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

Okay. Thank you, everyone, for joining us this morning. My name is Tim Chiodo. I'm the lead payments processors and fintech analyst here at Credit Suisse. We're very pleased to have with us today Frank Bisignano, the President and CEO of Fiserv. I'm sure everyone in the audience is very well familiar with Frank. Frank and Bob and to [ Shub ] thank you all for joining us today and for coming out to Arizona.

Thanks for having us.

Okay. Great. So for those in the audience before we get started, I just want to get a heads up that we do have microphones available. We'll save some time at the end for audience Q&A. So please begin to queue those questions and you can just step up to one of those microphones when we get to that point. With that, Frank, there's so much to talk through and not a lot of time here. So I think we should get started on one of the key topics of interest for investors, essentially the medium-term growth outlook and maybe breaking that down by the 3 segments?

Yes. We came -- we feel very, very committed to what we talked about last December. A year ago, we had an Investor Day, and we talked about that medium-term outlook. We talked about a 7 to 9. Obviously, you watch us during the course of this year, producing 11. But -- and you watch our merchant business, I think performing fabulously on a bunch of cylinders. But we're very committed to 7 to 9. If you look at Merchant, we've talked about 9 to 12. You can see the performance that we have in our Merchant business. You could see the future trajectory, we talked about it with the amount of innovation wins there. So we feel very, very good about that. Our fintech, we had a 4 to 6 and you watch us perform, and we feel very, very good. Here the amount of wins we've had, the business we're booking, the innovation we're bringing to that marketplace, and we have great receptivity from our client base and prospects. Payments at 5 to 8. And I think we've talked to you probably heard us talk about the elements within payments, but we've had a great set of wins that are onboarding now in our credit business. You heard us talking about debit business just recently about Chime. It gives a sense of the power of having those debit networks. So you should expect those to perform very well in all those segments. And I think you could see the momentum inside the business completely right now.

Okay. Excellent. So let's just dig into a little bit more of a few of those real quickly before we move on to some of the more near-term stuff, let's stay with more the medium term. So within merchant, the way we've kind of phrased it is that there are some crown jewels within the business, whether it be Clover or the ISV business, the e-commerce business, international. Maybe you can just talk about sort of the evolving mix within the overall merchant segment, skewing more and more towards those more durable growth businesses?

Yes. I think a good way, as I like to say, is to go back and look at the trajectory of that business, It was fundamentally a processor. And I think we did a good job of converting a processor into an acquirer and an innovator. We move from the back to the front with products like Clover. And obviously, you watch us continue to do things like Radius8, like BentoBox, which even moves us deeper into the relationship with the merchant. So I think that's a standout set of assets that we've put together. Obviously, we have great processing prowess. I think on both sides, if you'll get Clover on the front and our platforms, which many were consolidated and integrated and have a leading platforms globally. It gives us a very strategic position. During that transformation, we built out our e-com capabilities to do a lot more than processing and, in fact, to be an acquirer of choice. And that's what we call Carat. And Carat is a fabulous multi-currency product that's API-enabled that's a single input. And when we went back last year, we talked about the size and scope of our merchant business back then approximately $1 billion, and you hear us talk about the double-digit growth we have there. I think international, we have our footprint. We believe in our footprint, whether it's Brazil, whether it's India, whether it's Argentina, you look at Europe with Poland and Ireland and the U.K., in Germany, we feel very good -- Australia. We feel good about the countries, and we keep winning in the countries. I mean you heard us talk about a win in Brazil, that's explosive. You'll watch us through a partnership with Deutsche Bank, which will begin next year. Those will all use standard platforms and ultimately be Clover distributors and Carat distributors, and we'll share in the economics not as a processor, but as an acquirer. And that's really been a large transformation. So when you look at those, and we went and bought a couple of ISV assets back in '17-'18. We put those together, that was CardConnect and BluePay. We took those assets and had the ability then to get in a business line that we didn't have, which is growing very, very strong double digits. Backlog in all of these are large, and we'll continue to bring product, and Clover Connect will be the product for the ISVs. They're very enthused about it. So not only will we have an ISV business, but we'll attach our market-leading Clover product to it. And I think those are the elements that cause us to win in the marketplace right now.

