Fiserv, Inc. — 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 businesses are Payments and Financial Institution Services, which provide electronic payments, account processing, digital banking, lending, card, bill-payment and related technology services. This filing reports unaudited results for the three months ended March 31, 2018, compared with the three months ended March 31, 2017.
Most revenue is recurring and transaction-based under contracts generally having three- to five-year terms. The company completed a two-for-one stock split in March 2018; all share and per-share amounts are presented on a split-adjusted basis.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $1.440 billion | $1.394 billion | Up 3% |
| Processing and services revenue | $1.238 billion | $1.178 billion | Up 5% |
| Product revenue | $202 million | $216 million | Down 6% |
| Operating income | $608 million | $365 million | Up 67% |
| Operating margin | 42.2% | 26.2% | Up 1,600 bps |
| Net income | $423 million | $247 million | Up 71% |
| Diluted EPS | $1.00 | $0.56 | Up $0.44 |
| Operating cash flow | $372 million | $463 million | Down 20% |
| Capital expenditures | $77 million | $76 million | Up 1% |
Payments revenue was $842 million, up 6%, while Financial revenue was $616 million, down 1%. Payments operating income increased 5% to $271 million, with a 32.2% margin. Financial operating income increased 3% to $202 million, with a 32.8% margin.
The reported results include a $232 million pretax gain from the sale of a 55% interest in the Lending Solutions business. The gain increased diluted EPS by approximately $0.37. Excluding this unusual item, the reported operating margin and earnings growth would be materially lower; the filing does not provide a complete adjusted income statement excluding the gain.
Cash and cash equivalents were $382 million at March 31, 2018, compared with $325 million at December 31, 2017. Total debt, including current maturities, was $4.604 billion, compared with $4.900 billion at year-end. The company reported $1.2 billion of available borrowing capacity under its revolving credit facility and stated that it was in compliance with all debt covenants.
Material changes versus the prior comparable period
- Revenue increased $46 million, led by higher transaction volumes in Payments card services and biller solutions and contributions from 2017 acquisitions.
- Financial revenue declined $4 million, primarily due to the 2017 disposition of the Australian item-processing business and lower software-license revenue, partly offset by account-processing growth.
- Operating income benefited substantially from the $232 million Lending Solutions gain. Payments margins declined 50 basis points because of acquisition-related costs and product mix, while Financial margins improved 120 basis points due primarily to expense management.
- Net income benefited from the gain on sale and a lower effective tax rate of 24.9%, compared with 31.7% in Q1 2017, primarily because of the U.S. Tax Cuts and Jobs Act.
- Operating cash flow declined $91 million. Management attributed the reduction to unfavorable working-capital changes and the absence of a $31 million StoneRiver dividend received in Q1 2017.
- Financing activities used $696 million, including $806 million of debt repayments and $427 million of treasury-stock purchases. The company purchased approximately $398 million of common stock during the quarter and had approximately 15.8 million shares remaining under its authorization at March 31, 2018.
- ASC 606 revenue recognition was adopted using the modified retrospective method. The adoption increased opening retained earnings by $208 million, primarily from capitalizing previously expensed sales commissions. Reported Q1 2018 revenue was $25 million higher and net income was $16 million higher than amounts that would have been reported without ASC 606 adoption, according to the filing’s reconciliation.
Outlook, commentary, risks and unusual items
Management’s 2018 priorities are to build high-quality revenue while meeting earnings goals, deepen client relationships through digital and payments solutions, and deliver innovation and integration. The filing does not provide explicit quantitative revenue, earnings or cash-flow guidance.
Management expects long-term demand to benefit from increased electronic transactions, digital banking, regulatory and cybersecurity requirements, and financial institutions outsourcing technology infrastructure. It also expects industry consolidation and client movement between processing platforms to create both opportunities and risks.
- The company sold 55% of Lending Solutions for $419 million of gross proceeds and retained 45% interests accounted for under the equity method. It recognized a $232 million pretax gain and recorded a $34 million liability for guarantees of Lending Joint Venture debt.
- Fiserv guaranteed $350 million of variable-rate term debt and $35 million of revolving facilities held by the Lending Joint Ventures. The facilities mature in March 2023; no revolving borrowings were outstanding, and management does not anticipate a default.
- The company completed the sale of the MyVoucherCodes retail voucher business for $50 million of proceeds, reported through discontinued operations, with no operating-income gain or loss recognized in Q1 2018.
- Key identified risks include competition and pricing pressure, rapidly changing technology, cybersecurity breaches and operational failures, regulatory changes, economic conditions affecting financial institutions, and the ability to integrate acquisitions and realize expected benefits.
- The company estimates approximately $160 million of annual amortization expense for acquired intangible assets in each of 2018 and 2019, plus approximately $170 million of software amortization in 2018.
- 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 December 15, 2019.
Most important facts for investors to verify
- Separate underlying operating performance from the $232 million Lending Solutions gain and its approximately $0.37 diluted-EPS benefit.
- Reconcile year-over-year results for ASC 606 adoption, since Q1 2018 reflects the new standard while Q1 2017 was not restated.
- Assess the sustainability of Payments growth and the effect of Dovetail and Monitise integration costs on Payments margins.
- Monitor operating cash-flow conversion, working-capital movements and the effect of reduced affiliate distributions.
- Review debt maturities, including the $540 million term loan due in October 2018, variable-rate exposure and available revolving capacity.
- Evaluate the $34 million Lending Joint Venture guarantee liability and potential exposure under the guaranteed facilities.
- Track capital allocation among debt repayment, share repurchases, acquisitions and capital expenditures.
- Confirm the effects of the Tax Cuts and Jobs Act and future accounting adoption, particularly leases and expected credit losses.