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

Hello, everyone. This is Tien-Tsin Huang. I cover the payments, processors and IT services sector at JPMorgan. And so delighted to have Fiserv with us on the schedule today. And with us from Fiserv, we got Frank Bisignano, President and CEO of the company. And we're going to do a fireside chat, just like the other sessions. We'll also take questions from the ask a question portal. So if you have any questions there, I'll keep my eye out for that. But Frank, thanks for joining us. Spending a few minutes out of your busy day, going through some questions.

Happy to be here. Thanks for having me.

No. That's great. It's definitely great. So I want to mix it up a little bit. We'll get right into it. I didn't want to lead with the macro volume, your recovery question. I instead wanted to ask you about the tech stack at Fiserv, and there's so much talk about modernizing technology platforms. I know you spent a lot of time. Mr. Guy Chiarello spent a lot of time and resources and money, modernizing the tech. Where are you in this, let's call it, tech modernization journey? How much more is there to do? And how do you generally benchmark your tech versus the peer group?

Yes. Well, first of all, I think tech modernization is forever, right? So that's a good baseline to think about. And we historically, and I'm glad you talked about Guy because I think not only is he a fabulous technologist but business leader and attracts the best talent in the industry, I think we historically have always thought that as our product. That is our innovation capability. It's our innovation advantage. And we spent a lot of time increasing speed of deployment, right? How we get our agile teams to move in a better way, and we store it tremendously through the pandemic, and you can look across the product lines and the digital adoption and our ability to enhance the agility of the platforms. Heavily investing in cloud capability that's table stakes in many cases, both public and private. A lot going on in AI for us in terms of also how we're going to service clients. We look at digital front ends, and AI and the servicing element on the back end, and you'll watch us innovate in a way. And we acquire digital capabilities. Look at something like Ondot, and you'll hear me talk about how we'll put back to the front end of the stack. And actually, while we cloud enable, and that's cloud enabled, many of the processing systems, let's have a digital front end, and let's have a smarter servicing on the back end, all through AI. And obviously, we've consolidated data centers, but those are things that, I believe just happen in the background. Now we need to think about it, we got fabulous people who do it. Yes, hundreds of millions of dollars of savings on synergies, but actually, productivity gains unparalleled in the development environment. And I think we get 15% to 20% going forward as we continue the agility, continue bringing more technology to help our technologists grow. And I think it will just help us in the marketplace continually. It's our product advantage.

Got it. No, I remember we had Guy at this conference when you had the CIO role, talking about all of the big tech teams, and he was very thoughtful. And it sounds like a lot of that has been raised into Fiserv in terms of what you just described there.

Yes.

So thinking about then where we are with the recovery, just to get that out of the way, Frank, just what's your view on where we are in the recovery? What gives you optimism? And where is caution warranted in your mind?

I think optimism increases every day and Asia Pacific caused me concern for life, specifically in India. And we have a lot of U.S. employees who have families there. But we obviously have a business there with ICICI, and also we've been able to do a great job there. That's not a large part of our P&L. But it causes pause that, although in the U.S., this is feeling fast and furious in the robust category and openings are happening all over every day. I think we're not completely out of the woods. You've watched us go from December to February to April continue to raise the low end of what we thought. And we see very, very good recovery in the U.S. So we see it further out. You could see bookings in Q4 for industries, really strong. So I think strong underlying growth in March, April, again, and then continuing into May, but of course, there's still a form of caution because there's a global pandemic, and that causes different circumstances that nobody has ever experienced before.

Yes. No, we're definitely paying attention. And obviously, thinking about all the challenges in some of these markets like India. But fortunately, we're in a recovery here in the U.S., it feels like. So yes, thanks for that. Let's get into the acceptance business down, if you don't mind. Let's just -- about the first quarter, volume growth, 13%, actually outperformed Visa and MasterCard on the volume side. Why do you think that's the case?

