FISERV INC. 10-Q Summary: Quarter Ended March 31, 2004
Business Context and Reporting Period
This filing 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-month period ended March 31, 2004. The company operates through four segments: Financial outsourcing, Health plan management, Investment support, and Other/Corporate.
Key Financial Metrics
| Metric | Q1 2004 | Q1 2003 |
|---|---|---|
| Total Revenues | $937.5 million | $687.0 million |
| Processing & Services Revenue | $840.0 million | $604.3 million |
| Operating Income | $156.9 million | $124.6 million |
| Net Income | $92.8 million | $74.2 million |
| Diluted EPS | $0.47 | $0.38 |
| Operating Cash Flow | $129.2 million | $142.1 million |
| Free Cash Flow (Non-GAAP) | $126.3 million | $80.5 million |
| Long-Term Debt | $596.1 million | $699.1 million (Dec 2003) |
| Cash & Equivalents | $208.3 million | $202.8 million (Dec 2003) |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 36% year-over-year. Processing and services revenue grew 39%, driven by a 199% increase in the Health segment and a 19% increase in the Financial segment.
- Health Segment Impact: The Health segment's revenue surge includes $95.0 million in pass-through prescription ingredient costs. While revenue grew significantly, operating margins for this segment decreased from 18% to 9% due to the low-margin nature of pharmacy services.
- Investment Services Decline: Operating income in the Investment Services segment dropped 102% to a loss of $0.1 million, primarily due to a one-time $6.0 million charge related to SEC inquiries regarding market timing and late trading practices.
- Financial Segment Strength: The Financial segment operating income rose 27% to $137.0 million, aided by a one-time $8.0 million early termination fee from a customer.
- Debt Reduction: The company repaid $107.0 million of long-term debt during the quarter, reducing total long-term debt from $699.1 million to $596.1 million.
Guidance, Outlook, and Risks
- Credit Facility: On March 31, 2004, the company entered a new $700.0 million credit facility (replacing one due in May 2004). It includes a $465.3 million five-year revolver and a $234.7 million 364-day revolver. Covenants require a minimum net worth of $1.8 billion and a debt-to-EBITDA ratio of no more than 3.5x.
- Regulatory Risk: The company is cooperating with the SEC regarding market timing and late trading at its broker-dealer subsidiary, Fiserv Securities, Inc. (FSI). Cumulative revenues associated with these practices are estimated at $4.0 to $5.0 million. Potential fines or penalties remain a contingency.
- Stock-Based Compensation: The company follows APB Opinion No. 25 and records no expense for stock options. Pro forma net income (under SFAS No. 123) would have been $87.3 million ($0.44 diluted EPS) for Q1 2004.
- Internal Growth: Management highlights 10% internal revenue growth for the quarter, excluding acquired revenue, driven by new client sales and transaction volume increases.
Investor Verification Checklist
- Health Segment Margins: Verify the sustainability of the Health segment's revenue growth given the low-margin pharmacy services inclusion ($95M in ingredient costs).
- SEC Investigation Outcome: Monitor the resolution of the SEC inquiry into Fiserv Securities, Inc. regarding market timing and potential financial penalties.
- One-Time Items: Assess the impact of the $8.0 million termination fee in the Financial segment and the $6.0 million charge in Investment Services on normalized earnings.
- Debt Covenants: Confirm continued compliance with the new credit facility covenants, specifically the 3.5x debt-to-EBITDA limit.
- Internal vs. Acquired Growth: Distinguish between organic growth (10%) and growth driven by acquisitions to evaluate future scalability.