FISERV INC. 10-Q Summary: Quarter Ended September 30, 2005
Business Context and Reporting Period
This report covers the quarterly period ended September 30, 2005, and the nine months ended on that date. FISERV, Inc. is an independent provider of financial data processing systems and information management services to financial institutions and employers. The company operates through three segments: Financial institution outsourcing, systems and services ("Financial"); Health plan management services ("Health"); and Investment support services ("Investment").
Key Financial Metrics
| Metric | Q3 2005 | Q3 2004 | 9M 2005 | 9M 2004 |
|---|---|---|---|---|
| Total Revenues | $1,011.6M | $934.7M | $2,981.2M | $2,763.3M |
| Processing & Services Revenue | $925.3M | $843.1M | $2,720.7M | $2,484.5M |
| Operating Income | $171.5M | $173.7M | $546.8M | $496.9M |
| Net Income | $112.9M | $92.4M | $366.0M | $280.2M |
| Diluted EPS | $0.60 | $0.47 | $1.90 | $1.42 |
| Free Cash Flow (9M) | $280.5M (vs $405.4M in 2004) | |||
| Cash & Equivalents | $174.0M (Sep 30, 2005) | |||
| Long-Term Debt | $588.7M (Sep 30, 2005) |
Material Changes vs. Prior Period
- Revenue Growth: Processing and services revenue increased 10% in Q3 and 10% for the nine months ended September 30, 2005, compared to the prior year. Internal revenue growth was 7% in Q3 and 8% for the nine-month period.
- Segment Performance:
- Financial: Revenue grew 8% (Q3) and 8% (9M). Operating income decreased slightly in Q3 ($145.8M vs $148.8M) due to reduced contract termination fees and ramp-up costs for Australian operations, but increased 9% for the nine-month period.
- Health: Revenue grew 15% (Q3) and 15% (9M). Operating margins remained stable at 8% due to the inclusion of lower-margin prescription ingredient costs.
- Investment: Revenue grew 5% (Q3) and 8% (9M). Operating margin improved to 19% for the nine-month period due to higher net investment income.
- Discontinued Operations: The company sold its securities clearing businesses in March 2005. Q3 2005 included a $3.6M tax benefit related to this divestiture. The 2004 period included a loss of $11.9M from discontinued operations.
- One-Time Items: The nine-month 2005 period included a $43.5M realized gain from the sale of Bisys Group, Inc. stock. This contributed $0.14 to diluted EPS.
Guidance, Outlook, and Risks
- Future Revenue Impact: Management expects the Financial segment to be negatively impacted by approximately $40 million in 2006 due to changes in three client relationships (acquisitions, transitions to software licensing, and in-house conversions).
- Capital Allocation: The company repurchased $458.5M of common stock during the first nine months of 2005. As of September 30, 2005, $7.4M shares remained authorized for repurchase.
- Acquisitions: The company completed seven acquisitions in the first nine months of 2005 for net cash consideration of $428.0M, including the BillMatrix acquisition.
- Contingencies: The company received an indemnification notice regarding documentation maintenance for former securities clearing business clients. The outcome is currently undetermined.
- Accounting Changes: The company will adopt SFAS 123R (Share-Based Payment) on January 1, 2006, which will require expensing stock-based compensation.
Investor Verification Checklist
- Verify the sustainability of the 10% revenue growth rate given the anticipated $40M revenue reduction in the Financial segment for 2006.
- Assess the impact of the $43.5M one-time investment gain on the reported nine-month EPS of $1.90.
- Monitor the resolution of the indemnification notice related to the discontinued securities clearing operations.
- Review the company's ability to maintain debt covenants (minimum net worth of $1.9B and debt-to-EBITDA ratio) given the $588.7M long-term debt balance.
- Confirm the impact of the upcoming SFAS 123R adoption on future net income and EPS.