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Fiserv Inc. (FISV - Analyst Report) reported first quarter earnings of $1.33 per share, which were in line with the Zacks Consensus Estimate. Earnings per share increased 11.8% from the year-ago quarter but decreased 4.4% sequentially in the quarter.

Revenues

Revenues (excluding output solutions, postage reimbursements and Open Solutions deferred revenue adjustment) remained almost flat on a sequential basis but climbed 6.0% from the year-ago quarter to $1.08 billion. This, however, missed the Zacks Consensus Estimate of $1.18 billion.  

Revenues from products decreased 6.5% year over year and 9.7% sequentially to $186.0 million. However, processing and services revenues increased 7.6% year over year and 1.7% quarter over quarter to $966.0 million. Acquisitions contributed $65.0 million of revenues in the quarter.

Internal revenue growth was flat in the quarter due to lower license revenues and termination fees. Payments and Industry Products revenues (all internal) increased 1.7% from the year-ago quarter but decreased 5.1% sequentially to $543.0 million.

The moderate year-over-year growth was driven by strong performance from the Debit (volume up 13.0%), Biller Solutions (transaction volume up 3.0%) and Mobiliti businesses, partially offset by lower pricing related to the renewed contract with Bank of America (BAC - Analyst Report) and lower license fee revenues in risk business.

Fiserv signed 90 new clients, which helped it to expand its total number of clients for the Mobiliti solution to 1,500 at the end of the first quarter. Client demand for Popmoney solution continues to remain strong as Fiserv signed 89 new institutions in the quarter, bringing the total customer base to 1,900. During the quarter, Fiserv signed 78 electronic bill payment clients and 36 debit processing clients.

Transactions grew 68% from the year-ago quarter. The SpotPay solution continues to attract significant 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 first quarter.   

Financial Institution Services segment revenues increased 10.8% from the year-ago quarter and 5.9% sequentially to $555.0 million. Internal revenues declined 2.0% from the year-ago quarter due to lower termination fees, reduction in license revenues and loss of revenues from the migration of a large account processing client.

Margins

Operating margin (excluding mergers, severance costs and amortization of acquisition-related intangible assets) contracted 30 basis points (“bps”) on a year-over-year basis in the quarter. The year-over-year contraction was due to 100 bps negative impact of the Open Solutions acquisition and higher corporate losses. On a sequential basis, operating margin plunged 240 bps.

Payments and Industry Products’ operating margin improved 100 bps from the year-ago quarter but decreased 70 bps from the previous quarter to 30.6%. The Financial Institution Services segment’s operating margin declined 40 bps from the year-ago quarter and 330 bps sequentially to 29.7%.

The Corporate and Other segment witnessed an operating loss of $23 million, which deteriorated from $15.0 million loss incurred in the year-ago quarter but improved from $63.0 million in the previous quarter.

Balance Sheet

As of Mar 31, 2013, Fiserv had cash and cash equivalents of $356.0 million, slightly declined from $358.0 million at the end of the previous quarter. Long-term debt came to $4.04 billion compared with $3.23 billion in the previous quarter.

Free cash flow surged 28.0% year over year to $232.0 million. Fiserv repurchased 0.8 million shares in the first 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 (down from $5.88–$6.07 due to Club solutions divestiture), representing yearly growth of 15%– 19%.

Fiserv forecast 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.

Fiserv expects 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 Open Solutions acquisition.

Fiserv continues to expect internal revenue growth in the Payments segment within its long-term outlook of 4% to 8% for the remainder of 2013.

Recommendation

Fiserv has expanded its foothold in the financial and payment solutions business supported by its broad customer base and various contracts 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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