FISERV INC.: Supporting Financial Services

Shareowner, Jan/Feb 2005

Fiserv's revenue and earnings have been growing at a high rate, very consistently, for a long time. With such stocks, there is always the risk of a sharp decline in: (1) the P/E ratio - and share price - resulting from a surprising decline in a company's actual (or expected) EPS growth; or, (2) the general stock market.

To mitigate these risks, prudent investors would only consider purchasing such stocks using a series of modest purchases spread out over several months, quarters, and even years - rather than a single large purchase.

Currently, some 6,000 subscribers use ShareOwner's Low Cost Investing Program to make such risk-reducing purchases. Commissions start at under $2 per trade. -Editor

Fiserv is the leading provider of information management technology to the U.S. financial services industry. The company provides: data processing, software systems development, item processing, cheque processing and imaging, business process outsourcing, and technology support.

Since its formation in 1984 (a combination of two bank processing organizations), Fiserv has developed a portfolio of over 200 products and services that it sells to over 15,000 financial institutions.

Historic & Future Growth Prospects

Over the longer term, a stock's price only goes up "a lot" if the company's revenues and earnings go up "a lot." So let's start our study of potential appreciation in Fiserv's share price by understanding the reasons for its historical revenue growth and examining the prospects for continuing or accelerating growth over the next five years.

Revenues

As indicated by the accompanying Revenue Profile, compound revenue growth has averaged over 20% during the past decade. During the latter half of the study period (1999-2004), growth accelerated to an average of 22%. For the fiscal year ending December 2004, revenues grew by an estimated 26% to $3.8 billion.

Important Products

The growth in financial transactions (e.g. credit card usage, debit cards, on-line trading, digital document archiving, internet banking, etc.) has required banks and other intermediaries to make substantial investments in automation technology to stay competitive. Rather than make such significant investments, many financial institutions have opted to hand off all or part of their technology requirements to third parties like Fiserv. Today the company has the following three principal revenue streams.

(1) Financial Systems and Services (65% of 2004 Processing and Services revenues vs. 79% in 2001)

Fiserv provides the "backbone" technology for such core services as account maintenance, transaction processing (traditional and e-commerce), mortgage banking, vehicle financing and credit processing for banks, credit unions, mortgage lenders and finance and leasing institutions. The company processes 300 million customer deposit, loan and lease accounts annually. In addition, Fiserv supports daily operations with complimentary services such as management information systems, accounting software, data storage, call centers, training, etc.

In addition, the company also offers comprehensive insurance processing services in a wide range of sectors such as life insurance, property and casualty insurance, flood insurance, and workers compensation.

(2) Fiserv Health

(25% in 2004 vs. 3% in 2001)

Fiserv helps over 1,000 employers manage and administer benefit plans (e.g. health, prescription drugs, dental, vision, disability and catastrophic medical) for more than 4 million employees (30 million claims processed annually). Additionally, these services keep selffunded employers abreast of, and in compliance with complex health legislation, while minimizing additional costs.

The company also provides services to other health plan sponsors such as insurance companies and Health Maintenance Organizations.

(3) Securities Processing & Trust Services

(7% in 2004 vs. 14% in 2001)

Fiserv provides: (1) traditional and e-trade settlement services for stock brokers and mutual fund dealers (4 million trades processed annually); and, (2) administrative, custodial and processing services to individual investors and third-party retirement plan and pension plan administrators ($30 billion in retirement trust assets under administration).

Important Markets & Customers

Overall, Fiserv provides software and services to more than 9,400 financial institutions, 2,500 insurance companies and 148 broker-dealers in over 60 countries. However, U.S. operations generate some 92% of total revenues.

More than 35% of all banks, thrifts & credit unions in the U.S. are Fiserv customers. No single customer accounts for more than 3% of consolidated revenues.

Important Competitors Financial Systems & Services. Fiserv's principal competitors include internal data processing departments; independent computer service firms; data processing affiliates of large companies; and, large computer hardware manufacturers.

Few companies compete across Fiserv's full spectrum of financial services products; the closest comprehensive competitor is the Bysys Group (2004 revenues of $1.0 billion). Other considerably smaller competitors include: Jack Henry & Associates (financial services; revenues of $500 million in 2003) and Metavante (revenues of $700 million in 2003).