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

All right. Good morning, everyone. Good morning, everyone. Thanks so much for joining. My name is Dave Koning. I'm a senior research analyst at Baird covering payments. And we're thrilled to have Fiserv with us again, with CEO, Frank Bisignano. I think all of you know, Fiserv has been one of the most resilient and recurring businesses with decades and decades. I think 30-some -- 35, 36 years in a row or so of 10%-plus EPS growth, downturns, upturns. And in last year, one of the most resilient performances ever. This year, I think the best growth they're going to have since we've been covering the stock for 15 years. So I think you all know well.

And with that, maybe why don't we just kind of kick this off. Frank, maybe you can talk about how you did during the pandemic. And even recently, have you been keeping up with Visa. Last week, they kind of talked about April, 50% to 60% type of growth, and then, May kind of in the 30s. Are you keeping up with that as we've kind of come through the pandemic and out of it?

Yes. I think as you watched us through the pandemic and you saw our results, we felt very good about our 35th year of double-digit EPS growth, and we felt good about how our business performed during a very difficult time. And you saw our Q1 numbers and we began talking about how the recovery was happening very well. And I think that lines up exactly what you see out of Visa in terms of volumes and the like. Q2, I'd say, are a bit stronger than we expected. U.S. is a U.S.-centric statement, and we see the recovery continuing to occur. I do think it's early in international, but you can begin seeing the signs, and I'm really pointing at a [indiscernible] when I say that. We see it in our European franchise. And you can see there's constant business in motion. Our sales performance has been extraordinary, and ultimately, the sales performance turns into revenue acceleration. You should expect us to continue to win large mandates. I think you have heard us talk about Caixa, which -- a large Brazilian franchise. So I think that's an example of us continuing to, not only get the benefit of what the economy is recovering, but our solution set resonating with the client base and the opportunity.

Well, great to hear. Great to hear. And I would say, clearly, you've held up very well and you're covering well. The biggest investor concern probably in the last year or so has been just the rise of all these small fintechs that compete with you in different ways, very small little pockets. But how are you seeing them? Is it more of an opportunity with these fintechs or more of a headwind? And are you taking share, losing share in any areas? Maybe talk through all of that.

Yes. I think they're forever in business or innovators. And larger companies can be innovators also. They also can be acquirers of assets. And I'd point to Clover as an example, which we were able to use the breadth and depth of the company. And then when we put the companies together, our ability to bring merchant to the community banks is one of the things that we felt very, very strongly about. Then you look at us acquiring an asset like Ondot. And then our ability to take that across the spectrum from bill pay to DDA accounts and bring credit and debit and bring a single instance of mobile technology for all of our banking clients to their clients. So I like competition. We like competition. We think it's good. There will always be innovators. I think the difference is our size and scale give us the benefit of distribution and also the ability to get those products to a much larger base. And then we believe that we also invest in technology heavily. It's our largest really capital allocation, if you think about it across all our capital to get what we do with buybacks and other. But our ability to continue to allow us to grow -- I think if you look at products around our credit and debit offering, you'll continue to see innovation there and our ability to grow there. So I think our scale, comprehensive solution set, our ability to look at the whole ecosystem, our ability to think about ways to innovate across allow us a privileged position, whether it's in the core, whether it's in debit, credit or the merchant business. But I mean, clearly, there's great competitors out there, and we like it. And many times, we'll enable some of them because we're able to help them grow and help ourselves grow. So I consider ourselves as in a very good position and enjoy the competition, enjoy the cooperation also.

Yes. And maybe you touched on this a little bit, but the First Data acquisition, now that we're about 2 years into it, maybe talk about how that's gone. And it actually seems like you're bringing both First Data and Fiserv to better growth really than they've ever had before. What's -- what have you been doing here? How has it been going?

I mean, I think it's gotten great. I think it's gotten great from a people perspective. I think it's kind of great from a client perspective. And I think it's kind of great from putting the 2 together culturally in creating a new company, right? We've approached it like this is not either company, but a completely new company. And we've approached our clients in that manner. And the client overlap existed, but there was plenty of areas that there weren't client overlap, but there was a ton of cross-sell opportunity. And I think when you think about what we're able to do with merchant and bank, I thought we had a great opportunity. And I think we've distinguished ourselves as a partner of choice, not only in bank, but whether it was nonbank when we see things like Verizon, Deluxe and Paycheck. I think our ability to take our credit product and debit product and put it together, we always -- both companies had a very good position in debit. But when you bring STAR and Accel together, you bring the debit processing capability and the large-scale credit capability. It really gives us a very good strategic offering, both for merchants and issuers. So our clients on both sides have benefited from it. And obviously, we were able to accelerate synergies and increase synergies. And that was really about putting the company together and moving forward. So I think we feel that the strategy of the deal that we envisioned actually turned out better. I think the people side turned out fabulous. And I think clients are usually receptive to us on both sides, much more than even before. So it's hard -- it's not hard -- I mean, it's been hard work, and the team has done a great job. Of course, the pandemic throws a little monkey wrench in the plan, but somehow, the team has been incredibly resilient in delivering.

