- Fiserv (NASDAQ:FISV) expects at least 5% growth over $5.1 billion revenue it generated in 2014.
- The management is looking for between 4% and 8% in annual growth of organic revenue.
- Shift away from magnetic stripe cards likely to generate between $50 and $75 million in new revenue
Fiserv, Inc. (FISV) styles itself a provider of financial services technology, and it enjoys a strong market position with 40% share of the market.The company has a solid business model characterized by long-term contracts, high recurring revenue (at about 85% to 90%) and strong free cash flow.
Fiserv has realized significant benefits through discipline cost management. The acquisition of Open Source has also been a source of synergies for the company.
Fiserv’s performance projections
Estimates for 2015:
The management of Fiserv predicts that 2015 organic revenue will increase by 5%, coming at the lower end of the earlier estimate of growth in the range of 5%-6%. The reason for the estimate correction has much to do with adverse currency movements. The company generated revenue of $5.1 billion in 2014.
Operating margins are expected to rise by 50bps or higher in 2015, with free cash flow (CFC) expected to be $4.12 a share. Earnings per share are estimated to come in the range of $3.73-$3.83, reflecting year-over-year growth of 11-14%.
It is worth noting at this point that the company has posted annual EPS growth of 10% for a number of years.
Long-term growth outlook:
Fiserv’s management expects organic revenue to increase by 4-8%, with annual margins expanding by 50bps-100bps over the next four years. EPS is predicted to grow by 11-18% and CFC per share is estimated to rise by 11% per year.
Backing the claims
As they say, talk is cheap. As such, the important question at this juncture is whether Fiserv, Inc. (FISV) has anything to support its ambitious growth projections.
Growth highlights
The management anticipates between 50bps and 100bps annual growth of organic revenue over the next four years. That growth is expected to come from 4-5% year-over-year growth of the existing businesses, 1-2% growth driven by enrichment of existing businesses and 1-2% growth courtesy of new businesses.
Operational efficiencies
While Fiserv hopes to drive revenue gain through existing businesses, value-added existing solutions and brand new solutions, margin expansion is expected to come from operational efficiencies, among others.
The company expects to save $581 million through operational efficiencies by the end of 2015. An additional $250 million in cost synergies is expected from operational efficiencies between 2016 and 2020.
Some of the areas that the company has earmarked to drive efficiency include consolidation of datacenters, consolidation of offices and other real-estate properties and improved productivity.
Capital allocation priority
The management of Fiserv, Inc. (FISV) is committed to returning more cash to shareholders through share repurchases. In the company’s capital allocation plan, shares repurchase ranks at the top of the priority list. Repurchasing shares has double benefits. First, more cash is returned to shareholders. Second, stock repurchase boosts EPS, given that it leads to a reduced number of shares outstanding.
The other areas that Fiserv has prioritized for capital allocation are acquisitions and repayment of debt. The company finished the first quarter of 2015 with $3.76 billion in long-term debt.
Market share
Fiserv boasts about 40% share of the US market. International operations account for nearly 6% of the company’s aggregate revenue.The company anticipates that international operations could, in the next few years, account for nearly 1% of its incremental revenue.
Incremental growth catalysts
Fiserv is looking to a number of products to drive its growth over the years. Some of these products are existing solutions, expanded businesses and brand new ones. They include Mobiliti, Agiliti, NOW Network, DNA, EMV and Integrated Payments.
Mobiliti:
The Mobiliti business includes services such as P2P and check balance, among others, which financial institutions render to their clients. Fiserv expects to tap between $50 and $100 million in incremental revenue from Mobiliti solutions by 2019.
Source: Company Report
Agiliti:
Through Agiliti, a cloud-based account processing platform, Fiserv, Inc. (FISV) expects significant growth in the UK, where it is exposed to nearly 570 potential large clients. Incremental revenue from Agiliti is expected to be between $50 and $100 million.
Source: Company Report
DNA:
DNA is Fiserv’s second-highest source of revenue. About 500 clients have deployed DNA, a real-time core accounts platform. The company got its hands on DNA through Open Source acquisition.
Fiserv has reported exciting win rates with DNA. In the credit union space, for example, the company has noted a 67% win rate, signing 42 credit unions. In the banking segment, the company reported a 60% win rate, signing 18 banks in competitive bids. Fiserv is expecting more DNA wins in the U.S. and elsewhere.
The company expects to generate $50-$75 million in incremental revenue from DNA by 2019. More cost synergies are also expected on that front.
Source: Company Report
EMV
Fiserv, Inc. (FISV) expects to benefit as EMV chips replace magnetic stripes in cards because of the liability shift. The shift in ability is expected in October this year.
The company stands to benefit from the liability shift through its card processing and card production businesses. Producing EMV cards cost between $1 and $2 higher per card than magnetic stripe cards. More than 30% of transactions are expected to be EMV by 2019.
Over the next four years, Fiserv, Inc. (FISV) expects incremental revenue from EMV to range from $50 to $75 million.
Source: Company Report
NOW Network:
This is a real-time money remittance solution. The company expects to tap between $100 and $150 million in incremental revenue annually from the business.
Source: Company Report
Integrated Payments:
This solution offers next-generation payments solutions that are customer-focused. The solution simplifies the payments process, thus encouraging the uptake of electric payments. Over the next four years, the company expects Integrated to drive between $50 and $100 million in incremental revenue annually.
Source: Company Report
Areas of concern
There are a few things that could impact Fiserv, Inc. (FISV)’s performance adversely and derail the forecasted long-term growth.
Unpredictability of new businesses: The client and end-user uptake of some of Fiserv’s newer solutions is unpredictable. Slow adoption pace or a lack of interest could prove volatile to the company’s new revenue growth strategy.
Acquisition integration risks: Fiserv uses M&A to bolster its position, to either expand share of the market or supplement and complement its existing solutions. Integration of new properties comes with a fair share of risks, which could prove challenging for the company. However, it is worth noting at this juncture that Fiserv is a disciplined buyer. Additionally, the management of the company is experienced when it comes to acquisition integration.
Client consolidation: Consolidation of banks and financial institutions could put pressure on the company’s revenue growth. However, it is also worth noting that even when clients consolidate, transaction accounts are hardly affected and Fiserv gains from account transactions.
Conclusion
With expanded existing solutions and brand new products, Fiserv, Inc. (FISV) has more room for growth ahead. Revenue growth, continued cost controls and shares repurchase should result in significant EPS growth.
Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.