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

Good afternoon, everyone, and thank you for joining Citi's 11th Annual FinTech Conference. I'm Ashwin Shirvaikar, Citi's Global Head of FinTech Research. My team and I cover payments processes and IT services here for Citi. The company I'm hosting next is Fiserv and from Fiserv, really pleased to have Frank Bisignano, who is President and CEO; and Bob Hau, who is the CFO. Frank and Bob, welcome, and thank you for being part of our event.

Great. Thanks for having us.

The first question I'd like to start with is not necessarily company specific with regards to what you do, but the stock side of things, the Fiserv stock performance over the last 12 to 15 months, has lagged. And so the elephant in the room is always this notion of disruption, right? So to what extent is this narrative in the stock performance focus of the discussion when you and your Board talk about what you should be doing? Should we look for the strategy to adapt to some extent, maybe pivot towards faster instead of more balanced growth like it has been?

Yes. Well, when I think about disruption, I think about innovation. So our daily bread is innovation, discussing what we're doing with our client base in our clients' office. Remember, we're serving small, medium, large corporate businesses, and we're serving financial institutions from a small credit union with maybe only 13 employees to the largest financial institutions in the world. And in all cases, dialogue with our clients and then inside the company is about innovation. And if you take a look at us over time here, you’d say we view innovation as a way to disrupt ourselves. You can take Clover, which did not exist and we actually cannibalized a business by bringing it to market. And then we created it as the operating system for small and medium-sized businesses. And if you look at that, it's really the command center going at 47%. If you look at us in the banking space where the operating system for financial institutions without account processing platforms. And then we come and bring in on dot in to change the mobile experience and take both the cardholder experience and the mobile banking experience and put it at the forefront and allowing our clients to have an experience that they could not have for their clients before. And then you go look at us whether it's being the largest enabler of Zelle in the P2P space with that revenue growing strong, noble digits to over $100 million forecasted this year. And then you see us do things like back and point base and bringing open banking assets like Alldata and creating fintech partnerships with Goalsetter or Street Shares. So to use some the new network for real-time payment connectivity. So those are all large extenders that disrupt the way we work and help our clients in a meet and that innovation is about growth. And I think that you asked a question about moving for faster growth. I'd go back to -- we are very confident where we were with our medium term at 7% to 9% top line growth. We said that would be led by our merchant business, which has led the pack this year, and it would be a 9% to 12% annual grower. And then you'd see us be a 15% to 20% EPS grower. And then given what we've talked about of $30 billion of capital to deploy through 2025 we think we're capable of doing everything we want in share buybacks and in M&A. And I think you've seen us have a very balanced approach. So I think we're investing for growth. We're not giving up tried and true profitability mentality, and we will deploy capital for the benefits of our shareholders always.

Understood. Understood. So I mean, I get it, the antidote disruption, you've got to show innovation that leads to growth. What do you think investors are missing or overlooking then in the Fiserv story and maybe to look in an investor question I just got is the answer perhaps incremental disclosures that with regards to the merchant business, perhaps, things that you may be able to say that help investors along from a stock performance standpoint?

Yes. I think I generally have a very simple outlook on this, which is investors have a lot of choice. And our job is to perform extraordinarily well. If you look at the performance we've had, we'll end the year at double digits on the top line and double digits on EPS. We're committed to be a high single-digit grower on the top line in a very profitable fashion. I think sustainability, the durability, the resilience that this business has showed will be the long-term hallmark while we continue to invest for growth, while we continue to innovate. I think we have a relentless focus on results, while delivering innovation. I think the resilience of this business also is around our client base. right? We have a highly diverse client base, serving all segments, all sectors. We are geographically enabled for growth outside the U.S. while still having strong growth in the U.S. We have a privileged position without account processing business. And we have a privileged position with our merchant business, everywhere from S&P is up to the largest institutions. And I think when you look at our operating model, we are at the center of commerce, and that is an expanding TAM. We talk to shareholders all the time. We clearly think about better ways to present, and we will continue to refine that. You see the small refinement to it as we talk even this quarter. But I think nothing is better than good, solid top line growth, EPS growth and strong capital allocation methodology while improving the way we communicate to all.

Got it. Got it. Yes. Sort of a last question on this topic. If I consider the periods of time that Fiserv stock worked in the last 12 months. First was around your Investor Day. There was a lot of good disclosure there. It was a pretty good month of good performance. And then it worked again when there was speculation around the spin-off of Clover that came up. I'll give you my view. I think you guys are doing the right thing, putting your head down, powering through with Clover and current momentum that you have changed the business from the inside. But I can sort of see also the opposite tack. I mean, is there merit in this idea of spinning out Clover?

