Business Context and Reporting Period
Fiserv, Inc. provides transaction processing, electronic payments, account processing, business process outsourcing, and related software and services to approximately 16,000 clients. Operations are organized into Payments, Financial Institution Services, and Corporate and Other. The majority of revenue is recurring and generated under multi-year contracts.
This unaudited Form 10-Q covers the three and nine months ended September 30, 2010, compared with the corresponding 2009 periods. The filing was signed November 5, 2010.
Financial Performance and Position
| Metric | Q3 2010 | Q3 2009 | 9M 2010 | 9M 2009 |
|---|---|---|---|---|
| Total revenue | $1,025 million | $992 million | $3,055 million | $3,015 million |
| Operating income | $251 million | $231 million | $740 million | $690 million |
| Operating margin | 24.4% | 23.3% | 24.2% | 22.9% |
| Income from continuing operations | $134 million | $124 million | $387 million | $345 million |
| Net income | $132 million | $115 million | $380 million | $358 million |
| Diluted EPS from continuing operations | $0.89 | $0.79 | $2.54 | $2.21 |
| Diluted total EPS | $0.87 | $0.74 | $2.49 | $2.30 |
| Operating cash flow from continuing operations | Not provided | Not provided | $654 million | $639 million |
- Processing and services revenue increased 4% in Q3 and 2% for the first nine months; product revenue increased 1% in Q3 but declined 4% year to date.
- Cash and cash equivalents were $743 million at September 30, 2010, compared with $363 million at December 31, 2009. Total current assets were $1.733 billion and current liabilities were $1.114 billion.
- Capital expenditures, including capitalized software, were $129 million for the first nine months, down from $151 million in 2009.
- Total debt, including current maturities, was $3.706 billion at September 30, 2010, compared with $3.641 billion at December 31, 2009. The reported fair value of total debt was approximately $3.9 billion.
- The company had $970 million of available borrowing capacity under its new $1.0 billion revolving credit facility, after $30 million of letters of credit. Management stated that operating cash flow, cash on hand, and available revolver capacity should satisfy expected liquidity needs.
- Shareholders’ equity increased to $3.228 billion from $3.026 billion at year-end 2009. The company repurchased approximately 5.2 million shares for $254 million during the first nine months.
Material Changes Versus the Prior Comparable Period
- Q3 revenue increased 3%, operating income increased 9%, and net income increased 15%. For the first nine months, revenue increased 1%, operating income increased 7%, and net income increased 6%.
- Operating margin improved 110 basis points in Q3 and 130 basis points for the first nine months, primarily from operating leverage in recurring revenue businesses and efficiency initiatives.
- Payments revenue increased 5% in Q3 and 2% year to date. Financial revenue increased 2% in Q3 and was flat year to date.
- Interest expense declined 6% in Q3 and 13% year to date, primarily because of lower average borrowings and the effect of interest-rate hedges that expired at the end of 2009.
- SG&A declined 3% year to date, partly because 2009 included employee severance and higher CheckFree merger and integration costs.
- Discontinued operations produced a $2 million loss in Q3 and a $7 million loss year to date, compared with a $9 million loss and $13 million gain, respectively, in the 2009 periods. The 2009 year-to-date result included a $25 million after-tax contingent purchase-price gain.
Guidance, Outlook, Risks, and Unusual Items
- Management’s 2010 priorities were positive internal revenue growth, increased EPS versus 2009, a growth-focused culture, improved win rates, and continued product innovation. The filing does not provide a specific numerical full-year revenue or EPS forecast.
- Management cited continued caution in financial-institution technology spending, client failures and consolidations, declining check-processing volumes, and uncertainty related to the Dodd-Frank Act and related regulations.
- Long-term opportunities include the shift from in-house to outsourced transaction processing and demand for technology that improves customer retention, revenue generation, and operating efficiency.
- In September 2010, Fiserv issued $750 million of senior notes: $300 million due 2015 at 3.125% and $450 million due 2020 at 4.625%. Proceeds were used partly to repay $480 million of term-loan borrowings.
- In October 2010, the company repurchased $250 million principal amount of 6.125% notes due 2012 for $275 million. Fiserv expects to record an approximately $27 million pre-tax charge in the fourth quarter of 2010.
- StoneRiver declared a $61 million dividend to Fiserv in September, paid October 1, 2010. Fiserv also received $28 million from StoneRiver as repayment of a loan in the fourth quarter.
- Interest-rate swaps had total notional values of $1.2 billion, and forward-starting swaps had notional values of $100 million. Fiserv estimated approximately $40 million of hedge-related interest expense would be recognized over the following twelve months.
- The company was in compliance with all revolving-credit financial covenants at September 30, 2010. Management said ordinary-course legal proceedings were not expected to have a material adverse effect.
Facts Investors Should Verify
- Whether recurring revenue growth and operating leverage continue to offset weakness in product revenue and check-processing volumes.
- The fourth-quarter impact of the approximately $27 million debt-tender charge and the post-quarter-end reduction in debt to approximately $3.46 billion.
- Compliance with debt covenants, refinancing requirements for the 2012 maturities, and the availability of revolving-credit capacity.
- The effect of Dodd-Frank and other regulatory changes on client demand, pricing, transaction volumes, and compliance costs.
- The sustainability of share repurchases, capital expenditures, and cash generation relative to debt repayment and other capital-allocation priorities.
- Potential effects of financial-institution failures, consolidations, contract terminations, and associated termination-fee variability.