Fiserv, Inc. 2014 First-Quarter Form 10-Q Summary
Business context and reporting period
Fiserv is a global provider of financial-services technology serving approximately 14,500 clients. Its primary businesses are Payments and Financial, providing electronic payments, card services, digital banking, account processing, item processing, lending, and related services. Revenue is primarily recurring and transaction-based under contracts generally lasting three to five years.
The filing reports unaudited results for the three months ended March 31, 2014, compared with the three months ended March 31, 2013. All share and per-share amounts reflect the December 2013 two-for-one stock split.
Key financial metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total revenue | $1,234 million | $1,152 million | Up 7% |
| Processing and services revenue | $1,027 million | $966 million | Up 6% |
| Product revenue | $207 million | $186 million | Up 11% |
| Operating income | $271 million | $211 million | Up 28% |
| Operating margin | 21.9% | 18.3% | Up 360 basis points |
| Net income | $168 million | $117 million | Up 44% |
| Diluted EPS from continuing operations | $0.65 | $0.43 | Up 51% |
| Effective tax rate | 28.5% | 34.2% | Down 570 basis points |
| Operating cash flow | $292 million | $222 million | Up 32% |
| Capital expenditures | $70 million | $58 million | Up 21% |
Net income margin was approximately 13.6% in Q1 2014 versus 10.2% in Q1 2013. The company reported no income from discontinued operations in either period.
Liquidity, debt, and capital allocation
- Cash and cash equivalents were $307 million at March 31, 2014, down from $400 million at December 31, 2013.
- Total debt, including current maturities, was $3.848 billion, consisting primarily of $2.95 billion of senior notes and a $900 million term loan. Estimated fair value of total debt was approximately $4.0 billion.
- No borrowings were outstanding under the $2.0 billion revolving credit facility. The company stated that it was in compliance with all financial debt covenants.
- The term loan had a weighted-average variable interest rate of 1.4%; scheduled $90 million principal payments begin December 31, 2014, with $540 million due at maturity in October 2018.
- Financing cash usage was $315 million, including $335 million of treasury-stock purchases. Approximately 12.4 million shares remained available under the repurchase authorization at March 31, 2014.
- Management expects operating cash flow, cash on hand, and available revolver capacity to fund operating needs, debt service, capital expenditures, and other capital requirements.
Material changes versus the prior comparable period
- Payments revenue increased 9% to $673 million, driven by new clients, higher transaction volumes in card services and bill payment, growth in digital channels, and higher output-solutions volumes.
- Financial revenue increased 5% to $575 million, supported by Open Solutions revenue, account-processing growth, and higher contract termination fees.
- Payments operating margin was unchanged at 26.8%. Financial operating margin increased to 32.1% from 29.3%, reflecting scale efficiencies, Open Solutions synergies, operational improvements, and higher termination-fee revenue.
- Total expenses increased only 2% despite 7% revenue growth. The improvement primarily reflected lower merger and integration costs associated with the 2013 Open Solutions acquisition.
- Q1 2013 included a $30 million non-cash impairment charge related to replacing the Acumen account-processing system with Open Solutions’ DNA system; no comparable charge was recorded in Q1 2014.
- Operating cash flow increased $70 million, partly because Q1 2013 included payments related to Open Solutions merger and integration costs and assumed liabilities.
- Shares used for diluted EPS declined to 258.6 million from 270.3 million, reflecting share repurchases.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected the full-year 2014 effective tax rate to be approximately 35%. The Q1 rate benefited from the favorable resolution of tax matters, which reduced unrecognized tax benefits from $60 million at December 31, 2013 to $42 million at March 31, 2014.
- Management’s 2014 priorities were high-quality revenue growth, deeper client relationships, innovation and integration, and achieving earnings goals. The filing does not provide specific full-year revenue or earnings guidance.
- Management cited a difficult operating environment for financial institutions, cautious technology spending, regulatory developments, competition, rapidly changing technology, security breaches, operational failures, and acquisition-integration risk.
- Financial institutions’ consolidation can create opportunities when acquired institutions adopt Fiserv systems, but can also result in lost business. Contract termination fees may fluctuate significantly.
- The company owns a 49% interest in StoneRiver Group, L.P.; Q1 income from the investment was $4 million.
- Management stated that ordinary-course litigation is not expected to have a material adverse effect on the financial statements. The filing does not identify a material pending legal contingency.
- Disclosure controls and procedures were considered effective as of March 31, 2014. Implementation of an SAP billing module was continuing in phases during 2014.
Most important facts an investor should verify
- Whether revenue growth in Payments and Financial remains driven by recurring client and transaction volumes rather than variable contract termination fees or other unusual items.
- The sustainability of the 21.9% operating margin after the benefit from the absence of the $30 million 2013 impairment charge and lower acquisition-related costs.
- Progress on Open Solutions integration, including expected synergies and any further system-replacement or impairment charges.
- Cash conversion, capital expenditures, continued $335 million-scale share repurchases, and the resulting effect on liquidity and leverage.
- Debt maturities beginning in 2014, variable-rate exposure, covenant compliance, and access to the revolving credit facility.
- Whether the favorable tax resolution and 28.5% quarterly tax rate are nonrecurring, consistent with management’s approximately 35% full-year expectation.
- Potential effects of financial-sector consolidation, regulatory changes, cybersecurity events, operational disruptions, and competitive or technology developments.