Fellow shareholders:
2007 was a year of action.
During the last year, we took important strides for the future. Some actions got headlines; others did not. The highlights include driving strong results in our initial year of Fiserv 2.0 execution, exiting businesses where we lacked competitive advantage, and completing our $4.4 billon acquisition of CheckFree Corporation. Through these actions, we intentionally re-shaped the company - equipping ourselves with the premier suite of technology solutions to serve the evolving needs of the financial services industry and its consumers.
We entered the year with significant momentum resulting from the launch of Fiserv 2.0, our strategic framework for the future. That plan serves as a platform for our overarching objective to provide Fiserv clients with highly valued products and integrated technology solutions, to enable them to best serve their customers. We are 100% committed to that belief. By putting our clients at the center of the Fiserv universe, we should provide very attractive long-term returns for our shareholders.
Our first full year of executing against our Fiserv 2.0 strategies was a success. We exceeded our integrated sales and operational effectiveness targets. We managed capital proactively and added appropriate leverage to our balance sheet in connection with the CheckFree acquisition. We also added several key leaders to help us accomplish our long-term objectives.
The biggest news of the year occurred on August 2, 2007 when we announced our acquisition of CheckFree. This acquisition punctuated our commitment to providing the best technology solutions for clients. It also underscored the importance of expanding our leadership position in payments, Internet banking and risk management solutions. The combination of Fiserv and CheckFree forever changes the financial services processing landscape and adds velocity to our Fiserv 2.0 initiatives.
Over the last several years the financial services industry has been driving robust growth for much of the data processing sector. The global credit crisis, combined with a weakening U.S. economy, has negatively impacted the near-term outlook for the financial services industry. While we would prefer a stronger overall business environment, we believe that our recurring revenue business model, diverse client base and industry-leading products should allow us to continue to deliver solid results. We also believe that in today's market more institutions will consider outsourcing as a way to reduce costs, and that our broad set of solutions positions us well to deliver that value. We remain optimistic about our future.
2007 Operating Performance
Our financial performance was strong in 2007. We achieved 10% revenue growth for the year - extending our track record of double-digit revenue growth. We continued our focus on expanding operating margins, which together with revenue growth, resulted in a 15% increase in adjusted earnings per share from continuing operations. We believe the strength of our business model and the sources of our revenue growth will provide for continuing improvements in operating margin for the foreseeable future.
Within Fiserv, we view free cash flow as one of the most critical operating measures of business strength. Free cash flow from continuing operations was up 15% to $438 million. We used the majority of our free cash flow last year to re-purchase more than eight million shares of Fiserv stock.
Serving clients extraordinarily well is what we do each and every day. Our client satisfaction remained near record levels, with more than 85% willing to promote our products and services. While we are pleased with that strong performance, we believe there are a number of opportunities to enhance the already strong bond that exists between us and our clients.
Fiserv 2.0: On Point
We are focused on delivering results that support Fiserv 2.0. We made a series of structural changes during the year such as modifying our organization structure, hiring new leaders, enhancing capital management, and better aligning our incentive structure.
We communicated specific Fiserv 2.0 performance metrics to provide visibility on our progress against two of our most measurable strategic themes: Enhanced Client Relationship Value and Operational Effectiveness. We achieved 115% of our 2007 integrated sales objective, generating $30 million of incremental sales to existing clients that we expect to turn into recurring annual revenue in 2008. We also delivered a more effective cost structure - achieving 133% of our operational effectiveness goal, which translated to $20 million of net cost reduction for the year. Momentum is strong entering 2008, and we expect to see even better results in our second year of execution.
We made important decisions in 2007 about the company we aspire to be. Altering the mix of businesses that compose Fiserv was among the most transformational actions implemented during the year.
