FISERV INC. 10-Q Summary: Period Ended June 30, 2008
Business Context and Reporting Period
This Form 10-Q covers the quarterly and six-month periods ended June 30, 2008. Fiserv, Inc. provides integrated information management systems and services, including transaction processing and software solutions. The company operates through four segments: Financial Institutions Services, Payments and Industry Products, Insurance Services, and Corporate and Other. The reporting period is significantly impacted by the integration of the CheckFree Corporation acquisition (closed December 2007) and the disposition of the Fiserv Health and Fiserv ISS segments, which are reported as discontinued operations.
Key Financial Metrics
| Metric (in millions) | 3 Months Ended 6/30/08 | 6 Months Ended 6/30/08 |
|---|---|---|
| Total Revenues | $1,295 | $2,605 |
| Operating Income | $224 | $450 |
| Net Income (Total) | $99 | $428 |
| Net Income (Continuing Ops) | $99 | $196 |
| Diluted EPS (Total) | $0.60 | $2.60 |
| Diluted EPS (Continuing Ops) | $0.60 | $1.19 |
| Operating Cash Flow (6mo) | $392 | |
| Total Debt (Long-term + Current) | $4,516 | |
| Cash and Equivalents | $211 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 38% year-over-year for both the quarter and the six-month period. This growth is primarily attributed to the CheckFree acquisition. Internal revenue growth (excluding acquisitions) was minimal at 1% for the quarter and 2% for the six months.
- Segment Performance: The Payments segment saw the most significant growth, up 121% for the quarter and 116% for the six months, driven by CheckFree. The Financial segment grew 8%, while the Insurance segment grew 21% (quarter) and 26% (six months), though internal revenue in Insurance declined due to weak performance in workers' compensation businesses.
- Profitability: Operating income increased 23% for the quarter and 25% for the six months. However, operating margins declined slightly (from 19.4% to 17.3% for the quarter) due to increased amortization of acquired intangible assets and merger integration costs.
- Interest Expense: Net interest expense surged 464% for the quarter and 550% for the six months, rising from $11 million to $62 million (quarter) and $20 million to $130 million (six months). This increase is directly linked to debt incurred to finance the CheckFree acquisition.
- Discontinued Operations: The six-month net income includes a $232 million gain from discontinued operations, primarily from the sales of Fiserv Health and Fiserv ISS. Without these gains, net income from continuing operations would be significantly lower.
Outlook, Risks, and Unusual Items
- Subsequent Event: On July 14, 2008, Fiserv sold a 51% interest in its Insurance segment (Fiserv Insurance) to Trident IV, LP for $510 million in cash and a $30 million note. The company will no longer consolidate this segment starting in Q3 2008.
- Debt Reduction: The company used operating cash flow and proceeds from asset sales to repay approximately $890 million in long-term debt during the first six months of 2008.
- Share Repurchases: The company repurchased $94 million of common stock in the first six months. On July 2, 2008, the board authorized an additional repurchase of up to 10 million shares.
- Risks: Management highlights risks related to the completion of the remaining Fiserv ISS sale, the successful integration of CheckFree, and the impact of a general economic slowdown on the financial services industry. The company also notes a downturn in U.S. mortgage markets negatively impacting home-equity processing revenues.
Investor Verification Checklist
- Continuing vs. Discontinued Earnings: Verify the distinction between the $428 million total net income and the $196 million from continuing operations to assess core business performance.
- Amortization Impact: Review the $67 million increase in intangible amortization expense related to the CheckFree acquisition and its effect on future operating margins.
- Debt Service Capacity: Confirm the company's ability to service its $4.5 billion debt load, particularly given the significant rise in interest expense.
- Insurance Segment Transition: Monitor the financial reporting changes in Q3 2008 following the sale of the majority interest in the Insurance segment.
- Internal Growth Rate: Assess the sustainability of the business by focusing on the low internal revenue growth (1-2%) versus the high reported growth driven by acquisitions.