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Fiserv Inc. reported fourth quarter 2012 EPS of $1.39, which missed the Zacks Consensus Estimate by a couple of cents. However, EPS increased 9.4% from the year-ago quarter and 9.9% sequentially driven by lower expenses and higher margin expansion.

Revenues

Revenues (excluding output solutions postage reimbursements) remained almost flat on a year-over-year basis but climbed 3.4% sequentially to $1.16 billion. This, however, missed the Zacks Consensus Estimate of $1.19 billion.

Internal revenue growth was flat in the reported quarter due to lower license revenues (down $25.0 million). As a result, revenues from products plunged 16.3% year-over-year but increased 11.4% sequentially to $206.0 million. However, processing and services revenues increased 3.8% year over year and 1.8% quarter over quarter to $950.0 million.

The Payments and Industry Products revenues (excluding output solutions postage reimbursements) increased 2.5% year over year and 4.4% sequentially to $572.0 million. Internal revenue growth was 3.0% in the quarter.

The high recurring revenues accruing from Fiserv’s card services and digital channels fully offset the negative impact from the weaker performance of the investment services and bill payment businesses. Biller solutions continued to suffer from the Durbin effect during the quarter. Transaction volumes in the debit business increased 15.0% year over year, driven by expanding client base.

Fiserv extended its electronic payment and presentment relationship with Bank of America for another 10-year term. Fiserv signed 113 electronic bill payment clients and 40 debit processing clients in the quarter, which include power generation company American Electric Power and healthcare provider Humana . Fiserv also signed 134 Mobiliti clients and 113 Popmoney clients in the quarter.

Financial Institution Services segment revenues decreased 3.0% from the year-ago quarter but increased 2.1% sequentially to $524.0 million. The year-over-year decline was primarily due to lower license revenue.

The Corporate and Other segment recorded a loss of $12.0 million compared with a loss of $14.0 million in the year-ago quarter and $12.0 million in the previous quarter.

Margins

Operating margin (excluding mergers, severance costs and amortization of acquisition-related intangible assets) increased 80 basis points (“bps”) on a year-over-year basis in the reported quarter. The growth was primarily driven by higher recurring revenues, which fully offset the negative impact from lower license revenues. On a sequential basis, operating margin expanded 110 bps.

The Payments and Industry Products’ operating margin improved 10 bps from the year-ago quarter and 60 bps from the previous quarter to 31.3%.

The Financial Institution Services segment’s operating margin declined 170 bps from the year-ago quarter but increased 10 bps sequentially to 30.2%.

Corporate and Other segment witnessed an operating loss of $63 million, which decreased from $71 million loss incurred in the year-ago quarter and $66.0 million in the previous quarter.

Balance Sheet

As of Dec 31, 2012, Fiserv had cash and cash equivalents of $358.0 million, increasing from $307.0 million at the end of the previous quarter. Long-term debt came to $3.23 billion compared with $3.45 billion in the previous quarter.

Free cash flow surged 19.0% year over year to $271.0 million. Fiserv repurchased 0.7 million shares in the fourth 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%. EPS is likely to be in the range of $5.88 –$6.07, representing yearly growth of 15%– 18%.

Fiserv forecast free cash flow per share to be more than $6.60 per share, an increase of at least 18% over the prior year. The company expects operating margin to expand in a range of 10 to 50 bps.

Fiserv forecasts revenues and earnings growth to be sequentially stronger each quarter in 2013 attributable to large recurring revenue client conversions in the second and third quarter and positive synergies from the recent Open Solutions acquisition (closed in January 2013).

Recommendation

Fiserv has expanded its foothold in the financial and payment solutions business supported by its broad customer base, diversified product portfolio and continued technology upgrades.  The company’s advanced product ranges are likely to further enhance its revenue streams. Moreover, the company’s various contract wins have enabled Fiserv to expand its presence in the industry.

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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