FISERV INC. 10-Q Summary: Quarter Ended March 31, 2005
Business Context and Reporting Period
This report covers the quarterly period ended March 31, 2005. Fiserv, Inc. is an independent provider of financial data processing systems and information management services to financial institutions and health plan employers. The company operates through three segments: Financial institution outsourcing, systems and services; Health plan management services; and Investment support services.
Key Financial Metrics
| Metric | Q1 2005 | Q1 2004 |
|---|---|---|
| Total Revenues | $973.1 million | $908.9 million |
| Processing & Services Revenues | $882.3 million | $811.6 million |
| Operating Income | $188.0 million | $161.3 million |
| Net Income | $139.0 million | $92.8 million |
| Diluted EPS | $0.71 | $0.47 |
| Operating Cash Flow | $134.2 million | $161.4 million |
| Free Cash Flow | $102.4 million | $130.3 million |
| Cash and Equivalents | $719.7 million | $172.7 million (Q1 2004 end) |
| Long-Term Debt | $498.8 million | $505.3 million (Dec 2004) |
Note: Customer reimbursements of $90.8 million (2005) and $97.3 million (2004) are included in total revenues but offset by equal expenses, having no impact on operating income.
Material Changes vs. Prior Period
- Revenue Growth: Total processing and services revenues increased 9% ($70.8 million) year-over-year. Internal revenue growth was 7% in 2005 compared to 10% in 2004.
- Segment Performance:
- Financial: Revenue up 6% ($34.0 million); Operating income up 16% ($21.6 million) to $160.1 million. Margins improved to 26% from 24%.
- Health: Revenue up 17% ($34.5 million); Operating income up 19% ($3.6 million) to $22.3 million. Growth driven by pharmacy services, though internal growth rates slowed compared to 2004.
- Investment: Revenue up 8% ($2.3 million); Operating income up 35% ($1.5 million) to $5.6 million.
- Discontinued Operations: The company sold its securities clearing businesses on March 24, 2005, for $344.9 million in cash proceeds plus a $68.0 million pre-sale distribution. A net loss of $0.6 million was recorded for discontinued operations.
- Unusual Items: Net income included a one-time realized gain of $43.5 million ($0.14 per share) from the sale of remaining Bisys Group, Inc. stock.
Guidance, Outlook, and Risks
- Outlook: Management expects cash flow from operations and existing balances to meet operating requirements. Future acquisitions may be funded via borrowings or securities issuance.
- Accounting Changes: The company will adopt SFAS 123R (Share-Based Payment) on January 1, 2006. Pro forma net income for Q1 2005 would have been $128.0 million (EPS $0.65) if stock compensation had been expensed under fair value rules.
- Legal Proceedings: In April 2005, Fiserv Securities, Inc. settled an SEC investigation regarding mutual fund trading practices for $15.0 million. This amount was fully accrued in 2004 financial statements.
- Debt Covenants: The company maintains a $700.0 million credit facility and was in compliance with all covenants, including a minimum net worth of $1.9 billion.
Investor Verification Checklist
- Verify the sustainability of the 9% revenue growth excluding the impact of early contract termination fees ($14.9 million in Q1 2005).
- Confirm the impact of the $43.5 million one-time investment gain on reported EPS ($0.71 vs. $0.57 excluding gain).
- Monitor the $15.0 million contingent payment potential from the sale of securities clearing businesses based on future revenue targets.
- Review the 7% internal revenue growth rate, noting the slowdown in the Health segment compared to the prior year.
- Assess the $102.4 million free cash flow, noting the $25.8 million increase in accounts receivable impacting cash conversion.