Fiserv, Inc. 2011 Second-Quarter Form 10-Q Summary
Business context and reporting period
Fiserv provides financial-services technology, transaction processing, electronic payments, bill payment and presentment, business-process outsourcing, document distribution, and software solutions to approximately 16,000 clients worldwide. Operations comprise Payments and Industry Products, Financial Institution Services, and Corporate and Other.
This unaudited quarterly report covers the three and six months ended June 30, 2011, compared with the corresponding 2010 periods. Interim results are not necessarily indicative of full-year results.
Financial performance and key metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenue | $1.065 billion, up 4% | $2.113 billion, up 4% |
| Processing and services revenue | $884 million, up 3% | $1.746 billion, up 3% |
| Product revenue | $181 million, up 9% | $367 million, up 7% |
| Operating income | $251 million, unchanged | $472 million, down 3% |
| Operating margin | 23.6%, versus 24.5% | 22.3%, versus 24.1% |
| Income from continuing operations | $97 million, versus $130 million | $211 million, versus $253 million |
| Net income | $90 million, versus $127 million | $202 million, versus $248 million |
| Diluted EPS from continuing operations | $0.67, versus $0.85 | $1.45, versus $1.65 |
| Operating cash flow from continuing operations | Not separately provided | $418 million, versus $431 million |
Payments revenue increased 7% in both the quarter and six-month period, driven by new clients and higher transaction volumes. Financial revenue increased 2% in both periods, reflecting growth in account processing partly offset by continued check-processing volume declines and lower contract termination fees.
Cost pressures reduced profitability. Total expenses rose 6% in both comparison periods, faster than revenue. Product costs increased primarily because of higher postage pass-through revenue and related expenses. Corporate and Other operating losses increased because of higher legal, merger and integration costs, amortization, and first-quarter employee severance expense.
The effective tax rate was 34.7% for the quarter and 35.6% for the six months, compared with 38.3% and 38.1%, respectively, in 2010. Benefits included increased research and development credits and changes in state tax laws.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $675 million at June 30, 2011, compared with $563 million at December 31, 2010.
- Available borrowings under the $1.0 billion revolving credit facility were $972 million, with $28 million of letters of credit outstanding.
- Total debt, including current maturities, was $3.653 billion at June 30, 2011, compared with $3.356 billion at year-end 2010. The fair value of total debt was approximately $3.7 billion.
- In June, Fiserv issued $1.0 billion of senior notes, including $600 million due in 2016 at 3.125% and $400 million due in 2021 at 4.75%. Proceeds were used to refinance 2012 notes.
- The company repurchased $433 million of common stock during the first six months and had approximately 6.7 million shares remaining under its authorization at June 30.
- Capital expenditures were $102 million, up from $84 million, primarily because of equipment purchases for a new data center.
- Fiserv reported compliance with applicable financial debt covenants during the first six months of 2011.
Material changes versus the prior comparable period
- Revenue growth improved to 4% in the first six months, compared with 1% for full-year 2010, but operating income declined 3% and operating margin fell 180 basis points.
- Net income and diluted EPS declined principally because of the $61 million pretax loss on early debt extinguishment and higher corporate costs.
- Operating cash flow decreased 3% to $418 million, while capital expenditures increased 21%.
- Average diluted shares declined to 144.2 million in the quarter and 146.0 million for the six months, compared with 152.6 million and 153.2 million, respectively, reflecting share repurchases.
- Fiserv completed the $49 million acquisition of Mobile Commerce Ltd. and two other companies during the first quarter. Acquired businesses contributed $5 million of second-quarter revenue and $7 million for the first six months.
Guidance, outlook, risks and unusual items
Management’s 2011 priorities were to deliver higher-quality revenue growth and increased EPS versus 2010, strengthen client relationships, and provide differentiated technology solutions. The filing does not provide a specific numerical revenue or EPS forecast.
Fiserv agreed to acquire CashEdge Inc. for $465 million in cash, subject to regulatory approvals and customary closing conditions, with closing expected by the end of the third quarter of 2011. Management expected to fund the transaction with cash and, if necessary, revolver borrowings.
The remaining $300 million of 6.125% notes due in 2012 were redeemed in July 2011 for approximately $325 million, including premiums and costs. The company expects to record an additional pretax charge of approximately $25 million in the third quarter.
Key risks include economic weakness, financial-institution failures and consolidation, reduced client technology spending, regulatory developments including Dodd-Frank, privacy and compliance requirements, competitive pricing, changes in client demand, CashEdge closing and integration risk, interest-rate exposure, and continued declines in check-processing volumes. Ordinary-course legal proceedings were not expected by management to have a material adverse effect.
Interest-rate swaps and forward-starting swaps had aggregate notional values of $1.0 billion and $550 million, respectively, at June 30. Management estimated that approximately $40 million of interest expense related to hedge contracts would be recognized during the following twelve months.
Important facts for investors to verify
- Whether CashEdge closed on the expected timetable and the final purchase price allocation, financing, and integration results.
- The third-quarter impact of the approximately $25 million debt-extinguishment charge and the post-redemption debt balance.
- Whether revenue growth can offset rising product, corporate, legal, integration, and technology-development costs.
- The sustainability of Payments growth and the effect of declining check-processing volumes and lower contract termination fees in Financial.
- Cash flow conversion after capital expenditures, acquisitions, debt service, and share repurchases.
- Compliance with debt covenants and liquidity available after funding the CashEdge acquisition.
- Exposure to regulatory changes, financial-institution failures, client consolidation, cybersecurity or privacy issues, and competitive pressures.