FISERV, INC. — Q2 2010 Form 10-Q Summary
Business Context and Reporting Period
Fiserv provides transaction processing, electronic payments, bill payment, business process outsourcing, document distribution, and software and systems solutions to approximately 16,000 clients worldwide. Its principal segments are Payments and Industry Products, Financial Institution Services, and Corporate and Other. The filing covers the three and six months ended June 30, 2010; results are unaudited.
Key Financial Metrics
| Metric | Q2 2010 | Q2 2009 | Six Months 2010 | Six Months 2009 |
|---|---|---|---|---|
| Total revenue | $1,022 million | $1,000 million | $2,030 million | $2,023 million |
| Operating income | $251 million | $234 million | $489 million | $459 million |
| Operating margin | 24.5% | 23.4% | 24.1% | 22.7% |
| Income from continuing operations | $130 million | $115 million | $253 million | $221 million |
| Net income | $127 million | $140 million | $248 million | $243 million |
| Diluted EPS from continuing operations | $0.85 | $0.74 | $1.65 | $1.42 |
| Operating cash flow from continuing operations | Not separately provided | Not separately provided | $431 million | $395 million |
- Processing and services revenue increased 3% in Q2 and 2% year to date, while product revenue declined 3% in Q2 and 6% year to date.
- As of June 30, 2010, cash and cash equivalents were $338 million, compared with $363 million at December 31, 2009.
- Total debt, including current maturities, was approximately $3.439 billion, down from $3.641 billion at year-end 2009. Debt fair value was approximately $3.6 billion.
- The company had $870 million of available borrowings under its $900 million revolving credit facility, after $30 million of letters of credit.
- Capital expenditures were $84 million for the first six months, compared with $98 million in the prior-year period.
- Net interest expense declined 16% in Q2 and 17% year to date, primarily due to lower borrowings and the expiration of certain interest-rate hedges.
Material Changes Versus the Prior Comparable Period
- Q2 revenue increased $22 million, or 2%; first-half revenue increased $7 million, or less than 1%.
- Q2 operating income increased 7% to $251 million; first-half operating income increased 7% to $489 million. Margin expanded 110 basis points in Q2 and 140 basis points year to date.
- Payments revenue increased 3% in Q2 and 1% year to date, driven by electronic payments, new clients, and higher transaction volumes. Its first-half operating income declined 1% because of lower-margin output solutions revenue and product-development spending.
- Financial revenue increased 1% in Q2 but declined 1% year to date. Account-processing growth and higher contract termination fees were offset by declines in check processing, lending, consulting, and software-license revenue.
- Corporate and Other operating losses improved by $7 million in Q2 and $33 million year to date, principally because 2009 included employee severance and higher CheckFree merger and integration costs.
- Net income declined in Q2 because the prior-year period included a $25 million after-tax contingent purchase-price gain in discontinued operations. Excluding that unusual item, continuing-operations performance improved.
- The company repurchased approximately 4.2 million shares for $202 million during the first six months. Weighted-average diluted shares declined to 153.2 million from 155.9 million.
Outlook, Commentary, Risks, and Unusual Items
Management’s 2010 priorities were positive internal revenue growth, increased earnings per share, stronger enterprise win rates, greater strategic-solution penetration, and continued product innovation. The company emphasized its recurring, largely nondiscretionary revenue model and continued investment in payment, account-processing, and other strategic products, including ZashPay and Acumen. The filing does not provide a specific numerical full-year revenue or EPS forecast.
- Management expects continued long-term opportunity from financial institutions outsourcing transaction processing, but near-term technology spending remains cautious.
- Financial institution failures, government interventions, consolidations, client losses, and changes in transaction volumes could affect revenue. Management stated that such actions had not materially affected results to date.
- The Dodd-Frank Wall Street Reform and Consumer Protection Act and future regulations could adversely affect clients and Fiserv; the ultimate impact was described as difficult to predict.
- Other risks include economic weakness, client financial failures, changing client demand, competitive pricing, regulatory and privacy requirements, execution of Fiserv 2.0 initiatives, and interest-rate exposure.
- The company had $1.2 billion of interest-rate swaps that effectively fixed rates on floating-rate term-loan borrowings at approximately 4.8% before spreads and fees. Approximately $40 million of related interest expense was expected to be recognized over the following twelve months.
- The next scheduled principal payment on the senior term loan was $55 million in December 2010. The revolving credit facility expires March 24, 2011; the company reported compliance with its debt covenants.
- Amortization of acquisition-related intangible assets reduced diluted continuing-operations EPS by approximately $0.15 in Q2 and $0.30 in the first half.
- Management stated that pending litigation in the ordinary course was not expected to have a material adverse effect on the financial statements.
Important Facts for Investors to Verify
- Verify the sustainability of recurring-revenue growth, particularly in Payments, against continued weakness in product, check-processing, and software-license activity.
- Monitor debt maturities, the March 2011 revolving-facility expiration, covenant compliance, interest-rate exposure, and the company’s ability to fund repurchases while reducing debt.
- Assess whether the improved operating margin reflects durable operating leverage or temporary benefits from lower severance and integration costs.
- Evaluate the effect of Dodd-Frank regulations, financial institution failures, consolidations, and client technology-spending decisions.
- Separate continuing-operations performance from discontinued-operations results, including the $25 million after-tax gain recognized in Q2 2009.
- Confirm the scope and timing of strategic investments in ZashPay, Acumen, and other Fiserv 2.0 initiatives, as the filing provides no quantified return targets.