I think the strength of our franchise. Now that's a large, a large, a large client base that would provide services for, both in QSR and petro and some of the largest players in retailing. So our e-comm business was very strong. Our enterprise clients and how -- I think if you think about most of Fortune 50 are our clients and aggregators also. But obviously, we see this next leg, the SMB leg, where you've heard us talk about very good. COVID numbers, I think you're just going to see that move and affect the yield in our business in a very strong way.

Yes. I would imagine that once that SMB piece comes back, you'll start to see revenue growth outperform some of the volume growth. Do you see that as well? I know you don't have a lot of...

100 -- well, 100%. We see it already. So you should expect that in that trajectory change. So that's additive to where we were. And obviously, that's spotty. You probably, in New York City, could see it's a little spottier than other places. I think with California coming back, that's another recovery effort. So I think that will be very, very strong for us.

Yes. No, we'll be watching that for sure. You mentioned Clover, your modern, your point-of-sale system. The growth did accelerate. Looks like 36% is what I wrote down better than Square. We have Square speaking later on today, just so you know. What channels are selling well on the Clover side? And can we still say that it's primarily new logo versus existing?

Yes, that's staying close to approximately 90% range. I think both our direct and our partner channel has been very, very strong. Lead gen from digital continues to increase. And I think also these bank partnerships and all these partnerships that we've signed up through the pandemic has yet to really move at a pace we would expect through the next few years. Combine that with an ISV offering that will be coming into the market in the next 6 months, and I think we feel very good about the long-term growth prospects continuing in the trajectory it's been.

Do you feel like there's another year on growth that you can get into on Clover, whether it be through your bank channels or maybe internationally?

I think international. I mean, you think about international, you think about ISV and you think about all the partnerships we've signed up. It may not grow completely exponentially because of how much scale we have out there, but sustainability is good.

Yes. No, for sure. I mean, like I said, these are -- grew well above the benchmarks of Visa, MasterCard. That's why I wanted to check in with you. So switching gears to e-comm. With Carat, as you've rebranded it, grew 26%, a touch below Visa, MasterCard. But I don't think a lot of people appreciate the client mix that you have on your e-comm book. And I remember on your Investor Day, you called out that a lot of it was direct, not through partner channel. So can you elaborate on that?

Yes. We had talked about it, a 75-25 kind of split on that and that -- I think you'll continue to watch that shift in the directions to direct. I mean, we have great partners, Walmart, Apple, Google, Microsoft, Dunkin, McDonald's, Burger King, ExxonMobil, which we feel so good about. And a lot of these are omnichannel and some of them are just e-comm. And I bring out omnichannel because I think it's a differentiator. Our ability to have been very, very good in the physical and then how we've converted that e-comm capability for institutions, the best institutions in the world. And then we dropped that down to Clover, too. So Carat leads up top, Clover leads locally. That gateway capability at Clover makes it very, very good. And then we got a bunch of value-added services we have in there, whether it's least-cost routing disbursements. You heard us talk about QR codes. So we think our runway is very strong. Remember, this operates in 50-plus countries. So I think our global presence is valuable, our physical presence is powerful and the client franchise that we serve, we're very darn proud to have the opportunity to serve such great names.

And you've been talking about a good sales performance in this e-comm piece for a while. Can you quickly describe the pipeline? How has that changed? I would imagine it's pretty large coming out of the pandemic here.

Well, yes, there's great demand, and there's demand for those looking for multi-currency, multi-country, and then there's demand for various specific capabilities like least cost routing. And historically, when we talk about names and wins, we're really doing it in the context of highlighting the capability advancements we've made and why we're being selected. Of course, we're so proud about clients, but it's not about anything other than the full set of capabilities. I think demand is very high right now. And I think we'll continue to feel good about -- we got 4,000 FIs that are connected to improve authorization rates as an example and taking all that data. And look, we do have the third-largest debit network, when you put STAR and ACCEL together and the capability of a debit network along with a merchant-acquiring business that is both physical and logical gives us a surround that I think for its issuers benefit and our client -- merchant clients benefit.

