It has been about a month since the last earnings report for Fiserv (FISV). Shares have added about 1% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Fiserv due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Fiserv Beats Q1 Earnings Estimates, Lags Revenues
Fiserv's first-quarter 2019 earnings surpassed the Zacks Consensus Estimate but revenues lagged the same.
Adjusted earnings per share of 84 cents beat the consensus mark by 2 cents and increased 12% on a year-over-year basis attributable to higher revenue growth, improved adjusted operating margin and some benefit from lower taxes. This marks the 34th consecutive year of double-digit adjusted EPS growth.
Revenues of $1.50 billion lagged the consensus estimate by $9.2 million but increased 4.3% year over year. Adjusted revenues of $1.43 billion increased 4.8% on a year-over-year basis.
On Jan 16, 2019, Fiserv announced the acquisition of First Data in a $22 billion all-stock deal. On Apr 18, 2019, Fiserv shareholders approved the issuance of shares in connection with the First Data transaction with more than 99% of the votes in favor of the action. Subject to customary closing conditions and regulatory approvals, the deal is expected to close during the second half of 2019.
Revenues in Detail
Revenues at the Payments and Industry Products segment increased 8.6% year over year to $914 million. The upside was driven by solid performance of electronic payments, card services and biller solutions.
In the reported quarter, debit transaction grew in high single digits and total P2P transactions, including Popmoney and Zelle solutions, grew almost 100%. Mobiliti ASP subscribers increased 20% to exceed 8.5 million. The company also witnessed client addition in its unified digital platform Architect.
Revenues at the Financial Institution Services segment decreased 2.9% year over year to $598 million. Revenues were hurt by the divestiture of 55% interest of the company's Lending Solutions business (the "Lending Transaction").
Internal revenue growth was 5% in the reported quarter, with 4% growth in the Payments segment and 6% growth in the Financial segment.
Revenues at the Total processing and Services segment increased 4.4% year over year to $1.29 billion and product revenues rose 3.5% year over year to $209 million.
Adjusted operating income of $457 million was up $13 million from the year-ago quarter. Adjusted operating margin declined 60 basis points (bps) year over year to 31.9%. Adjusted operating margin was hurt by higher client implementation costs in the company’s digital and payment solutions, expenses originating from the 2018 tax reinvestment program and headwind from acquisitions in the lending transaction.
Adjusted operating income at the Payments and Industry Products segment was $287 million, up 5.5% year over year. Adjusted operating margin declined 140 bps year over year to 34%.
Operating income at the Financial Institution Services segment totaled $199 million, down 1.5% year over year due to the lending transaction. Operating margin improved 50 bps to 33.3% due to growth in recurring revenues and the timing benefit of license revenues, partially offset by higher product investments.
Balance Sheet and Cash Flow
Fiserv exited first-quarter 2019 with cash and cash equivalents of $452 million compared with $415 million at the end of the prior quarter. Long-term debt at the end of the reported quarter was $5.87 billion compared with $5.96 billion at the end of the prior quarter.
The company generated $373 million of net cash from operating activities in the reported quarter. Free cash flow was $302 million. Capital expenditures were $98 million.
During the reported quarter, Fiserv repurchased 1.6 million shares for $120 million prior to the announcement of the First Data acquisition news. The company has deferred additional share repurchase till the closure of the acquisition. As of Mar 31, 2019, the company had 24.3 million shares remaining in its share repurchase authorization.
Fiserv reaffirmed its guidance for full-year 2019. Adjusted earnings per share are expected in the range of $3.39-$3.52, which indicates 10-14% year-over-year growth after adjusting for the Lending Transaction. The current Zacks Consensus Estimate of $3.46 lies within the guided range.
The company expects internal revenue growth in the range of 4.5-5%. Additionally, the company anticipates adjusted operating margin to expand around 50 bps and free cash flow conversion to be more than 105% for 2019. Full-year adjusted effective tax rate is expected between 22% and 23%.
The company's 2019 guidance does not include any impact related to the proposed acquisition of First Data.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates.
Currently, Fiserv has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. Following the exact same course, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Fiserv has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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