Business Context and Reporting Period
Fiserv, Inc. filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2009. The company provides transaction processing, electronic payments, bill payment, outsourcing, document distribution, and financial technology solutions, primarily through its Financial Institution Services and Payments segments.
Results are affected by the July 2008 sale of a 51% interest in substantially all of the Insurance Services segment. Insurance results are excluded from consolidated results beginning July 15, 2008, but remain in the 2008 comparable periods.
Key Financial Metrics
| Metric | Q2 2009 | Q2 2008 | Six Months 2009 | Six Months 2008 |
|---|---|---|---|---|
| Total revenues | $1,032 million | $1,292 million | $2,076 million | $2,598 million |
| Operating income | $232 million | $227 million | $450 million | $457 million |
| Operating margin | 22.5% | 17.6% | 21.7% | 17.6% |
| Income from continuing operations | $114 million | $102 million | $216 million | $201 million |
| Net income | $140 million | $100 million | $243 million | $429 million |
| Diluted EPS | $0.90 | $0.60 | $1.56 | $2.60 |
| Operating cash flow from continuing operations | Not separately provided | Not separately provided | $378 million | $395 million |
Processing and services revenue was $860 million in the second quarter and $1.712 billion for the first six months. Product revenue was $172 million and $364 million, respectively. The effective tax rate for continuing operations was 38.2% in both 2009 periods presented.
At June 30, 2009, cash and cash equivalents were $309 million, compared with $232 million at December 31, 2008. Total debt, including current maturities, was $3.880 billion, down from $4.105 billion. Long-term debt was $3.751 billion and current maturities were $129 million.
Fiserv had $900 million available under its revolving credit facility, with no borrowings outstanding. Management stated that operating cash flow, cash on hand, and available revolver capacity were expected to fund operating needs, debt service, capital expenditures, and lease payments. Capital expenditures were $98 million in the first six months of 2009.
Material Changes Versus the Prior Comparable Period
- Total revenue declined 20% in both the quarter and first six months, primarily because Insurance revenue of $235 million in the second quarter and $480 million in the first six months was no longer consolidated.
- On a segment basis, Financial revenue declined 8%, while Payments revenue increased 2% in both comparable periods.
- Financial revenue was pressured by the downturn in U.S. mortgage markets, including lower home equity loan processing revenue, reduced contract termination fees, and lower software license and professional services revenue.
- Operating income increased 2% in the quarter but declined 2% for the first six months. Operating margin expanded 490 basis points in the quarter and 410 basis points year to date, reflecting the Insurance disposition, operating efficiencies, cost reductions, and improved business mix.
- Payments operating income increased 10% in both periods, supported by CheckFree-related cost savings, transaction-processing growth, and operating leverage.
- SG&A declined 16% in the quarter and 11% year to date. The first quarter included $15 million of employee severance and related reduction-in-force costs.
- Interest expense declined 10% in the quarter and 16% year to date due to lower borrowings and interest rates. Approximately $225 million of debt was repaid during the first six months.
- Net income and EPS benefited from a $25 million after-tax gain in discontinued operations related to a contingent purchase price payment for a prior Fiserv ISS disposition. The first six months of 2008 included approximately $232 million of after-tax gains from prior business sales, making the year-to-date net income comparison unfavorable.
- Weighted-average diluted shares declined to 155.8 million in the quarter and 155.9 million year to date, versus 164.8 million and 165.1 million, respectively, in 2008.
Outlook, Risks, Contingencies, and Unusual Items
- The filing does not provide a specific numerical revenue, earnings, or EPS guidance range.
- Fiserv expected to receive approximately $70 million in the second half of 2009 from the proposed sale of the remaining Fiserv ISS business. The transaction remained subject to customary closing conditions and regulatory approval and was expected to close by year-end.
- Fiserv ISS assets and liabilities held for sale totaled $867 million and $783 million, respectively, at June 30, 2009. The business acted as custodian for approximately $12 billion of client-directed retirement plan assets; these client assets were generally not recorded on Fiserv’s balance sheet.
- Fiserv Insurance refinanced bridge financing in the third quarter of 2009. Fiserv, which retained a 49% interest, loaned the business approximately $65 million, with principal due in 2013.
- The company maintained $1.75 billion of interest-rate swaps that effectively fixed rates on floating-rate term borrowings at approximately 4.5% before financing spreads and fees. Approximately $40 million of related interest expense was expected to be recognized over the following 12 months.
- Key risks identified by management include economic weakness, financial institution consolidation or failures, reduced client spending, competition, client demand changes, execution and integration of CheckFree, completion of the Fiserv ISS sale, regulatory and privacy requirements, and Fiserv 2.0 initiatives.
- A patent infringement lawsuit brought by Leon Stambler alleges infringement involving secure online banking and bill-payment services. Fiserv denied the allegations and did not expect a material adverse effect, but stated that the ultimate outcome could not be predicted with certainty.
- The company was in compliance with its debt covenants at June 30, 2009. The term loan matures in November 2012, the $1.25 billion of 6.125% senior notes mature in November 2012, and the $500 million of 6.8% senior notes mature in November 2017.
- Disclosure controls and procedures were determined to be effective as of June 30, 2009, and no material change in internal control over financial reporting was reported.
Important Facts for Investors to Verify
- Reconcile reported year-over-year revenue and margin changes for the Insurance disposition and assess continuing-operations trends separately from discontinued operations.
- Verify the timing, regulatory approval, proceeds, and final accounting for the remaining Fiserv ISS sale.
- Assess debt maturities, variable-rate exposure, interest-rate swaps, covenant headroom, and the $900 million revolver availability.
- Evaluate whether Payments growth and Financial segment margin improvements offset mortgage-market weakness and declining contract termination fees.
- Review the sustainability of operating cash flow after capital expenditures, debt repayment, share repurchases, and the $65 million loan to Fiserv Insurance.
- Monitor the Stambler patent litigation, client indemnification obligations, and other contingencies for developments that could affect future results.