As part of Fiserv 2.0, we adopted a principle that we would only participate in businesses where we either have - or could project - a clear path to industry leadership. While we clearly possess those characteristics in our financial businesses, we determined that operating Fiserv Health and Fiserv ISS would not allow us to maximize shareholder value. Accordingly, during the year we announced our intent to sell both businesses - along with two smaller lending operations - for a total of nearly $1 billion. We believe that the clients of the impacted businesses, as well as Fiserv shareholders, are now in a better position to optimize value as a result of these transactions. We will continue to manage our businesses with this principle in mind.
In addition to CheckFree, we acquired three other businesses in 2007 geared at building competencies and enabling our clients to achieve best-in-class results:
- BancIntelligence provides enhanced analytics to help financial institutions allocate resources and optimize profitability;
- NetEconomy brings world-class risk management and compliance tools to clients; and
- WorkingRx strengthens Fiserv's position in the workers' compensation pharmacy transaction processing market.
Although our first priority is the integration of CheckFree, we will continue to consider opportunities to expand our scale and differentiation through acquisition.
Innovation is also a driving force of Fiserv 2.0. We were recognized in 2007 by Bank Technology News at the industry's Innovator Awards. The sixth annual awards honored the banking and financial services industry's 25 most innovative people, companies and technologies. Bank Technology News selected our leadership for its top honor, citing our corporate strategy to offer a platform-wide suite of products to move the company from a business-unit-focus to one that is client driven.
Our new vice chairman, Pete Kight, CheckFree founder and former chairman and chief executive officer, was a recipient of the first lifetime achievement award and was inducted to the Innovators Hall of Fame for his significant achievements in bank technology.
Although we are grateful to have our management recognized, the awards are really a tribute to our 25,000 associates around the world whose creativity, innovation and tenacity should enable even greater results in the future. It's our people who continue to make the difference.
As management, we know that our ultimate responsibility is to provide value to clients and strong returns for shareholders. After strong 2006 total shareholder return, 2007 performance was mixed, with our 6% return beating the S&P 500 index but falling short of other relevant indices. Our two-year return of 28% led all major indices. Regardless of near-term share price performance, we are confident that we have taken the actions that should provide attractive returns for our shareholders over many years.
The New Fiserv
Inside the halls of the company we refer to ourselves as "The New Fiserv" to reflect the many actions we took in 2007, and the vast opportunities we believe await us. The New Fiserv has pro-forma annual revenue of nearly $5 billion and employs 25,000 associates in more than 250 locations around the world. We have a low capital intensity business model which delivers attractive earnings, operating margin and cash flow. Our human and financial capital is focused on capturing the tremendous potential we see ahead.
We enter 2008 as a leading provider of technology processing solutions for the broad financial services industry. We offer a variety of leading solutions in critical areas such as core processing, Internet banking, electronic bill payment and presentment, debit and EFT processing, item processing, risk management, and many others. Our goal is to not only deliver the products that we have today, but to increase integration and innovation so that we can provide even more client value in the future. That is the essence of The New Fiserv.
We envision The New Fiserv playing a larger role in shaping industry trends -including increased focus on the end-users of our technology. Our goal is to further influence the next generation of client relationships - specifically remote interactions - for retail and commercial consumers. We are increasing our thought leadership and product innovation to ensure that Fiserv clients are the beneficiaries of the best technology solutions available.
We believe that our shareholders will continue to benefit from a strong focus on profitable growth and capital allocation. We will avoid the trap of growing revenue for revenue's sake. We will stay keenly focused on revenues that are recurring in nature, and that have strong underpinnings of profitability. We are extending our broad operating competencies across the enterprise to enhance results. And, as stewards of the attractive cash flow generated by our businesses, we are diligently managing that capital to optimize shareholder value.
2007 was a rewarding year. We delivered solid financial results and took decisive actions to build your company for the long-term. We served more clients, and built more value, than ever before. We sharpened our focus on industry leadership, and are building on the strong foundation that has always been Fiserv. We are satisfied with our start, and excited about the future.
Jeffery W. Yabuki
President and Chief Executive Officer
Donald F. Dillon
Chairman of the Board
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