Great. And maybe one last just high-level question. Just when we think of the growth model, I think you've talked about kind of higher single-digit revenue growth, some margin expansion and buybacks. I mean should we expect 5 years of kind of 15% to 20% EPS growth? And then a little corollary just on the buyback. When the stocks pulled back like it has recently, do you kind of put the accelerator down and just start buying more?

Well, let's just think about -- I think where you started earlier was -- it's interesting. This combined company will outgrow either company by itself. And I think that was the thesis of the deal. We may not have articulated at that moment in that manner, but we did articulate the trend as amount of accretion we would have. And that builds to be performing at an even better pace. Sales growth has been extraordinary. So I do think the idea of high single-digit revenue growth, the ability to expand margin, the ability to enter new markets and new products, the ability to cross-sell to our clients all drive not only the top line, but what we ultimately see in the EPS model. And I mean, you've seen us lean in when KKR was selling stock, us buying stock. We obviously have a target to get TAM leverage, but that's within eyesight here right now. And then you'll see our capital deployment model continue to perform the way it did with us deploying capital to buying back shares and M&A. And we have bought properties. And I referred to Ondot before, it could be Pineapple Payments. All of which are not very large, but we believe we have a formula. And it showed in many ways that we could buy smaller properties and use the distribution advantage to make them much larger and much more valuable and apply our whole ecosystem to it. So we feel very good about the medium-term growth guidance. And probably more confident today that we can deliver at the high end of the things that we've talked about in every category.

Great. If we turn to merchant specifically, when we look at last year, it seemed like you took share in the market. I guess I just want to make crystal clear, like, it seems like in Q1 and Q2 thus far, you feel like you're fully keeping up with kind of the Visa trends and just the market trends. Do you view yourself as a market share gainer in the merchants?

Well, if you go back to '19, which I think is in a reasonable place to always think about because '20 was an odd year. '19, we were a 9% to 10% grower in the merchant. And I think for a lot of that point in time, we may have had the largest growth rate, and we have the largest business. So you can't get those 2 things together and not be a market share gainer, I think, if you do math on that. And then we've continued to drive distribution. We've continued the Clover expansion. We have more distribution areas for Clover, whether it be ISV, whether it be outside the U.S., but we'll continue to drive value-added services. I think when you think about what we pivoted in omni-commerce are industry leading. I think if you look at size and scale, our e-comm business is industry leading. And we completely talk about that, as you know, 75% direct. So we talk about 90% plus or minus for Clover into new businesses. We think our global presence is very, very strong. And I'll refer to Caixa again. You come into a place like Brazil, you build out a single-digit market share business from 0, and then I think, obviously, Caixa gets you to double digit. So I think we clearly think we're a market share gainer around the world.

And -- because what a lot of people will ask is, well, how can you have competitors like Square and Stripe and Adyen and others that grow at a hyper level. And then you've got some of the historic players like you -- I think in the mindset is you have a group that gains share and a group that loses share, but it seems like you're also in the group that's gaining share. Who's actually losing share that everybody is winning from?

Well, I'm not -- I'm worried about winning, not who is losing. But if you think about us building out an ISV business that we did not have, us having Clover from being a thought in engineers and a patent to a leading platform across the world, you think about us going from a processor in e-comm to an acquirer an e-comm. And so I actually believe we expanded our addressable market both in enterprise and SMB in global presence and ISV from what we were addressing prior. And so that's really how -- I think it's the best way for you all to consume it is, we're operating in ways we did it before, and there's market opportunity there.

And I always kind of put together and you addressed all these. You addressed e-comm, you addressed Clover, international and ISV. You put those together, it's probably, in my view, probably over half of your merchant segment, and all of them have metrics growing 20% or so, give or take. Like, is that the right way to think -- kind of simplistically think about it that you've half growing really fast and the other half is still probably growing and you blend to that 10% or so?

