, and management did not expect a default.
- Contingent consideration of up to $20 million related to the Lending Joint Ventures may be recognized as a gain if specified conditions are resolved favorably.
- Fiserv acquired Elan Financial Services’ debit card processing, ATM Managed Services and MoneyPass network on October 31, 2018 for approximately $690 million, subject to post-closing adjustments.
- Key disclosed risks include competition and pricing pressure, rapidly changing technology, cybersecurity breaches and operational failures, regulatory changes, financial-industry conditions, and execution and integration risks from acquisitions, including the Elan transaction.
- The company plans to adopt the new lease standard on January 1, 2019. It expects the principal effect to be recognition of right-of-use assets and lease liabilities for operating leases, with no material income-statement impact anticipated.
Most important facts for investors to verify
- Separate recurring operating performance from the $227 million Lending Solutions gain and related $0.36 per-share benefit.
- Assess Q3 margin pressure from higher SG&A, product-development costs, acquisition integration costs and client-focused investments.
- Reconcile 2018 versus 2017 results for the non-comparable effects of ASC 606, including capitalized contract costs and deferred revenue.
- Evaluate leverage, refinancing requirements and covenant compliance after the September debt issuance, October note retirements and the $690 million Elan acquisition.
- Monitor operating cash flow conversion, working-capital movements and capital expenditures, particularly as share repurchases remain substantial.
- Track the financial exposure and performance of the retained Lending Joint Ventures, including the debt guarantees and contingent consideration.
- Confirm the effect of the Tax Act and IRS guidance on the effective tax rate and future cash taxes.