FISV

FISERV INC. 10-Q Summary: Quarter Ended March 31, 2008

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2008. Fiserv, Inc. provides integrated information management systems and services, including transaction processing, electronic commerce, and business process outsourcing. 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 recent acquisition of CheckFree Corporation (closed December 2007) and the divestiture of the Fiserv Health and Fiserv ISS segments, which are reported as discontinued operations.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 39% to $1.31 billion, driven primarily by the full quarter impact of the CheckFree acquisition. Internal revenue growth was 3%.
• Discontinued Operations: Net income was significantly boosted by $232 million in income from discontinued operations, including $231 million in after-tax gains from the sale of Fiserv Health and Fiserv ISS. Without these gains, net income from continuing operations would have been lower than the prior year.
• Operating Expenses: Total expenses rose 41% to $1.08 billion. Selling, general, and administrative (SG&A) expenses increased 66% due to CheckFree integration costs and higher amortization of acquired intangible assets ($21 million increase).
• Interest Expense: Net interest expense surged 656% to $68 million, reflecting debt incurred to finance the CheckFree acquisition.
• Debt Reduction: The company utilized proceeds from asset sales and operating cash flow to repay approximately $630 million in long-term debt during the quarter.

Guidance, Outlook, and Risks

• Outlook: Management expects the effective income tax rate for continuing operations for the remainder of 2008 to be 38.7%. The company anticipates closing the second transaction of the Fiserv ISS disposition by the end of the third quarter of 2008.
• Segment Performance: The Payments segment saw a 112% revenue increase and 150% operating income increase, largely due to CheckFree. The Financial segment revenue grew 8%, though home-equity processing volumes declined due to the U.S. mortgage market downturn. The Insurance segment margin decreased due to the inclusion of high-volume, low-margin prescription product costs.
• Risks and Contingencies:
  • Integration Risk: Success depends on the integration of CheckFree operations.
  • Regulatory Risk: The remaining Fiserv ISS sale is subject to regulatory approval.
  • Market Risk: Exposure to fluctuations in interest rates is managed via swap agreements with a total notional value of $1.75 billion.
  • Litigation: Shareholder class actions regarding the CheckFree acquisition were dismissed without prejudice in April 2008; no liability has been accrued.

Investor Verification Checklist

• Verify the sustainability of revenue growth excluding the one-time impact of the CheckFree acquisition (internal growth was only 3%).
• Confirm the closing timeline and final working capital adjustments for the remaining Fiserv ISS transaction.
• Monitor the impact of the U.S. mortgage market downturn on the Financial segment's home-equity processing volumes.
• Review the trajectory of amortization expenses related to acquired intangible assets, which significantly impacted operating margins.
• Assess the company's ability to maintain debt covenants given the high leverage from the CheckFree acquisition, despite recent debt repayments.