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

Good morning. I'm Bryan Keane. I'm senior analyst for payments processors and IT services at Deutsche Bank. And we're excited to have the CEO of Fiserv, Frank Bisignano, for a virtual fireside chat today. So Frank, thanks for joining us, and hopefully, you are safe. And what we'll -- the format today is we'll kind of fire through a bunch of questions, fireside chat questions. You can ask a question on the portal or you can always try to e-mail me, if that doesn't work, at my e-mail, bryan.keane@db.com, if you want to ask a question in particular we don't get to. So Frank, thanks again for joining us.

Maybe I'd just start out high level kind of thinking about big picture here. The July internal revenue growth turned positive, and I know it was a negative 1% in June. What's the trajectory you kind of envision for the recovery here for Fiserv?

Well, obviously, everything's pandemic-related and the pandemic recovery, obviously, has an effect. But as we go through the quarter we're in and look forward into '21, we see the continued growth of the business. And if you think about what we've talked about, I believe how we're set up for '21, it is very strong. So we expect to continue to see accelerating revenue growth in the business and get a very good boost coming into '21, as we've put everything in place and the business is performing well.

Got it. One of the things that stand out -- stood out to me was the sales were up 38% year-over-year in the second quarter, and I think they're up 20% year-to-date. That doesn't include 2 large issuer deals coming in on -- in 3Q that you announced on the earnings call. I think it's Atlantic Holdings and Genesis. What's driving the better sales? And what's the right growth rate Fiserv should be targeting for new sales growth annually in order to drive that higher organic growth you talk about?

Yes. So I think, first of all, the company Jeff and I put together had a vision for how we would operate in the client's office, and that would be this integrated solution set and integrated servicing model and integrated sales approach. And so that was one of our major mantras to each other, like we are going to deliver in the client's office the best experience. And that would be whether we were in issuer solutions and card services and account processing, across the board and how we bring it together. And the receptivity we've seen from clients has been very, very high, right? So we do end up with best-in-class platforms. If you think about Clover and its digital solutions, including virtual terminal and order ahead, you see those bank sign-ups that we talked about, more than 160 of them, right? And then you look at the omnichannel ISV solution with CardPointe, Copilot and Bolt. But our heavy investment in e-comm over the past journey is what kind of causes that stack to perform in an omnichannel flash in which your e-comm transactions up 30% in '19 and 26% in Q2. You saw us going 50 new enterprise e-comm deals and 86 year-to-date. Those are institutional large. And you see how the QSR is performing as 9 out of the top 15. And I think the sales force has done a great job. If you look at Atlanticus and Genesis, you'd say those were because over the past several years, we had invested heavily a single platform serving general purpose, retail, private label, commercial and loans as a complete differentiator and then a highly configurable APIs. So I think when you put all that together and then the investment in digital that allows us to bring all the other surrounds in there, whether it be Zelle, our mobility platform, how architect performs. So heavy digital emphasis, clients receiving integrated solutions as well. I do give the sales force a lot of credit for their work out there. But it's working as one team every day in the company. And it's a client-centric business model, which I think people feel very, very good about our ability to deliver against.

Is there a target rate for sales that you have internally that you're trying to grow? Is it double digits? Or is it even higher than that? And then how did those sales figures translate into the revenue growth exactly? I know there's probably some churn in the base, some contracts come off, some of the periodic revenue, just thinking about the pluses and minuses to grow organic growth.

Yes. I think the way you think about it is, first of all, we would expect to perform in the double-digit area. I'd look at 15 and a little north of that over the long haul here. That's our expectation, and we feel very good about it. Quarters will be quarters. But if you look at full year trajectory for this company over the long haul, that's how you should see it. When we look at the company as total and you take look at you're going to have price compression, you're going to have attrition, you're going to have organic growth and you're going to have new wins, and I think what you should see us being is fundamentally, over the long haul, a mid- to high single-digit grower with tremendous cash flow generation and capital allocation model that was tried and true at Fiserv. That will get continued here. And I think when you take a look at the short run, you get synergy sales in there, but that will always end up being a double-digit sales number in this company.

Got it. You talked about the e-comm transactions that were up 26% in the second quarter and the 50 new e-comm deals, which I think are being implemented in the second half. I don't know if Fiserv gets enough credit for having a big card-not-present or e-comm presence. Just thinking about what percentage of Merchant Acceptance is that now of card-not-present and how much will these new e-comm deals help push a little bit faster growth in e-comm helping accept its organic growth.

