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

Welcome back to Evercore ISI's Fifth Annual Payments and Fintech Innovators Forum. I'm David Togut, payments and processing analyst. Delighted to welcome Fiserv Chief Executive Officer, Frank Bisignano. Welcome, Frank.

Thanks for having me. Thank you very much. Good to be here.

The #1 question I receive about payments industry and about the merchant acquirers, in particular, is whether omni-channel payments companies with their roots at the physical point-of-sale can succeed as a secular shift toward e-commerce accelerates during COVID and potentially beyond. How is Fiserv's merchant acquiring business positioned to succeed in a world that's accelerating toward e-commerce? And is -- and is the Carat offering comprehensive enough? Or do you need to acquire more e-comm assets?

Well, we feel great about our e-comm assets, and we invest in them for a very long time to get to the point that we're at today. But we believe that omni-channel capability is critical to succeed and that starts at the at being really strong at the physical point of sale. We had a strategic advantage in the physical point of sale, and we've really catapulted. To me, it's much easier to add digital capabilities. I've always believed, and you heard me say, that technology is the great enabler than to build a strong physical presence. In fact, pure digital players are going to have a much harder time on the physical side than we have on the digital side, and that's been demonstrated by us in multiple places. Whether it be Clover or Carat, our digital solution is very, very impressive. And our next-gen omni-channel capability is delivering strong results: single API for multiple channels; truly global solution, across more than 130 countries; next-generation omni-channel platform capabilities with Carat commerce braided at the center of it all; multi-acquirer solution for large complex omni-channel clients; commerce hub as a complete orchestration layer for integrating digital and physical POS, with a seamless customer experience, which I think is usually important, very client-focused. Once again, $1 billion of annual revenue, 75% of it, direct, great names, Dell, ExxonMobil, Lyft, Disney, Shell, Walmart, Albertsons, Microsoft, we could go on and on. And those are things that have really caused us to have the industry-leading growth rate at outsized in scale. Obviously, remember, the total business is in excess of $5-plus billion. So when you look at that and you think about prepandemic, we talked about January and February, the year before being a double-digit grower and seeing us have a leading growth position quarters before. I do have to highlight underlying that is our very strong growth in a direct enterprise segment, where we have more than 170 new logos in 2020, 25% year-over-year growth. And you heard us rattle off a ton of wins across the board and I don't need to do that again because you've heard it once before. And then a lot of that's driven by value-added solutions, omni-channel, digital commerce, business growing very strongly. You heard us talk about transactions up 140% in Q4 and more than 125% for the year. So there, you see we continued toward acceleration and that investment. We like to talk about 9 of the top 15 QSRs use our multichannel solution, omni-channel, multi-solution. 35% of digital sales in 2020 included an omni-channel component. So this isn't about a desire. It's about a current capability that we're continuing to invest in and continuing to expand our digital payout solution, powering Apple, Lyft, State Farm, growing very strong. And all of these are future growth engines because we've invested so heavily, prepandemic during the pandemic and brought lots of capabilities. And then additional value-added solution to include POS lending capabilities. You see our partnering that we've announced, so authorization optimization, using strong issuer data in the leading AI technology, and that will continue. We will continue to refine that. We will continue to invest in it; and then connected commerce solutions like pay at the pump for clients for Exxon, Amazon. So ultimately, we step back. We love the omni-channel. We believe it's critical. Our physical presence is critical. We think we can do it at tall and small, large providers and then individual stores all across the world. And so Carat, Carat's a leading competitive offering today. But you should just think we're going to continue to invest organically and inorganically. And we think about that in everything we do in terms of go-forward here.

More broadly, what are the greatest structural shifts that have occurred during COVID? And how are you pivoting Fiserv to benefit from positive shifts and mitigate some of the negative shifts?

