Financial Industry Still Craves Tech, Which Is Good For Fiserv

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As banks farm out more tech services and try to keep up with customers managing more of their money via their phones, Fiserv ( FISV ), a company that provides back-end technology to the finance industry, seems to be expanding at a solid, measured pace.

Companies spilling over with triple-digit growth every quarter are drawing more adventurous investors, which is why many on Wall Street seem to like Fiserv's steadiness. The company routinely generates single-digit sales gains and low-double-digit earnings growth, aided by share buybacks.

Following the Fed's rate hike last year and forecasts for fatter industry tech budgets, more of the same could be in store despite worries over a downturn and consolidation, the company and analysts say. That's due primarily to a steady income base.

"When you have 85% of revenue recurring, it gives them a very good visibility into their numbers," helping enable more accurate guidance and minimizing surprises when earnings season rolls around, Monness Crespi Hardt analyst Alexander Veytsman told Investor's Business Daily.

"They do increase pricing, but given the longevity of those contracts and given the fact that these clients have been with them for a number of years, I would say they're growing it slowly and steadily," Veytsman said.

The nature of the company's contracts with clients helps Fiserv maintain its firm footing. Many deals are longer-term and retention is high, Morningstar notes in its research on the company. In addition, it's costly and potentially hugely disruptive for financial companies to switch from one core-processing service to another, helping Fiserv keep customers in the fold.

And even amid Wall Street's hand-wringing over a possible recession, Chief Executive Jeffery Yabuki told IBD that he sees the trends in tech spending among Fiserv's own clients continuing.

"Most of our revenue is based on non-discretionary, mission-critical technologies under longer term contracts and is not subject to dramatic fluctuation," he said via email. "We are seeing stable and growing demand for newer technologies that enhance experiences in the increasingly digital world."

13,000 Clients

Brookfield, Wis.-based Fiserv serves 13,000 banks, credit unions, retailers and other clients around the world. If you've withdrawn money from an automated teller or transferred a balance from one account to another, there's a good chance it went smoothly in part because of Fiserv.

Created in 1984 through a merger, Fiserv handles everything from transaction processing to data analysis to person-to-person payment systems. With this year's technology spending seen growing 4%-5% among banks and credit-union customers -- Fiserv's bread and butter -- the company is set to follow, Argus Research says.

"We believe that Fiserv remains well positioned to benefit from technology infrastructure spending among its primary customers (banks and credit unions), many of whom are working to improve processing efficiency for online bill payment and debit card transactions," Argus analyst Stephen Biggar said in a research note last month.

"This should help revenue to keep rising at a modest mid-single-digit pace," Biggar said, adding that Argus sees 5.5% in sales growth this year.

Shares are up 25% over the past 12 months. The company has a Composite Rating of 93 out of a best-possible 99, boosted most recently by its strong fourth-quarter results that were marked by better-than-expected operating margins.

The company also has tried to stay relevant through acquisitions. In 2011, Fiserv snapped up mobile banking company M-Com and digital payments outfit CashEdge, which gave it Popmoney, a bank-based person-to-person payments system for participating institutions that has helped drive sales growth. The company in 2013 announced that it acquired Open Solutions, giving it real-time account-processing technology.

"You don't need a new product every day," Biggar said, "but you need something fairly significant every 2-3 years that would have its own sort of life cycle."

Last month, Fiserv said the United Nations Federal Credit Union for U.N. employees, among the largest in the U.S. by assets, will begin using Fiserv's core account-processing technology. Analysts say the Federal Reserve's rate hike in December could help strengthen banks' finances, potentially freeing up cash for their technology budgets.

"We view the Fed rate increase for the first time in a decade as good news for banks and a way to help fund needed increases in IT spend, as institutions look for ways to keep up with the broad changes across the technology landscape," CEO Yabuki said on the company's fourth-quarter earnings call last month.

Outsourcing Limits?

Some concern persists that Fiserv could make less money if consolidation continues within the banking industry, either due to tightening regulations or an event like the 2008 financial crisis. Mergers and acquisitions could reduce client count and give those bigger, combined companies more muscle in negotiating cheaper contract prices with companies like Fiserv.

However, the reduction in clients hasn't materialized, Veytsman said, and the prospect of more banks bringing tech operations in-house seems unlikely. Fiserv counts Wells Fargo ( WFC ) among its big clients, potentially signaling a stronger shift to outsourcing among larger banks.

Monness Crespi's Veytsman said consolidation could actually accelerate the trend of tech outsourcing.

"When they consolidate they also look to see what's happening with the bottom line and what they're doing around the costs," he said. "And if someone was not considering using Fiserv as a client, maybe together, they will."

Yabuki sees consolidation continuing, but stressed that the number of accounts and transactions has kept rising for the company.

Foreign exchange amid a stronger dollar could also hurt the company, although its international exposure is limited, Veytsman said. Jack Henry & Associates and FIS are among the company's primary competitors. Concern also lingers about Fiserv's debt, although Yabuki cites the company's $1-billion-plus free cash flow last year.

Still, both Biggar and Veytsman say the company's acquisitions have been relatively focused and restrained.

And one might be forgiven for wondering whether a person-to-person service like Popmoney can compete with PayPal's ( PYPL ) Venmo, or payment-tech offerings from Facebook ( FB ), Alphabet ( GOOGL ) and, potentially, Apple (AAPL).

However, Yabuki said P2P was in the early innings. And Veytsman said Popmoney is intended more as a side dish in its offerings to midcap banks than a main course.

"It's very hard to challenge PayPal," he said.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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