FISV

FISERV INC. 10-Q Summary: Quarter Ended March 31, 2006

Business Context and Reporting Period

This filing is a Quarterly Report (Form 10-Q) for FISERV, INC., a provider of information management systems and services to the financial and health benefits industries. The report covers the three-month period ended March 31, 2006. The company operates through three segments: Financial, Health, and Investment. As of April 24, 2006, there were approximately 175.7 million shares of common stock outstanding.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 13% ($123.6 million) year-over-year. Internal revenue growth was 10%, with the remainder driven by acquisitions. Processing and services revenue grew 10%, while product revenue grew 20%.
• Profitability Decline: Despite revenue growth, Net Income decreased 16% to $116.2 million. This decline is primarily attributed to the adoption of SFAS 123R (Share-Based Payment) on January 1, 2006, which added $12.9 million in incremental compensation expense, and the absence of a $43.5 million one-time realized gain from the sale of Bisys Group stock recorded in Q1 2005.
• Segment Performance:
  • Financial: Revenue up 12%; Operating income up 4%. Growth was aided by $30.3 million in flood claims processing revenue, partially offset by a decrease in contract termination fees.
  • Health: Revenue up 16%; Operating income down 7%. Margins were compressed by high prescription product pass-through costs and investments in consumer-directed health initiatives.
  • Investment: Revenue up 5%; Operating income up 8%.
• Debt and Liquidity: Long-term debt increased by $162.5 million due to borrowings under a modified $900 million revolving credit facility. The company utilized free cash flow and borrowings to repurchase $228.9 million of its own stock.

Outlook, Risks, and Unusual Items

• Accounting Changes: The adoption of SFAS 123R significantly impacted Q1 2006 earnings, reducing operating income by approximately $12.9 million and operating margin by 1 percentage point. This is a recurring expense going forward.
• Discontinued Operations: The company sold its securities clearing business in March 2005. While the sale is complete, the company retains liability for an SEC investigation regarding its former subsidiary, Fiserv Securities, Inc. (FSI). An indemnification notice was received in Q3 2005 regarding documentation maintenance; the company cannot currently estimate the financial impact.
• Unusual Items: Q1 2005 included a one-time $43.5 million gain from the sale of Bisys Group stock, which is not present in 2006. Q1 2006 included $30.3 million in flood claims processing revenue, which is expected to be lower in subsequent quarters as the backlog was cleared.
• Guidance: Management expects the effective income tax rate for the remainder of 2006 to be 38.5%. The company plans to continue pursuing acquisitions and reducing expenses through operational efficiencies.

Investor Verification Checklist

• Verify the sustainability of the 10% internal revenue growth rate excluding the temporary flood claims processing revenue ($30.3 million).
• Assess the long-term impact of the SFAS 123R adoption on future operating margins and net income.
• Monitor the status of the indemnification notice related to the former Fiserv Securities, Inc. (FSI) and potential liabilities from the discontinued operations.
• Review the company's capital allocation strategy, specifically the balance between aggressive share repurchases ($228.9 million in Q1) and debt levels ($757.9 million).
• Confirm the trajectory of the Health segment's operating margins given the high volume of prescription product pass-through costs.