Business Context and Reporting Period
Fiserv, Inc. filed an unaudited Form 10-Q for the three months ended March 31, 2011, with comparative results for the three months ended March 31, 2010. Fiserv provides financial-services technology, transaction processing, electronic payments, bill payment, banking, software, and related services to approximately 16,000 clients worldwide. Revenue is primarily recurring, transaction-based, and generated under contracts generally lasting three to five years.
The company operates through Payments, Financial Institution Services, and Corporate and Other segments. First-quarter 2011 acquisitions included Mobile Commerce Ltd. and two other companies for total consideration of $49 million, net of cash acquired.
Key Financial Metrics
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Total revenue | $1,048 million | $1,008 million | Up 4% |
| Processing and services revenue | $862 million | $831 million | Up 4% |
| Product revenue | $186 million | $177 million | Up 5% |
| Operating income | $221 million | $238 million | Down 7% |
| Operating margin | 21.1% | 23.7% | Down 2.6 percentage points |
| Income from continuing operations | $114 million | $123 million | Down 7% |
| Net income | $112 million | $121 million | Down 7% |
| Diluted EPS from continuing operations | $0.77 | $0.80 | Down $0.03 |
| Diluted total EPS | $0.76 | $0.79 | Down $0.03 |
| Net cash from operating activities | $283 million | $260 million | Up 9% |
| Capital expenditures | $56 million | $42 million | Up 33% |
Payments revenue increased 7% to $580 million, and Financial revenue increased 2% to $480 million. Payments operating income rose 5% to $156 million, while Financial operating income rose 2% to $139 million. Corporate and Other operating loss increased to $74 million from $46 million.
At March 31, 2011, cash and cash equivalents were $517 million, compared with $563 million at December 31, 2010. Total assets were $8.257 billion and shareholders’ equity was $3.138 billion. Long-term debt, including current maturities, was $3.355 billion. Available borrowings under the $1.0 billion revolving credit facility were $972 million after $28 million of letters of credit.
Working-capital and operating performance generated $283 million of operating cash flow. Investing cash outflows were $111 million, including $56 million of capital expenditures and $49 million of acquisitions. Financing cash outflows were $218 million, primarily reflecting $252 million of treasury-stock purchases. Cash decreased by $46 million during the quarter.
Material Changes Versus the Prior Comparable Period
- Revenue growth improved to 4% from a 1% revenue decline in the first quarter of 2010, driven by recurring revenue, new clients, higher transaction volumes, and increased postage pass-through revenue.
- Total expenses increased 7%, faster than revenue, reducing operating margin from 23.7% to 21.1%.
- Selling, general and administrative expense increased $31 million, or 18%, primarily because of an $18 million employee severance charge and the absence of a $5 million facility-sale gain recorded in the prior-year quarter.
- Cost of processing and services improved to 55.0% of related revenue from 55.6%, while cost of product increased to 80.6% from 76.8%, primarily due to postage pass-through activity and lower-margin mix.
- Operating income increased in both operating segments, but Corporate and Other costs increased materially due to severance, merger, and integration expenses.
- Operating cash flow increased $23 million, while capital expenditures increased $14 million and treasury-stock purchases increased from $71 million to $252 million.
- Weighted-average basic shares declined to 145.9 million from 152.5 million, reflecting share repurchases.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management’s 2011 priorities include higher-quality revenue growth, increased earnings per share compared with 2010, deeper client relationships, innovation, and disciplined capital allocation.
- Management anticipated a full-year 2011 effective income tax rate of approximately 37%.
- Management expects acquired intangible-asset amortization of approximately $160 million in 2011, $150 million in each of 2012 and 2013, and $140 million in each of 2014 and 2015.
- Management stated that diluted continuing-operations EPS was reduced by approximately $0.08 by employee severance expenses and by $0.16 from acquisition-related intangible amortization in Q1 2011.
- The operating environment remained challenging because of cautious financial-institution technology spending, client consolidation or failure, competition, regulatory changes, and uncertainty surrounding Dodd-Frank implementation.
- Check-processing volumes were expected to continue declining during 2011, and software-license revenue declined in the Financial segment.
- Fiserv maintained $1.0 billion of interest-rate swaps and $450 million of forward-starting swaps. The company estimated that approximately $40 million of accumulated hedge losses would be recognized in interest expense over the following twelve months.
- The company was in compliance with its financial debt covenants at March 31, 2011. Long-term debt primarily consisted of a $1.1 billion senior term loan and $2.25 billion of senior notes, including $1.0 billion due in November 2012.
- Management stated that litigation arising in the normal course of business was not expected to have a material adverse effect on the financial statements.
- Disclosure controls and procedures were concluded to be effective as of March 31, 2011, with no material change in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Assess whether revenue growth can continue to offset margin pressure from severance, integration spending, postage pass-through costs, product investment, and lower software-license revenue.
- Review the company’s refinancing and liquidity plan for debt maturities beginning with the $1.0 billion of senior notes due in November 2012.
- Evaluate the sustainability of the $252 million share-repurchase pace relative to operating cash flow, acquisitions, capital expenditures, and debt obligations.
- Monitor bank failures, financial-institution consolidation, client losses, contract termination fees, and ongoing declines in check-processing volumes.
- Track the contribution and integration of M-Com and the other acquired companies, including the effect of acquisition-related amortization and goodwill.
- Compare the approximately 37% expected full-year tax rate with quarterly results and verify the effect of research and development credits and state tax changes.
- Review regulatory developments, including Dodd-Frank and privacy requirements, and their potential effect on Fiserv and its financial-institution clients.