FISERV INC. 10-Q Summary: Period Ended June 30, 2005
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for FISERV, INC., an independent provider of financial data processing systems and information management services. The report covers the three and six-month periods ended June 30, 2005. The Company operates through three segments: Financial institution outsourcing, systems and services ("Financial"); Health plan management services ("Health"); and Investment support services ("Investment").
Key Financial Metrics
Revenue and Profit (Six Months Ended June 30, 2005):
- Total Revenues: $1,969.5 million (Processing and services: $1,795.4 million).
- Operating Income: $375.3 million.
- Net Income: $253.0 million.
- Diluted EPS: $1.30 (includes $0.14 from a one-time investment gain).
- Operating Margin: 21% of processing and services revenues.
Cash Flow and Liquidity:
- Free Cash Flow: $180.0 million for the six months ended June 30, 2005 (down from $260.3 million in 2004).
- Cash and Cash Equivalents: $566.6 million as of June 30, 2005.
- Debt: Long-term debt totaled $490.7 million; Short-term borrowings were $100.0 million.
- Credit Facility: $700.0 million total capacity; $190.2 million utilized as of June 30, 2005.
Material Changes vs. Prior Period
Revenue Growth: Processing and services revenues increased 10% ($83.3 million) in Q2 2005 and 9% ($154.0 million) for the six months compared to 2004. Internal revenue growth was 8% for both periods, down from 11% and 10% respectively in 2004, primarily due to lower growth in the Health segment.
Profitability: Operating income increased 16% ($25.3 million) in Q2 and 16% ($52.0 million) for the six months. The Financial segment drove this growth with a 25% operating margin in Q2. The Investment segment saw a significant margin expansion to 24% in Q2 from 16% in 2004.
Discontinued Operations: The Company completed the sale of its securities clearing businesses in March 2005 for $344.9 million. These operations are now excluded from continuing operations results.
Guidance, Outlook, and Risks
Management Commentary:
- Financial Segment: Growth driven by loan settlement volumes, a new Australian check processing business, and software licenses. However, revenues in 2006 are expected to be negatively impacted by approximately $40 million due to changes in three client relationships (acquisitions, transitions to in-house, or software licensing).
- Health Segment: Growth slowed compared to 2004 due to the high base from large client signings in early 2004 and increased competition in the large commercial employer market.
- Investment Segment: Margin improvement attributed to temporary increases in cash investment balances and client growth in custody services.
Unusual Items:
- Realized Gain: A one-time gain of $43.5 million ($0.14 per share) was recorded from the sale of 3.2 million shares of Bisys Group, Inc. common stock.
- SEC Settlement: A $15.0 million settlement regarding the SEC investigation of the sold securities clearing business was paid in April 2005 (fully accrued in 2004).
Risks and Contingencies:
- Acquisition: On July 27, 2005, the Company signed an agreement to acquire BillMatrix Corp. for approximately $350 million, expected to close in Q3 2005.
- Stock Repurchases: The Company repurchased $263.2 million of common stock in the first six months. In July 2005, the Board authorized an additional 10 million shares for repurchase.
- Accounting Changes: The Company will adopt SFAS 123R (Share-Based Payment) on January 1, 2006, which will require expensing stock-based compensation.
Investor Verification Checklist
- Verify the sustainability of the Financial segment's revenue growth given the disclosed $40 million headwind from client changes expected in 2006.
- Confirm the impact of the pending BillMatrix Corp. acquisition ($350 million) on future leverage and cash flow.
- Assess the volatility of the Health segment's internal growth rates, which dropped significantly from 50% in Q2 2004 to 10% in Q2 2005.
- Review the pro forma net income impact of the upcoming SFAS 123R adoption on stock-based compensation expenses.
- Monitor the utilization of the $700 million credit facility as the Company pursues further acquisitions and stock repurchases.