Yes. No, no doubt. You touch a lot of pieces end-to-end. So you mentioned banks, of course. I have to ask you about Caixa as a win. That's an important one. Our team has been tracking that down in LatAm. I know it's really competitive there. So what took -- what put Fiserv over the top to win that one? By our math, that could be 7%, 10% share in Brazil in terms of their history. So I'm sure it was very, very competitive. What put you over the top?

I think like -- we have a strategic advantage in our partnership model. We know how to manage bank partners at a level. I think in parallel, some of that comes from maybe the DNA and many people inside the company. And some of it comes from a model of how do we treat that partner as a client as opposed to just a partner. And I think if you think about Caixa, 145 million individuals and corporate customers, 26,000 physical locations. I always kind of think they like to say more than 99% of the cities, and it's kind of a funny number, they think about it because there's not much between more than 99% and 100%. But I do think it's our go-to-market strategy as a partner. That was taking 3 providers and consolidating into one. We feel great about the Brazilian market. We talked to them many times over the years. I personally spent a lot of time on the ground in Brazil as we've built out that franchise. And I think it's an opportunity to affect the growth rate in the company.

Yes. It seems like they end up being quite a large important client for you. And just to clarify here, Frank, is that -- is this set up just for you to pursue new merchants into the new joint venture? Or does this also include being able to convert the back book?

Back book and new clients. Back book and new clients.

Back book and new. Okay. Good. So this is a big win for you. So yes, congrats on that. We've been studying the market there. There's a lot of innovation. So I think to win there is important and hopefully...

Yes. We had acquired a property down there, Software Express a long time ago, which really was a great provider of services across all e-comm capabilities and many large market share points of network. So that asset also is very valuable across the Latin American landscape for e-comm capabilities. And Caixa looked to everything we had. They concluded we were the right partner.

No. Great. And again, yes, your -- the culture of serving banks is long rooted at Fiserv, so in first data, that makes sense, so. Wrapping up with acceptance then, and I know you put out a 9% to 12% growth rate long term. Do you need more wins like Caixa to get there in some of your traditional business? Do you need that to accelerate? Just trying to think about the buildup to that, that long-term target that you have?

No. I mean, I like to continually remind ourselves that we are fundamentally at 10% grower pre-pandemic. And then we continue to build out Carat. We continued to build out bank partnerships, Clover, ISV set of products. So we feel very, very, very comfortable about the hand we have and the ability to grow really double digits in that business because we've seen it before. And I think as this recovery occurs, I think we'll see the strength of the franchise takeover.

Yes. Yes, get SMB to come back, have some of these new wins come in. So we'll definitely be tracking it. So let's shift gears and do fintech real quick. I know there's a lot of focus there. I think you've talked about growth accelerating in the second half of the year. So catch us up, what's happening there, net revenue, retention, wins, backlog, churn? What do you focus on there, Frank?

Yes. Well, I actually have a few things I think about here. First of all, I'd like to just -- if you think about, and we've talked about periodic revenue a whole bunch. If you normalize for that, it was 3.5% in Q1 versus 2%. We see the periodic revenue dropping in Q2 and Q3, 75 basis points. And so the base business is strong, new account wins plus increasing penetration of our digital offering. And so we feel very confident that we would fall within the 4% to 6% range without issue. And on the longer or the medium term, the same. Now I think it's important to talk about Ondot here because Ondot was a fabulous digital enablement asset for cards. And we knew the property, we felt great about the property. But our vision was to really have it across our digital assets. So one instance on mobility across debit, credit and core. And I think we'll be -- other than some of the finest financial institutions in the world, we'll be the provider for all of our financial institutions when nobody else does that. And you should expect that in the second half. And we believe that, that capability, and we've heard it from our bank partners, and that will go all the way through credit unions, community banks, midsized banks, and that will be over the next 2 years, rolled out, but I think it's a game changer in the capability. And remember, when you think about our card business, our debit business and our core business, right, we're the only player that really has that size and scale against all three. And now we're going to provide our clients the most modern digital interface for their clients. And that really should drive digital adoption in their institutions at a level maybe much more closer to your home team than where it's been for some of these institutions. So I take -- that's in the longer-term view, but you're going to see it, and I think it enhances our offering, enhances our retention, increases digital adoption for our clients, which ultimately will hopefully show in a manner we believe it does in group.

