Fiserv Earnings: Strong Growth and Margin Improvement

Fiserv FI saw strong growth and margin improvement in the second quarter. Revenue grew 7%, or 10% on an organic basis. With the company tracking well so far this year, management modestly raised its revenue growth and EPS guidance. We will maintain our $135 fair value estimate and narrow moat rating.

The acquiring business saw year-over-year revenue growth of 14% in the quarter, which represents a modest decline sequentially but is still well above our long-term expectations. Clover continues to be a positive factor with 23% growth. Management said Clover has now reached about 25% of revenue for this segment, highlighting how critical this business has become. While revenue growth remained strong, volume growth came in at only 1% year over year. Management pointed to two issues that drove a larger-than-usual spread between volume and revenue growth. First, the decline in gas prices reduced volume, but gas purchases are typically priced on a per transaction basis. Second, the company saw a decline in volume for a processing-only client, and these relationships generate a relatively low amount of revenue.

The payments segment was up 9% year over year on an organic basis, while the financial technology segment declined 1%. The payments segment appears set to see growth this year at the top end of the company’s longer-term 5%-8% guidance. Growth in the fintech segment was negatively affected by a high level of one-time revenue last year; management still expects full-year growth to hold within its long-term guidance of 4%-6%.

Fiserv continued its recent trend of strong margin improvement, with adjusted operating margin increasing to 36.5% from 33.5% last year. As a result, management increased its full-year margin improvement target to 150 basis points. We think the scalable nature of Fiserv’s business should allow for margin improvement over time, but we expect the long-term improvement to be much more modest.