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

Good morning, everyone, and thanks so much for joining. I'm very pleased to introduce Fiserv this morning. I think it's been about 15 years in a row now that Jeff Yabuki has been with us to speak for Fiserv, and it's been an incredible run. I think we -- he's extended the streak of 10%-plus EPS growth to 34 years. The stock's beat the market, I think, the last 14 years in a row now. And so it's been quite a run. We're thrilled to have them with us again. And maybe to kick it off, Jeff, you could discuss with us why is now the time for the transition out as CEO and Frank to step in.

Yes. Thanks, Dave, and thanks for having us. We're excited to be here. We thank you for your support over the years. It's certainly an interesting time in the industry. From my perspective as you noted, it's been -- this is year 15. We've had 14 pretty good years. And really for the last probably 3, 5, 7 years, we've really been working on succession, what was the right plan, how do you bring in the right leadership. From a principle perspective, I've always believed that organizations benefit from change and change in leadership. And even though we had done well, I believe there's a lot more ahead. And so when working closely with Frank over the last 18 months, I could see the things that Frank brings that are different than the things that I do. I think we have very complementary skills. As everyone knows, Frank did a tremendous job at First Data. And obviously his career is -- has been tremendous over the last, call it, 30-plus years of leadership and demonstrating success after success after success. And when you add that all together, it certainly made sense. I had told myself if we got in, we're building the kind of value for clients and shareholders and associates that I believe we would do, that Frank would be a natural handoff. He knows the business. He knows the industry. And as we got into it, I could see again what Frank brought. But really as the coronavirus crisis hit and I saw firsthand how Frank brought the organization together through his leadership, his understanding of what to do, not just on a day-to-day basis but what to do around a crisis, how to coalesce. And I could actually see, it's a little bit like time-lapse photography, you could see the organization coming together every single day. And as I watched that, I thought if it was something that was potentially going to happen over the next year, 1.5 years or so, given the acceleration that I saw and the leadership reaction, the positive reaction, it felt like, "Let's make the announcement. Let's kind of continue on the momentum that we have." Frank and I have worked very well together for the last 18 months. People often hear us talking about the fact that we'll talk multiple times a day, very aligned on what to do with Fiserv. The "what" is going to stay very intact. The "how" is going to be different. Frank is going to bring Frank's skills and Frank's style and unlock value that I couldn't get at over the last 14, 15 years. And that's going to translate because of the shareholder value creation platform that we put together. That's going to create, we think, more value for everyone, at a time where I think the markets and our clients are looking for new ways and new differentiated value proposition.

Yes. Well, thanks for that. And Frank, you certainly created tremendous success at First Data into what is now a nice market share gain where you developed Clover. You bought ISV assets. You've really diversified into some really good, good places. Maybe you could talk a little bit about how you see the future now at Fiserv and what you're going to do.

Yes. Well, first of all, thanks for recognizing the journey. I actually thank Jeff a lot more because he recognized it as we sat together and talked about the opportunity. And I think it's important to recognize we've been on this for 18 months together. So Jeff talks about the rigor we may bring in a different fashion than we did before, but the pillars of our strategy are the same. And the pillars of our strategy, very client-centric, client value creation model that has a tried and true capital allocation model that's kind of unparalleled in my mind. And so sometimes you have change in leadership and its change in direction. Or I know there may not be a lot of baseball fans on the call, but I talk about earned run averages a lot. And all the runners on base are mine right now. They were mine and Jeff's. There's not a rewriting of the strategy. We will be a grower. We will accelerate growth. We will expand margins. I mean the $1.2 billion synergy that we're working on, which half of it fundamentally has already been actioned. And you hear about that coming into this year. And Jeff was very clear early on that we were trying to recession-proof the company through this synergistic opportunity. You'll watch us invest in our growth areas. You'll -- but you'll see our margins grow, you'll see accelerated revenue, and you'll see the tried and true capital allocation methodology. And we got here as partners. We got here as 2 guys, one from LA, one from Brooklyn, who figured out they may speak different and our words will sound different, but our strategy would be intact. And I think the reason Jeff came and said, "I think it's time to do this," was we had aligned on that strategy. We had the team aligned. We put it together. So we're looking at a situation going forward where we're going to continue to invest in clients. We're going to continue to invest in growth. But we are going to grow those margins, and we are going to use our free cash flow to buy back the stock in the capital allocation methodology. We will grow EBITDA to deleverage. And we will look at tuck-ins at a time that makes sense for our client franchise and for our shareholder franchise. What happened at Fiserv, I was so admirable of, right? So I joined this, I felt like I hitched my wagon to Jeff. And if you think about the attributes that we would have aspired to at First Data, we have them today. And we took the best of both companies. So I think you'll get growth dynamics. I think you'll get operating leverage dynamics, that margin expansion and that great capital allocation methodology that I praise Jeff for so dearly.

