Fiserv, Inc. 2008 Annual Report (10-K) Summary
Business Context and Reporting Period
Company: Fiserv, Inc.
Reporting Period: Fiscal year ended December 31, 2008.
Business Overview: Fiserv provides integrated information management and electronic commerce systems, including transaction processing, electronic bill payment, and software solutions to approximately 16,000 clients globally, primarily financial institutions. Operations are reported in two main segments: Financial Institution Services ("Financial") and Payments and Industry Products ("Payments").
Key Financial Metrics
| Metric | 2008 | 2007 |
|---|---|---|
| Total Revenues | $4,739 million | $3,897 million |
| Operating Income | $890 million | $739 million |
| Net Income (Total) | $569 million | $439 million |
| Net Income (Continuing Ops) | $346 million | $414 million |
| Net Income (Discontinued Ops) | $223 million | $25 million |
| Diluted EPS (Total) | $3.49 | $2.60 |
| Operating Cash Flow | $775 million | $565 million |
| Total Assets | $9,331 million | $11,846 million |
| Long-Term Debt (incl. current) | $4,105 million | $5,405 million |
| Cash and Cash Equivalents | $232 million | $297 million |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 22% to $4.739 billion, driven primarily by the full-year impact of the CheckFree acquisition (Payments segment) and partially offset by the sale of the Insurance segment.
- Segment Performance:
- Financial Segment: Revenues increased 5% to $2.144 billion. Internal revenue declined 2% due to a $70 million drop in home-equity processing revenues caused by the U.S. mortgage market downturn.
- Payments Segment: Revenues surged 99% to $2.131 billion, largely due to the CheckFree acquisition. Internal revenue grew 6%.
- Insurance Segment: Revenues decreased 36% to $513 million following the sale of a 51% interest in July 2008.
- Profitability: Operating income increased 20% to $890 million. However, operating margin decreased slightly from 19.0% to 18.8% due to increased amortization of intangible assets and merger costs associated with CheckFree.
- Discontinued Operations: Net income from discontinued operations jumped to $223 million (from $25 million in 2007) due to after-tax gains of $230 million from the sales of Fiserv Health and portions of Fiserv ISS.
- Debt Reduction: Long-term debt decreased by $1.3 billion to $4.105 billion as the company used operating cash flow and proceeds from business dispositions to repay debt.
Guidance, Outlook, Risks, and Unusual Items
- Strategic Initiatives: Management is focused on "Fiserv 2.0," aiming to integrate CheckFree operations to achieve estimated annual cost savings of over $100 million and revenue synergies of over $125 million.
- Outlook: Management anticipates less account processing system switching in 2009 due to the economic climate, which should benefit Fiserv. They expect the income tax rate for continuing operations to be approximately 38.5% in 2009.
- Risks:
- Economic Conditions: Exposure to the global recession and the decline in the U.S. mortgage market, which negatively impacted home-equity processing revenues.
- Consolidation: Failures and mergers in the banking industry could reduce the client base.
- Goodwill/Intangibles: Goodwill and intangible assets represent approximately 70% of total assets; impairment could materially affect results.
- Regulatory: Ongoing uncertainty regarding the classification of the walk-in bill payment business as a money services business under FinCEN regulations.
- Unusual Items:
- Loss on Sale: Recognized a $24 million pre-tax loss on the sale of a 51% interest in Fiserv Insurance, including a $34 million income tax provision due to a lower tax basis in the stock compared to book basis.
- Amortization: Significant increase in amortization expense ($119 million increase) related to the CheckFree acquisition.
Key Facts for Investor Verification
- CheckFree Integration: Verify progress on realizing the projected $100 million+ in cost savings and $125 million+ in revenue synergies from the CheckFree acquisition.
- Mortgage Market Exposure: Monitor the Financial segment's exposure to the U.S. mortgage market, specifically home-equity processing revenues, which declined significantly in 2008.
- Debt Covenants: Confirm continued compliance with debt covenants, particularly the leverage ratio and interest coverage requirements, given the $4.1 billion debt load.
- Discontinued Operations: Note that the high net income in 2008 was heavily influenced by one-time gains from discontinued operations ($223 million); future earnings will rely more on continuing operations.
- Regulatory Status: Track the outcome of the FinCEN ruling regarding the walk-in bill payment service, as a determination of "money services business" status could increase compliance costs.