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

All right. Good morning, everybody, and thanks again for joining us. Really, this is the tenth year of our conference going back all the way when we founded with other venues. But really happy to have Frank from Fiserv with us here today. Frank, I followed now for a number of years, going back even before First Data through his days across banks. And I think it's pretty clear that his operating results speak for themselves time and again. But now with Fiserv, it's really good to see some of the trends speaking for themselves, the number over the last couple of quarters. And so we're really happy to be able to talk about that today. Frank, thanks again for joining us. Really happy to have you as always.

Great to be here. Thanks for having me.

Guys, as a reminder, we're going to spend about 30 minutes in a chat, and then we're going to try to leave about 5 minutes at the end for Q&A. [Operator Instructions] Frank, just going back, I mean, obviously, this was a crazy and an unprecedented year for the industry overall. Just start off maybe a bit with what surprised you, what either positively or negatively about the industry and specifically Fiserv and then we'll go from there. I just want to hear, from your seat, what you saw.

Well, I mean, first of all, the pandemic has been tough on everybody. And I think surprising to me and maybe surprising is actually the wrong word, but pleasantly surprising was the ability of our company to come together as -- the way it did. I do credit that to our leadership team, who, I think, have been battle-tested through a lot of difficult situations. But the whole organization's ability to operate at the past and the course it did, and I think it showed up in our results. I mean, it showed up in our results. I think the sales engine, its ability to galvanize -- I mean, I definitely thought, when we sent everybody home, obviously, we had essential workers who still came in, 7,000, and produced as they did, and we created a super secure environment for them. And how people platform became a big element of how we would run the place. In fact, we took all of our essential workers and, at the time, given them a 25% pay increase. So counter intuitive to how you would treat -- we didn't cut anybody's pay at all, and we stayed the course. And I think that brought the company together very well. Our sales force was off the charts. I mean, they're back, they're beginning to hit the road and seeing people but they were galvanized. They had a lot in the pipeline. The synergies that we talked about were coming through. And so I think those were all on the upside. I think we sped up the digital agenda by a lot. Our ability to build order-ahead apps in Clover and be able to serve our clients in a manner differently, and that was small and tall. I think the length of this has been in the negative category and is, I think...

Surprising for everybody, I know.

Yes, and I think we're going to have to rebuild some muscle as we continue to develop our systems back and come back in a manner that is good for our clients. I think -- I also -- I mean, I never had this time frame when it started. This time frame, I think, surprised us all in terms of duration. And although we're tremendously optimistic, I think we're cautious because we've yet to see the other side of things, so to speak. I think what we laid out on our digital agenda accelerated. You heard us on December 8, talk about everything we would get done. I think Karen and Clover continued to perform well. We came out and we acquired on Dodd. I think that's big in our digital view. And our modern core platforms are winning in the market. I think the toll on people, I'm worried about. So if you said the negative, I also -- we've spent a lot of time on our people platform, I'm worried about -- worried about people in general, not just us, but our clients also. And digital acceleration will continue. And workforce dynamics will be changed as we come back also and we're thinking really hard about that. And I think we have good plans around all of it. But unprecedented in any way. And I've been -- seen 9/11. I was there in '08. I've seen a lot of these things as this is beyond anything you can imagine.

Yes. It's incredible. But looking back, some of the trends, I mean, I think the company really did stand out. I mean, looking at even just the merchant numbers, obviously, versus some tiers. It was very strong. How -- I mean, just to the best that you can talk about it, how have trends been so far year-to-date the last few months? Is it still similar to what you were seeing in terms of the merchant trends? Or anything else you can comment on, just higher level?

Yes. I think Europe is the most challenged. Europe is the most challenged. You could feel the U.S. beginning at a different pace. Even with the catastrophes in Latin America and Brazil, spending is occurring now. So I think if you wanted to say negative surprise from where we were in the fourth quarter and now you put Europe in the category to some degree. And I think the rest of the world is ready to come back.

That's heading in the right direction.

Yes. I think so. And I root for our European colleagues and I think that will also come back as you would expect, but a little more lockdown there than you anticipated.

So where are you spending most of your time now? I mean I know, obviously, digital was just accelerated. But if you can give us a sense on where are you focusing, where you prioritize your time, given really a pretty vast number of opportunities.

Yes. I think, first of all, the people platform matters a lot and spending time on -- in this environment, having our people platform in good order, and why I say that in front of the client. Obviously, it's client versus digital, first, but having our people well organized and all galvanized around the opportunity is large. I think digital, whether it's in e-comm, whether it's in card, whether it's through Clover, whether it's in the opportunities across our core and how -- digital banking. So a lot of time on this next-generation of bringing our assets together inside the company, we're going to put the bow, so to speak, on expense synergies. We're going to put the bow on integration, but we have another piece of the leg coming through. And '21 through the future, which is the integrated set of assets we have and how we deliver them in the client's office in an unprecedented manner. So I think it's about serving the client. It's about finishing the integration. It's about having a people platform with DNI on the forefront there. And then, in fact, continuing to expand total addressable markets. We have a deep belief that our expansion in total addressable markets by bringing more product and more integration will definitely serve our clients well and serve our shareholders tremendously well.

