FISERV INC. 10-Q Summary: Period Ended September 30, 2008
Business Context and Reporting Period
This report covers the quarterly period ended September 30, 2008, and the nine-month period ended on that date. Fiserv, Inc. provides integrated information management systems and services, reporting operations through four segments: Financial Institutions Services, Payments and Industry Products, Insurance Services, and Corporate and Other. The reporting period was significantly impacted by the December 2007 acquisition of CheckFree Corporation and the July 2008 sale of a 51% interest in its Insurance Services segment (Fiserv Insurance).
Key Financial Metrics
| Metric (in millions) | Q3 2008 | Q3 2007 | 9M 2008 | 9M 2007 |
|---|---|---|---|---|
| Total Revenues | $1,080 | $924 | $3,678 | $2,792 |
| Operating Income | $214 | $192 | $671 | $557 |
| Net Income | $78 | $121 | $507 | $343 |
| Diluted EPS (Total) | $0.48 | $0.73 | $3.08 | $2.02 |
| Operating Cash Flow (9M) | $579 | $407 | ||
| Long-Term Debt (Total) | ||||
| Cash and Equivalents | $472 | $297 | $472 | $297 |
Note: Net Income for the nine months ended September 30, 2008, includes $232 million from discontinued operations, primarily gains from the sale of Fiserv ISS and Fiserv Health.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 17% in Q3 and 32% year-to-date (YTD) compared to 2007. This growth was driven primarily by the CheckFree acquisition, partially offset by a decline in the Insurance segment following the sale of a 51% interest in July 2008.
- Segment Performance:
- Payments Segment: Revenues surged 116% YTD due to CheckFree integration. Operating income increased 160% YTD.
- Financial Segment: Revenues grew 7% YTD, but internal revenue declined due to a downturn in the U.S. mortgage market affecting home-equity processing.
- Insurance Segment: Revenues dropped 82% in Q3 as the business was sold mid-quarter.
- Expenses: Selling, general, and administrative (SG&A) expenses increased 70% YTD, largely due to amortization of acquired intangible assets ($65 million incremental) and merger integration costs ($28 million) from CheckFree.
- Interest Expense: Net interest expense increased 467% YTD to $187 million, attributed to debt incurred to finance the CheckFree acquisition.
- Discontinued Operations: The company recognized $239 million in after-tax gains from the sale of Fiserv ISS and Fiserv Health during the first nine months of 2008.
Outlook, Risks, and Management Commentary
- Capital Allocation: Management utilized operating cash flow and proceeds from business dispositions to repay approximately $1.1 billion in long-term debt during the first nine months of 2008. Total debt stands at $4.3 billion.
- Share Repurchases: The company purchased $244 million of common stock YTD. A new authorization for up to 10 million shares was announced in July 2008, with 6.8 million shares remaining as of September 30, 2008.
- Risks and Contingencies:
- Regulatory Approval: The final portion of the Fiserv ISS disposition is pending regulatory approval, expected to close by Q1 2009.
- Economic Conditions: Management cites the general economic slowdown and the health of the financial services industry as factors that could impact client demand and discretionary spending.
- Integration: Ongoing integration of CheckFree operations remains a key focus, with associated costs impacting current margins.
- Liquidity: The company maintains $472 million in cash and cash equivalents and $634 million in available borrowings under its revolving credit facility.
Investor Verification Checklist
- Discontinued Operations Impact: Verify the sustainability of earnings by excluding the $232 million gain from discontinued operations, which significantly inflated YTD Net Income.
- CheckFree Integration Costs: Monitor the trajectory of amortization expenses and merger-related SG&A costs to assess when full margin benefits from the CheckFree acquisition will be realized.
- Debt Servicing: Review the impact of the $1.1 billion debt repayment on future liquidity and the company's ability to meet covenants given the high interest expense ($187 million YTD).
- Insurance Segment Transition: Confirm the accounting treatment of the remaining 49% interest in Fiserv Insurance and its impact on future "income from investment in unconsolidated affiliate."
- Mortgage Market Exposure: Assess the extent of the decline in home-equity processing revenues within the Financial segment and its potential to persist in a downturn.