Excellent. Just one little follow-up because you mentioned those 2 big international wins, Deutsche Bank and also in Brazil, if you could just -- if there's any way you could just directionally even put some context around how meaningful those might be in terms of supportive to your growth within the segment?

Well, I mean, if you think about Caixa as leading bank in Brazil, and I kind of find it interesting because they're in 99% of the cities and they have a dominant share. And they are animated, they're committed. We've onboarded tens of thousands of merchants already there. So I would treat that as it affects the growth rate. And Deutsche, we're going to have access to their whole small business community, and they'll be a Clover distributor. But when I think about the growth rate in total over the longer haul, these are all elements of it. There are all elements of it. I think what's happening in Clover, what's happening in ISV, what's happening internationally. And that's why when we look at that, we feel very, very good about where the medium term will perform.

Excellent. Thank you, Frank. Well, absolutely, it's very much well aligned with some of the research we've done around just pointing out the relative levels of fragmentation, whether it be U.S. versus some of those markets that you're making more meaningful entry into there's much more opportunity there. So very much aligned. Okay. Great. Well, I think we did a good job of covering some of the medium-term outlook. Why don't we just spend just a couple of minutes here, just more if there's anything to call out in terms of the near-term trends, whether it be across merchant fintech or payments around Q4, Q1? Anything to call out there that you've been discussing with the market?

Well, I mean, we could take a look at -- I'm sure people wondering about holiday season, if that's what you mean by near term, I guess that's really near term.

Yes.

And we feel very, very good about what we see. If you look at any leading indicators out there or published data, whether it's Salesforce, whether it's Adobe, whether it's MasterCard, obviously we take a look at all of those. And if you walk in our office, you see the big fat wall showing transactions per second. I mean we were red lining at over 7,000 in the U.S. alone. So we feel very good about how we stacked up against current data out there. Outside the U.S., it's a little bit of a question mark as lockdowns are happening. On the other hand, I think most people are outspending, they're outspending. The environment is -- when I talk to Europe, I'm basically talking about, yes, there are lockdowns, but people are outspending. So we'll watch it closely. And that's been a last week item, really.

Okay. Great. And the holiday season was definitely a big part of it. So thank you. The other piece that often investors want to see, if you have just any thoughts around any issues that you're seeing related to supply chain constraints? Has that really just been sort of a...

Well, we've been on supply chain for a long time. And we've fared well to date where as we like to do anything that has potential risk, we're well organized to sit around the table and make sure we're managing it well. I think we've done a really, really good job. Remember, we have a broad company around the world. I think everybody is focused on it, is able to manage through it, although there's no guarantee to what you see next year when you think about supply chain issues.

Okay. Great. All right. So we can circle back to that a little bit more when we talk about your own hardware. But actually -- so we covered the medium term, we covered the more near term. Why don't we move to -- just to the extent that you could give any context around the preliminary view of 2022. You clearly have already put out some of the guideposts for how to think about next year. But just if you could give some context to the audience.

Well, I think the context I'd give is, first of all, we'll come out with fourth quarter, and you'll have full context, a complete guide. But you should treat what we talked about as the guidepost. Now a couple of things have happened within that. We've gone out and acquired properties. And we think the properties we acquired -- we acquired a property OnDot, which was really about digital card issuance. And what we've done is -- and it was also about digital experience and digital card management, which would span debit and credit. And it was the industry leader. And what we did was convert it into being part of a single instance for mobile banking delivery. And I think what you'll see is that will give us a strategic advantage in the fintech segment. It also gives us a strategic advantage in the card segment. But our ability to bring to our clients, so what you're finding about the company is it's focused on serving our clients so they can serve their clients. We're really talking about their end users to give our banking clients the best possible digital experience that maybe the simplest way to say that you would only probably get at the top 5 or 10 banks in the country. So I think that that's very strategic for us. You saw us hopefully announced BentoBox. And we've been talking about the restaurant vertical. The restaurant vertical, we brought Clover Dining to market. And then we bring BentoBox in front of Clover Dining. And I think when you look at it, you'll see a very, very strategic asset that we're going to apply to our hundreds of thousands of restaurants and then further build out that vertical. So I think there are all these elements, and we can talk about others that will apply and you'll hear more about as we guide to the future that we didn't have necessarily when we sit at the table and talked last December about 7 to 9 and in different segments. So I think we feel very, very good about investments we've made. We've built a lot of technology. We've invested in the business. We're investing for growth. And we could go on about that forever, but you probably have other questions you want to cover, probably other people want to ask questions. So...

