Fiserv, Inc. (FISV) Earnings Call Transcript & Summary

Delighted to welcome Fiserv to Evercore ISI's Fourth Annual Payments & Fintech Innovators Forum. Jeff Yabuki, Chairman and Chief Executive Officer. Welcome, Jeff.

Thank you, David. Nice to be here.

And joining us also, Bob Hau, Chief Financial Officer; Peter Poillon, Head of Investor Relations. Welcome, and thanks so much for being here today.

Our pleasure.

Just to start off, Jeff, on your fourth quarter earnings call, you guided to a 2020 internal revenue growth outlook of 6% to 8%, differs a little bit from the preliminary outlook, and you're very clear that it was preliminary and not guidance on your third quarter earnings call, which was at least 7% organic revenue growth for 2020. So what changed from the third quarter to the fourth quarter that widened that range on possible outcomes?

Sure. So -- and again, it's great to be here. Thank you. Actually, I think as we answered and reiterated several times on the call. In the third quarter, we had not given any guidance at all for anything. So we gave the quarter, the full year and then it was our belief, we gave a preliminary view and my view at the time, and it continues to be today that we would deliver at least 7%. However, when you go to give actual formal guidance, we thought it was both prudent and pragmatic to give a range, the range is 6% to 8%, the midpoint is 7%. We did the same thing on EPS, where we said we expect it to be plus or minus 25%. We gave 23% to 27%. So we think that made sense. Interestingly, in retrospect, I think the first case of coronavirus was reported on December 31. It just is, I think, illustrative of things happen, and we want to make sure that we could give a range that would account for the fact that there may be macro or exogenous factors that are out of our control. But as we sit here today, we feel quite good about our numbers. We -- nothing has changed since Q3. I would say that, that when we gave guidance -- the other thing that was important in our guidance that we hadn't given in Q3 is that we said we expected Q1 to be the low point in the year. We had a very good year -- sorry, very good Q1 in the prior year. We had a lot of periodic revenue, nonrecurring revenue and a very low tax rate, but most importantly, we also knew that synergies would layer in over time, and we expected that to aggregate over the year and actually create a very strong exit rate. But that does, again, reinforce that Q1 would be the lowest quarter of the year and then move up through the year through a strong exit rate going into '21.

Got it. For 2020, you also guided to at least $100 million of revenue synergies from the First Data acquisition, and then for 5 years post-deal, $500 million of revenue synergies. So as you look at 2020, what factors since you've acquired First Data support your conviction in achieving or exceeding that revenue synergy target for 2020? And then what factors in your mind create some risk?

Sure, absolutely. And as most people know, we're going to do our inaugural Investor Day on March 25. We're quite excited about getting out and talking in much more detail about synergies or maybe I'll talk about it as opportunities to drive more value for clients, more revenue for us to create more efficiency, to deliver the cost synergies that we talked about. We -- it's been great since -- really since we announced back in January of '19 and then closed on July 29. The teams have worked incredibly well together, serving clients. We've been able to get our arms around, frankly, much more opportunity that when we originally indicated that we would achieve $500 million of synergies. And I think from day 1, we thought we would be around $100 million in year 1. The thing that's been most interesting is people will remember, we gave 3 broad categories of synergies. We gave bank merchant a couple of hundred million, we gave network innovation and payments $250 million and just general, delivering more value to clients as cross-sell at $50 million. And as we've gotten into it, and the teams have worked so well together, we've identified many additional opportunities. For example, in our initial calculus international was 0, right? And we have found that international will be well off of 0 as we move through the 5-year period. And I can't say more than that now because we're going to talk about that at Investor Day. But we do see a lot. As far as specific to '20, we have found a couple of areas, again, that we didn't anticipate would ramp as quickly. So in our Output Solutions business, we have very strong card production, multi-color print, and we're finding our financial institution clients. Specifically, both of us have great relationships, but neither of us have the full set of capability. Now when you put the firm together, we have this incredibly robust offering, and we're actually getting clients to move more quickly than we anticipated. Again, much of that will ramp in the second half of the year, but contracting to move forward earlier than we anticipated. So we have a lot of conviction in both 2020 as well as moving forward.

