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Fiserv, Inc. ; Remain Fans Over Medium Term, but Would Be Disciplined With New Money

Fiserv’s third‐quarter results were right down the middle of the plate, in our opinion, although strength was more attributable to the financial segment than we had anticipated. Management remains focused on growing Fiserv by building high‐quality recurring revenue streams that will help its financial institution clients generate incremental revenue and differentiate themselves in the marketplace. Specifically, we see internal revenue growth accelerating (albeit at a somewhat slower pace than we, and we’re sure the company, would like) as a result of the rollout of the company’s new real‐ time person‐to‐person payments network (PopMoney), implementations of Acumen in the large‐credit‐union space, and bill‐pay wins with notable clients such as TD Bank and Regions Bank.

In the quarter, revenue was $1.118 billion, versus our estimate of $1.130 billion but quite a bit closer to consensus of $1.122 billion. Internal revenue growth was 3.6%, versus our estimate of 3.8%, comprising 5.3% growth in the financial segment and 2.1% growth in the payments segment. The adjusted operating margin increased 80 basis points year‐ over‐year, to 29.7%, demonstrating the scalability of the business even during periods of significant investment in new solutions (e.g., mobile, P2P) and large‐scale Acumen and online banking implementations. Adjusted EPS of $1.27 were a penny below our estimate but in line with the Street; a slightly higher tax rate and lower share count essentially offset each other, so we viewed the bottom‐line result as in line.

2012 guidance. The only adjustment Fiserv made to its 2012 guidance was to note that internal revenue growth will fall toward the lower end of its 3.0%‐4.5% range, which was not surprising. Guidance for adjusted operating margin expansion remains 30 to 60 basis points. Adjusted EPS guidance remains $5.08‐$5.20, implying 11% to 14% growth. Free cash flow is still expected to grow 8% to 12%.

Updating estimates. We are making only minor changes to our 2012 and 2013 estimates. At a high level, we lowered internal revenue growth a touch, maintained our adjusted operating margin estimates, lowered our interest expense estimates to reflect a recent refinancing, and lowered our share count estimates slightly. Our new estimates include 3.2% internal revenue growth, 46 basis points of adjusted operating margin expansion to 29.6%, and adjusted EPS of $5.19 (13% growth), the high end of guidance. For 2013, we project 4.2% internal revenue growth, 62 basis points of adjusted operating margin expansion, and adjusted EPS of $5.87 (13% growth). A more detailed review of the quarter and our estimates by segment can be found in the exhibits on the following pages.

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