Fiserv, Inc. 2018 Second-Quarter Form 10-Q Summary
Business context and reporting period
Fiserv provides financial-services technology, including account processing, electronic payments, digital banking, card processing and related services to more than 12,000 clients worldwide. Operations comprise the Payments and Financial segments. The filing covers the three and six months ended June 30, 2018; results are unaudited and prior-period amounts were not restated for ASC 606.
Fiserv completed a two-for-one stock split in March 2018. All share and per-share data are presented on a split-adjusted basis.
Key financial metrics
| Metric | Three months ended June 30, 2018 | Three months ended June 30, 2017 | Six months ended June 30, 2018 | Six months ended June 30, 2017 |
|---|---|---|---|---|
| Total revenue | $1,420 million | $1,386 million | $2,860 million | $2,780 million |
| Operating income | $358 million | $372 million | $966 million | $737 million |
| Operating margin | 25.2% | 26.8% | 33.8% | 26.5% |
| Net income | $251 million | $221 million | $674 million | $468 million |
| Diluted EPS | $0.60 | $0.51 | $1.61 | $1.08 |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $613 million | $691 million |
Processing and services revenue increased 2% in the quarter and 3% year to date. Product revenue increased 7% in the quarter but declined less than 1% year to date. The effective income tax rate declined to 23.0% in the quarter and 24.2% year to date, compared with 32.8% and 32.2%, respectively, primarily because of U.S. tax reform.
At June 30, 2018, cash and cash equivalents were $348 million, total debt was $4.806 billion, and long-term debt was $4.805 billion. Fiserv reported $1.0 billion of available borrowing capacity under its revolving credit facility. The $540 million term loan matures in October 2018, and management stated it intends and is able to refinance it on a long-term basis through the revolving facility.
Material changes versus the prior comparable period
- Second-quarter revenue rose $34 million, or 2%, while six-month revenue rose $80 million, or 3%.
- Payments revenue increased 7% in both periods, supported by card services, biller solutions, transaction volumes and 2017 acquisitions. Payments operating margin improved 160 basis points in the quarter and 60 basis points year to date.
- Financial revenue declined 5% in the quarter and 3% year to date, primarily because of dispositions, including the Lending Solutions transaction. Account-processing growth partially offset the decline.
- Second-quarter operating income declined 4% and operating margin fell 160 basis points, primarily reflecting higher selling, general and administrative costs, acquisition and integration costs, data-center consolidation costs and the absence of the prior-year gain on sale of a business.
- Six-month operating income increased 31%, but the comparison was materially affected by the $229 million pretax gain from selling a 55% interest in the Lending Solutions business. Diluted EPS included an approximately $0.36 favorable impact from that transaction.
- Operating cash flow declined 11% to $613 million, mainly because of working-capital timing and $30 million less in cash dividends from StoneRiver, partly offset by improved operating results. Capital expenditures increased 24% to $169 million.
- Fiserv repurchased $789 million of common stock during the first six months, compared with $684 million in the prior-year period; approximately 10.4 million shares remained authorized for repurchase at June 30.
Outlook, commentary, risks and unusual items
Management identified 2018 priorities of building high-quality revenue while meeting earnings goals, expanding digital and payment solutions, and delivering innovation and integration. Management expects long-term demand to benefit from financial institutions outsourcing technology, increasing digital-channel usage and growing payment volumes. The filing does not provide a specific quantitative revenue or earnings forecast.
- Fiserv retained 45% interests in the Lending Joint Ventures and accounts for them under the equity method. It also guarantees $350 million of their senior unsecured debt and $35 million of revolving facilities. No guarantee payments had been required at June 30, 2018.
- The Lending transaction generated $419 million of gross proceeds and included a $34 million initial liability for the estimated fair value of guarantee obligations. Contingent consideration of up to $20 million may be recognized in future periods if the relevant conditions are resolved.
- ASC 606 was adopted on January 1, 2018 using the modified retrospective method, increasing opening retained earnings by $208 million. Without ASC 606, reported six-month revenue would have been approximately $2.808 billion and net income approximately $635 million, based on the filing’s reconciliation.
- Capitalized contract costs were $398 million at June 30, 2018, including $304 million of sales commissions and $94 million of implementation and fulfillment costs.
- Key disclosed risks include competition and pricing pressure, rapidly changing technology, cybersecurity breaches and operational failures, regulatory changes, acquisition integration, market conditions affecting financial institutions and execution of strategic initiatives.
- The company plans to adopt the new lease standard on January 1, 2019 and was assessing its impact. It was also assessing the expected-credit-loss standard, which is effective for the company after 2019.
- Management stated that disclosure controls were effective at June 30, 2018 and that no material change occurred in internal control over financial reporting during the quarter. Routine legal proceedings were not expected to have a material adverse effect.
Most important facts for investors to verify
- Separate recurring operating performance from the $229 million Lending Solutions gain and the related $77 million tax expense.
- Assess comparability of 2018 and 2017 results because ASC 606 was adopted prospectively without restating prior periods.
- Monitor refinancing of the $540 million term loan due October 2018 and overall leverage relative to covenant requirements.
- Evaluate the effect of lower operating cash flow, higher capital expenditures and substantial share repurchases on liquidity.
- Monitor the company’s guarantee exposure to the Lending Joint Ventures and the performance of its retained 45% investments.
- Verify future effects of lease accounting, expected-credit-loss accounting and capitalized contract-cost amortization.