EUR 850.00 For Business Accounts Only

Morningstar | Fiserv Sees Slower Organic Growth in 3Q; Acquires Elan's Debit Card Platform Seeking Scale Benefits

Wide-moat Fiserv’s results continue to come in below our expectations. For the quarter, the company produced organic revenue growth of 5% from the previous year, a slight deceleration from the previous quarter. Much of the decline in the company’s organic growth is the result of weaker performance in Fiserv’s financial segment. In addition, the company's operating margin fell to 31.3%, a decline of 100 basis points from the previous year. Management attributes this to the $690 million acquisition of the Elan debit processing business. According to management, Elan generates $170 million in annual revenue. Given that the deal is only 4 times sales, we don’t think management paid too much. After adjusting our model to account for this quarter’s weaker performance, the Elan acquisition, and the impact of the time value of money, we’re increasing our fair value estimate to $66 per share from $63. Our updated fair value estimate does not reflect any change in our overall thesis for Fiserv.

Frequently, Fiserv has stressed the importance of scale in its business, given that its products often involve significant fixed costs but low incremental costs or ongoing investment. During the call, management said Fiserv has migrated 1,200 clients onto its single debit platform and Elan will contribute another 1,000 clients. This makes sense to us. For us, the revenue synergies are harder to grasp, as we’re not sure why the newly acquired customers would be more likely to purchase additional Fiserv products. It’s likely these new customers already have relationships with other service providers for these solutions, which we’d think would make cross-selling challenging. That's why we're not surprised that management said it will take longer to realize significant revenue synergies.

We continue to watch Fiserv’s DNA product closely. During the call, management mentioned eight new clients went live on the platform while it signed another eight this quarter. Fiserv said it has signed up more than 20 clients for DNA, with eight in the third quarter and seven in the first quarter. In addition, Fiserv signed more than 50 Zelle clients during the quarter. Transaction volume on the Zelle platform increased 50%, an acceleration from the 40% sequential increase last quarter. Zelle’s growth is coming off low numbers, but we believe it has a long runway. In addition, as Fiserv’s Zelle solution increases in size it will probably start to move the needle for the company. Excluding any economic disturbance, we believe this quarter’s modest deceleration in organic growth will be short-lived as Zelle’s contribution to Fiserv increases.