FISERV INC. 10-Q Summary: Quarter Ended March 31, 2009
Business Context and Reporting Period
This report covers the quarterly period ended March 31, 2009. Fiserv, Inc. provides integrated information management and electronic commerce systems for the financial services industry. Operations are divided into the Financial Institutions Services segment, the Payments and Industry Products segment, and Corporate and Other. The reporting period reflects the impact of the July 2008 sale of a 51% interest in the Insurance Services segment, which is now reported as an unconsolidated affiliate.
Key Financial Metrics
| Metric | Q1 2009 | Q1 2008 |
|---|---|---|
| Total Revenues | $1,044 million | $1,306 million |
| Operating Income | $218 million | $230 million |
| Net Income (Continuing Ops) | $102 million | $99 million |
| Net Income (Total) | $103 million | $329 million |
| Diluted EPS (Continuing Ops) | $0.65 | $0.60 |
| Diluted EPS (Total) | $0.66 | $1.99 |
| Operating Cash Flow | $224 million | $219 million |
| Total Debt (Long-term + Current) | $4,007 million | $4,105 million |
| Cash and Equivalents | $312 million | $371 million |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 20% ($262 million) year-over-year. This was primarily driven by the exclusion of the Insurance Services segment following its sale in July 2008, which accounted for a $245 million decrease.
- Segment Performance: The Financial segment revenue declined 7% due to a downturn in U.S. mortgage markets and lower contract termination fees. Conversely, the Payments segment revenue increased 3% driven by new clients and higher transaction volumes in electronic payments.
- Profitability: Operating income decreased slightly by 5% ($12 million). However, operating margin improved by 330 basis points to 20.9%, aided by the sale of the lower-margin Insurance business and cost reduction initiatives.
- Discontinued Operations: Net income dropped significantly from $329 million in Q1 2008 to $103 million in Q1 2009. The prior year included $230 million in after-tax gains from the sale of Fiserv Health and portions of Fiserv ISS, which were not present in the current quarter.
- Cost Structure: Total expenses decreased 23%. Cost of processing and services as a percentage of revenue improved to 56.7% from 59.2% due to operational efficiencies.
Outlook, Risks, and Management Commentary
- Guidance: The filing does not provide specific numerical guidance for the full year 2009.
- Capital Allocation: Management continues to prioritize debt repayment and capital expenditures over dividends. The company repaid approximately $100 million of long-term debt in Q1 2009 and purchased $25 million of treasury stock.
- Restructuring: The company incurred $15 million in employee severance and related expenses associated with a reduction in force of approximately 700 employees (3.5% of the workforce).
- Risks and Contingencies:
- Legal: Fiserv is defending against patent infringement lawsuits filed by Leon Stambler regarding online banking services. Management does not currently expect a material adverse effect but notes uncertainty.
- Transaction Completion: The sale of the remaining Fiserv ISS business remains subject to regulatory approval and closing conditions, though agreements were modified in April 2009 to facilitate completion.
- Economic Environment: Risks include potential revenue reductions due to consolidation or financial failures in the financial services industry and decreased client spending.
Investor Verification Checklist
- Verify the status and expected closing date of the remaining Fiserv ISS sale to Robert Beriault Holdings, Inc.
- Monitor the impact of the U.S. mortgage market downturn on the Financial segment's home equity processing revenues.
- Review the progress of the Leon Stambler patent litigation and any potential indemnification requests from financial institution clients.
- Assess the sustainability of operating margin improvements given the one-time impact of the Insurance segment sale and ongoing restructuring costs.
- Confirm compliance with debt covenants, specifically the leverage ratio and interest coverage requirements under the senior term loan and revolving credit facility.