It has been about a month since the last earnings report for First Data (FDC - Free Report) . Shares have added about 0.8% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is First Data due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
First Data Lags Q3 Earnings Estimates, Cuts EPS View
First Data reported disappointing results wherein both earnings and revenues lagged the Zacks Consensus Estimate.
Adjusted earnings per share of 35 cents missed the consensus mark by a penny and fell short of the year-ago figure by 5 cents. The bottom line was hurt by the normalization of adjusted effective tax rate and negative impact of 2 cents due to unfavorable foreign currency movements, which, however, were partially offset by improved operating performance.
Total segment revenues of $2.16 billion lagged the consensus estimate by $47 million. The top line was, however, up 4% year over year on a reported basis, 3% on a comparable accounting basisand 5% on an organic constant currency basis. Impacted by the adoption of ASC 606, consolidated revenues were down 22.9% year over year to $2.37 billion.
The top line benefited from strength across the company’s core merchant acquiring and card issuance businesses. ISV and Clover both performed strongly in the quarter. While ISV recorded more than 50% revenue growth, annualized volume on Clover was up 45% year over year. First Data is increasing its investments in both these businesses. International businesses recorded double-digit growth in the quarter.
Additionally, the company is expanding its digital merchant signup initiatives across its JV and other bank partners. Its direct channel continues to grow on the back of solid volume growth across RSA partners and several initiatives undertaken in the last two years.
Segments in Detail
Global Business Solutions: This segment generated revenues of $1.38 billion, which grew 10% year over year on a reported basis, 7% on a comparable accounting basis and 6% on an organic constant currency basis. Growth was driven by strong geographical market results across North America, Latin America, Europe, Middle East and Africa (EMEA) and Asia Pacific (APAC) regions.
Strong growth in the ISV and agent businesses within the Partner Solutions channel, combined with good growth in the Direct channel boosted North American performance. Latin American revenues were driven by strong growth in Argentina and Brazil. While growth in the U.K. drove EMEA revenues, APAC revenues were driven by solid growth in India.
Global Financial Solutions: Revenues from this segment came in at $407 million, down 2% year over year on a reported basis, 1% on a comparable accounting basis but up 6% on an organic constant-currency basis. The improvement can be attributed to higher revenues from Latin America and APAC, partially offset by lower revenues from North America and EMEA.
Network & Security Solutions: This segment generated revenues of $367 million, down 7% year over year on a reported basis, 4% on a comparable accounting basisand 2% on an organic constant currency basis. The downside was due to lower revenues in Stored value network, Security and fraud and TeleCheck, which was partially offset by strength across EFT Network Solutions (which recorded mid-single digit year over year growth).
Total segment EBITDA came in at $815 million, up 4% year over year on a reportedbasis, 5% on a comparable accounting basis and 7% on an organic constant currency basis. Segment EBITDA margin of 37.8% improved 50 basis points (bps) year over year on a comparable accounting basisand 60 bps on an organic constant currency basis.
Operating profit increased 13.9% year over year to $475 million. Operating profit margin climbed to 22% from 20% in the prior-year quarter. Total expenses declined 28.8% from the year-ago quarter to $1.89 billion.
Balance Sheet & Cash Flow
First Data exited the third quarter of 2018 with cash and cash equivalents of $601 million compared with $544 million at the end of the prior quarter. Long-term debt was $16.9 billion compared with $17.7 billion at the end of the prior quarter.
The company generated $671 million of cash from operating activities in the reported quarter. Free cash flow was $444 million. Capital expenditures were $162 million.
First Data revised its 2018 guidance for segment revenue growth, segment EBITDA growth and adjusted EPS.
For segment revenues, First Data expects reported constant currency growth of 6.3-7.3% compared with the previously guided growth range of 7-8%. Organic constant currency segment revenue growth range of 5-6% remains unchanged.
Segment EBITDA is now expected to register 7.6-9.6% growth on a reported constant currency basis compared with the previously guided growth range of 8-10%. Organic constant currency segment EBITDA growth range of 6.5-8.5% remains unchanged.
The revised guidance for segment revenue and segment EBITDA growth reflects the impact of divestitures completed in the third quarter of 2018.
Adjusted earnings are expected in the range of $1.38-$1.40 compared with $1.42-$1.47 guided earlier. The decline in EPS guidance primarily reflects the negative impact associated with foreign currency movements and a modest dilutive impact of two recent divestitures.
Full-year free cash flow guidance of more than $1.4 billion remains unchanged.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -11.62% due to these changes.
At this time, First Data has a subpar Growth Score of D, though it is lagging a bit on the Momentum Score front with an F. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, First Data has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.