FISERV INC. 10-Q Summary: Period Ended June 30, 2007
Business Context and Reporting Period
This report covers the quarterly period ended June 30, 2007, and the six months ended June 30, 2007. FISERV, INC. provides integrated information management systems and services, primarily through two continuing segments: Financial Institution Services and Insurance Services. The company is currently in the process of divesting its Investment Support Services (Fiserv ISS) segment, which is reported as discontinued operations.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2007 | Six Months Ended June 30, 2007 |
|---|---|---|
| Total Revenues | $1,180.1 million | $2,365.1 million |
| Operating Income | $181.1 million | $369.0 million |
| Net Income (Continuing Ops) | $104.6 million | $213.7 million |
| Net Income (Total) | $108.2 million | $221.8 million |
| Diluted EPS (Total) | $0.64 | $1.30 |
| Operating Margin | 15.3% | 15.6% |
| Free Cash Flow (6 months) | $208.8 million | |
| Long-Term Debt | $879.8 million | |
| Cash and Equivalents | $151.6 million |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 12% year-over-year for both the quarter and the six-month period. Internal revenue growth was 8%, with the remainder attributed to acquisitions.
- Segment Performance:
- Financial Segment: Revenues grew 6% (quarter) and 8% (six months). Operating income increased 14% and 18%, respectively, driven by higher-margin revenues and operational efficiencies.
- Insurance Segment: Revenues grew 22% (quarter) and 19% (six months). However, operating income declined 51% in both periods due to a $30.6 million decrease in flood claims processing revenue (high margin) and $16.9 million in charges related to ceasing a technology platform investment.
- Discontinued Operations: Income from discontinued operations (Fiserv ISS) decreased significantly compared to the prior year, which included a one-time gain from a previous sale. The company signed definitive agreements in May 2007 to sell this segment.
- Share Repurchases: The company repurchased 6.0 million shares of common stock for $321.8 million during the first six months of 2007.
Outlook, Risks, and Unusual Items
- Major Acquisition: On August 2, 2007, the company announced an agreement to acquire CheckFree Corporation for approximately $4.4 billion. Financing includes a $5 billion bridge loan commitment.
- Divestiture: The sale of the Fiserv ISS segment is expected to close in Q4 2007 or Q1 2008. The company will retain certain liabilities, including those related to ongoing litigation.
- Litigation: A class-action lawsuit regarding an alleged Ponzi scheme involving Fiserv Trust Company (part of the discontinued segment) is ongoing. The company believes the suit is without merit but cannot estimate the potential impact.
- Guidance: Management expects the effective income tax rate for continuing operations for the remainder of 2007 to be 38.7%.
Investor Verification Checklist
- Verify the closing conditions and regulatory approval status for the $4.4 billion CheckFree Corporation acquisition.
- Monitor the timeline and final terms of the Fiserv ISS divestiture, including the retention of litigation liabilities.
- Assess the impact of the $16.9 million technology platform charge and the decline in flood claims revenue on the Insurance segment's future profitability.
- Review the company's debt covenants, specifically the leverage ratio limit (3.5x EBITDA), in light of the new bridge financing for the CheckFree deal.
- Track the progress of the class-action lawsuit against Fiserv Trust Company for potential material adverse impacts.