Well, I wasn't involved in those conversations. So I don't really remember the moment but that was an idea. But I'll give you my point of view. Clover is an operating system for businesses. And when you look at this company, and you hear us talk about the hundreds of core privileged core account processing clients that now we created relationships through Clover and through our merchant business, and that's continued to be a very strong [indiscernible], tying out assets together how you bring merchant acquiring and the networks that we've put together so well, the synergies of starting. So I think the property together performs very, very well. Clover is a strong asset, but our account processing business is a very privileged position of debit networks that are very strong, and there's interway between all of those. And if you think about us as we went in the market, we bring out a core or we bring our surrounds, we sign up merchants, and we deliver value to our clients' clients. And that's really how I would think about it. We think we're setting up to maximize long-term shareholder value. And we think the growth profile both on EPS and on revenue, as we said before, is very resilient, very durable and has lots of benefits.

Got it. Got it. Just moving to operating results and 2 years past the Fiserv-First Data deal closing. Some of the benefits, of course, got lost because of an unexpected pandemic. But as you kind of grade yourself what went right, what could have gone better? What were the surprises positive or negative, what did you learn, things like that, as you perform that internal analysis of your position in the market, how do you come out on that? What should investors be left with? Who are you post that transition out?

Well, I think who we are is a large scale integrated e-commerce company, enabling payments across the world in a major that I think is pretty unparalleled from financial institutions to small businesses, and that could be a small town in Brazil or it could be [ lowers ] business in America or other countries. So our client franchise expanded through this transaction, our breadth of ability to distribute expanded through this transaction. And that showed up in the revenue synergies, right? We already actioned 75% of the $600 million target, right, and that was 20% higher than where we started at $500 million. And then if you look at a cost synergies, by the end of this year, we've actioned $1.2 billion in 2.5 years. That's fundamentally 1/3 higher and done in half the time so I think we demonstrated our execution excellence, while increasing quality, while innovating and bringing new product to market, while working on text modernization and integration and doing a series of acquisitions that tucked in and brought a better capability than it could have to either stand-alone company. I think we continue to raise our revenue targets, post pandemic and the same on EPS. I think you'd see the success in opportune business. I think you can see the success in the fintech business. And those card wins are a testament to the company we put together. We've talked about that. And I believe there is a lot more revenue growth opportunity within the franchise and the ability to innovate while raising quality and improving margins, I think we will always be working on efficiency at every level. Technology is a great enabler, and we think we have world-class technology, both inside to run the company and on the front end for our clients. So I think if you look at how Clover software has played out and how the merchant channel worked out by using the FI partners, I think it's turned out very, very well. We can continue to refine the portfolio to optimize value for our clients and for growth. I think the team has been unbelievable. Now top 300 leaders across the board who I'm so committed to as I am carried by the company, but I feel like the top 300 are really my responsibility through my executive team, they've been stalwarts at managing this integration while innovating, while doing it during a pandemic. So I think you're right, it's pretty good. I hope you would think so too.

Okay. Okay. Yes. I want to bring up a couple of points. You mentioned acquisitions, of course. So I have a couple of questions on acquisitions. Now maybe the first one. We've obviously seen a lot of scale-led deals, both in the U.S. and Europe. But more recently, there seem to be more tuck-ins, more capability-led acquisitions, if you will, -- Do you think that's sort of the new norm for you as well? And then I want to talk about some of the specific acquisitions because I do like them a lot. The gear for [indiscernible].

I can drill. I think for us, if you look at the company is -- our ability in this company, and this was true in the previous companies, to buy a business and then scale it to be industrial scale is very large. That was true across the board. So if you look at the most recent thing we announced BentoBox where we're going to be out there with a capability, if you think about Ondot and SpendLabs or Radius8, it's all about scaling them up. And I think for us, the ability to have new founders, be partners inside the company. In many cases, they end up with more responsibility, the opportunity to grow their business in an integrated fashion inside the company a matter that they plan to, if not here, a distribution base and our client base is really unparalleled. And so for us, these tuck-ins are a high-return strategy and very, very accretive for our shareholders over the long haul.

Yes. Yes. Got it. So is it fair to say, I mean, you mentioned OnDot, Spend Labs, Pineapple, Bentobox, retaining the founding team, so to speak, helping them grow within -- can you perhaps maybe point to sales success due to these added capabilities? Or is it too early in that [indiscernible].

[indiscernible] Within about 6 months, we integrated the product at a level beyond its original capability. We put it in our mobility banking platform, and we're already out in market with clients signing up for it. And that will be a long, long runway that will, we believe, help our clients increase their digital banking clients and create their digital quotient with their end-user clients. So that would be an exact example. Radius8’s winning in the market, bringing capability. It's been very strong. I think when you think about SpendLabs, it's growing, but that too has a huge pipeline. So the pipeline for these are very huge and now the implementations are beginning. So I think much like Clover, I did say early on on that we'll have that same effect. SpendLabs' ability to be integrated across the company is very, very high. And then features like Radius8 helps our e-com platform and a large institutional platform. So I think it's not in the today's revenue numbers, but it's in the pipeline and it's in the client acceptance and the client satisfaction, and we'll see a ramp-up very close next year.

