Fiserv, Inc. 2014 Q3 Form 10-Q Summary
Business context and reporting period
Fiserv provides financial-services technology, including account processing, electronic payments, digital banking, card services, and related products. It serves approximately 14,500 clients, with most revenue generated from recurring, transaction- and account-based contracts generally lasting three to five years. The filing covers the three and nine months ended September 30, 2014, compared with the corresponding 2013 periods.
- Payments segment: electronic payments, bill payment, card services, digital banking, and related products.
- Financial segment: account processing, item processing, lending, cash management, and consulting services.
Financial performance and key metrics
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Total revenue | $1,263 million | $1,201 million | $3,750 million | $3,551 million |
| Operating income | $315 million | $280 million | $893 million | $764 million |
| Operating margin | 24.9% | 23.3% | 23.8% | 21.5% |
| Income from continuing operations | $239 million | $161 million | $573 million | $430 million |
| Net income | $239 million | $159 million | $573 million | $427 million |
| Diluted EPS from continuing operations | $0.95 | $0.61 | $2.25 | $1.61 |
| Operating cash flow | Not separately provided | Not separately provided | $960 million | $681 million |
- Q3 revenue increased 5%; nine-month revenue increased 6%.
- Processing and services revenue increased 5% in Q3 and 5% for the first nine months. Product revenue increased 8% in Q3 and 10% for the first nine months.
- Q3 net margin was approximately 18.9%, compared with 13.2% in the prior-year quarter. Nine-month net margin was approximately 15.3%, compared with 12.0% in 2013.
- Payments revenue increased 9% in Q3 and 8% year to date; Payments operating margin was 29.2% in Q3 and 27.9% year to date.
- Financial revenue increased 1% in Q3 and 3% year to date; Financial operating margin was 32.8% in Q3 and 33.0% year to date.
- Capital expenditures were $225 million year to date, up from $171 million, and represented approximately 6% of revenue.
Liquidity, debt, and capital allocation
- Cash and cash equivalents were $409 million at September 30, 2014, compared with $400 million at December 31, 2013.
- Total debt 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 term loan had a weighted-average variable interest rate of 1.4%.
- The company was in compliance with its debt covenants. Scheduled term-loan principal payments of $90 million begin December 31, 2014; $540 million remains due at maturity in October 2018.
- Year-to-date financing cash outflows were $731 million, including $785 million of treasury-stock purchases. Approximately 5.2 million shares remained under the repurchase authorization at September 30, 2014.
- Management expects operating cash flow, cash on hand, and available revolver capacity to fund operating needs, debt service, capital expenditures, and other requirements.
Material changes versus the prior comparable period
- Operating income increased 13% in Q3 and 17% year to date, while operating margin expanded 160 basis points and 230 basis points, respectively.
- Margin improvement primarily reflected scale efficiencies and lower merger and integration costs associated with the 2013 Open Solutions acquisition. The prior-year periods also included a $30 million non-cash impairment charge related to replacement of the Acumen system with DNA.
- Income from the StoneRiver unconsolidated affiliate increased to $85 million in Q3 from $1 million, and to $89 million year to date from $7 million, due primarily to Fiserv’s share of an $85 million gain on StoneRiver’s sale of a subsidiary business.
- The StoneRiver gain favorably affected diluted EPS from continuing operations by approximately $0.21 in Q3 and $0.20 year to date, but also generated $32 million of related tax expense.
- Operating cash flow increased 41% to $960 million, aided by higher earnings, favorable working-capital changes, and $108 million of dividends from StoneRiver. The comparable 2013 period included $6 million of operating cash flow from StoneRiver dividends.
- Share count declined: diluted weighted-average shares were 251.8 million in Q3 and 254.6 million year to date, compared with 263.7 million and 267.5 million, respectively, in 2013.
Outlook, commentary, risks, and unusual items
Management’s 2014 priorities were to deliver high-quality revenue growth and earnings, deepen client relationships, and continue product innovation and integration. The filing does not provide a specific quantitative revenue or earnings forecast.
- Management cited recurring, largely non-discretionary revenue, high contract renewal rates, continued electronic-payments and digital-banking adoption, and the long-term shift from in-house to outsourced technology as supportive factors.
- Financial-institution technology spending remained cautious because of market conditions and regulatory change, although demand exists for solutions that improve customer retention, revenue generation, and operating efficiency.
- Key disclosed risks include economic conditions affecting financial institutions, rapid technology changes, competition and pricing pressure, legislative and regulatory requirements, security breaches, operational failures, and acquisition integration.
- The company continued phased implementation of an SAP billing module. Management expects improved billing and collection efficiency but noted that related controls will require testing during implementation.
- The effective tax rate increased to 44.0% in Q3 and 37.2% year to date from 33.1% and 34.1%, respectively, primarily because of tax expense related to the StoneRiver gain.
- Legal proceedings arise in the ordinary course of business; management does not expect resulting liabilities to have a material adverse effect on the financial statements.
- ASU 2014-09 revenue-recognition guidance was not yet effective, and the company was assessing its impact. The filing does not provide a quantified adoption impact.
Investor verification items
- Separate recurring revenue growth from contract termination fees, postage pass-through revenue, and other potentially less recurring items.
- Assess normalized earnings and EPS excluding the $85 million StoneRiver gain and related tax effects.
- Review debt maturities, covenant calculations, refinancing needs, and the beginning December 2014 term-loan amortization.
- Evaluate whether the higher operating cash flow is sustainable after considering working-capital timing and StoneRiver dividend returns.
- Monitor the effect of continued share repurchases on share count, leverage, and capital allocation.
- Track the SAP billing-module implementation and any resulting changes to internal controls or collection performance.
- Review the potential effects of ASU 2014-09 and regulatory, cybersecurity, operational, and acquisition-integration risks.