Yes. I think more broadly, we think about it in terms of COVID, really accelerating the shift to digital. And that's in both our merchant and our FI business. The migration from cash to electronics payments, which was always there, will be more pronounced as we go forward and specifically outside the U.S., in places like India, where 80% are still in cash; or in LatAm, where approximately 70% of consumption is cash. We're strategically well positioned around the world to benefit from that as that acceleration occurs. Specifically, if you want to go to merchant and within Acceptance, we all know quite well that there has been a pronounced shift from physical POS to digital and omni-channel in 2020. And we've invested heavily in making that our mission. We probably will see a little change as opening up occurs, that there will be a desire for people to go back to physical, but we believe our investment in digital and the high level of desire, and we believe we're very well positioned. We've invested heavily in expanding our digital capability, both at Clover and at Carat, SMB and enterprise. And that's how you should think about those 2. And we have a full suite of stand-alone digital offerings and fully integrated omni-channel offerings, online EBT, order ahead, line busters, SMB, digital store management, and we could go on because it's continuing to build function that allows our clients to operate in the most modern aspect. And then we expect to see a recovery among some of our stronger sectors, including petrol, travel, dining, entertainment. They're not at the level we think we'll see them in the second half of this year. And we -- I mean, we've definitely enabled many of the harder hit sectors to have a more digital experience when customers come back, and we think that will be a strategic advantage for our clients. If you want to go to FIs, we've been investing heavily in helping out FIs have a full digital slate and all the dialogue around and all the solution set and all of our investments around making that happen. When you think about our breadth of solutions for FIs, I think it's unparalleled. That's completely unparalleled. If you think about everything from the our FI as being able to have Clover as an offering, to us having the #3 debit network, to our global capabilities, and obviously, our mobile transaction across our platforms, whether it be mobility Architect or through Zelle, and our P2P capabilities through Zelle are the industry leader. So I think there is an inevitable surge of FIs that want to move to the next, and that's everywhere from our great credit union clients, to our community banks, to our regional banks, to our global banks. And it's got a lot of opportunity for us, and that opportunity is well beyond what we talk about in 2021.

On your fourth quarter earnings call, you guided to a 2021 internal revenue growth range of 8% to 12%, which raised the bottom of the range. From the 7% to 12% organic growth outlook you provided at your December Investor Day, which business segments do you expect to grow faster this year than you did back at your Investor Day?

Yes. So I think the way to think about this is, first of all, we came out with 7% to 12% , and then we moved to 8% to 12% , which just tightened the lower end with us watching the world and watching what's going on. This was a result of our pure growing optimism and clarity around the economic recovery in the U.S. and the impact of expected additional fiscal stimulus provided in the near term. If we go back, what we said on our call, that the bottom end of 8% to 12% guide equates to very minimal economic recovery. I would treat it like the environment today. And remember, the environment today is the U.S. showing signs of the vaccination and some openings. But you have Europe with a fair amount of lockdown. You have Brazil with a fair amount of lockdown. But when you look at that 8% to 12% , and you want to take a look at the middle of the range, the way I think -- which gets you to 10% , that does not require a short economic recovery above and beyond. The trend line we're seeing, 8% is status quo, 10% is a trend line with the issues you even see today, to some degree, improving, more of a modest recovery. And we could clearly see the upper end of the range with the second half with pent-up demand in, like, hotels, other elements that you don't see in today's environment. When you think about our quarterly cadence, I think the cadence will be different in the first half than the second half. I like to think about the first 80 days of last year were prepandemic, and we talked to you all about January and February coming on the first quarter call. January and February had double-digit growth in our merchant business that were stronger than the year prior. And then -- we just -- it just completely hit the bottom as we got to the last 20% in the quarter. So you should expect Q1 to look extremely different than Q2. Q1 really, being at a different place. You should expect the second half to be more normalized in a growth rate. And one way to think about it is we will have both -- outside the range. We will have quarters on the low end of the outside the range, and we'll probably have quarters exceeding the range in the first half of the year. I think Europe is operating in -- it's about 7% to 8% of our total company revenue and it's at varying stages. We have optimism for the second half, but the first half in Europe and, specifically, right now, it's a challenge to see. And then, of course, we expect that growth rate in the second half of the year to normalize. We think all the investments we've made, all the wins we have, the revenue synergies are all tremendous wins at our back as we come into the second half.

Got it. We have some questions coming in from investors. So I'll just shift there for a minute. So from Investor Day, your 3-year merchant growth target is 9% to 12% revenue growth. In what scenario do you come in at the low end of that range versus the high end? And what gives you confidence in this acceleration since, historically, First Data independently was closer to mid- to high single-digit organic constant currency merchant growth, maybe with the exception of 2019 where you might have been 10%?

