Business Context and Reporting Period
Fiserv, Inc. filed this Form 10-K for the fiscal year ended December 31, 2011. The filing also presents unaudited fourth-quarter data. Fiserv provides financial-services technology to approximately 16,000 clients, primarily through recurring, account- and transaction-based contracts. Its principal segments are Payments and Financial Institution Services.
- Payments includes electronic bill payment, card processing, digital banking, mobile and person-to-person payments, investment services, output solutions and risk management.
- Financial includes account processing, item processing, source capture, lending and related services.
- Processing and services revenue represented 82% of 2011 consolidated revenue; international revenue represented 7%.
Financial Performance and Liquidity
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Total revenue | $4,337 million | $4,133 million | +5% |
| Processing and services revenue | $3,543 million | $3,415 million | +4% |
| Product revenue | $794 million | $718 million | +11% |
| Operating income | $996 million | $1,007 million | -1% |
| Operating margin | 23.0% | 24.4% | -140 basis points |
| Income from continuing operations | $491 million | $506 million | -3% |
| Net income | $472 million | $496 million | -5% |
| Diluted EPS from continuing operations | $3.40 | $3.34 | +2% |
| Net cash from operating activities | $953 million | $958 million | -1% |
| Capital expenditures | $192 million | $175 million | +10% |
Fourth-quarter 2011 revenue was $1,161 million, compared with $1,078 million in the prior-year quarter. Fourth-quarter operating income was $281 million, continuing-operations income was $153 million, net income was $143 million and diluted continuing-operations EPS was $1.07, compared with $0.80 in the fourth quarter of 2010.
Payments revenue increased 8% to $2,381 million, while Financial revenue increased 3% to $2,004 million. Payments operating margin was 27.5%, down from 28.3%; Financial operating margin was 30.6%, up from 30.3%.
At December 31, 2011, cash and cash equivalents were $337 million, total assets were $8.548 billion and shareholders’ equity was $3.258 billion. Long-term debt, including current maturities, was $3.395 billion. Fiserv had no borrowings under its $1.0 billion revolving credit facility, although $28 million of letters of credit were outstanding. Management stated that operating cash flow, cash on hand and available revolver capacity were expected to fund operating needs, debt service, capital expenditures and other requirements.
Material Changes Versus the Prior Comparable Period
- Revenue growth accelerated from 1% in 2010 to 5% in 2011, led by recurring electronic payments and account-processing activity.
- Operating income declined despite revenue growth because Corporate and Other losses increased, including $18 million of severance expense, $17 million of merger and integration costs and $9 million of higher acquisition-related intangible amortization.
- Product revenue increased, partly because of higher postage pass-through revenue; the associated pass-through costs also reduced margins.
- Fiserv incurred an $85 million pretax loss on early debt extinguishment in 2011, compared with $26 million in 2010. The company refinanced or retired its 6.125% senior notes due 2012 and issued $1.0 billion of senior notes due 2016 and 2021.
- CashEdge was acquired in September 2011 for approximately $460 million, net of cash acquired. M-Com and two other companies were acquired in the first quarter for approximately $50 million. Total acquisition payments were $511 million.
- Share repurchases increased to $533 million from $413 million. Approximately 4.7 million shares remained available under the applicable authorization at year-end.
- Discontinued operations produced a $19 million loss in 2011, compared with a $10 million loss in 2010, reducing reported net income relative to continuing operations.
Guidance, Outlook, Commentary, Risks and Unusual Items
Management identified 2012 priorities of improving financial performance and high-quality revenue growth, deepening client relationships and increasing adoption of strategic solutions, and delivering differentiated products. The filing does not provide a specific quantitative earnings or revenue forecast.
Management expects continued demand for electronic payments, Internet and mobile banking, outsourced processing and other digital channels. It also expects revenue to remain weighted toward the second half of the year because financial-institution clients often finalize spending decisions later in the year.
- Key risks include adverse economic conditions affecting financial-institution clients, competition and pricing pressure, client contract renewals, bank failures and consolidations, slower adoption of electronic transactions, and regulatory changes including Dodd-Frank.
- Security breaches, cyberattacks, software defects, operational outages and service interruptions could result in liability, reputational damage and client loss.
- Goodwill and intangible assets represented 77% of total assets at year-end. No goodwill or acquired-intangible impairment was identified in the fourth-quarter 2011 assessment, but a material future impairment remains possible.
- Debt service and refinancing are important considerations. Approximately $179 million of debt maturities were scheduled for 2012, and the company intended to refinance $925 million of term-loan borrowings on a long-term basis.
- Contractual cash obligations totaled $4.693 billion, including $4.169 billion of debt principal and interest, $350 million of operating leases, $147 million of purchase obligations and $27 million of income-tax obligations.
- Subscriber funds of approximately $1.5 billion at December 31, 2011 were invested in short-term U.S.-government-guaranteed instruments and were not included on the consolidated balance sheet.
- Management stated that ordinary-course litigation was not expected to have a material adverse effect. The filing also discloses indemnification obligations related to intellectual-property claims and previously sold businesses.
Important Facts for Investors to Verify
- Whether recurring Payments and Financial revenue growth continues to offset margin pressure from product mix, postage pass-through costs and investment in new platforms.
- The execution and financial contribution of the CashEdge and M-Com acquisitions, including integration costs and expected digital-payments growth.
- Progress in refinancing or repaying the term loan and other scheduled maturities, and the effect of interest rates and credit ratings on financing costs.
- Changes in goodwill and intangible-asset carrying values, particularly given their significant proportion of total assets.
- Whether share repurchases remain consistent with debt reduction, acquisitions and capital-expenditure needs.
- The eventual effect of Dodd-Frank and related regulations on client spending, pricing, compliance costs and payment operations.
- Potential exposure from cybersecurity incidents, operational disruptions, intellectual-property claims, tax examinations and indemnification obligations.