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Fiserv Inc. (FISV - Analyst Report) reported fourth-quarter earnings of 79 cents per share, which lagged the Zacks Consensus Estimate by a couple of cents. Earnings per share (excluding merger and integration costs, severance costs, amortization of acquisition-related intangible assets, and gains related to stoneRiver transaction) increased 14.5% from the year-ago quarter.

Revenues

Revenues (excluding output solutions postage reimbursements and Open Solutions deferred revenue adjustment) increased 10.4% year over year to $1.19 billion. Revenues, however, missed the Zacks Consensus Estimate of $1.27 billion.  Internal revenue growth was 4.0% in the quarter.

Product revenues increased 9.2% year over year to $225.0 million. Processing and services revenues increased 10.5% year over year to $1.04 billion.

Payments and Industry Products revenues (all internal) increased 6.2% from the year-ago quarter to $596.0 million. The strong year-over-year growth was driven by robust performance from Debit (volume up 13.0%) and Biller Solutions (transaction volume up 9.0%).

Fiserv signed 77 new clients, which took the total number of clients for Mobiliti solution up to 1,800 at the end of the fourth quarter. Client demand for Popmoney solution continues to remain strong as Fiserv signed 98 new institutions in the quarter. During the quarter, Fiserv signed 96 electronic bill payment clients and 44 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 10 new contracts in the reported quarter.   

Financial Institution Services segment revenues increased 14.5% from the year-ago quarter to $600.0 million. Internal revenues increased 2.0% from the year-ago quarter. The year-over-year growth was primarily due to robust revenue contribution from the Open Solutions acquisition.

Margins

Total expenses (cost of processing & services, cost of products and selling, general and administrative expense) as a percentage of revenues increased 150 basis points (bps) from the year-ago quarter to 81.5%.

Operating margin (excluding mergers, severance costs and amortization of acquisition-related intangible assets) contracted 30 bps on a year-over-year basis to 30.5% in the quarter.

Financial Institution Services operating margin increased 200 bps from the year-ago quarter. Scale efficiencies and operational effectiveness savings, including synergies from the Open Solutions acquisitions, primarily led to this adjusted operating margin growth.

Payments and Industry Products operating margin declined 50 bps from the year-ago quarter to 30.9%. The year-over-year decline was due to the unfavorable product mix, lower license revenues and higher variable compensation.

The Corporate and Other segment witnessed an operating loss of $30.0 million, which deteriorated from the $18.0 million loss incurred in the year-ago quarter.

Fiserv exceeded its operational effectiveness goal of $60.0 million, which includes the Open Solutions cost synergy target, by 35% in 2013. The company achieved $81.0 million of savings. Exiting the third year of this 5-year program, the company has generated $188.0 million of annual savings, which is approximately 50% more than the scheduled target.

Balance Sheet

As of Dec 31, 2013, Fiserv had cash and cash equivalents of $400.0 million, up from $321.0 million at the end of the previous quarter. Long-term debt was $3.76 billion compared with $3.93 billion in the previous quarter. Fiserv repurchased 2.3 million shares for $124.0 million in the fourth quarter.

Guidance

For fiscal 2014, adjusted revenues are expected to increase in the range of 4.0% to 5.0%. Adjusted internal revenues are expected to increase in the range of 4.0% to 4.5%

Earnings per share are likely to be in the range of $3.28 to $3.37, representing yearly growth of 10.0% to 13.0%. However, the mid-point of this guidance range is lower than the Zacks Consensus Estimate of $3.35.

The company expects to post stronger results in the second half of 2014, primarily due to mix of sales and timing of client implementations.

Fiserv forecasts free cash flow per share to be up at least 10% to more than $3.65 per share. The company expects operating margin to expand at least 50 bps for the full year. For 2014, Fiserv’s operational effectiveness goal remains at $60.0 million.

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 (BAC - Analyst Report), 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 the Open Solutions acquisition 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.

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

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

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