Got it. Got it. Yes. Understood. Understood. And your overall sales commentary that has been robust. Could you maybe discuss what projects, products are seeing the most demand? Where are your clients may be speeding up their decisions and has demand, in your opinion, come back to sort of pre-pandemic levels in general?

Well, I think demand is very, very high. I mean in some cases, maybe they're higher than when we talk about demand of our clients looking for functionality and capability, it might be the highest we've seen. Now granted we’ve put the company together, and it wasn't too long before pandemic was occurring. But I would say if you think about digitization and the need for digital. And then you think about what we're doing with SpendLabs, what we're doing with Ondot, what we’re doing with Clover, our winning ISV formula, all of these things are allowing us to be able to have a very good look at continued growth, continued consumer adoption and our clients' adoption and the ability for us to be that operating system that our clients still need. So I think it's actually an all-time high right now from what I know. Now maybe some of that's pent-up demand, maybe some of it is pent-up demand. But I think a fair amount of it is just the speed of change. You look at Carat and the strong momentum on Carat, you look at what we're doing with Abiliti, which is our modern cloud-based, API-driven digital banking platform sees great momentum, 150 wins, right, in converting clients to it. And then as I talked about. And look at -- we talked about 3 of the top 25 issuer wins. That shows the amount -- that's a very unusual situation with that many issuers but it's about change. It's about modernization. It's about tech platforms, it's about enablement. And even what we talked about earlier about Zelle being a $100 million business and growing strong double digits. I think that shows the amount of demand, any amount of change in technology is good and being client-focused and the ability to serve them to allow them to serve their clients wherever they need to.

Ashwin, the one thing I'd add to that, the other thing we're seeing is the breadth of the conversations are wider. Post-merger, the product offering that we have, gets us into deeper conversations with our clients where it might have been 1, 2 or a handful of products. It's now a much wider ranging conversation giving us more growth opportunity.

Good point. Okay. So when I look at, say, for example, the Acceptance segment. I know everybody is all focused on Clover, which is great. You're doing good. But maybe I'll maybe start with Carat. Can you provide an update on how that fits in with the digitization theme playing out at your clients how should investors look at it, what external metrics might help with sizing or just tracking the success that you mentioned? You mentioned Carat, I think, a couple of times now, Frank.

Yes. Well, Carat, much like Clover, we're investing heavily in our platform. So think about it this way, invested heavily in our Clover platform. Clover Connect for ISVs and Carats for large enterprise clients. And I think really, you guys think of it as our omni-commerce platform for large enterprises, single API what we have agreed -- we have great franchising grocery. We have a great franchise in petro. We have a leading franchise in a restaurant and even including fintech segment emerging. Why I bring all that up because these are tried and true businesses that we have leading platforms in, leading positions in, we bring Carat in, we bring an omni-commerce solution, and we have a developer portal. So I think as you think about that, you should think about surrounding the property with an omni-channel, they can be an e-com only shop, they could be physical and e-com and Carat allows that single point multi-country, multi-currency. I think the way to think about it, is simple. How is e-com growth, how is that volume growth, we're importing those numbers, we're talking to you about it. You saw us talk on Investor Day, fundamentally $1 billion e-com business, 75% of it direct, which obviously is the higher-margin business and the business that we aspire most to continue to grow while still having one of the best processing platforms in the industry.

Yes, yes. And on Clover, and you mentioned that, I think a good description of you think of it as operating system, not just sort of a single processing type of thing. What kind of benefit do you see in terms of attach rates to a long list of services that you bring in from that operating system mentality perspective. Is that true for all your channels that Clover is now flowing through?

Well, I think the beauty of this franchise is that we have great distribution channels and we also are our own distributor. And I would say that was one of the big transformations of the company over time was establishing ourself and our own presence both through Clover, through Carat and our investment in the ISV business. I think you start off with Clover's compelling proposition and all and rolling command center serves a lot of different verticals. It serves a lot of distribution. And you had API-driven services to help SMBs. You can do everything from payroll to marketing, to tax, to loyalty. It's a very good value prop. And what we continue to do, and you heard us talk about [ bento ] in restaurants that will really be the front end. We continue to think about how to expand its ability to have a larger total addressable market and you watch us continue to be able to get more value-added services. It starts off with the business owner recognizing that they can do 4 or 5 things that they maybe did separately within Clover. And then that Clover also has this omni-commerce capability and continues to grow share. And when you look at the GDP growth, I think it's important to recognize we've talked about this number. What 90% of that is net new volume coming through there. We do think also that it will continue its expansion outside the U.S. So you hear us think about it in America, already in Argentina, headed to Brazil. You see us going to India, you think about us with the Deutsche Bank, JV and a strong hold in Germany that we already have, but even expanding. So our objective is for it to be the most used platform in the world. And I think it's on a pretty good track for that. And then the generation, as we do in our current system of more revenue from every client, by more value-added services and to continue to expand the TAM. And I think Clover is positioned that well, we started in a pandemic where we rolled out order ahead to our Clover client base that did not have it. And stores that never thought they'd be in order to hit business were, and it was very strong rail growth, and we'll continue to do it.