So to play it back to you, Ondot, from a digital enablement standpoint, you can serve the full spectrum, small, medium, large-sized issuers?

100 -- issuers and account processors. So go back to you're a mobile user of those 3. Today, you may have more than one -- you do have more than one instance or you have one instance without all 3 products. That's across most institutions, and we'll be the first enabler of across all those products in a digital banking wallet really for clients.

Okay. No, that's great. No, it's something we'll be studying and asking you about on a go-forward basis.

And we'll be happy to talk about it. No, you're absolutely right.

No, this is going to be a -- there's going to be a lot of attention on it, for sure, I know. Just thinking about client payments in general. I know you talked about a new brand -- new credit product, right, during Investor Day. And you mentioned your scale, issuing is evolving. I'd like to use this phrase, Frank, that everyone's trying to bank their users and issue them a card, credit, debit, you name it, prepaid. So the theme is -- the wind is definitely at the sector's back. So how do you feel you're positioned there on the card payment side? You can -- whether it be credit or debit?

Well, I think we started off with a good position, #1 global issuer processor. But I think we're differentiated in a single platform to process all account types, credit, debit, installment loan, prepaid, retail private label. And so that capability is well sought out by clients. And that's big, and community and credit union across the board saw operational efficiency, we believe very high there. But our ability to win is driven off of that. And then you have to say what we've added to this digital capability with Ondot will sit on top of that. And we're creating a better digital cardholder experience through these mobile apps. Our community FIs have embraced this fact that we have the ability to deliver them debit and credit with core, right? Very, very strong offering, leveraging the world-class office platform. And over time, our global -- I think our global reach, I mean, obviously, we're all very burdened by our situation in India right now, but we've been a big market share gainer in India, and we've had tremendous wins there. And then obviously, I think ADS, Genesis, Atlanticus were all premium wins. Some of them are on-boarding, right as we speak. And we have a strong pipeline behind that, right? So I think our capability is very strong. We're investing a lot. We have tremendous talent on this, and we believe that it's a strategic advantage.

Yes. So you mentioned India. I'm just curious. So U.S. versus international here on the card side. Do you rank one over the other in terms of importance or opportunities?

No, I mean. It's kind of like talking about different family members. I think international has a lot of opportunity in growth. We love the U.S. market because of the size and scale of it. But we have a good EMEA franchise around issuing that right now has a strong pipeline. So I think there's global growth opportunity for sure. And we had no business in India 4 or 5 years ago when we built it up into, I think, a top 10 issuers. We have a number of them now.

Good. Good. Thinking about all of this in terms of growth and new sales, I cannot ask you about margin here. And what does this all mean for your thinking around margin? Maybe I'll just ask your philosophy on margin. Is the importance of margin expansion versus investing, can you do both?

I've thought my whole career, that's the job. I think you can expand margins, grow revenue and improve quality all in the same stroke, right? And that's technology as the enabler, right? However, the fact that we're bringing tremendous AI into our servicing capabilities for our clients that we're going to be able to allow a lot of self-serve. This is across core, across issuing and across merchant. So that's the case. We're bringing technology in, investing in capabilities that provide higher quality, better margin and will ultimately allow us to grow more revenue. And then on the front end, it's -- you take something like Ondot and we will probably triple the staff it had, but it gives us capability that I believe will be unparalleled in a lot of the cases. So I think it's margin expansions and outcome of revenue growth and quality. It's not margin expansion for margin expansion sake. And it's not cost cutting, it's quality enhancement and productivity gains by the utilization of technology where technologists [indiscernible].

I had a question here from the audience, and it was on my list as well. The $500 million in innovation spend, Frank? So how much of that is around revenue versus productivity versus [indiscernible] yourself, some of the things you just alluded to, can you maybe give us some examples?