Okay. All right. Maybe we'll just start to shift into some numbers questions for a minute. When we think about your guidance, Frank, which I think surprised some at your Investor Day to the magnitude of the top line strength that you guys expect to the upside. But when we think about what's baked into guidance in terms of recovery, even for '21, I think you had 8% to 12% internal growth. On revenue, you had 20% to 24% EPS growth. And then even the medium term outlook of 7% to 9% was strong, 15% to 20% on EPS. If you can give us a sense on, a, your conviction level is still around that for now and for this year; and b, really what the assumptions are that, that give you the confidence in that?

Yes. I mean, first of all, our conviction is as high as it was when we stated it. If you remember, we took the low end up from 7 to 8. Now of course, that's a wider range than you've ever seen or heard from us and I think the way to think about that is 8% is current course in Velocity, right? It's not deeper lockdowns, but it's no different than where we are today. And we feel very, very confident around that. 10% would be what the expectation is of a steady recovery growth. And 12% is really in the pent-up demand in the second half beyond what may be even in most economic models, vaccinations, completely, have taken hold, activity returns, cruise ships are in the water and planes are flying in a manner that we were accustomed to before. And I mean, if that even accelerated more, we can imagine that we could even see potentially above that number. The low end is probably in a little probability. And that's how I would think about it.

That makes sense. That's helpful. What's the -- go ahead.

I think, we think about there a little bit is the key in of this, right? Q1, obviously, it will be the low end, and the second half will be the high end because Q1 really had 80% of it normalized last year. So you would actually see, even in any scenario, in some quarters, we're going to be under the range. And then some quarters, we're actually going to be like Q2 at the higher end over the range. That's how I think about in the second half.

That helps. When we say it, Frank, do you hear me, okay. I think you just -- the screen...

I can hear you. I no longer can see you, but let's treat it like we're both here. Can you see me?

I could see myself, I can't see you right now. But we -- as long as they're able to hear us, I think that's fine.

Yes.

Okay. But with -- There you are, then.

Hey, I'm back.

With regard to moving into a segment permitted. So when we think about merchant, I think we've gotten questions from investors around mix, being a factor that's given you an advantage? And is it really more than this, right? And your guidance on Merchant is pretty strong. I mean, you talked about a high single to low double, let's call it, 9%, I think it was 9%, 12%, 13% type growth. But clearly, very strong numbers and expectations. And so you could just touch for a minute on what you see being the key driving forces of your confidence around those kinds of relatively high levels versus even many in the industry?

Yes. So -- we first of all, I think when you take our Merchant business and look at that Merchant Acceptance segment, we are the largest in the industry, just on a basic revenue number. So when people talk about, well, maybe they were advantaged by mix. I know like we have every mix. We have planes, we have trains, we have boats, we have restaurants. We have -- and we probably have the most of the most. So I think that's always struck me an odd comment, but one that I understand. I think in the recovery, we have lots of businesses that will be recovered, lots of industries that, in fact, were shut that are not -- have not come back yet. So I think it really is the strength of the diversity of our business. And maybe you could consider that mix, right? But if you think about our geographic dispersity, our channel dispersity -- diversity, right? And what I mean by that is we have banks. We have agents. We have a direct business. We have a powerful e-comm business. We have Clover at the front end of our SMB business. I think all those assets, and you think about large retailers, but you think about airlines. So it all is in there, and I think if you have the largest business and you have it spread geographically and vertically and also vertically in terms of size, we have a great, great view. And I go back to '19. I think in '19, we were leading the industry on growth rate. So we came in strong with a continued acceleration over the years.

Okay. Let's just jump for a minute on a couple of the areas that I think may be underappreciated from some investors that you have. For example, let's start with Clover for a minute because it's an area that we've spent a ton of time on in trying to help understand -- help investors understand it. But the growth, I mean, at 20% to 30% through the pandemic was better than pretty much anyone, even the growth of your peers out there. And there are some that say, a little bit of that could be cannibalization. But think Union had said that less than 10% of new -- of your business that's new to Clover or that comes to Clover is not new. If you don't mind, just talk about why you think that product is still resonating so well if that growth potential is sustainable? And what kind of investments are they getting?