Exactly. I'm going to try and get through these because I'm guessing there's Q&A. All right. Great. Let's go to the next big topic, which is clearly -- for good reason, Clover is a big topic for you guys. Clover on our estimates is approaching 20% of revenue within the merchant segment ex-hardware, and it's growing at a healthy rate. And the quick math that investors can do is it's that percent of the business growing at x percent rate, and it's a nice contributor to the overall segment's growth. So maybe you could just put some additional color around some of the growth drivers there. And also you dug into a little bit the international expansion, but I would love to hear more about that.

Yes. I mean we see long runway for Clover. We see a very long runway. And remember, it's a tremendous front-of-store asset. It has horizontal applicability and then we build the vertical applicability. And so -- and then obviously, there's international expansion and there's ISV expansion. And so for all that, we have a product doing about $200 billion of GPV now. Obviously, value-added services are being more and more adopted. Our ability to bring more software to front of store as I like to call it, have the ability to deliver to our clients a greater capability than merchant acquiring. And you see us do things like BentoBox or Radius8, which is really to help that business owner whatever vertical they may be in to expand their opportunity to make money. So as opposed to being in the payment processing business, Clover continues to demonstrate. It's in the business management business and has payment processing, but has a great software stack. Scale is very, very well. And clients can grow too from Clover [indiscernible] to Clover Station through their life cycle. Obviously, we always like to talk about fundamentally 90% of that GPV is net new. So I think that's an important element when you're thinking about the equation.

Excellent. Thank you, Frank. Related to Clover, but more on the Clover Connect or the ISV business and the formerly CardConnect. You mentioned some of the value-added services that can be working into Clover. You also have Clover Capital, which maybe doesn't get discussed as often, but it's an offering that you have for the merchants. To what extent does or can some of these value-added services be integrated into third-party ISVs, right? So...

Well, that's really why look at third-party ISVs like Clover. And I won't make a long story. But when we started on Clover, I think the ISV community completely viewed us as a competitor. Now we remade what Clover was. We had a dream that it would have an app store and everybody would come to the app store, and it would be the iPhone for merchants. But we are in that small- and medium-sized business owners and different verticals use different capability. And we also began focusing on an ISV business that we did not have. So we've spent a lot of time on our current ISV clients on what specific software that's in our stack that they would like to use. And I could give you the perfect example, a Gift product, right? Our Gift product gets deployed to Clover will get deployed through the ISV community. It will make a large difference. And so I think it's a software journey. We love software, we love delivering software, but you got to veer to a vertical expertise. And yes, Gift can have a more horizontal capability where our data analytics can have a more horizontal capability. But there are vertical specifics and that's why you look at that aspect, too. And look, I think one of the most important things, and we have a great benefit with [indiscernible] of industry-leading merchant size and scale is listening to the clients. So the fact that the ISVs want Clover is a tremendous win for us as opposed to us pushing Clover to our ISV community.

Excellent. Thank you, Frank. I want to hit on maybe one or two more here before we move to the audience Q&A. So capital allocation. A topic that came up a little bit on the last earnings call. Maybe you could just talk through the -- basically the road map to that $30 billion of capacity that you have available to allocate over the coming years? You mentioned that the investors...

Yes. So I think that's a good -- it's a good place to plant that $30 billion. And if you think about our free cash flow generation over that 5-year period and then you think about we're going to have debt capacity because of where our earnings are, our leverage ratio, which we're highly committed to being at in the first half of this year, you should think about $5 billion potentially of debt capacity there. But the rest will be just free cash flow generation.

