Fiserv Beats on Q3 Earnings, Misses Rev

Fiserv Inc. (FISV) reported third quarter earnings of $1.56 per share, which comfortably beat the Zacks Consensus Estimate by a nickel. Earnings per share increased 23.8% from the year-ago quarter and 4.0% sequentially.

Revenues

Revenues (excluding output solutions postage reimbursements and Open Solutions deferred revenue adjustment) increased 9.5% year over year but remained almost flat quarter over quarter at $1.14 billion. Revenues, however, missed the Zacks Consensus Estimate of $1.22 billion.

Product revenues remained flat year over year but increased a modest 1.1% sequentially to $185.0 million. However, processing and services revenues increased 10.2% year over year but remained almost flat quarter over quarter at $1.02 billion.

Internal revenue growth was 3.0% in the quarter. Payments and Industry Products revenues (all internal) increased 4.7% from the year-ago quarter but remained flat sequentially at $562.0 million.

The strong year-over-year growth was driven by robust performance from Debit (volume up 16.0%), Biller Solutions (transaction volume up 10.0%) and e-bill transactions (up 5.0% year over year).

Fiserv signed 136 new clients, which took the total number of clients for the Mobiliti solution up to 1,700 at the end of the third quarter. Client demand for Popmoney solution continues to remain strong as Fiserv signed 100 new institutions in the quarter. During the quarter, Fiserv signed 71 electronic bill payment clients and 38 debit processing clients.

Fiserv continues to proceed rapidly with Open Solutions integration (acquired Jan 14, 2013). Open Solutions’ primary product DNA has gained significant momentum as Fiserv won 11 new contracts in the third quarter.
Financial Institution Services segment revenues increased 14.0% from the year-ago quarter but decreased 0.8% sequentially to $585.0 million. Internal revenues increased 1.0% from the year-ago quarter. The year-over-year growth was primarily due to robust revenue contribution from Open Solutions acquisition.

Margins

Total expenses (cost of processing & services, cost of products and selling, general and administrative expense) as a percentage of revenues decreased 110 bps from the year-ago quarter to 60.2%.

Operating margin (excluding mergers, severance costs and amortization of acquisition-related intangible assets) expanded 70 basis points (bps) on a year-over-year basis to 30.5% in the quarter. On a sequential basis, operating margin increased 10 bps.

The expansions were primarily driven by strong revenue growth in the financial institution services segment, favorable product mix and improving operational efficiency.

Financial Institution Services operating margin increased 300 bps from the year-ago quarter and 130 bps sequentially to 33.7%.

Payments and Industry Products operating margin declined a modest 10 bps from the year-ago quarter and 110 bps from the previous quarter to 30.8%. The year-over-year decline resulted from a 60 bps negative impact from a client settlement. The decline was also due to the negative impact of the Bank of America (BAC) bill payment contract renewal.

The Corporate and Other segment witnessed an operating loss of $23 million, which deteriorated from $22.0 million loss incurred in the year-ago quarter but remained flat sequentially.

Balance Sheet

As of Sep 30, 2013, Fiserv had cash and cash equivalents of $321.0 million, slightly down from $320.0 million at the end of the previous quarter. Long-term debt was $3.93 billion compared with $3.95 billion in the previous quarter. Fiserv repurchased 2.0 million shares for $192.0 million in the third quarter.

Guidance

For the fourth quarter of 2013, adjusted internal revenues are expected to increase in the range of 4.0% to 5.0%, led by stronger growth in the Payments segment. Lower corporate expense in the fourth quarter of 2012 is expected to negatively impact operating margins in the forthcoming quarter.

For full year 2013, Fiserv expects revenue growth to be more than 10.0% and adjusted internal revenue growth of approximately 3.0%. Earnings per share are likely to be in the range of $5.94 to $6.02 (earlier guidance range was $5.84 to $6.03), representing yearly growth of 17.0% to 19.0% (earlier guidance range was 15.0%– 19.0%).

Fiserv forecasts free cash flow per share to be more than $6.55 per share. The company expects operating margin to expand in a range of 30 to 50 bps for the full year. For 2013, Fiserv’s operational effectiveness goal remains at $60.0 million. The company achieved 92.0% of this target in the first nine months of the year.

Our Take

Fiserv has expanded its foothold in the financial and payment solutions business supported by its broad customer base and various contract wins from the likes of Bank of America, TD bank and American Electric Power and Humana.

Fiserv’s diversified product portfolio and continued technology upgrades are expected to boost its top-line growth. Higher synergies (both top-line and cost) from Open Solutions acquisitions and continuous contract wins by the DNA platform are expected to drive growth over the next couple of years.

The company continues to add clients for its bill payment, mobility and Popmoney solutions. Higher recurring revenues, operational efficiencies and strong internal growth are expected to result in solid earnings and free cash flow growth, which will provide the company a competitive edge against the likes of Global Payments (GPN) and MasterCard Inc (MA).

Currently, Fiserv has a Zacks Rank #1 (Buy).

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