Fiserv, Inc. 2019 Second-Quarter 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 six months ended June 30, 2019, compared with the corresponding 2018 periods. Results are unaudited.
The period was dominated by preparation for the proposed all-stock acquisition of First Data, expected to close on or about July 29, 2019. Fiserv also included the Elan debit-card processing acquisition, completed October 31, 2018, in its Payments results.
Key financial metrics
| Metric | Three months ended June 30, 2019 | Three months ended June 30, 2018 | Six months ended June 30, 2019 | Six months ended June 30, 2018 |
|---|---|---|---|---|
| Total revenue | $1.512 billion | $1.420 billion | $3.014 billion | $2.860 billion |
| Processing and services revenue | $1.328 billion | $1.207 billion | $2.621 billion | $2.445 billion |
| Product revenue | $184 million | $213 million | $393 million | $415 million |
| Operating income | $384 million | $358 million | $757 million | $966 million |
| Operating margin | 25.4% | 25.2% | 25.1% | 33.8% |
| Net income | $223 million | $251 million | $448 million | $674 million |
| Diluted EPS | $0.56 | $0.60 | $1.12 | $1.61 |
| Operating cash flow | Not separately provided | Not separately provided | $579 million | $613 million |
Second-quarter net margin was approximately 14.8%, compared with approximately 17.7% in the prior-year quarter. Six-month net margin was approximately 14.9%, compared with approximately 23.6% in 2018. The year-to-date comparison was significantly affected by the $229 million pre-tax gain on the 2018 sale of a 55% interest in the Lending Solutions business.
- Segment performance: Second-quarter Payments revenue increased 10% to $917 million and operating income increased 13% to $303 million, producing a 33.0% operating margin. Financial revenue increased 2% to $604 million and operating income increased 1% to $203 million, producing a 33.7% margin.
- Cash flow and investment: Six-month operating cash flow was $579 million, down 6% year over year. Capital expenditures were $210 million, up 24%, or approximately 7% of revenue.
- Liquidity: Cash and cash equivalents were $8.441 billion at June 30, 2019, compared with $415 million at December 31, 2018. Management also reported $2.0 billion of available revolving-credit capacity.
- Debt: Total debt, including current maturities, was $13.756 billion at June 30, 2019, compared with $5.959 billion at year-end 2018. Debt consisted primarily of $13.7 billion of fixed-rate senior notes.
- Balance sheet: Total assets were $19.640 billion and shareholders’ equity was $2.546 billion at June 30, 2019.
Material changes versus the prior comparable period
- Revenue increased 6% in the second quarter and 5% in the first six months, driven primarily by Payments growth and the Elan acquisition. Elan contributed approximately 5.5% to Payments revenue growth.
- Processing and services revenue increased 10% in the quarter and 7% year to date, while product revenue declined 14% and 5%, respectively.
- Second-quarter operating income increased 7%, but six-month operating income declined 22% because the prior-year period included the $229 million Lending Solutions gain. Excluding the gain, the year-to-date operating comparison is less adverse, but the filing does not provide a fully adjusted operating-income figure.
- Interest expense increased to $64 million in the quarter and $123 million year to date, reflecting additional senior-note issuances in September 2018 and June 2019.
- Fiserv recorded $37 million in second-quarter and $96 million in year-to-date debt-financing activity expenses related primarily to financing for the First Data transaction.
- Net income and diluted EPS declined despite higher quarterly revenue and operating income, due to higher interest and financing costs, a loss from investments in unconsolidated affiliates, and transaction-related expenses.
- Share repurchases were deferred after January 16, 2019 pending completion of the First Data acquisition. Fiserv made no repurchases in the second quarter and had authorization for approximately 24.3 million additional shares at June 30.
Guidance, outlook, commentary, risks and unusual items
Management identified 2019 priorities of building high-quality revenue while meeting earnings goals, expanding digital and payment relationships, and delivering innovation and integration. The filing does not provide specific quantitative revenue, earnings or cash-flow guidance.
Fiserv expected to close the First Data acquisition around July 29, 2019 after receiving required regulatory approvals and non-objections. The transaction was expected to require substantial refinancing and integration resources. Fiserv had issued $9.0 billion of senior notes in June and had arranged a $5.0 billion term-loan facility. Additional euro- and pound-denominated notes were issued July 1, 2019 and therefore were not included in the June 30 balance sheet.
- The First Data merger could face integration, execution, cost, customer-retention, employee-retention, litigation, regulatory and financing risks. Expected synergies and operating efficiencies may not be achieved on schedule or at all.
- If the First Data merger were terminated, not consummated, or deemed unlikely to close by April 16, 2020, Fiserv would be required to redeem the June 2019 senior notes at 101% of principal plus accrued interest.
- Other continuing risks include competition, changing customer demand, cybersecurity or operational failures, technological change, regulatory developments, litigation, economic conditions and the ability to contain costs.
- Fiserv guaranteed approximately $350 million of Lending Joint Venture senior debt. Management did not expect the joint ventures to default, and no payments had been made under the guarantees.
- Fiserv adopted the new lease accounting standard on January 1, 2019, recognizing $383 million of lease liabilities and $343 million of right-of-use assets at adoption. The filing states that the adoption did not materially affect income or cash flow.
- The company settled $5.0 billion of Treasury Locks, resulting in a $183 million operating-cash-flow payment. Approximately $21 million of related amounts were expected to be recognized in interest expense over the following 12 months.
Management stated that disclosure controls and procedures were effective as of June 30, 2019, and that no material change in internal control over financial reporting occurred during the quarter. Pending legal proceedings were described as ordinary-course matters not expected to have a material adverse effect.
Important facts for investors to verify
- Completion date and final terms of the First Data acquisition, including the amount and mix of debt ultimately drawn.
- Post-closing leverage, interest expense, covenant compliance and progress toward debt reduction.
- Realized First Data synergies, integration costs, customer retention and operating margins after consolidation.
- Whether Payments growth remains durable after separating Elan-related contributions from organic growth.
- Impact of reduced product revenue, lower software-license mix and higher processing-service costs on margins.
- Conversion of operating cash flow into free cash flow after elevated capital expenditures and transaction-related payments.
- Potential obligations under Lending Joint Venture debt guarantees and the effect of market, cybersecurity and regulatory risks.