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Fiserv Inc.  (FISV - Analyst Report) reported adjusted income from continuing operations of $151 million (excluding items) or $1.02 per share in the first quarter of 2011, which was up 7% year over year.

However, the reported figure missed the Zacks Consensus Estimate of $1.04.

Including one-time items, net income from continuing operations came in at $114 million, down 7% year over year.

Revenues

Revenues came in at $1.05 billion in the first quarter of 2011, up 4% from the year-ago quarter and ahead of the Zacks Consensus Estimate of $1.033 billion.

Adjusted revenue (excluding output solutions postage reimbursements) came in at $982 million, up 3% year over year, driven by a 6% growth in the Payments segment and a 2% growth in the Financial segment.

The company operates in two business segments: Financial Institution Services, and Payments and Industry Products.

Financial Institution Services generated adjusted revenues of $480 million, up 2% from the year-ago quarter. The expansion in the quarter was driven by steady growth in the Account Processing business, which was partially offset by weakness in license revenue and a continuing secular decline in item processing.

Payments and Industry Products delivered adjusted revenues of $514 million, up 6% from the year-ago quarter. Fiserv continued to expand its consumer payment footprint by signing 100 electronic bill payment clients and 53 debit clients in the quarter.

Excluding the impact of the Wachovia de-conversion, bill payment transaction volume increased 8% year over year. Debit transaction volume increased 21% year over year.

Margins

Adjusted operating margin (excluding mergers, severance costs and amortization of acquisition-related intangible assets) came in at 28.3%, down 60 basis points from the year-ago quarter due to the operating loss in the Corporate segment and a decline in Payments margins.  During the quarter, Fiserv reduced its headcount by 700 and incurred $18 million on cutting down headcount.

The Financial segment’s adjusted operating margin increased 10 basis points year over year to 28.9%, which benefited from the company’s position in these operations. However, increase in investments and lower license revenue had a negative impact on the margins.

The Payment segment’s adjusted operating margin decreased 20 basis points year over year to 30.3%, due to investments on mobile banking, biller solutions, online banking and ZashPay.

Balance Sheet and Cash Flow

As of March 31, 2011, Fiserv had cash and equivalents of $517 million, down $46 million from the previous quarter. At the end of the quarter, total debt remained static at $3.4 billion from the previous quarter. During the quarter, the company generated free cash flow of $244 million, up 8.4% year over year.

Share Repurchase and Acquisition

During the quarter, the company repurchased 4.3 million shares for $261 million. At the end of the quarter, Fiserv had about 1.8 million shares remaining under its existing repurchase authorization.

In the quarter, Fiserv acquired Credit Union On-Line Inc., Mobile Commerce Ltd. and Maverick Network Solutions Inc. for $50 million.

Guidance

Going forward, the company will 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%, on the back of the Payments segment. Management stated that the company’s investments in new technology solutions, such as ZashPay and Mobile Money, will fuel organic revenue later this year.

Adjusted operating margins are expected at 29.9%, up 50 basis points from fiscal 2010. The company expects adjusted earnings per share in the range of $4.42 -$4.54, implying 9% -12% growth. The tax rate is projected at 37%.

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 assists financial institutions and health plan administrators in managing their information systems, which helps them deliver services efficiently to their customers. The company competes with Fidelity National Information Services Inc. (FIS - Analyst Report) Metavante Technologies Inc., Jack Henry and Associates Inc., and Open Solutions Inc.

We would like to wait for an improvement in organic growth and margins before turning positive on the stock. Thus, we render a long-term Neutral recommendation on Fiserv. Currently, Fiserv has a Zacks #3 Rank, implying a short-term 'Hold' rating.

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