Yes. I mean, we would expect to have performed on the high end of our number over the low, medium term. I mean obviously, this year is an odd year given where things were. But you saw where we performed in the trough. I think you got to think about these growth engines as where we're continuing to invest that we continue to think about value-added services. I mean Clover was growing at 36% prepandemic. We got a good omnichannel capability. I think our physical presence is a strategic advantage that allows us to have a much better omnichannel presence. So when you play it all in, there's a reason why we believe we've given the range we did, and we see it in the numbers, we see it in the performance. We have very high-performing businesses. But those other businesses continue to have good secular trajectory, and that's why I would think about the high end of the range over the medium term.

Yes. That's great to hear. And maybe lastly on merchant. The EBIT margins, you guys run about 30% or so EBIT margins. Your competitors are often 45%, I think there's just a difference. You have network fees pass through in there, I believe. But can those margins close the gap somewhat? Or where could those go to, give or take?

Yes. I mean we won't guide at that level per se. But if you thought about it, we will continue to drive efficiency. And we will continue to get high-quality revenue with high margin and those 2 combinations actually get us to margin expansion.

Okay. No, that's great. Then the payments business, right? So the next kind of 40% bucket of revenue, this, I feel, is one where there's the most, I guess, investor confusion is probably not the right word. It's just there's so many different parts to that business that people maybe don't fully understand it. What -- I think Q1 low single-digit growth, Q2 you'll accelerate and you really expect the whole year to do much better. What are some of the driving factors? What are the businesses there that are getting a lot better quickly?

Well, I think we have a fabulous credit processing business, right? And you hear us rattle off wins like ADS, Atlanticus, Genesis, and they have exactly 0 revenue on the books today. And those are 3 wins that you won't usually see in a year in this industry. We have a fabulous debit business and, remember, the combination of STAR and Accel put together in our debit processing capability, and the way I think a little bit about that is in -- Fiserv had one set of components for debit. First Data had another. It actually is the largest combination part of the company if you think about the only real place that there was tremendous overlap. And then the ability in card services to ultimately sell to small FIs all the credit capability that large FIs have and the ability to have credit and debit run on a single platform. So those all give forward momentum, forward growth. We have Zelle, which you have heard us talk about growth of 60% or so. And we view that business say, $100 million in '21, but that's a multiple hundred million dollar business. And then we have bill pay. We've talked about the pressure on that during the pandemic, but I think you'll see that also get relieved in the second half of the year, so to speak, beginning in Q2, but more relief in the second half. But you have some very powerful assets, credit, debit, Zelle, bill pay, all of which come together in a very good fashion. And as we talked about the range, we feel very, very good about that range of performance.

Yes. And I think you said -- am I remembering this right, the high end of the range in 2021 that, even though you started a little lower, you still have the pandemic impact in Q1, but because of the wins and momentum full year kind of the high end of that range?

Yes. Yes. Yes, that's correct. And I think we look at, you got a bunch of business on boarding. You got a bunch of strategies applied. You really have the #3 debit network. You have a tremendous card business. You got the power of innovation around Zelle and that distribution. So all coming together, that's how we see it performing.

And do you think -- I know the bill pay market, the bank channel hasn't grown super fast the last handful of years or whatever. The biller direct has grown a little faster. You have solutions for both sides, right? And are you fully participating in the overall growth?

Well, yes, we're fully participating and we're also innovating there. And you won't see that innovation in this year a set of numbers. But in the go forward, how we make it easier for billers, how we make it easier for clients to be able to put more on it, how we partner with the billers and our bank partners to get better outcomes for each so they get better at economics. And so there's a lot of innovation going on in bill pay. It may have been stayed for a while, but we find it to be a great place to operate, giving our ecosystem benefit that we have. So I think as we go forward, you're going to hear about that innovation and that growth opportunity over the next few years, which is not necessarily in this conversation for this year's numbers.

Yes. That's great. And maybe one last thing on payments. Marketo recently filed their IPO. I had a chance to go through the S-1, most of it, a huge majority is Square. And I think the net revenue outside of Square maybe is $50 million or a little more. I mean it's just -- it's tiny relative to the size of you guys. But is that a competitor? Like can they even serve bigger banks with issuer processing?

Well, everybody is a competitor. Everybody is a competitor. And I've spent my career watching companies grow, watching people change. So I think our offering -- there's a reason why we win these deals, the global nature, the single platform, the digital front end. So I think our platform is very, very, very strong. But Marketo has got some different elements. As you said, you read the S-1. So some different elements of their business model than ours. But I think it's why we continue to innovate. And most of our innovation, whether you think about Clover, you think about Ondot, whether you think about what we do in our digital banking capabilities are not about only serving the institution, our client, but ensuring that we get the best front-end experience to their client. And that may be a fundamental change that people need to absorb over time that, at one point in life, being a processor was interesting, being a front-end enabler to help client -- our clients, whether it's one of the largest retailers in the world or whether it's a credit union or a community bank. But how, in fact, we help them attract more clients. And that is a fundamental shift that the market will adjust to over time. That's our real purpose in life. Yes, we will be great and processing will be truly efficient, will drive service, but we'll also drive innovation to help our clients grow their business.