Yes. Well, 2019 was our last comparable. And I think when you looked at our industry and a player with over $5 billion in revenue being -- probably having the best overall growth rate in '21 or lack of growth rate in '21 but really where we ended up relative to our peer group feels very strong. So I think we have more -- we have the '20 performance. We have the '19 performance. The '19 was set up by the '18 performance. There's been a trajectory in this business. There's the building out of the ISB. There was the continued investment in Clover. There's the international expansion, which continues to prove very, very strong. There's the investments in e-comm and Carat, specifically. There's our omni-channel presence that we talk so strongly about. There's the revenue synergies that you see that will take a few years to come through completely in the business, but we begin to see the upshoot of it in the bank merchant capability. There's being a partner of choice for Verizon, Deluxe, Paychex. So I think the economy is a driver to the 9% to 12%. But the capability has been demonstrated. The total investment continues to be strong. And I think our client base is unparalleled, and I'd like to make that. Our client base is also, I think, the most diverse in the industry, and we have the best geographic dispersity. So I think those are all the elements, and I think 9% to 12% is -- has some degree of what the economy does and how it moves. But we do believe that our ability to get the wind from all the investments and all the things we've done over the past couple of years, it was at our back in January and February last year. Now we think it's back, it's coming back in that same manner with even a bigger, better set of assets competing strongly.

Two related questions coming in from investors. The first really is on Clover and whether you might consider breaking out the revenue contribution from Clover so investors can model Clover as part of the overall Merchant Acceptance business.

Yes. We've never -- and do I think we will be at a subsegment level breaking out. Well, we have a good understanding. We talked to you very clearly about its value creation model. We've been very clear that it is a net new gainer that there's about 10% plus or minus of the base that moves into Clover and that the rest is out with net new. We talk about our GPV very clearly. You'll hear us talk more about value-added services added to it. And I think when you look at the growth rate in our merchant business, they go back in time, maybe longer than anybody wants to think about when it was as fundamentally, First Data was a 0 grower. And now you got a fundamental over past maybe 10 quarters plus or minus as an industry leader. I think it's clear that Clover is one element to that. Remember, we talked about a $1 billion e-comm business with double-digit transaction growth that is 90 -- 75% really direct and 25% is indirect which has been a huge -- so there's a lot of engines inside this. We talk about an ISV business, that is still small, but continues to have tremendous growth rates. And I think on Investor Day, we talked to you about that being your market, $0.5 billion opportunity and that will continue to be a strong double-digit grower. So I bring all that up, even though you brought up Clover is there's lots of elements to this, as I would call it, offense in terms of providing client the best capabilities, both at the smallest end and the tallest end and providing that across the world. So hopefully, that's maybe even a little more than you asked for in an answer.

Another question coming in on capital allocation. How do you think about M&A in the payment space? And where do you think you need to get bigger in terms of adding more capability? And maybe just taking that out to capital allocation overall, kind of you did just increase your share repurchase authorization by 60 million shares, about 10% of the outstanding stock. So kind of broadly speaking, M&A opportunities that you're focused on and then, overall, how you're thinking about share repurchase at current prices.

Yes. So why don't we start with -- we earmarked $30 billion over 5 years of cash to deploy and that's while having a leverage ratio at the historic levels, 3 and sub 3, so to speak. And so we feel very, very fortunate to be able to deploy capital to inorganic, in organic and shareholder return. And you also heard me talk about in our model we hit $500 million of innovation spending but 0 revenue. And you should expect in the second half of the year to hear about those new initiatives and what we think that value creation. But we will buy back stock. We will buy back stock and we will buy growth-y assets. And we will buy assets that actually improve our growth rate and improve our earnings. And we feel fortunate and blessed to be able to do all of those. So we've always used buybacks as a benchmark, and I don't expect that will change. But as you know, in this environment, there are going to be assets that we can acquire. I point to on Ondot, where we're going to bring digital capability in a manner that is good for our clients' clients, gives us an offering that is unparalleled and, in fact, allows us to deliver against, as I called it, the 4 pillars and the white space in the 4 pillars. So I think we feel -- and we've had a very balanced '19 and '20 doing share repurchase, paying down debt and acquiring assets. And I think over time, debt paydown is a current item. It will not play over the medium term. It's more in the current and our ability to both buy assets. But there are going to be ones that we believe is good for our client franchise, expands the total addressable market and, in fact, allows us to deliver for our clients in a manner they want, and we will be a buyer of the stock, you can rest assure yourself of that, in the manner the company always has.

Since Fiserv acquired First Data in 2019, you brought forward by 2 years an increased your cost synergy target for 2022 to $1.2 billion from $900 million and your revenue synergy target to $600 million from $500 million. What tailwinds support your conviction in achieving or beating your cost and revenue synergy targets? And what headwinds could cause you to fall short?