Yes. I mean, first of all, when you talk about spending time, I do spend time on Clover. Clover was, back in the day, 8 engineers and a patent. So we have an internal view on Clover is clearly strategic CRO business. And we always had the objective to have would best GPV. Now I can't remember talking to you ears ago about this, and it sounded more like an aspiration than maybe will it actually turn out. I think you got to think about the size and scale. We have -- that take business to itself within the company. And we have over 500-plus engineers dedicated to continually building that along with a whole ecosystem around it. It's a flexible solution and can play across every vertical. And when you think about our growth rate, it deals with our client bases, too, $125,000 in annual revenue and above is more where that plays and those guys were able to sustain, in some cases, better maybe than the smaller end of the market. I think when you think about it, we've added 231 FIs and that distribution is continuing. We added Verizon Paychex and the Deluxe, right? And so those aren't future growth engines that are not in our numbers today. And then you'll see us coming out to ISV with Clover Connect. And that's another untapped opportunity and the fact that the ISV community wants Clover is also, I think, another pure validation point. We've had geographic expansion, and we expect to continue to innovate geographically. Our order-ahead capability of virtual terminal, invoicing next-gen hardware and I think bringing out Clover Dining, which we're very committed to. You should expect us to continue to invest heavily in that vertical and be innovative with very innovative partners over there. So it's a lot of engines, all focused on the client experience, ultimately. And then our partnership model, whether it's agents, whether it's direct whether it's bank partners, whether it's other non-FI partners are all treated as part of their ecosystem also.

That's really helpful. I mean, I can go on and on about Clover, but the interest of time, maybe we'll shift to Carat also, which is another relatively newer initiative. You guys have been taking in e-comm for a long time, but maybe talk a little more about what this -- what Carat really means for Fiserv, whether it be offerings or any type of packaging around that it brings?

Well, I think the Carat -- why don't we go to its characteristic? Single API for multi-channels, truly global solution across 130 countries, next-gen omni-channel platform with Carat commerce hub; multi-acquirer solution for large, complex omni-channel clients that would like multichannel and the commerce hub is a complete orchestration layer for integrating digital and physical POS for a seamless client experience, right? So that's the package. And we spent a lot of time on it. We had very good processing capabilities coming into this journey. And we were pretty committed to -- as we did in Clover, move closer to the front in the acquiring economics than to be only a processer. And when you think about $1 billion of annual revenue, over $1 billion that we talked about on Investor Day, remember, we talked about 75% of that is direct. And we got tremendous logos out there, innovators like Dell, and Disney and Shell and companies that we've been in business with for a long time, like Walmart. And so it's another one of those places where we're continuing to deploy technology, our capital to organically build what we think can be the best-in-industry platform. Our direct segment won 170 new logos and had 25% transaction growth. So that's how direct business that we built out built up and continue to fight well. And I feel good when we get up and say 9 of 15 QSRs use our omni-channel solution. And if you thought about digital commerce, we talk about 1.5 billion transactions growing at 25% for the year. So you'll continue to see us winning. We'll bring digital disbursements, POS lending, authorization, optimization, all of that is daily work inside the place with a deep client focus. And we spend a lot of time talking to our institutional clients throughout the organization.

Okay. All right, that's helpful. So look, I mean, those areas are key growth drivers for Merchant. But I mean there's also areas, whether it's international, broadly speaking, has been a really big growth driver for your Merchant business for years. I think it surprised us since your IPO as the magnitude of what it become and grown by. And you have some integrated ISV partnerships that are growing in size and numbers. All-in though, and I see this question already coming from the audience, just to double down this question with you. When you put those together, are those areas more than enough to really give you the conviction that 9% plus merchant growth rate is sustainable and manageable long term, medium term, which is I think what you guys guided towards the investment.

That's right. Well, I keep veering us back to '19 and a little prior to '19, where we were fundamentally 9%/10% grower. And so if you go there and look at that we, in our first quarter call, last year, said we were better in January and February than the prior year. And then you look at all the investments we made, all the innovation we made, we don't really believe we're having a heroic conversation, but more normal-course conversation.

Okay. That's better.

And the data points are past performance, current performance, investment and client wins and the wind at our back from all those FI wins, the ISV for Clover and the backlog that we're onboarding of other implementations.

Very helpful.

So we feel quite good about it.

Great. Let's shift quickly to fintech, which you guys talked about '19 new core processing wins in the fourth quarter, I think, 60 or so in 2020. Is there any way to help us understand maybe a bit more on sizing that? Or just maybe just broadly speaking, what your sales force is seeing in terms of pipeline and competitive landscape for fintech and what you guys have to offer?

Yes. I think the way I think about it is we win in fintech because of our total capability. It starts with our core capabilities. It then expands to our digital capabilities with our core. And then the surround solutions that, really, clients do like. Our ability to bring debit, credit, virtual, all in a package with the type of product like DNA, which is really, truly modernized core, that, very heavily. I think when you think about our sales force, and we spend a lot of time listening to their feedback. It is about digital, and it is about surrounds. We've been fortunate in winning at all sizes. You look at somebody like Republic, which is moving to be a complete digital and was ranked the #1 customer service bank by Forbes, and they come to us because they want that full package and have deep belief in our capability to deliver it seamlessly. So I think we're the only guy who could actually provide all of that when you look across the spectrum. And that's when I talk about us continually working on how to have a better integrated set of all of these that will help our clients grow their business.

