Fiserv Inc. (FISV) reported adjusted income from continuing operations of $163 million (excluding items) or $1.13 per share in the second quarter of 2011, which was up 13% from the year-earlier quarter. The reported figure surpassed the Zacks Consensus Estimate of $1.08.
Including one-time items, net income from continuing operations came in at $97 million, down 25% from the year-earlier quarter, mainly due to a loss of $61 million related to an early debt extinguishment.
Revenues
Revenues came in at $1.065 billion, up 4.2% from the year-earlier quarter. Adjusted revenue (excluding output solutions postage reimbursements) improved 3.4% year over year to $1.003 billion, driven by a 6% growth in the Payments segment and a 2% growth in the Financial segment.
Fiserv operates in two business segments: Financial Institution Services, and Payments and Industry Products.
Financial Institution Services generated revenues of $497 million, up 2% from the year-ago quarter. The expansion in the quarter was led by strong growth in community bank and credit union account processing businesses, which was partially offset by a continuing secular decline in check processing.
Adjusted revenues from Payments and Industry Products improved 6% from the year-ago quarter to $517 million, attributable to electronic banking, card services and investment services businesses. Fiserv continued to expand its consumer payment footprint by signing 107 electronic bill payment clients and 41 debit clients in the quarter.
Moreover, the company’s innovative solution Mobile Money and ZashPay were taken over by 450 clients and 870 clients, respectively.
Excluding the impact of the Wachovia de-conversion, bill payment transaction volume increased 7% year over year. Debit transaction volume increased 19% year over year.
Margins
Adjusted operating margin (excluding mergers, severance costs and amortization of acquisition-related intangible assets) plunged 30 basis points from the year-ago quarter to 29.3%.
The Financial segment’s adjusted operating margin decreased 10 basis points year over year to 30.8%, due to a decline in termination fee. The Payment segment’s adjusted operating margin improved 70 basis points year over year to 31.7%, led by strong, high-quality revenue growth.
Balance Sheet and Cash Flow
As of June 30, 2011, Fiserv had cash and equivalents of $675 million, up $158 million from the previous quarter. At the end of the quarter, long-term debt remained static at $3.4 billion from the previous quarter.
During the quarter, the company generated free cash flow of $91 million, compared with $128 million in the year-ago quarter.
Share Repurchase and Acquisition
During the quarter, the company repurchased 2.6 million shares for $163 million. At the end of the quarter, Fiserv had about 6.7 million shares remaining under a new 7.5 million share repurchase authorization in the quarter.
In the quarter, Fiserv entered into an agreement to acquire CashEdge Inc. for $465 million to expand its digital payments and channel strategies.
Guidance
Fiserv continues to focus on growth, especially high-quality revenue growth and innovative products.
For 2011, management reiterated its adjusted internal revenue growth expectation in the range of 2%-4%. Management also expects that the company’s innovative solutions, such as ZashPay and Mobile Money will fuel recurring revenue growth.
Fiserv now expects adjusted operating margins in the range of 29.5%-29.9% from the previous expectation of 29.9%. The company expects its adjusted earnings per share in the range of $4.42-$4.54, implying a 9%-12% growth.
Free cash flow is projected to increase in the range of 5%-8%, implying a guidance range of $771.8 million-$793.8 million.
Fiserv, which competes with Fidelity National Information Services Inc. (FIS), assists financial institutions and health plan administrators in managing their information systems, thus helping them deliver services to their customers efficiently.
We believe that the company will benefit from its strategic acquisitions and investments in technology solutions. However, we remain concerned about the company’s slow organic growth and margin setbacks.
We have a long-term Neutral recommendation on Fiserv. Currently, Fiserv has a Zacks #3 Rank, implying a short-term Hold rating.
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