Yes. Well, I think the fact we've actioned over $1 billion of $1.2 billion already and we have clear visibility to where there are remaining 100 clauses, we'd have to put a check mark on it. And what we really wanted to do is not finish the cost synergy job but finish the integration job, the complete integration of the company. And that is well on its way and I think you could kind of move into operational effectiveness, productivity gains, higher quality provided to get, actually, better productivity all occurring in the go forward. And then on the revenue side, we've actioned $215 million that we announced in December. We're actioning more as we speak. That does not -- we have a large opportunity in the merchant space. We have a strong pipeline of synergy deals that are not in that number, that won't be in that number until actually they were implemented. So I think that bodes very, very well, and you hear us talk about it as late as our earnings call. I think we fully expect $600 million in revenue synergies. That's in the duration of time. It will be worth a lot more over the decade than the 5-year horizon because, remember, they will -- some of them will take hold and year 3 and year 4 and be fully ramped in year 6 and year 7. So I would think that as a decade of growth at a much bigger number. And I think -- I mean, to be asked to work again in the way that it'd be I think maybe the economy in total. But otherwise, our line of sight is so darned good on these things, and they're in our DNA, and they're becoming just part of our day-to-day operating, and that's a fully integrated company with a fully integrated team, and I think that was really job won.

You touched on Clover a bit earlier, your high-growth POS payment solution, where you exited 2020 with $133 billion of total payment volume run rate growing at 25%, I think, as of the fourth quarter. Can Clover sustain this mid- 20s rate of growth this year? And what is the product innovation road map for Clover going forward?

Yes. I mean, I'll go back to as I said before, we don't provide guidance on our solutions. But now let me talk to you about what's going on there. Go to -- we're continuing to expand our partners. 231 legacy, Fiserv FIs. We add Verizon, Paychex and Deluxe. Clover Connect will be the market-leading solution for ISVs, and that will be rolled out in 2021, and that's a growth engine, both for Clover and our ISV business, which also you heard us talk about at strong growth rates. It's a global product, but you should expect more global expansion. And then we've definitely in the -- on the e-commerce world, expanded Clover's e-comm capabilities through omni-channel capabilities, and I would take that just simple things like order ahead and invoicing, and we're evolving the platform continuingly horizontally and in vertical services to be flexible and open. So I think we feel great. We're always working on that physical solution, too, next-gen hardware and now Clover Mini and now Clover Flex; a new offering on is Station Solo, which is designed for table service restaurants. We built out and continue to build out Clover Dining. And we think as the world comes back, this full vertical software will be mission-critical. And Clover Link is a rollout for larger, multi-location merchant clients. So there's depth there. I could go on for the whole meeting around the Clover -- that's '21's initiatives and also a little bit of the rear-view of all the things we have and our forward momentum. So feel great about that growth rate, and we continue to invest heavily to have it be an industry-leading platform.

Traditionally, Fiserv, along with your main competitor, have led the credit union and community bank core processing market, typically smaller financial institutions with under $5 billion in assets. In each of your last 3 quarters, your new core processing contract wins are running 2 to 3x the rate of Jack Henry's, including 19 core account wins versus 6 for Jack in the December 2020 quarter. Are you gaining share now because of your more comprehensive payment solutions from First Data? Or are there other factors that account for some of these share wins?

Well, I think I'd start with all of the above. And then let's go a little deeper. We're gaining share for a number of reasons. Mostly, what we are seeing at a combination of more advanced technology requirements and we think we're a tech company, and we behave like a tech company and the #1 thing within -- spend in the company is around technology and the #1 employee base and our technologists inside this company. And so that more advanced technology requirements and the need for a robust ecosystem that can support the banks in the future. On the core side, we're winning with tech buyers looking for cloud-based, open real-time processing solutions that can scale to accommodate the agility and flexibility our banks and credit unions are demanding. I think this is part of the mission-critical element of how we're leaning in through the innovation and very focused on giving the agility and flexibility. Combined with the desire for more modern technology is the desire for this ecosystem of surround. I think we have merchant payments, digital platforms that span both retail and commercial bank needs. And the average bank core client over $100 million in assets has 37 surround products from Fiserv. Now they're of all shapes and sizes. And we will continue to create a better integrated solution on those. That's part of the journey. That's part of the mission. And our clients look to leverage a core relationship to pull-through more integrated contact to drive growth for their institution. So I think when you take a look across the board on this, we're winning because of our deep understanding of where they need to go and the capability set that's unparalleled. We have the #3 debit network. We have a huge debit processing capability. We have mobility, Architect, Zelle, right? We have Merchant, we have Clover. And running an integrated company to face off to our client the way they're organized. And that's one of the main missions: digital first, and we're going to face off to our client and deliver to their clients, our client, the way they are organized, not we like to be organized.

Frank, greatly appreciate all of your insights today, and thanks so much for being with us here at the conference.

Thanks for having me, and I look forward to it, and everybody stay safe. Appreciate it. Thank you.

Have a great day.

Thanks.