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Fiserv Inc. (FISV - Analyst Report) reported second-quarter earnings of $1.50 per share, which comfortably beat the Zacks Consensus Estimate by 6 cents. Earnings per share increased 18.1% from the year-ago quarter and 12.8% sequentially.

Revenues

Revenues (excluding output solutions, postage reimbursements and Open Solutions deferred revenue adjustment) increased 12.2% year over year and 5.2% quarter over quarter to $1.14 billion. This, however, missed the Zacks Consensus Estimate of $1.18 billion.  

Revenues from products remained flat year over year but declined 1.6% sequentially to $183.0 million. However, processing and services revenues increased 12.3% year over year and 5.1% quarter over quarter to $1.01 billion.

Internal revenue growth was 4.0% in the quarter. Payments and Industry Products revenues (all internal) increased 7.0% from the year-ago quarter and 3.5% sequentially to $562.0 million.

The strong year-over-year growth was driven by robust performance from Debit (volume up 15.0%), Biller Solutions (transaction volume up 7.0%) and e-bill transactions (up 5.0% year over year).

Fiserv signed 98 new clients, which helped it to expand its total number of clients for the Mobiliti solution to 1,600 at the end of the second quarter. Client demand for Popmoney solution continues to remain strong as Fiserv signed 64 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 5 new contracts in the second quarter.   

Financial Institution Services segment revenues increased 17.5% from the year-ago quarter and 6.3% sequentially to $590.0 million. Internal revenues increased 2.0% from the year-ago quarter.

Margins

Operating margin (excluding mergers, severance costs and amortization of acquisition-related intangible assets) expanded 100 basis points (“bps”) on a year-over-year basis in the quarter. On a sequential basis, operating margin jumped 200 bps. The expansions were primarily driven by strong revenue growth in the Payments segment, favorable product mix and improving operational efficiency.

Payments and Industry Products operating margin improved 200 bps from the year-ago quarter and 130 bps from the previous quarter to 31.9%. The strong margin expansion was driven by improving operating leverage, which fully offset the negative impact of the Bank of America (BAC - Analyst Report) renewal.

The Financial Institution Services segment’s operating margin declined 10 bps from the year-ago quarter but increased 270 bps sequentially to 32.4%. The year-over-year decline was primarily attributed to the negative impact from loss of revenues due to migration of a large account processing client and the acquisition of Open Solutions. The sequential growth was driven by improving operating efficiency and higher licensing revenues.

The Corporate and Other segment witnessed an operating loss of $23 million, which deteriorated from $21.0 million loss incurred in the year-ago quarter but remained flat sequentially.

Balance Sheet

As of Jun 30, 2013, Fiserv had cash and cash equivalents of $320.0 million, down from $356.0 million at the end of the previous quarter. Long-term debt came to $3.95 billion compared with $4.04 billion in the previous quarter.

Free cash flow was $127.0 compared with $232.0 million in the previous quarter. Fiserv repurchased 2.3 million shares for $204.0 million in the second quarter.

Guidance

For full year 2013, Fiserv expects revenue growth to be more than 10.0% and adjusted internal revenue growth to be 3.0% – 4.5%. Earnings per share are likely to be in the range of $5.84 to $6.03, representing yearly growth of 15%–19%.

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 10 to 50 bps.

For 2013, Fiserv’s operational effectiveness goal remains at $60.0 million. The company achieved 53.0% of this target in the first half. The company also expects that the synergies from the Open Solutions acquisition will exceed the original revenue and expense target of $75.0 million and $50.0 million, respectively.

Recommendation

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 power generation company American Electric Power (AEP - Analyst Report) and healthcare provider Humana (HUM - Analyst Report).

Moreover, Fiserv’s diversified product portfolio and continued technology upgrades are expected to boost its top-line growth going forward.

However, volatile macroeconomic environment, banking and financial service consolidation, poor cash flow, tough competition and increasing industry regulations are the primary concerns in the near term.

Currently, Fiserv has a Zacks Rank #3 (Hold).

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