Got it. And then sort of moving into cost synergies. I'd like to just start with operational effectiveness because you've had these plans for 10-plus years. Traditionally, $250 million over 5 years, and I think on average, you beat these targets by about 30%. You finished your 5-year plan a year early at the end of 2019. So should we expect a new operational effectiveness target at the March 25 Analyst Day? Or does this just get folded into the First Data cost synergy targets?

I think at this stage, we think it's a simpler to just work with the one cost synergy number. We have said publicly in prior discussions that we do believe that as we move through the cost synergy opportunities, we will find more opportunities that I would call bigger, more transformational. And some of those were already started in the prior operational effectiveness journey, but we won't specifically call that out at Investor Day. We will talk about what is not included and some of the things that we think will come in the future, but for right now, we're just going to stay focused on that opportunity.

Understood. So as a segue into First Data cost synergy targets, you've given out a target of $300 million of incremental cost savings for 2020...

At least $300 million.

At least $300 million for...

Bob would want me to correct that, David. You know the CFO always wants you to correct things like that.

Okay. So at least $300 million of incremental cost savings in 2020, which are the main drivers of that $300 million, are you -- have you made the most progress to date? And on which do you still have the most heavy lifting to do to achieve?

Sure. It's a great question. I would say that on balance, the synergy programs are going extraordinarily well. Both of the companies had a legacy of working towards efficiency that you mentioned the program that we have been running for about 14 years, First Data and the -- prior original First Data and their management team also brought an incredible amount of operational rigor to the party. So we have made, kind of, I would call, as expected progress on things like duplicate corporate costs, merger of corporate systems. We have made really strong progress on -- in the procurement area. Our partners have stepped up and said, "You guys are a market leader, we want to partner with you," and that's been great. We're quite grateful for that. We have made very good progress on converting contractors, taking outside contractors and either converting them into our offshore captive or, frankly, using our offshore captive when maybe we didn't have that capability, especially in the original First Data. And then I would say the last area that probably the area that we've been able to move, I would say, a bit more quickly than I anticipated is our technology and operations area. The original First Data business had a very significant capability there, especially on the operations side, and we've been able to bring things together a little bit more quickly than we anticipated, which is why we're very confident on the, at least, $300 million for 2020. And then like in revenue synergies, we continue to identify other areas in which we think we will be able to move forward. And you'll remember that in the base number of synergies, which does not include interest expense, which Bob and the team have done very well in reducing our interest exposure by more than $200 million, you add that together, you're even at the current levels at $1.1 billion plus. But on top of that, we had not included what we thought were the heavier-lifting IT items, like would you do any major platform consolidation? That's not really in the run. So as we think about the opportunities that we look at that original $900 million and say, yes, that's pretty much an achievable level. We've been getting more and more confidence, and we'll give updates on targets on March 25.

Great. And then at the time of the acquisition, you announced the $500 million innovation fund, and you were clear that there were a lot of new products you intended to deliver. How should we think about the timing and the magnitude of the rollout of that fund? Is that a 2020 event, 2021?

Yes. So we thought it was really important to differentiate this transaction, not knowing there would be others that would kind of follow along so quickly that we were -- not only would we create value for shareholders through the capture of synergies, but we would take that and redeploy at least $0.5 billion into innovation. And we've begun that journey already. So in the 2020 guidance, we've anticipated that we would begin to invest in some of these new innovations. There's no revenue associated with that. And frankly, we don't think they'll see any meaningful revenue in those areas, probably for at least 3 years. Because we're looking at ways in which we can drive new kinds of value. And so some of the areas that we begin to invest in are areas like e-commerce -- merchant e-commerce as we talked about. Looking at probably the most transformational area in the financial services space right now is just around payments and how money is moving, and how do you prepare for real-time money movement world. And so looking at fraud, risk, data, those kinds of areas. Really looking at making investments into card payments, which I think, in our mind, are just illustrative of how people will pay. We think credit vehicles are going to change meaningfully that they'll move from plastic to virtual, but the same kinds of technologies when they're moving, if you want to go into a sporting goods store and finance a fishing pole or a pair of shoes, that will be just as easy as pulling out a credit card. And so we see, given that we are the largest credit processor in the world, we see real opportunities there. So those are some of the areas. But again, I would say if you look about the ability to create a quantum leap forward, it's really going to be at the intersection of the applications, I think, in the data. And so just some of those investments will be around forming the right structure so that we can access data in a way that benefits our clients and their customers.

