FISV - Fiserv: Market Sentiment Is Catching Up After Recent Earnings

Summary

• Fiserv's latest quarterly results were largely expected, and yet the market seemed to be caught off guard.
• The company is firing on all cylinders with both high revenue growth and margin expansion across all three business units.
• Fiserv remains well-positioned to outperform most of its peers and the broader equity market in 2023.

Fiserv ( FISV ) is often seen as a slow-growth business with a significant share of legacy services and challenged profitability. Since I have been following the stock, investor sentiment has been mostly neutral to slightly negative. Wall Street Analysts have also been slowly turning more cautious over recent years by either slowly reducing their price targets or keeping them flat.

Contrary to all that, however, Fiserv continued to execute on its strategy and the latest quarterly results clearly illustrated that the market was not anticipating what Fiserv had in store.

After yet another strong quarter, Fiserv achieved organic revenue growth in its Merchants Acceptance, Payments, and Fintech segments of 17%, 9%, and 5%, respectively.

The strong topline growth was also followed by margin expansion across all three business units. Thus, operating margins are now significantly above their pre-pandemic levels in each of the three segments.

Given this strong business performance, Fiserv has also become one of the best-performing companies in the sector. Outperforming even the highest quality businesses of Visa ( V ) and Mastercard ( MA ), while leaving an even larger gap between it and its peers.

Fiserv's strong outlook for 2023 has also come as a surprise to many, with expected organic revenue growth of high single digits and adjusted EPS growth in the teens (see below).

We should also note that the scenario above assumes a mild recession in the United States and is not materially different from the initial guidance for last year.

In a nutshell, this strong performance was hardly a surprise and I already analyzed the lagging market sentiment for my subscribers at The Roundabout Investor back in early October of last year when Fiserv was still trading at roughly $94 per share.

During the recent quarter, however, a much-needed context for this performance was discussed in further detail by the management.

The Story Behind The Numbers

The strong margin performance over the quarter and the rest of 2022, was largely a result of the completion of First Data and Fiserv integration process in the first half of 2022 and higher operating leverage due to increased revenue. There were also two other factors at play which are non-recurring.

As we anticipated, four factors drove this margin improvement; first, the final ramp-down of integration expenses and resulting productivity benefits ; second, operating leverage on increased revenue and improved inflation comparisons; third, actions taken late in the third quarter and fourth quarter to tighten spending in light of the uncertain macroeconomic conditions across the globe; and finally, the divesture of our Korea business and two small low-margin nonstrategic units.

Source: Fiserv Q4 2022 Earnings Transcript

Although the four factors were important, Fiserv's profitability depends heavily on a larger scale. That's one reason why the merger with First Data was so important strategically. As we see, since then gross margins in both processing and services as well as products have been on an upward trajectory.

Merchant Acceptance

On a segmented basis, Merchant Acceptance business unit was once again the best performer over the quarter.

Clover delivered spectacular 23% growth during the quarter and is likely to remain ahead of Square (its major peer) once Block ( SQ ) reports full year results later this month.

The relatively new enterprise omnichannel solution of Fiserv (Carat) also continued to expand relationships with major customers.

In merchant acceptance, for example, we expanded our global relationship with ExxonMobil . This energy giant will move to the Carat platform to support its retail utilizations in the US and Canada with gateway acquiring and fraud security services.

Source: Fiserv Q4 2022 Earnings Transcript

Within the segment, Fiserv also registered a very wide gap between revenue growth and volume growth, which comes as a result of introducing a number of new value-added services on the platform. Clover Capital is one example of such an offering that is growing rapidly and is having a favorable impact on customer attrition.

The recent acquisition of BentoBox is yet another example of how strategic acquisitions could deliver results over the long run.

We've begun migrating merchants from our existing Internet gateway to a new Clover gateway , where they can more easily access our full suite of value-added services .

(...)

We continue to build out our direct sales channel. The integration of Bento into the Clover solution significantly increases the ARPU . And then, we saw some benefit of value-based pricing , so kind of across the board doing very well. And that's both in the SMB as well as in the enterprise markets for us.

Source: Fiserv Q4 2022 Earnings Transcript

Payments and Fintech

In the Payments and Network segment, Fiserv also made significant progress over the quarter, with two major customers being announced - Target ( TGT ) and Desjardins Group in Canada.

Performance was led by implementations of three top 25 credit issuing customers and continued growth with existing customers. We followed this up with two major new credit wins in the fourth quarter, with Target , one of the largest retailers in the world and with Desjardins , the largest credit union consortium in Canada and the fourth largest card issuer.

Source: Fiserv Q4 2022 Earnings Transcript

Both of them represent significant growth opportunities, and Desjardins gives Fiserv access to further expansion in Canada.

There was another major win in the segment in the face of the State of California, which is issuing debit cards with inflation relief payments to millions of Californians.

Since we began combining Fiserv and First Data, we made a decision to pursue the opportunity in the government vertical with its large TAM and multiple use cases that span merchant, issuer and output services. We began investing in the solutions, people and infrastructure, and the strategy is now playing out. This month, we began issuing roughly 10 million prepaid cards for the State of California under its Middle-class Tax Credit Program.

Source: Fiserv Q3 2022 Earnings Transcript

Last but not least, the Fintech segment is also showing signs of strength, with Fiserv being among the leaders in the cloud-enabled core banking solutions.

Conclusion

After a strong ending to a pivotal year, Fiserv's management expects 2023 to be yet another strong period, even if a mild recession hits. Of course, recent events do not preclude a more severe economic slowdown to occur during the next 12-18 months. While in this worst-case scenario, we would likely have the opportunity to add more shares of Fiserv at lower prices, at the moment the company appears well-positioned to weather an upcoming storm.

In addition to the strong competitive positioning in acceptance, payments, and fintech, Fiserv also trades at a relatively low earnings multiple given its EPS growth in the low teens.

Based on management's long-term focus and Fiserv's significant competitive advantages, the company remains as one of my top picks within the electronic payments space.

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