Okay. That's helpful. Let's just wrap it up with my questions, at least, then there's a few from the audience. So look, one of the favorite topics that we have for Fiserv is always capital allocation given the cash flows you generate are so substantial. And so you talked about $30 billion of potential to deploy over the next 5 years. Maybe just give us your view on where you really want to allocate that between -- whether it's debt paydown or more importantly, buybacks and M&A. A bit more on the magnitude of buybacks and M&A, and maybe even this year, and that should be helpful.

Yes. I think what you've seen from us today is a balanced approach. Obviously, we -- you heard us talk about debt pay down and share buyback. And you've watched us do a little bit of M&A also. The debt pay down journey is a short-term journey. And the buyback and M&A will be one in our DNA forever. We won't be surprising anyone in our methodology. We will be very, very disciplined and what I mean by that is, even if you went to First Data, we had a very disciplined capital allocation methodology. We paid down about $7 billion of debt. We needed to get the leverage ratio, but we went out and bought key strategic assets for that. Actually are in our growth today, whether it was a good e-comm asset in Brazil or the ISV businesses of Carat and BluePay, we were very disciplined around that. We have the luxury inside this company to use that same exact discipline to buy back our shares and -- as opposed to paying down debt over the long-haul and that same discipline to buy growthier assets. And you should expect our M&A strategy to be around top line. We have a deep belief we know how to manage the expenses, and we know how to deliver positive operating leverage. And when you look at us buying an Ondot, you see us buying an asset that will integrate digital experience for our clients across debit, credit and core and we expect that to be an industry leader in experience that will have long-term benefits for us. And much like Clover turned into a -- we believe on time has that Ondot same capability. So those type of things that when you put in our ecosystem can give us tremendous growth and tremendous shareholder return. I mean, we're very, very conscious of the value of the buyback and M&A needs to sit up against that also.

Okay. Frank, just in interest of time, maybe I'll take 2 quick ones. There's a bunch more, but one of the them -- just a follow-up on M&A, so last in now, and it's do you anticipate doing something more transformational? Or do you see tuck-ins being the right approach for Fiserv?

I think tuck-ins at this moment. I mean, I think we're coming back from a pandemic. We need to galvanize our company. We understand the things we can tuck-in to create a wider, addressable market that, by themselves, couldn't be. So I would think about it in that manner. I think we'll get to the second half of the year and the end of the year, and we'll have a different view as, hopefully, the world safe and healthy and recovered. But I think right now, it's continue -- we love our hand and continue the course that we have. I think we think we have the best hand in the industry. We have a fabulous payments business with credit and debit as industry leaders, we have Clover. We have a bunch of prepaid assets that have played very well and we've got great digital surround capabilities. So I think we can tuck things in and make them way more valuable than they are alone and we'll continue buying back the shares.

Another question is on. It's really a follow-up on emerging growth rate. There's a number here like it, but I'll just kind of consolidate it. And it really has to do with whether Clover here. So how much of the accelerating margin growth over the midterm is coming from Clover versus non-Clover? And what -- if you could rank the other areas that are giving you conviction in that 9% to 12%, that will be appreciated.

Yes. I would say, like we have a bunch of engines, as I like to say it. And they're probably evenly divided in some manner. We do have deep conviction in e-comm and Carat in that beginning to take hold with those wins and coming in. I think ISV sits very high in the -- you heard us talk about it being $500 million in a couple of years of revenue that sounds large. That's good growth there. Clover is embedded in our growth rate. We're -- I don't think we're looking for that to grow double to get what we're talking about, we're looking for to maintain its steady cadence and those new distribution channels along with our direct business. International is powerful. International is powerful on investment. International in India, in Brazil, in Argentina, a great business in Poland, a good U.K. business with good, strong partnerships, an Ireland business that's strong and continuing to build on all those. And that's 25% of the revenue. So that's a tremendous growth engine that is a market share gainer. I think the issue is in most categories, we will be a market share gainer, and we have demonstrated that in a couple of years.

Well, Frank, assuming everyone else is as pent-up to get out of their house and shake some hands again, hopefully, you can be at the high end of that range in the recovery we're about to see, hopefully. Because I think we're all looking forward to that. But, listen, we're about out of time now. So thank you very much for joining us.

Thank you, Darrin.

Guys, the next session is at 9:20 with JPMorgan Chase, hosted by Steve Chubak. So anyway, thanks again. Be well, Frank, all right? Stay safe.

You as well, Darrin.