Yes. Yes. Great. Well, maybe what we can do is for the last 5 minutes or so, we can switch to core processing, kind of the legacy Fiserv business. One thing just on growth. I think there was -- some investors wondered the 4% to 6% growth you talked about for the full year, is that a full year comment this year? Some people thought maybe it's a back half of the year comment, but do you expect full year 4% to 6%?

We expect full year 4% to 6%. And one thing I know that people kind of look at this number to and think like, well, how are you going to get there? Historically, here's where you were. But if you go back and look at Q1 and you pull out the famous periodic revenue, termination fees, whatever we want to call it, right, that was a 3.5% grower, right? We see those term fees coming down, right? And as we go through the rest of the year, it gets cut in half in Q2, in fact. We see the new account wins we have, the base business growing. And so we continue to fully expect the 4% to 6%. And we have good -- these are very good visibility business. We feel comfortable with that in the medium term. We see a lot of end client adoption that surrounds around digital. We have real-time cloud-enabled core solutions. And there's a whole bunch more that we're doing in business intelligence. And remember, this core position has been tremendously valuable to all our other businesses. So it, growing and continuing to add, will also add across the portfolio like it has in merchant, like it has in debit also. So we feel great about the position there. We're going to continue to innovate there. Our digital solutions will continue to be at the front end center of it. And this is the real place where, when I talk about Ondot, also, Ondot was always viewed as a card issuer solution. And our ability to implant it in our mobility product and out front end and allow a mobile client to, not only have their banking, but their card on debit and credit along is, I think, and an industry-leading opportunity for us.

Great. Well, yes, and it seems like the momentum there in core processing is better than it's been the last 10 years. I mean I think the processing part, I was reading the 10-Q, it grew 8%, I think, in Q1. Do you think the industry just is getting better, too? And is it maybe a function of all these new accounts? I know you do a lot of neobanks, too. Are people just getting an account at a neobank, an account at a legacy bank and there's just more accounts so you guys kind of -- your industry grows faster?

I think I mean, look, I think there's expansion all over, right? And we've probably never invested as much in core. And we've also probably expanded our addressable market both on the high side and on the neobank and on the fintech. So I think the investments we made is showing in the long-term trajectory of the business, and we'll continue to invest in these.

Yes. And do you think rates starting to rise, inflation kicking in, does some of that benefit either the banks get healthier, I think you have some inflation clauses in your contracts. Does all that kind of help too?

It's not in my calculus, right? It's not in my calculus. And I'll -- this may be -- I mean, you'll take this for what it's worth, I spent a lot of time in financial institutions and we didn't necessarily gravitate our spend or our desire based off of those factors. It's what do clients need, what's the market need, how are we going to organically grow. And if you get some other benefit from the economic tailwind, good. But this is about -- there's nothing in our calculation relative to that.

Got you. Got you. We have about a minute left. Nets or Bucks? I know you're in New York, Milwaukee has got the Bucks, who's going to win this?

I'm very challenged in this conversation. I have a son who, before they were Nets, would shoot in the backyard and think it was either Kyrie or James Harden, and it was a Nets band. So you can imagine what happened when those 3 guys showed up. But I will talk to the President of Bucks today who we have a great relationship with. I'd love to see the Bucks win. But it's 2-0 and whether James Harden has a bad hamstring or not, if my son ever listens to this recording, I'm going to be in deep trouble if I say the Bucks. I'm probably in deep trouble with the Bucks right now.

That's right.

So I think it's a Nets series. We'll see. We'll see. What are you thinking? What do you think?

Well, I kind of agree. It feels like the Nets are going to win this, but I'd love to see the Bucks come back and win the next 2. Well, I guess we'll see.

I'm up for 7 games. I'm up for 7 games. It's better for Fiserv forum.

Yes, right. It is. More advertising for you guys.

Exactly. We do the processing in both locations, so I'm good with 7 games.

There we go. Well, that's about all the time we have. Thanks so much. We'll do -- we're going to do a breakout session that people can join starting in about 5 minutes. So we can -- I'll go in, you can go in. And yes, thanks so much for the time.

Good to see you. Be well. Good to see you physically soon.

Sounds great. Thanks. You, too.

All right then. See you. Bye.