Fiserv (FISV) Beats Q3 Earnings, Revenues on Strong Sales

Revenues

Revenues increased 5.2% year over year to $1,263 million and surpassed the Zacks Consensus Estimate of $1,252 million.

Adjusted revenues (including the impacts of Output Solutions postage reimbursements and Open Solutions deferred revenue adjustment) increased 4% year over year to $1.19 billion. Adjusted internal revenue growth in the third quarter was 5% driven by 8% rise in the Payments segment and 1% increase in the Financial segment.

Source-wise, Product revenues increased to $200 million from $185 million in the year-ago quarter. Processing and services revenues increased to $ 1,063 million from $1,016 million in year-ago quarter.

Segment-wise, Payments and Industry Products adjusted revenues increased to $609 million from $562 million in the year-ago quarter. Financial Institution Services revenues, on the other hand, increased to $589 million from $585 million in the year-ago quarter.

During the reported quarter, Fiserv signed its 50^th DNA account processing client since its acquisition of Open Solutions in Jan 2013. The company also signed 152 Mobiliti clients in the quarter leading to 2,000 mobile banking clients as of Sep 30.

Fiserv signed 85 Popmoney clients to join the payment network in the third quarter, which now includes over 2,300 financial institutions. Fiserv signed 77 electronic bill payment clients and 40 debit-processing clients in the quarter.

Margins

Adjusted operating income increased to $370 million, up 6.6% year over year. Adjusted operating margin of 31.2% increased 70 basis points (bps) on a year-over-year basis. Growth was primarily due to favorable revenue mix, scale leverage, higher operational effectiveness savings (including synergies from the Open Solutions acquisition) and higher termination fees.

Total expenses amounted to $948 million, up 2.9% year over year. Operating ratio stood at 79.9% year over year, down 110 bps.

Balance Sheet

As of Sep 30, 2014, Fiserv had cash and cash equivalents of $409 million, up from $321 million at the end of the year-ago quarter and $400 million in 2013. Long-term debt was $3.76 billion, flat with the 2013 levels.

Fiserv repurchased 4.2 million shares in the third quarter for $270 million. As of Sep 30, 2014, the company had 5.2 million shares remaining under its repurchase authorization.

Guidance

For fiscal 2014, adjusted revenues are expected to increase in the range of 4% to 5%. Adjusted internal revenues are expected to increase within 4% to 4.5%.

Adjusted EPS is expected in the range of $3.34 to $3.38, representing growth of 12% to 13% over the 2013 level. The company expects adjusted operating margin to expand at least 50 bps for full-year 2014. Free Cash flow per share is expected to be at least $3.65.

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 U.S. Bank, TD bank and Bank of Ozarks.

The company’s partnership with Visa (V) will allow it to offer debit EMV solutions for the Accel debit network. We believe that EMV-based card solutions have significant growth opportunities in the U.S. and this partnership will boost Fiserv’s EMV offering.

However, the back-end loaded guidance is expected to remain a concern in 2014. We also believe that intensifying competition from the likes of Global Payments (GPN) and MasterCard Inc. (MA) remains a major headwind, going forward.

Currently, Fiserv has a Zacks Rank #2 (Buy).

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