Great. Well, thanks for that, and it's been about a year now since the combination. It'd be interesting just to hear your thoughts on what's been the biggest positive surprises and maybe the biggest challenges since you being in the journey.

I don't know statistically where I would sit in having been through big mergers. But I know sometimes people worry about my age because Jeff and I are the same age. But like Jeff and I like to say, 60 is the new 40. But I go back to merging Shearson and Hutton and then go all the way through that. And we were very committed to having a real partnership ourselves and then bringing a team along. And I've seen a lot of at-the-top battles and factions. And Jeff and I committed to each other, and I to say -- I would say everybody would agree to it. We've never gotten to be upset at each other. We never woke up with that conversation. And we'd probably talk at the start of the morning and the end of the day. So we brought the team together. And I think the #1 element was the team. Now we found more opportunity because the team galvanized well. And it was not the Jeff and Frank Show, but it was the leadership team, the senior leaders, the top 200 members of our team and then every other team member. So I think the teamwork's off the charts, but it's off the charts for shareholder and client value. Our indicators relative to many things have gotten better even during COVID that you wouldn't necessarily have thought could have happened in a merger. So I think teamwork, and then execution which followed the teamwork, is beyond our expectations. We worked hard at trying to make that happen though.

Yes. Dave, I would also add that one of the things that we talked about when we announced this deal back in January of '19 is after spending time with Frank and the team and looking at the data, we believe that the markets had missed all the good work that the team had done. And that good work was creating a -- to accentuate Frank's point, creating a strong operational capability. And that operational capability, combined with some of the investments and a focus on execution, drove the merchant business. And we really saw that deliver last year, right? So that -- and we saw it again in the first quarter, right, having results that were pretty strong, at least relative to others in the industry. And so the -- when you think about the positive surprises, they've really been around the synergy opportunities, not just those around revenue. We took revenue up 20% as you know, to $600 million. And we see a lot more opportunity there to continue to deliver. And we don't think that the -- unfortunately, when you do large transactions, you have to put a box around timing. But I think more about revenue growth on a decade basis for this business. Bank merchant, we think, will do well over $200 million in the first 5 years, but we'll just be get -- barely getting started in that time frame, and that's going to continue to deliver. And some of the other integrated sales opportunities, whether they be credit, some of the other payments opportunities as they come together, they may take 2, 3 years to even put together. Those aren't in our numbers. But for -- if you take a decade view of the company, you think about free cash flow generation on a decade basis. And then you combine that with going from $900 million of synergies to $300 million plus at $1.2 billion. And as you know, Dave, it doesn't include interest savings. The market's been quite generous on an interest savings basis. But the ability to take what First Data had done and what Fiserv had done in the category of call it operational efficiency and operational effectiveness, those synergy targets don't include what we think are some of the more innovative ways to better streamline our cost infrastructure, deliver more value for clients on a less -- on a per X basis. When you put all that together and then you layer on something like international synergies that we never even -- we didn't have -- either we didn't have the time or we had enough, but we hadn't really got -- Frank I know is laughing about this. We didn't spend any time on that. And you heard in the first quarter, we signed OXXO, right, one of the largest retailers in -- certainly in Mexico and the rest of South America. We're seeing much more opportunity there. So it's just so much more opportunity. And when you combine that with how the team has come together and the quality of the combined team, Frank likes to use the metaphor "best team on the field" a lot. When you put that together, we think there's a lot of opportunity to drive more revenue, higher margin, more free cash flow and continue to allocate it very effectively over time.

Yes. Well, thank you. That's good. And maybe we could jump into the accept -- the Merchant Acceptance segment. And maybe you could talk a little bit about the current environment, how COVID's impacted the segment? And has this changed in May? And maybe weave in a little bit about how much is fixed revenue and how much is variable with the environment?

