FISERV INC. 10-Q Summary: Quarter Ended March 31, 2007
Business Context and Reporting Period
This report covers the quarterly period ended March 31, 2007, for Fiserv, Inc., a provider of integrated information management systems and services. The company operates through three segments: Financial Institution Services, Insurance Services, and Investment Support Services. The financial statements are unaudited.
Key Financial Metrics
| Metric | Q1 2007 | Q1 2006 |
|---|---|---|
| Total Revenues | $1,219.4 million | $1,096.7 million |
| Operating Income | $193.4 million | $193.0 million |
| Net Income | $113.6 million | $116.2 million |
| Diluted EPS | $0.66 | $0.64 |
| Operating Margin | 15.9% | 17.6% |
| Free Cash Flow | $121.5 million | $143.3 million |
| Long-Term Debt | $821.9 million | $747.3 million (Dec 2006) |
| Cash and Equivalents | $200.8 million | $185.3 million (Dec 2006) |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 11% ($122.8 million). Product revenues surged 31% due to new clients in pharmacy management and workers' compensation, while processing and services revenue grew 2%.
- Margin Compression: Operating margins declined 1.7 percentage points to 15.9%. This was driven by a $29.7 million drop in high-margin flood claims processing revenue and the inclusion of low-margin prescription product costs in both revenue and expenses.
- Segment Performance:
- Financial: Revenues up 10%; Operating income up 23% to $159.9 million, aided by contract termination fees ($9.0 million vs. $3.9 million prior year).
- Insurance: Revenues up 15%; Operating income fell 51% to $27.9 million due to the loss of flood claims revenue and lower margins in pharmacy/compensation businesses.
- Investment: Revenues flat; Operating income declined 8% to $5.5 million.
- Capital Allocation: The company repurchased 2.7 million shares of common stock for $141.8 million and paid $43.4 million for acquisitions.
Outlook, Risks, and Management Commentary
- Guidance: Management expects the effective income tax rate for the remainder of 2007 to be 38.5%.
- Liquidity: The company maintains a $900 million revolving credit facility (expandable to $1.25 billion) and a $500 million commercial paper program. Approximately $370 million was available for borrowing as of March 31, 2007.
- Share Repurchases: On January 31, 2007, the board authorized the repurchase of up to 10 million additional shares. The company prioritizes share repurchases over dividends.
- Legal Contingency: A class action lawsuit was certified against Fiserv Trust regarding an alleged Ponzi scheme involving self-directed IRAs. Plaintiffs seek $120 million in compensatory damages plus punitive damages. Fiserv intends to contest vigorously; no accrual has been made as the outcome is uncertain.
- Accounting Changes: The company adopted FIN 48 regarding uncertainty in income taxes effective January 1, 2007, with no cumulative adjustment to earnings. The company is assessing the impact of SFAS 157 and 159 regarding fair value measurements.
Investor Verification Checklist
- Verify the sustainability of the 10% revenue growth in the Financial segment given the volatility of contract termination fees.
- Monitor the Insurance segment's margin recovery as flood claims revenue is expected to be inconsistent.
- Review the status of the Fiserv Trust litigation and potential impact on the Investment Support Services segment.
- Confirm the company's ability to maintain debt covenants (consolidated indebtedness limited to 3.5x EBITDA) amidst increased borrowing.
- Assess the impact of rising interest rates on net interest expense, which increased $2.3 million year-over-year.