Fiserv has been a real leader in P2P payments. And you are probably the first in the industry to really get into this to make some aggressive investments. Where are we today in the evolution of P2P? We sort of went from Popmoney, now to Zelle, and you're kind of hinting at possibly a future evolution. Kind of what's next in P2P payments? And how do you think about Fednav when that comes out in 2022, 2023?

Absolutely. So I believe, we are still in the very, very early innings of P2P. And P2P is really an adjective for allowing people to move money more simply to other people or to small businesses. Think about that, as opposed to kind of traditional bill pay, either through a bank aggregator, like CheckFree or on a biller direct, using technologies like our BillMatrix technology or acquiring technology. But there's this kind of squishy middle where we don't know if we should take out cash or write a check or those kinds of things. P2P I think will obliterate that middle over the next decade. You'll always still have cash and checks and things like that because old people like me, who still want to do that occasionally. But that will not be the norm. So we are in the very early innings. Even I think -- I won't get this perfectly right, David, but Early Warning, put out a press release that they had over 700 million transactions, and I want to say $19 billion, something in that range for very early, that's a nice move. But keep in mind, Zelle as an application, we're the largest third-party processor of Zelle or third-party enabler of Zelle. That's the front-end application. When you go to something like Fednav or TCH real-time or card payments, EXL, STAR, those kinds of things. Those are the rails in which money will move. Zelle is ahead of the actual rail movement. We have a technology that we've talked about called NOW, which is basically a gateway/network to allow institutions to choose the way in which they want to move that money. And so whether they want to move on Fednav when it comes out in probably '23, '24 in that time frame or through the Clearing House through their RTP solution, EXL, STAR, but looking for what's the smartest way to route it, how do we -- how does that routing compare with fraud? And the most important inhibitor to all this kind of excitement around real-time is fraud and risk and making sure that the industry creates ubiquitous, fraud and risk solutions that protect the centers and the institutions and the receivers. Because the difference between an ACH, which is a slower-moving technology where you can actually sometimes stop fraud in the middle, real-time payments are irreversible and with finality, right? And so that is the real limiter. And I think the Early Warning, the larger financial institutions, us and other processors are all working to make sure that we bring that to bear, much in the same way that technologies have allowed credit card payments to move in that same fashion. But very early, very exciting. And we have -- we still have a couple of thousand institutions that are on Popmoney, using Popmoney, liking it. But ultimately, I do believe we'll move to a single network experience called Zelle in bank-based bill pay, and we will ride that wave with our clients for, I think, a long period of time.

Do you see Zelle at some point, adding a social feed like Venmo? It seems to me you're both competing for that high-growth millennial demographic, and the use cases, I think for Zelle have been very different from -- for Venmo. I mean do you see Zelle as continuing to be a very different product in the way it's positioned in the market? Or do you think it's going to become more viral and more, let's say, social over time?

I think over time, the entire world will become more social, right? It is the way the world is going. To your point, the use cases of Zelle tend to be very different. The dollar values, the transactions are much higher. The aggregate dollars are much higher. You actually have a different demographic. And so I think more about -- and this is probably not the perfect way to say it, but I think more of -- Venmo has more of an appeal of a millennial to millennial and I think Zelle will have more of an appeal to a more networked ecosystem of families regardless of age and demographics. And I think you'll see -- eventually, I do believe you'll see Zelle playing a role and how money moves between businesses and consumers, and consumers and businesses and a little bit more of that. And at the end of the day, banks do stand for safety and security and having Zelle be connected to banks where people feel the best about their money, I think, ultimately, will allow that to continue to prevail, but I do think it will evolve as the world evolves around social and everything else.