Got it. Got it. So moving to the payments network business. On your 3Q '21 earnings, you broke out or the rough sizing of the business is there. That was very useful. By the way, I mean, Bob showed really great incremental disclosure there. I would ask you, when you look at that breakout though, right? On the one hand, you have a number of large issuer wins like you mentioned. So the question becomes, how does that affect '22 and beyond. But then there's also what part is your exposure perhaps to private label, which in the near term will benefit from the ADS win, but what's your fundamental view on the underlying private label business. So if I ask you those questions, how -- what's the answer there?

I think, first of all, we like talking about the fact that we're at the top 25 issuers converted over to us. And all that at a base run rate, you are going to say that's like 120 annualized. I also think you heard us talking about a strong credit business -- And I think an example also was we're winning fintechs like Rakuten and SoFi or you use a credit offering. The retail private label business by itself is approximately maybe 3% in the payment segment when you think about size and scope although active accounts are growing low single digit. And we do see that asset as being strategic and helpful to our clients. So I think when we think about it, also within that segment, we have about to have it in order and they're very powerful assets and Star and Excel combined are very, very well liked by the issuers and also by our merchants. So I think when you look at that, we're -- and by the way, we're innovating. Remember, the card products from Ondot sits on top of all of these. And in many cases in our pure credit business, which we've -- on the smaller end, financial institutions are winning a lot because of the capabilities of Optis and then we put on top of it the core banking platform and on that together for digital acceptance. It's a very strong offering and compelling and issuers love it, too.

Okay. Got it. Got it. I do have an incoming question from an investor, and that's with regards to free cash flow. So -- and it was a matter of concern for many investors because of the recent free cash flow guide down. Was that guide down a temporary event for this year? Or how should investors think about whether you're entering an elevated capital investment cycle to support growth? And if that's the case, how should investors expect free cash flow conversion in the long term?

Yes, I would say what you should -- what we guided down to 95 to 100 was in the period of change. We are -- we talked about the CapEx in that ex investment. We talked about the continued investment in businesses and people. We talked about the expiration of the NOL. But I think when you think of the number north of 100 is where you should think about it, and we will always be a very strong cash flow converter. There are aspects of our business that require more capital. Maybe if you look at the [indiscernible] explosion we're having America, that's a little more capital intensive for our revenue growth. That will normalize as that business grows. But I think generally, we should think about it as still a strong north of a 100 number [indiscernible].

Understood. Understood. Last question as we sort of wrap up, I haven't talked too much about your FinTech segment. You mentioned it a couple of times. You do have some core processing wins there. What's a good growth rate to think of in that segment as we think of the next year to 2 years, what can you do to accelerate growth in that segment?

Well, I think -- I hope you've kind of heard us pretty loudly that well, medium-term guide is 4% to 6% there. And we feel very, very good about that. I think you've watched us perform during the course of this year. And we've had a feel that the wins that we've already achieved that are not onboarded, the more digital product that we're bringing to our client base will allow us to continue to accelerate our growth, but we're very confident in the range, and we're very confident in our ability to accelerate. I think the integrated surrounds are a big deal there. We're playing in the open banking space. We have a developer studio that we've brought in. I think our scale, our reach, our services across the banking ecosystem continues to differentiate as we grow. And so I think we're very, very confident about [indiscernible]. Today, we're 4% year-to-date, but we've talked about the elements of that, you should expect that number to continue to [indiscernible].

Great. Great. We're 2, 3 minutes past time here, Frank. Bob, I want to say thank you very much for your insights. If there's a quick 30-second message you have for investors, takeaways that they should look at when they think of Fiserv?

Well, I think they should think about a completely durable, resilient company that will continue to grow in the high single digits and have good double-digit EPS, strong free cash flow generator that will allocate its capital in a manner that rewards the shareholders, both by doing strategic acquisitions that allow us to grow while buying back the shares in an appropriate manner as we always have.

Got it. Thank you very much. I appreciate you guys being here.

Thanks, Ashwin.

Thank you both.