FISERV INC. 10-Q Summary: Quarter Ended September 30, 2004
Business Context and Reporting Period
This filing is a Quarterly Report (Form 10-Q) for FISERV, INC., an independent provider of information management systems and services to the financial industry. The report covers the three and nine-month periods ended September 30, 2004. The company operates through four segments: Financial outsourcing, Health plan management, Investment support, and Other/Corporate.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2004 | Nine Months Ended Sep 30, 2004 |
|---|---|---|
| Total Revenues | $958.1 million | $2,841.6 million |
| Processing & Services Revenues (Excl. Reimbursements) | $866.3 million | $2,562.2 million |
| Operating Income | $160.7 million | $477.9 million |
| Net Income | $92.4 million | $280.2 million |
| Diluted EPS | $0.47 | $1.42 |
| Operating Margin (Total) | 19% | 19% |
| Free Cash Flow (Nine Months) | $395.9 million | |
| Cash and Equivalents (Sep 30, 2004) | $450.1 million | |
| Long-Term Debt (Sep 30, 2004) | $490.5 million | |
| Short-Term Borrowings (Sep 30, 2004) | $228.8 million |
Material Changes vs. Prior Period
- Revenue Growth: Total processing and services revenues increased 23% ($164.4 million) for the quarter and 31% ($612.1 million) for the nine months compared to 2003. Internal revenue growth (excluding acquisitions) was 7% for the quarter and 9% for the nine months.
- Segment Performance:
- Financial: Revenues up 10% (quarter) and 15% (nine months). Operating income increased 25% and 23% respectively, driven by efficiencies and termination fees.
- Health: Revenues surged 100% (quarter) and 137% (nine months) due to the inclusion of pharmacy services businesses. Operating income rose 55% and 62%, though margins compressed to 9% due to lower-margin pharmacy operations.
- Investment Services: Operating income declined significantly (down 227% for the quarter) primarily due to a $10 million charge related to an SEC investigation (see Risks).
- Cost Structure: Total cost of revenues increased 25% (quarter) and 34% (nine months). Prescription costs rose 447% for the quarter due to the new pharmacy business mix.
- Liquidity: Free cash flow increased 24% to $395.9 million for the nine months. The company used cash to repay $209.8 million in long-term debt.
Guidance, Outlook, Risks, and Unusual Items
- SEC Investigation (Unusual Item): Fiserv Securities, Inc. (FSI) recorded an additional $10 million charge in Q3 2004 regarding an SEC investigation into mutual fund trading practices. Total reserves now stand at $16 million. Management does not anticipate further material liability, but a portion of the settlement may be non-deductible for tax purposes.
- Outlook: Management believes cash flow from operations and available funds are adequate for operating requirements, debt repayments, and capital spending. Future significant acquisitions may require additional borrowings or equity issuance.
- Debt Covenants: The company entered a new $700 million credit facility in March 2004. It remains in compliance with covenants, including a minimum net worth of $1.8 billion and a debt-to-EBITDA ratio limit of 3.5x.
- Forward-Looking Statements: The filing includes standard safe harbor language regarding risks such as economic, competitive, and regulatory factors that could cause actual results to differ from expectations.
Investor Verification Checklist
- Verify the status of the SEC investigation into Fiserv Securities, Inc. and the potential tax deductibility of the $16 million reserve.
- Monitor the operating margin trends in the Health segment as the pharmacy services business matures and scales.
- Review the impact of the loss of the item processing customer and weakness in the automobile leasing market on the Financial segment's internal growth.
- Confirm the company's ability to maintain debt covenants under the new $700 million credit facility.
- Assess the sustainability of the 7-9% internal revenue growth rate excluding the impact of acquisitions.