Great. You had a very clear, and I think, differentiated thought process when you announced the First Data acquisition, very different thesis than the market had on First Data. And one of the things we've seen since you've acquired First Data is Clover has really flourished. And Clover has been reporting TPV growth over 40%, I think, $100 billion annualized run rate. You announced 44 new bank merchant wins on the fourth quarter earnings call, quite a big number. What's the time line for converting some of these wins to revenue? And do you see that helping Clover possibly accelerate TPV growth in 2020 above where it is today? So I...

We're very excited about Clover. I mean to your point, the GPV has been moving very nicely. A lot of that growth is coming from expansion outside the U.S. and so you've got this not just a -- I'm sorry, not just a narrower North America opportunity but now becoming global and other countries and jurisdictions, we will continue to build. And so we're quite excited about that. None of that mutes our overall excitement for the bank merchant opportunity, which Clover is the centerpiece. We -- as we talked about, as you mentioned, 44-or-so institutions, about 1/3 of the banks have been competitive. We foresee that to be -- that's much higher than we anticipated. Larger banks coming on earlier than we anticipated. And so that's all very good news. We'll give an update at Investor Day. I think we've already said that we expected now our synergy target in that area to actually exceed our original estimate, all very good news, especially how early we are into the game. All of that said, we don't expect bank merchant to have a meaningful impact on actual purchase volume this year. We've got to convert. And remember, as you sign up banks, you tend to only get the front book. You tend to only get new clients. So there's no real conversion of back book. And so that will elongate that process. And again, it gets to a little bit of the synergy point that I mentioned when we talked about 2020, we probably won't see any real revenue until -- the later in the second half of the year. Now we'll see, obviously, pennies, nickels and dimes, but the real revenue is going to take really a couple of years to start to show up in the kinds of GPV numbers because you're talking about, what, $100 billion of GPV. It just takes real, real tailwind to get -- to show up in the numbers.

Got it. How do you compare your progress on bank merchant revenue synergies versus the stand-alone opportunity to cross-sell payments to merchants?

Well, the bank merchant opportunity has come on faster than we thought. We -- you don't know, right? You can't go out and talk to your client base. But the reception has been stellar. And the beauty there is, even though I mentioned a few minutes ago, you've got to implement, you've got to start working at the front book, unlike a payments sale, especially into a larger institution, that can take 12, 18, 24 months. You can get a bank merchant deal transaction up in 90 days, right? And so the ability to get them up in 90 days, now you have to help them go sell and do all of that, and that's the real ramp time. So the ramp is different. But that whole idea, and to your point, we thought the payments opportunity would be bigger than bank merchant. We now are saying bank merchant is going to be higher. We also think the payments opportunity now looks bigger than we anticipated, but the sales cycles are longer and the implementation cycles are longer. And so we won't see those benefits until into the out years. We're seeing a lot of early success and how we're -- you go back to your question about Fednav. Well, we happen to own STAR and EXL, that's actually a really great use case around network innovations, many more end points. The ability to do things more uniquely because of the combination, but a lot of interest. We -- here's a little bit of a preview of something you'll hear about it at Investor Day. Bob just got a little bit nervous, but we're seeing really interesting movement in credit, as I talked -- mentioned a moment ago. And so those -- lots of interest but they will take longer to come to fruition because larger transactions, longer sales cycles, longer implementation.

One of the key competitors for Clover is Square. When you look at the 40% TPV growth that Clover is putting up. Are most of those greenfield opportunities? Or are you going up against Square in a lot of cases?

I don't know -- most of the real growth comes from a combination of converting. So you go out -- when you go out and sell an existing merchant, they're often not brand-new merchants, right? And so our merchants tend to be a little bit larger, right? And so we're seeing success on that front. We do compete with Square on a day-to-day basis. I don't have the data to know exactly how they compare. But it's -- I mean, it's really, right now, a 2-horse race out there. And we started a couple of laps back, right? And I think we're moving up nicely. One of the things that Square does well is they've built a strong ecosystem, right? We're in the early days of building that ecosystem, right? The acquiring piece is just a small element of that value proposition, and so we're bringing new services, whether it be Clover Capital or Rapid Deposit. We're building more of the software ecosystem, right? It's really a platform. We're having good success in stadiums like Fiserv Forum, where Square is now the centerpiece of how money is moved. So those kinds of things we're quite excited about. And unlike Square, we're differentiated, not on only the acquiring piece, but all that we can put in the background, right? We have a vision for how the platform itself, how the Clover can become the brain of how merchants operate, right? And we'll talk a little bit about that at Investor Day as well.

