Fiserv, Inc. — Q2 2012 Form 10-Q Summary
Business context and reporting period
Fiserv is a global financial-services technology provider serving approximately 16,000 clients. Its principal businesses are Payments, Financial Institution Services, and Corporate and Other. Revenue is primarily recurring, account- and transaction-based fees under contracts generally lasting three to five years.
This unaudited Form 10-Q covers the three and six months ended June 30, 2012, compared with the corresponding 2011 periods. The filing was dated July 31, 2012.
Financial performance and key metrics
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total revenue | $1.100 billion | $1.065 billion | $2.208 billion | $2.113 billion |
| Operating income | $259 million | $251 million | $500 million | $472 million |
| Operating margin | 23.6% | 23.6% | 22.7% | 22.3% |
| Income from continuing operations | $163 million | $97 million | $296 million | $211 million |
| Net income | $161 million | $90 million | $293 million | $202 million |
| Diluted EPS from continuing operations | $1.18 | $0.67 | $2.13 | $1.45 |
| Diluted total EPS | $1.17 | $0.62 | $2.10 | $1.39 |
| Operating cash flow | Not separately provided | Not separately provided | $385 million | $418 million |
Q2 revenue increased 3%; processing and services revenue rose 4% to $917 million, while product revenue increased 1% to $183 million. Six-month revenue increased 4%, led by processing and services revenue growth of 5%.
Q2 net income margin was approximately 14.6%, compared with 8.5% in the prior-year quarter. Six-month net income margin was approximately 13.3%, compared with 9.6% in 2011. The improvement primarily reflects the absence of the $61 million early debt-extinguishment loss recorded in 2011 and lower effective tax rates.
- Payments: Q2 revenue increased 5% to $609 million; operating income declined 2% to $160 million and margin decreased to 26.3% from 28.4%. Six-month revenue increased 6% to $1.228 billion, while operating income was essentially flat at $321 million.
- Financial: Q2 revenue increased 1% to $502 million; operating income increased 7% to $163 million and margin improved to 32.5% from 30.8%. Six-month revenue increased 3% and operating income increased 8%.
- Acquired businesses contributed $14 million of Q2 revenue and $30 million for the first six months, primarily reflecting the CashEdge acquisition.
Cash flow, liquidity, debt and capital allocation
- Six-month operating cash flow was $385 million, down 8% from $418 million, primarily because of working-capital timing, higher income-tax payments and higher discretionary and incentive compensation payments.
- Capital expenditures, including capitalized software costs, were $102 million, unchanged year over year and equal to approximately 5% of revenue.
- Cash and cash equivalents were $302 million at June 30, 2012, compared with $337 million at December 31, 2011.
- Long-term debt, including current maturities, was $3.415 billion at June 30, 2012, compared with $3.395 billion at year-end 2011. The filing also reports estimated fair value of total debt of $3.6 billion.
- The company had $20 million outstanding under its $1.0 billion revolving credit facility and $13 million of letters of credit drawn. Management expected to amend and restate the facility, potentially extending maturity to 2017 and increasing availability to up to $2.0 billion.
- Approximately $967 million of term-loan borrowings maturing in November 2012 were classified as long-term because management intended to refinance them using the revolving facility.
- The company repurchased $388 million of common stock during the first six months and had approximately nine million shares remaining under its authorization at June 30, 2012. No dividend policy change was reported.
Material changes versus the prior comparable period
- Operating income increased 3% in Q2 and 6% for the first six months, while operating margin was flat in Q2 and improved 40 basis points year to date.
- The cost of processing and services improved as a percentage of related revenue, reflecting operating leverage and efficiency. Product costs increased as a percentage of product revenue because of higher postage pass-through activity and lower software-license revenue.
- Payments margins declined because of product-development, integration, professional-services and delivery costs, lower software-license revenue and higher postage pass-through costs.
- Financial margins improved through revenue growth and scale efficiencies in account-processing and lending businesses.
- Interest expense declined 10% in Q2 and 12% year to date, primarily because of lower average interest rates.
- Average diluted shares declined to 137.8 million in Q2 from 144.2 million, and to 139.1 million for the first six months from 146.0 million, reflecting share repurchases and other share-count changes.
Guidance, outlook, commentary, risks and unusual items
- Management expected a full-year 2012 effective tax rate of approximately 34% and a second-half rate of approximately 37%. The Q2 and six-month rates were 27.6% and 30.7%, respectively, due in part to federal tax-planning deductions and discrete benefits.
- Management stated that software-license and contract-termination-fee revenue, which declined in Q2, was expected to be stronger in the second half. The filing also notes that a larger percentage of annual revenue and earnings generally occurs in the second half.
- Management highlighted continued investment in digital payments, mobile banking, person-to-person payments and next-generation account-processing platforms.
- Key disclosed risks include economic weakness and reduced client spending, regulatory and legislative changes including Dodd-Frank, acquisition integration, changes in client demand, competition and pricing pressure, strategic execution, privacy compliance and financial-institution consolidation or failures.
- Acquisition-related intangible amortization reduced diluted continuing-operations EPS by $0.19 in Q2 and $0.37 for the first six months. Estimated annual amortization was approximately $160 million for 2012–2014.
- Discontinued operations generated losses of $2 million in Q2 and $3 million year to date.
- Interest-rate swaps and forward-starting swaps had total notional values of $1.0 billion and $550 million, respectively, and were scheduled to expire in September 2012. The company estimated approximately $15 million of related interest expense would be recognized over the next twelve months.
- The company reported compliance with all financial debt covenants and stated that disclosure controls were effective as of June 30, 2012. Management did not expect pending legal proceedings to have a material adverse effect.
Important facts for investors to verify
- Whether the planned refinancing of approximately $967 million of term-loan borrowings was completed on acceptable terms before the November 2012 maturity.
- Whether the amended revolving credit facility was executed, including its final size, maturity and covenant terms.
- Whether second-half software-license and contract-termination-fee revenue improved as management expected.
- The sustainability of Payments segment margins amid investments in new products, integration costs and lower software-license revenue.
- The effect of CashEdge and other acquisitions on organic revenue growth, expenses, amortization and integration execution.
- Progress of share repurchases and the resulting impact on diluted share count and EPS.
- Exposure to regulatory changes, financial-institution consolidation, client losses, economic conditions and interest-rate movements.