Yes. I think it's really driven on revenue and client experience. So if you look at this AI servicing platform, our clients want from us. So it's going to drive efficiency. It's going to drive margin. It will drive revenue growth from clients. You look at taking Ondot and taking it across the spectrum of core, debit, credit, where it was always a stand-alone single instance. So that's where we're going to be able to provide a product that delights our clients, reduce the friction between the 3, generate more revenue through digital adoption of our clients, which, in fact, both they and us benefit from. And I believe reduce unit cost at a place. So we have a series of those going on across all the businesses. That would be true in merchant also.

Okay. It's good stuff. That's good stuff. So just thinking about the cash flow from this output of margins being good from the hard work that you all are doing. I think you at the Investor Day, talked about $30 billion in total free cash flow liquidity available, right, over the next 5 years. It's a lot. You did the Ondot acquisition. I think recently, you executed a concurrent repurchase with the KKR secondary. Is that a model that we can expect going forward, Frank?

Well, you should expect us to be balanced in the short run, paying down debt while doing strategic acquisitions and repurchasing shares. You should watch that change to us using famous tried and true capital allocation methodology of share repurchase as a benchmark for shareholder returns. But obviously, if you look over the past 1.5 years, we've had a very balanced methodology, and we'll continue to it. And you saw with a deep belief when KKR was selling some shares, we were a buyer.

Good. I know that there's a lot of industry consolidation. There's some very well-funded private companies as well. Does that raise the sense of urgency for Fiserv to get back into the M&A game? And I know Ondot sounds like you mentioned game changer. Is there more opportunity to do those types of deals or larger transformational ones?

I think we live with urgency. We like to say the speed of the game has changed. And we're completely veered into execution times, delivery times for clients. We traffic in a lot of properties and pay attention to a lot of them. You should expect us to be strategic in our thought while using share buyback always as a benchmark. We don't feel any pressure, while -- when you look at the things we're accomplishing, and that could be whether winning ADS or Caixa, which I consider both kind of landmark transactions, and we feel capable of doing others. But we like the Ondot. I think Ondot's like Clover, right? Ultimately, it will be the same, very small and turn on steroids, great digital DNA. So we like to acquire digital DNA and good DNA. But obviously, if there is something that makes sense as our business heads, and I sit around talking about, where the puck's going, we feel very, very capable of deploying capital against it. And I think we believe that we know how to keep talent from acquisitions very, very well. We have less than a -- we have a low single-digit regrettable loss rate here. We know how to put properties in a place, whether it was BluePay, whether it's CardConnect, whether it's Ondot, whether it's Clover, whether it was DNA bought previously, how to grow them. So we feel like we have very good execution expertise around integration, and we feel like we have very good execution capabilities on organic growth, too, and we will balance all of that.

Yes. No, it's important to be a destination, a desirable destination for acquisitions, like you said. So it isn't -- for sure, it's important. I'm glad you mentioned all that. I think in a follow-on question here about La Caixa. It's more around, does that open the door for other deals like that in Latin America, maybe Mexico, some of these other markets where there's a lot of consortiums, for example? Is that in your mind, open the door for more deals to come?

Well, we started Latin America business by deals like this. They weren't quite this deal. We had to begin it by ensuring we knew how to operate it, but you should expect us, like I believe we are in many markets a partner of choice and I think it does. And we've always spent time way ahead of a process with institutions on how we and them can do things together.

Yes. We're just about out of time, Frank. I've enjoyed the conversation for sure.

My pleasure. Thank you.

We try to get one last one. Just what do you think is underappreciated about Fiserv stock? We certainly like it at this level. Just curious what you think is underappreciated as you've been talking to investors?

I think possibly the long-term sustainability of it. This growth is real that we've been accelerating grower as you put these companies together. The amount of capital we have to deploy as we come out of the back end of this year. And just the technical prowess was inside the company and the amount of innovation we actually do.

Great. We'll end on that note then, Frank. Thank you so much for spending a few minutes again, and hopefully, we'll get to see each other in person very, very soon.

I'll see you -- I'll take you downtown.

Yes. Sure. Thank you, Frank.