Integrated payments, it sounds like. If we look at your traditional bank tech business, and I'd like to just shift gears a little bit there. So sort of heritage Fiserv business is pre-First Data. Along with your main competitor, you've traditionally led the Credit Union and Community Bank core processing market. So typically, smaller FIs, which you've had some very good success in moving upmarket. So with the acquisition of First Data, does this give you more of an opportunity to move upmarket since First Data historically at least on the card issuer processing side has worked with bigger FIs? So does that give you a bit of an entrée to do core processing a little bit more upmarket than you've been historically?

So when I think about the heritage Fiserv, I really think about kind of core account processing and then the things that surround it. So really driving through the community financial institution space, banks and credit unions. And then I think of digital payments, risk, right all the way up the ecosystem, right? And so whether it's CheckFree or PEP+. TransferNow, all kinds of products in that, Corillian in that set. The First Data combination has actually enriched the potential of both of those. So on the core side, where our target space we're not looking to bring core into $1 trillion institution. We're really focused on, I don't know, $10 billion to $50 billion -- sorry, $1 billion to $50 billion, right? The ability to drive our value proposition into institutions that really look for a more integrated provider. And so when you now have the #1 credit-issuing solution in the world, you now have the #1 bill payment solution in the world. We're the most scaled digital provider in the U.S. We've got transfer products, aggregation, risk, fraud, the whole suite, the ability to drive that through in an integrated, high-quality way, along with debit, network, all the other payments products. We now have -- because having a better credit product, Clover, all of that, which we think enriches. This merchant value proposition is doing well because banks want to sell -- banks and credit unions want to sell more to their commercial clients or small business clients. And so that bundle has gotten better. So we feel very good about that. The other thing is because of the heritage First Data relationships, at the top of the financial ecosystem globally, we are having great conversations around the other payments products that we have and ways that we can bring more to those relationships.

So in Evercore ISI's 2020 Bank Tech Outlook, we interviewed 85 bank and credit union CEOs, 27 of those were Fiserv customers and for the second consecutive year, payments was a top 3 spending priority for bank and credit union CEOs, and that had displaced regulatory and compliance, which had traditionally been #3 prior to that. And we asked bank and credit union CEOs what their appetite was to cross-sell First Data payment-related services and 31% said they were very interested in cross-selling. So it seems like that early traction is certainly there. And hopefully, in future surveys, we'll see that move up. But we definitely see that in our numbers. So just staying on that topic. So top 3 spending priorities for 2020, digital banking, which is the #1 for a while; IT security, #2; and then payments, #3. So as you look at those top 3 bank and credit union spending priorities, where do you see your greatest opportunity to take market share in those 3 spending buckets?

I would say we feel very good about our capabilities across each of those vectors. We've been growing digital greatly. We have a fantastic embedded base of clients and that embedded base just got larger. So we continue to move in that space, both on the license as well as the outsource Software-as-a-Service space. In the cyberspace, we've been building up our capabilities. We've made some investments in other companies. One of the things that First Data brought to bear was an incredibly sophisticated internal cyber capability, which we are looking at the different ways that we can use that expertise to enrich the services that our clients get and make sure they're well protected. There's nothing more important than them being safe. And then third, and the area in which I am the most excited, is really around payments. And it goes to what you were talking about earlier. I mean Zelle as an idea will completely transform the way money moves just having it all be electronic. And -- but that is going to require a significant modernization of the bank system. And so you'll remember we bought Dovetail payment hub a few years ago, right? Those modernization conversations are everywhere. And that's necessary to create the kind of -- or to answer the kind of expectation that consumers and small businesses and corporates have on money moving instantaneously the way everything else does, right, kind of the Amazon effect of money movement. So from that perspective, lots there, both on the modernization front, and we will be doing that for many clients on a Software-as-a-Service basis as well as installing payment hubs for larger institutions who want that. We are modernizing the way bill payment works, and we'll talk about that at Investor Day. We see a great opportunity to change that and create a powerful alternative to biller direct journeys, right, and doing it in one place and commercial payments, right? The way that money moves commercially between -- one of the interesting areas of innovation is if you think about the First Data -- the heritage First Data merchant business and you think about the Fiserv kind of consumer and payments business and the things that we do around merchants and the original Fiserv. If you put those together, you have the base fees of an interesting ecosystem. So just all of those opportunities as they come together, really do manifest in payments and that kind of a transformation. And frankly, we think we're best suited in the industry to partner with our clients, whether they be FIs or corporate or a merchant to go get there.

