Fiserv, Inc. — 2014 Q2 Form 10-Q Summary
Business Context and Reporting Period
Fiserv is a global financial-services technology provider serving approximately 14,500 clients. Its principal segments are Payments and Financial, with recurring account- and transaction-based fees representing most revenue. This unaudited filing covers the three and six months ended June 30, 2014, compared with the corresponding 2013 periods.
Key Financial Metrics
| Metric | Q2 2014 | Q2 2013 | Six Months 2014 | Six Months 2013 |
|---|---|---|---|---|
| Total revenue | $1,253 million | $1,198 million | $2,487 million | $2,350 million |
| Operating income | $307 million | $273 million | $578 million | $484 million |
| Operating margin | 24.5% | 22.8% | 23.2% | 20.6% |
| Income from continuing operations | $166 million | $152 million | $334 million | $269 million |
| Net income | $166 million | $151 million | $334 million | $268 million |
| Diluted EPS from continuing operations | $0.65 | $0.57 | $1.31 | $1.00 |
| Operating cash flow | Not separately provided | Not separately provided | $569 million | $397 million |
Q2 processing and services revenue was $1,051 million, up 4%, while product revenue was $202 million, up 10%. Six-month processing and services revenue increased 5% to $2,078 million, and product revenue increased 11% to $409 million.
Q2 total expenses were $946 million, or 75.5% of revenue, versus 77.2% in the prior-year quarter. Six-month expenses were 76.8% of revenue versus 79.4% in 2013. The filing does not present a separate net profit margin; based on reported net income, net margin was approximately 13.2% for Q2 and 13.4% for the first six months.
At June 30, 2014, cash and cash equivalents were $329 million, compared with $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. No borrowings were outstanding under the $2.0 billion revolving credit facility, and the company reported compliance with its debt covenants.
Material Changes Versus the Prior Comparable Period
- Q2 revenue increased 5%, while six-month revenue increased 6%.
- Payments revenue increased 7% in Q2 and 8% for the first six months; Financial revenue increased 2% and 3%, respectively.
- Operating income increased 12% in Q2 and 19% for the first six months. Consolidated operating margin expanded 170 basis points in Q2 and 260 basis points year to date.
- Financial segment operating margin improved to 34.1% in Q2 and 33.1% year to date, aided by scale efficiencies, Open Solutions synergies and higher contract termination fees.
- Payments segment operating margin declined to 27.7% in Q2 and 27.2% year to date, reflecting product mix, biller-solutions investments, client-acquisition costs and higher postage pass-through costs.
- Results benefited from lower merger and integration expenses related to the 2013 Open Solutions acquisition. The prior-year first quarter also included a $30 million non-cash impairment charge related to replacing the Acumen system with DNA.
- Six-month operating cash flow increased 43% to $569 million, while capital expenditures increased 36% to $150 million.
- Share repurchases increased to $528 million in the first six months from $254 million in the prior-year period. Approximately 9.4 million shares remained authorized for repurchase at June 30, 2014.
Guidance, Outlook, Risks and Unusual Items
Management did not provide specific quantitative full-year guidance in the filing. Its stated 2014 priorities were high-quality revenue growth, meeting earnings goals, deepening client relationships, and delivering innovation and integration.
Management cited cautious financial-institution technology spending, regulatory developments, client demand for digital and electronic-payment solutions, and the long-term shift from in-house to outsourced technology as important industry factors. It expects the recurring, largely non-discretionary nature of its fee-based model to support resilience.
- Fiserv received a $45 million cash dividend from its 49%-owned StoneRiver affiliate in Q2. The dividend reduced the investment carrying value to zero; the company stated it may provide future financial support if needed, although it has no legal obligation to fund StoneRiver liabilities or operating deficits.
- The StoneRiver dividend contributed to operating cash flow and was a significant factor in the year-over-year cash-flow increase.
- The company expects approximately $200 million of amortization of acquired intangible assets in 2014 and approximately $110 million of amortization related to capitalized and purchased software.
- Forward-looking risks include economic and market conditions affecting financial institutions, technology obsolescence, competition and pricing, legislative and regulatory changes, security breaches, operational failures, and acquisition integration risks.
- The company is implementing an SAP billing module in phases through the remainder of 2014. Management stated that controls were effective as of June 30, 2014 and that no other material control changes occurred.
- ASU 2014-09, the new revenue-recognition standard, will apply after December 15, 2016; the company was assessing its impact. ASU 2014-08 on discontinued operations will apply prospectively after December 15, 2014, with early adoption permitted.
Most Important Facts to Verify
- Whether revenue growth and margin expansion continue after the benefit from lower Open Solutions integration costs and the absence of the prior-year impairment charge.
- The sustainability of operating cash flow excluding the $45 million StoneRiver dividend and the implications of the investment balance reaching zero.
- Debt maturities, including the $90 million annual term-loan principal payments beginning December 31, 2014, and refinancing requirements for senior notes due in 2015 and 2016.
- The effect of Payments-segment investments, product mix and postage pass-through costs on future margins.
- The eventual effect and adoption method of ASU 2014-09 on revenue, deferred revenue and reported earnings.
- Exposure to cybersecurity, operational, regulatory and acquisition-integration risks, including the continuing SAP billing-module implementation.