Well, thanks. I think you saw our first quarter and that had the elements of COVID in it. We're watching the volume today, and we're watching it continually, and we continue to see an uptrend. We continue to see acceptance. And the fact that we would say variable is interesting. Because what we knew, and obviously Jeff had pressure tested this 12 ways pre-acquisition including back to [ OE ] and what actually happens to this business, what we knew is that there's a lot of stability even as you're in a recession. And I think what we see is that we're the industry leader. We have geographic dispersity. We have diversity of client mix. You've seen that in our numbers. We have the best distribution system in the industry that's from bank partners, and you see how well the bank partner adoption has occurred to sign up with us. You heard us announce over 100 sign-ups since we did the deal, which was one of the premises. So our distribution -- and then we have ISV. We have a strong e-com business, which you watch its growth in Q1 and last year, you're seeing that strong double-digit performance. And we continue to invest in these. So although we're in a very difficult time, we continue to see growth occur. And we can see -- then you see our technological adoption, right? You heard us talk on the call about 1,800 restaurants. We've built an app over the past month, 1,800 restaurants adopted it. That thing is exponentially growing as we talk here now and the adoption of it. So our technology base, which we had Clover as one of the elements, but obviously Clover was also designed to serve e-com with its virtual terminal capability. So I think the strength, and Jeff had identified this as we were going through doing the deal, the strength of the diversification of geography, business mix, distribution channel, our technical investments in e-com and ISV, along with our ongoing commitment to Clover, has allowed us to continue to grow and build function during this period. Now we are in a difficult time. And so we've watched it continue to recover, but we're nowhere near where we were in January. And we're going to continue to work very hard to continue to help our clients. We've taken a very client-centric approach to this, that one of our jobs is to help our clients in this very difficult time. And that would be our bank clients also very deeply. And we were there serving them and these businesses that need to come back. So hopefully that gives you a flavor of it.

Yes. And maybe you could talk a little bit -- you talked about ISV, international, Clover. How big is Clover now in terms of revenue? And can this grow even in the difficult environment that we're in right now?

Yes. Well, some days I think back on maybe my overemphasis on Clover as a breakout for early on, as a matter of fact when we only had 8 engineers and a patent back at First Data. And maybe we never did it justice, the totality of our other elements, both international and e-com, and the power of distribution. But Clover is a growth engine and we talked about it, what type of numbers it had and how it had grown over the past year. We talked about those type of elements of growth. It is a big part of our enablement capability. What I mean by that is by itself, we don't treat it as a business. We treat it as an element to help our clients run their business. And that open platform that you see the bank acceptance of it, but we also see the ISV acceptance of it and we see mid-market acceptance of it, and we're continuing to build out those functions. We view it as a platform. We have lots of form factors. You see Flex playing very big right now as a mobile device to be able to allow restaurants to go out and have people do pickups. And we watch it move from restaurants to other business who recognize people may not want to come in their store, but may want to acquire goods from them. So I think when you think about Clover, it has a multi-dimension facet to it. ISVs would like it. Its virtual terminal e-com capability is very strong. It helps banks grow their client base. And we continue to invest in it and feel very, very strongly about the future growth of it.

Dave, I would just add one quick point to that, if it's okay. And that is that I think people -- you're asking on kind of how big is Clover, right? We talked about back in Q3, it was -- kind of crossed the 100 billion annualized threshold and continued to grow. And we think that that's a critically important aspect, but I want to just reinforce a point that Frank made, and that is Clover as a platform. And transactions process is one piece, but other value that we can add, which becomes less variable on a click basis and more kind of recurring revenue that we like as a company. There's a lot of opportunity there. And I think we're in the very, very early stages. That's one of the areas that, that you'll see us investing in. It's going to drive more value. But we also have a different kind of connectivity when you think about platform, and Frank referenced it. And that is when you connect to the banks, now we have cash management technology. So we're able to create unique connectivity between Square and bank cash management. We've got digital enablement through the online banking and mobile banking technologies that we have more broadly. So that, there's an opportunity to even further expand the definition of a platform and drive different growth across the enterprise. Whether it's in ISV or in cash management, it's just a better value proposition for the market. And we think it's unique versus the other providers in the market.

I think versatility, and what Jeff is talking about is that total versatility. We just have a lot more versatility through Clover and ability to address banks' needs, integration and delivering for businesses in a manner that makes us a strategic partner to every one of those small and medium-sized and large businesses.

Yes. Well, we see it all over. So it's a great sign. It's great.

Well, early on we had a saying, and this is probably when we had 8,000 Clovers in the market, we'd say, "We're going to have Clover all over."

It's great.

Thanks.

Yes. Maybe moving to the fintech segment, kind of the legacy Fiserv segment, how does the current environment play there? I mean is this such a recurring business that it just keeps growing even in an environment like this?