Great. Let me just pause for a minute to see if there are any questions?

Jeff, you talked in the past about accelerating revenue growth in both Fiserv and First Data, so through 2020, you expect revenue growth to accelerate, until sometime we feel great about that 7-ish range. Can you talk to the steps at both Fiserv data acceleration and First Data and synergies and about deal, in terms of getting that?

Sure. So I would say, if people will remember in January of 2019, when we made the announcement, one of the things that we said is we thought the market missed all the hard work that the original First Data had done. And as much as we'd like to take credit for bringing a lot to bear on First Data in 2019. Strategically, I don't think we can do that. And yet, the merchant business still grew, call it, 10% for the full year. And so that business was doing better than any one thought. And the things that we've been talking about up here and some of the synergy opportunities, some of the innovation investments we think are going to impact that business. And we talked in the fourth quarter about the number of e-commerce wins we had, I think people underestimated the progress that First Data had been making in that space. So just continuing strong performance in merchant, I would put it, number one. Number two is really -- if you think about the synergies, we talked about nearly $100 million or around $100 million in 2020. $100 million is, I don't know, what 70-ish basis points of growth right there, right? And some of the synergy opportunities that we talked about. And then in original Fiserv, we had 2 incredibly strong sales year starting to get transactions -- sorry, starting to get systems implemented and starting to see that revenue and just the continuing aggregate benefit of moving those businesses forward. When you add them all together, it gives us the confidence that we'll be right where we're saying we're going to be.

Jeff, I'd just like to close with a question on capital allocations. Look you've had a very firm view...

Sure. It's one of my favorite subject.

On capital allocation, historically, so you've recently restarted the share repurchase program, which historically has been your capital allocation benchmark, will that be the case going forward? Or has the First Data acquisition, let's say, whetted your appetite to do more deals?

Yes. So it's -- when we talk about -- and thank you for bringing up one of my favorite subjects. When we talk about share repurchase as a capital allocation benchmark, what we've said is, we will always compare other uses of capital against the allocation kind of on a risk-weighted basis against share repurchase. For the last several years, you know this very well, we have both been acquiring, allocating more than -- on a payout-ratio basis, more than 100% of our free cash to share repurchase and acquiring where we think it makes sense. That has not changed. We will continue to operate in that fashion, with one exception and that is we made a commitment to the rating agencies that we would take our debt-to-EBITDA ratio down to the kind of the normalized historic levels. Obviously, we could not have gone back into share repurchase and maintained our debt ratings had we not been doing what we needed to do. And this business will generate significant free cash flow, right? We were nearly $4 billion in 2019, that's going to grow with synergies and strong performance. And the amount of cash that we have to -- that we will generate over the next 3 years, including some -- obviously, some debt repayment. When you add it all together, you guys do the math, you know that we're going to be in a place where we're going to have even more capital beyond the free cash flow generated to allocate. So we're going to have a large pool to allocate. We're going to always use share repurchase as our benchmark and we will also acquire where we think it makes sense strategically, add scale and makes our proposition more differentiated and compare those potential uses to share repurchase.

Great. Well, Jeff, thanks so much for being with us here today. We greatly appreciate it, and look forward to Analyst Day on March 25th.

Thank you, David. Appreciate it.

Thank you, Jeff.