We've always had a fairly large e-comm business. And we've always been a provider of e-comm for very, very notable award names, sometimes not always recognized by the market. But I think when you look at overall, our e-comm growth continues to outstrip out card presence. And when we bring in the virtual terminal in Clover, when we bring in the other digital presence items, you really see us having a tremendous opportunity to continue to expand on it. When we talk about expansive growth in omnichannel transactions, like order ahead for QSRs, we're doing it for 9 of the top 15. And I think when we bring the ISV platform in along with the Clover platform, we expect these growth numbers to continue. We expect it to continue to be a larger portion of our total growth in the company. And that's really, if you go through the trajectory of the life of this merchant business, what you'd see is a large Clover presence, an overgrowing, strong, double-digit ISV presence and a strong, growing e-comm presence, and that's why we produce the type of numbers we have, fundamentally 9% or 10% in 2019 and probably a lot of low numbers performed related to the -- in the pandemic and why we get selected. So I think when we get to Investor Day, we'll try to give a much deeper dive on an understanding of all the technical capabilities here and why we win in the client's office and why they continue coming to us.

Got it. Wanted to ask around Clover. I know it rebounded really well to, I think, up 32% in July, outperforming almost all small business volumes we track and any of the peers in Clover. What do you think is driving those higher growth rates at Clover versus peer group?

Well, I think, first of all, we continue to build out the technical capability of Clover. Clover is an outstanding platform that we see 5 to 7 years more a great opportunity, and now that platform will expand both in the capability it delivers to merchants and the capability of delivering their strategic partners, and that includes an ISV growth coming forward here. It's digital acceptance model. So we see long-term great opportunity for this platform because it's platform. But I think then you go through that -- it was a strong base of merchants, 500,000 to 1 million in these merchants have continued to do business. They reorganized their business models to be more virtual and more digital, and Clover was there for them. And it has good vertical diversity. And that means we got balance in it. Whether it's QSRs, whether it's restaurants or whether it's general retail, it has very good diversity. Its functionality gets graded very high. And when you think about integrated hardware and software and horizontal payment platform, it's serving card-not-present of all types. So we're very pleased with Clover. We think that vertical integration is a strategic advantage. I do think the reason why we're a partner of choice, whether it's an ISV or a bank or another form of institution, like a deluxe who serves small businesses, is because Clover is a strategic advantage, and that continues allowing it to perform very well with our best distribution network in the world.

That's great. Wanted to switch gears and ask about the BAMS deal and how that impacted the P&L versus Fiserv's original expectations outlined on its call back in July of 2019. So I guess, in other words, how has that deal evolved from your original expectations?

Well, I think the deal performed at or above expectations. And I start with the initial partnership, right? We're very pleased, and the bank is very pleased. And Bank of America is a great client and a great partner. So I think the first and most important thing was to continue that relationship. And I think we've continued it seamlessly both from a processing standpoint and a distribution standpoint. Now we always believe that -- and the bank and I talked about this a lot, that when you have BAMS sitting between the 2 of us, if they actually were distributors and when you were a processor, there was a fair amount of expense to take out of the middle. And then, secondarily, that we would have the ability to provide other services to the bank. And so I think that, that all worked out about as good as could happen in a very, very amicable dissolution of the JV. And then on the other hand, we always believe that we'd be able to do more with clients we take in, the cross-sell opportunity on our book, because we don't have as many products, obviously, the same as the bank does to these clients. And we would be having less shelf space to fight for in the client's office. And I think we're seeing it come through. Very large clients that I talked to are delighted on both sides. And so I think we'll continue to address the cost base in the manner we have and get the outcome we like, and we think that we can sell more to the clients and be able to do more while doing a great job for the bank as their processor and then being a distributor of our capabilities also. So I think it's -- I think it worked out about as good as one would have imagined. And it was an execution job. It was an operational execution job, and it was a partnership job. And today, we sit here in September, and I feel very, very good about how it played through, both in our P&L and in the client's office, both the bank and the end clients.

That's great. Just thinking about Acceptance overall, I know it grew high single digits organically in 2019, and I think it was low double digits in the first 2 months of 2020. What drove the key turnaround in that Merchant Acceptance business? And how sustainable is that kind of high single-digit or better growth rate in a more normalized environment?

I'd point to probably 4 major items: ISV, e-comm, Clover and international, and they all were strong double-digit growers. And I'd say, in each one of them, heavy investment category continued to occur to drive the client franchise. So the sustainability we see right in front of us for a long time here, because of the amount of tailwind we have, the amount of ISVs we're on-boarding, the amount of e-comm we're onboarding. Clover is a standout performer. International, obviously, has had challenges during the pandemic, but we see that growth, and we see it very, very strong. And then the distribution of all the banks we've signed up that fundamentally has only generated a few million will ultimately be hundreds of millions of dollars of revenue opportunity over the long term for this company.

And is there kind of a normalized growth rate you think Acceptance can grow at? Is it that high single-digit level or better?

Yes. I think -- I mean, look, we're very comfortable talking about this being a high single-digit revenue growth business with a set of initiatives to have us become -- given the economy performs, seeing it over the long haul performing even better than that. But you should think of this as a clearly high single-digit and potentially low double-digit revenue grower.

Great. I wanted to move over to the Fintech segment, which is a business, I think, new to you, at least, Frank. At least First Data didn't have much overlap in the core bank processing business. So how does this segment stack up competitively versus peers? And what's the right internal revenue growth expectation for Fintech?