Well, I'd say first of all, it is clearly our most resilient business. But what I found, and I like to reflect back always when Jeff and I first talked of course, I believe I understand something about how banks operate and what banks need. And having kind of grown up in a small regional, which could even today equal a community, I had an understanding of the inner workings of these financial institutions and the actual depth of what they need from us and how they view us as their strategic provider. And as Jeff and I talk to bank CEOs during this and when we check in daily, it's about how we could bring them more capability. I was somewhat pleasantly surprised that our implementations, our professional services, our digital capability which [ I hope ] to sometime reach 6x, we were doing 6x the norm in digital in many matters. So I think we have a view on this. We think digital will -- the speed at which digital is moving is probably 6x or more. Just like Jeff and I would say, COVID brought this team together at a speed that may had taken extra few years [ for our ] tea because we're together every day like this, governing and running and improving. It has done the same to digital. So digital adoption has exponentially grown. And our assets, I think, are far leading the pack in terms of client. So yes, it's the most resilient. And yes, it is integrated in a manner which causes us to have this tremendously sustainable model. But to my surprise, what's happened is we have greater demand. We have greater demand for us, which wasn't really clear on, say, March 11 when we all said it's time to go home. And we look at client indicators and see how well they were communicating with us digitally. We were communicating with them digitally and how we were serving our thousands of bank partners even in the remote locations that we're operating out of. So I loved it because of where I grew up and how I looked at it when Jeff and I worked on it, the transaction. I think that the growth opportunities there are very, very large and that we will continue to invest and grow and expand margins and improve the model with our clients. I think it's a fabulous asset and it's rarefied air to have the opportunity to be working on it.

Yes. Well, that's great to hear. And we have a couple of minutes left. Maybe we can talk about the Payments segment. There's so much in the Payments segment from both First Data and Fiserv. There's the credit issue. There's network from First Data. There's debit processing, bill pay from Fiserv. How does that operate in a current environment? What's more and less impacted? How are you seeing that?

Well, I think the Payments segment, which has a fair amount of resiliency to it also as you all know, is the best payments segment in the world. I think our assets are unparalleled. And what we watch is products like our biller business become more valuable even to government entities to be able to operate. So I think that we have the ability to enable payments in any form, any shape, any way from point-of-sale through any other mechanism that our clients want. So we're a client-centric company. We're an innovative company. And when you take debit, credit, our prepaid assets, our biller assets, you look across the P2P opportunities that are getting created, it's another one of those places where we believe we have tremendous optionality to serve our clients the way they want to be served. And we're seeing it manifest itself. Some of these assets, people might have wondered, well, how do they play? Well, we're finding innovative ways to use biller, to use our prepaid products in a manner to help the economy and help people operate when you can't physically be there. So it's the best set of these assets in the industry. I feel very, very confident saying that. And I feel -- I think financial services partners feel that way, as do corporations. And I think you'll continue to see us grow and invest it. Our debit is in parallel -- is unparalleled. When you put those debit businesses together, what we could do for our clients is unparalleled. And you look at output, you look at credit, it's just -- it's -- I think Jeff and I believe this would behave like this. We didn't really ever count on a pandemic or do we ever want to think about [ wanting to gain. ] But watching how leaders have come together to bring them to clients to create value has been, in a very difficult time, has been very, very, very strong.

Dave, I would add -- I agree with everything that Frank said. I would add that remember strategically, we thought the biggest differentiator and maybe the hardest to try to quantify from a value perspective was the intersection of 40% share in merchant and this incredible set of payment origination, payment initiation assets and how would that all come together. And Frank referenced, none of us were expecting global pandemic. That's right, of course. We didn't expect to see debit freeze, right? Everyone saw that. I think it was one of the biggest surprises as you know, which has come back very nicely. But what that means now if you go into a retailer, they don't really want cash. But I've seen things like cash is dirty now. Well, if that's the case and you have this amazing set of assets, whether they be P2P and Zelle, debit, prepaid, just other ways to facilitate the movement, electronification of money, even the back-office systems like Dovetail and PEP+, there's just more and more energy there. And we really like where we sit again when you think about future growth opportunities. Things that we just hadn't contemplated in the near term may actually end up coming to fruition faster than we thought. And I think it all catalyzes around the idea that there's just more opportunity in Fiserv than we've ever seen before.

Yes. Well, that's all great. And that's about all the time that we have. But thanks so much for so many years, Jeff. I mean you've done an amazing job. And we look forward to many years with you, too, Frank. And yes, we'll leave it there. I wish we could all give you a big applause, but we don't have the big crowd.

Thank you, Dave. Thanks, very kind. We're excited. We're excited. Frank's going to do a great job. We're going to continue to partner through the end of the year, and we're going to drive a whole bunch of client and shareholder value for many years to come.

Great. Thanks, guys. Have a great day.

Thank you.

Thank you.