Dive Brief:

• In its second-quarter earnings report Tuesday, payments processor Fiserv reported net income increased for the quarter over last year, but the company cut the rate at which it expects its profit margin to expand this year, pointing to increased costs.
• During a conference call Tuesday to discuss the results, CEO Frank Bisignano and Chief Financial Officer Bob Hau cited higher costs due to inflation, but suggested they can act to combat increases if necessary. As macroeconomic factors weigh on the company, “we’ve got levers we can pull right now,” Hau said.
• Fiserv said second-quarter revenue of $4.45 billion was up 10% over the same period in 2021, per a news release on the results. Net income for the quarter more than doubled to $598 million over the year-earlier quarter.

Dive Insight:

Brookfield, Wisconsin-based Fiserv is a major worldwide payments services provider that enables merchants to accept payments, provides software and technology services to financial institutions and facilitates digital payments processing for businesses.

Hau pinned the lower margin outlook on higher costs for labor and materials, such as point-of-sale terminals. He also cited investments related to the acquisitions of BentoBox last year and Finxact earlier this year. In addition, he said continued investment in integrating Fiserv and First Data products was also part of the increase. 

As the company completes spending related to such items, “you should expect the margins to improve into Q3 and more so into Q4,” Hau told analysts on the call. The company also anticipates inflation subsiding to some degree in the second half of the year, he added.

One analyst commenting on Fiserv’s results noted this wasn’t the first outlook revision by Fiserv for this year. Wolfe Research analyst Darrin Peller said in a note to investors that Fiserv’s operating margin expansion and free cash flow conversion “came in below the 2022 guidance again (despite recent confidence by management in the metrics).” The first quarter’s operating margin fell short of analyst expectations.

As recently as three weeks ago, Fiserv management told Peller the company’s margin expansion target for the year was still attainable, he said during a Tuesday interview. Now, the company is “acknowledging that there's a lot more cost in the environment than they probably even expected as of a month ago,” Peller said.

While inflation has driven revenue growth, it has also dealt the company a blow in terms of “a bigger impact from an expense standpoint,” Hau said.

When an analyst asked if the company has good visibility of its costs, Bisignano responded: “Visibility on the expense side is very, very clear.” He added that there is also an “opportunity to take down expenses on a run-rate basis,” without discussing any particular measures.

Fiserv’s adjusted operating margin dropped 40 basis points to 33.5% in the second quarter, the company said. The company lowered its 2022 margin expansion target, from 150 to 100 basis points. Free cash flow was $658 million for the quarter.

Peller said Fiserv is “very, very dedicated to their double-digit [earnings per share] growth.” He recalled a conversation with Bisignano earlier this month, where the CEO told him, “we have $11 billion of operating expenses, so if we needed to pull levers to make sure we can grow EPS, we’ll do so,” Peller said.