Fiserv, Inc. Form 10-Q Summary
Business Context and Reporting Period
Fiserv is a global provider of payments and financial technology solutions, operating through Acceptance, Fintech, and Payments segments. The filing covers the three months ended March 31, 2021, compared with the first quarter of 2020. Results reflect the ongoing effects of COVID-19, the First Data integration, the 2020 dissolution of the Banc of America Merchant Services joint venture, and other acquisitions and dispositions.
Key Financial Metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenue | $3.755 billion | $3.769 billion | Down $14 million |
| Processing and services revenue | $3.054 billion | $3.075 billion | Down 1% |
| Product revenue | $701 million | $694 million | Up 1% |
| Operating income | $475 million | $629 million | Down 24% |
| Operating margin | 12.6% | 16.7% | Down 410 basis points |
| Net income | $318 million | $377 million | Down 16% |
| Net income attributable to Fiserv | $304 million | $392 million | Down 22% |
| Diluted EPS | $0.45 | $0.57 | Down $0.12 |
| Net cash from operating activities | $952 million | $888 million | Up 7% |
| Capital expenditures | $234 million | $246 million | Down 5% |
Processing and services revenue represented 81.3% of total revenue, while product revenue represented 18.7%. Net margin attributable to Fiserv was approximately 8.1%, compared with 10.4% in the prior-year quarter. Segment revenue was $1.397 billion for Acceptance, $736 million for Fintech, and $1.405 billion for Payments. Segment operating margins were 27.7%, 33.4%, and 41.1%, respectively.
Liquidity, Cash Flow, Debt, and Balance Sheet
- Cash and cash equivalents were $831 million at March 31, 2021, compared with $906 million at December 31, 2020. Approximately $371 million was classified as unavailable, primarily due to joint venture restrictions, foreign exchange controls, or regulatory capital requirements.
- Operating cash flow of $952 million exceeded capital expenditures of $234 million, producing approximately $718 million of operating cash flow before capital expenditures.
- Total debt was approximately $21.2 billion, consisting of $366 million of short-term and current maturities and $20.838 billion of long-term debt. Carrying value excludes certain unamortized discounts and financing costs.
- The company had $511 million outstanding under its revolving credit facility and $3.5 billion of total revolving capacity, implying approximately $3.0 billion of available borrowings.
- Fiserv intends to refinance the $400 million of senior notes due June 2021 on a long-term basis and stated that it has the ability to do so under its revolving facility.
- The company was in compliance with all financial debt covenants. Its principal credit facilities include leverage and interest-coverage requirements.
- Fiserv repurchased $612 million of common stock during the quarter and had approximately 60.5 million shares remaining under repurchase authorizations at March 31, 2021.
Material Changes Versus the Prior Comparable Period
- Revenue was broadly stable, but reported results were affected by approximately $85 million of revenue reductions from dispositions, including the BAMS dissolution and the Investment Services divestiture.
- Acceptance revenue declined slightly, while Fintech revenue increased 3% and Payments revenue increased 1%. Management reported improving merchant acquiring and payment volumes, particularly in March 2021.
- Operating income declined primarily because the first quarter of 2020 included a $431 million gain on the sale of a 60% interest in the Investment Services business. Excluding that unusual gain, 2021 benefited from expense management, acquisition synergies, and lower integration and severance costs.
- Acceptance operating income increased 22%, and Fintech operating income increased 21%; Payments operating income increased 2%.
- Interest expense declined 6% to $176 million, primarily due to lower borrowings and lower variable interest rates.
- The effective tax rate decreased to 5.6% from 17.1%, reflecting discrete tax benefits in 2021 and the prior-year tax expense associated with the Investment Services sale.
- Foreign currency translation reduced other comprehensive income by $162 million in Q1 2021, compared with a $638 million reduction in Q1 2020.
Guidance, Outlook, Risks, and Unusual Items
Management stated that payments volume and transactions were improving and expected to continue improving throughout 2021 based on consumer and business spending experienced through the filing date. The filing does not provide specific numerical revenue, earnings, or cash-flow guidance.
- COVID-19 remains a significant uncertainty. A prolonged pandemic, renewed restrictions, weak consumer or business spending, or a slower recovery could adversely affect transaction volumes, merchant credit losses, liquidity, and goodwill valuations.
- First Data integration remains a material execution risk. The company expects additional restructuring and integration costs but stated that the amount could not yet be estimated because plans were not finalized.
- Fiserv acquired the remaining interest in Ondot for approximately $270 million net of acquired cash and acquired Radius8 for approximately $14 million. The company also announced a planned acquisition of Pineapple Payments, expected to close in Q2 2021 subject to customary conditions.
- The Ondot transaction generated a $12 million pretax gain from remeasurement of the previously held investment. A Tegra118 merger generated a $28 million pretax gain, accompanied by a $200 million capital contribution and a remaining 24% equity-method interest in Wealthtech.
- Restructuring charges were $23 million, employee termination costs were $13 million, and facility-related noncash impairment charges were $6 million in Q1 2021.
- Merchant credit losses declined to $22 million from $30 million. The merchant credit loss reserve was $60 million, and collateral held was $1.9 billion at March 31, 2021.
- Legal reserves were $33 million, with estimated potential exposure in excess of accrued amounts ranging from zero to approximately $60 million. Management does not expect current litigation to have a material adverse effect.
- Unrecognized tax benefits were approximately $179 million; management believed the liability could decrease by up to $57 million over the next twelve months.
- Other risks include cybersecurity and operational failures, fraud and merchant defaults, regulatory changes, competition, foreign currency movements, interest rates, access to financing, acquisitions, litigation, and the company’s investment-grade credit ratings.
Important Facts for Investors to Verify
- Whether the recovery in merchant acquiring and payment volumes continues after the March 2021 improvement.
- The effect of BAMS-related revenue reductions and the completion and economics of transition-service arrangements through June 2023.
- Refinancing of the $400 million senior notes due June 2021 and continued compliance with debt covenants.
- Progress, purchase price, financing, and integration costs associated with Pineapple Payments and other acquisitions.
- Whether First Data integration savings offset remaining restructuring, severance, amortization, and other acquisition-related costs.
- Potential goodwill impairment at First Data-related reporting units if COVID-19 or economic conditions deteriorate.
- Future merchant credit losses, chargebacks, fraud exposure, litigation outcomes, and tax audit developments.
- The sustainability of cash generation after share repurchases, acquisitions, capital expenditures, debt repayments, and other financing activities.