Okay. Excellent. All right. Why don't we pause there to see if there are questions. If anyone would like to take the mic or raise their hand, please go ahead. It would be great if you could.

By the way, I didn't say this, but it's kind of good to be human again.

It's great.

Right. I mean like, yes, I just don't want to make people getting up to mics. We're in a room together. And geez, I'm not even standing at 42 mass. God bless America. Thanks for being here, guys.

Definitely nice change. But I'm curious to hear more about the ISV strategy. It sounds like you're more of a Switzerland approach than I assumed because it seemed like FIS was kind of more of the Switzerland approach with everyone. It's like they have seen a lot of disruption, especially in the restaurant vertical. Have there been certain channels within -- certain verticals within the ISV channel, where you have seen more competitive pressure? And how do you manage that channel conflict with being seen as a partner versus a competitor? How is your strategy different at all and playing out differently than...

Yes, I don't really use Switzerland as how I think about things, but we'll just put that aside from that. What I do think about is the capability model, right? So when we bought Clover Connect, we bought BluePay, we bought an ISV that served e-com, and we bought an ISV that served physical, and we brought those assets together. I would also make a point that with that, we believe with the CardConnect suite, with CoPilot, we bought the best partner management solution capability, which we could spread to our ISV community, right? So one of the assets we believe we bring is great partner management tools that allows them to understand their business better, understand their economics better, right? We're -- we serve all ISVs. And yes, there's going to be a moment where we're competing for a piece of business and they're competing for a piece of business, but they are way more moments that we're helping them win their business. So we were never a buyer of software verticals. We were a builder within Clover of capability to serve a vertical, right? But we were never a buyer of software ISVs so that we would pick one because I couldn't -- I just can't figure out who that would be or where that would be. And when you have Clover, I think one shoe can say, you're going to give it to all your partners. And we do that with every bank we serve, with every ISO we serve, with every agent who's on our books, with every retail ISO who's on our books. So we have the vastest distribution channel, and we want to have all that software that we own and Clover distributes as many merchants in the world as possible.

And you don't see event eventually had it been not forced to, but eventually needing to buy that software?

I haven't come to a conclusion or else I would have done it. I mean...

Excellent. Would anyone else like to ask a question or we could get back to the list. All right. I'll keep moving on. So Frank, we touched on this a little bit earlier around the supply chain type stuff. Just to hit it home real quickly on your own hardware. Can you just give some context around, I mean, how many suppliers are you using? Is there anything we should be concerned about at all or you're in good shape?

I feel like I'm in good shape, but I worry about it every second, like most things in my life. I mean, when you say our own hardware, I assume you're referring to Clover?

Mostly...

Okay. Just I mean we produced [ FT130s ] back in the day, and there's still people that want [ FT130s ]. But in all cases, we have deep supply chain relationships. We have very good partners on the chip side. And do I worry about it, do we sit around and manage it, do we talk about it, do we look at the set of numbers fundamentally daily? Yes. But we don't see anything in the way of serving our clients.

Perfect. Okay. Great. With a little bit of time we have left, this is a topic that was much more topic of pre-COVID, the -- and I think you've had a great track record of execution here in terms of the revenue and cost synergies, which you raised, and you're on track to meet or exceed. Maybe you could just give a brief update on where we stand there? And particularly on the revenue synergy side, there's still a little bit more to come, and you've already achieved a good deal.

Yes. I mean just to go back, we started off with $500 million of revenue. We upped it to $600 million, remember. And that was within a 5-year time frame because the reality is that will go on for a much longer track and a much broader track, but that was a 5-year time frame. And we've executed over $450 million of that already with clear visibility to the rest of it. And I mean, it's probably a number, at $600 million we put a bow on, but recognized that's the gift that we'll keep giving. The ability, as an example, to sign up 300 new banks, their ability to end the -- 300 new banks to distribute Clover, their ability to ramp that in a year or 2 won't happen, but that ability to ramp in over 5 to 7, we know the pattern of that. So we just pulled the line at the 5-year mark. I think the expectation for us is that we have a great combo for growth by putting these assets together in our ability to bring capability across both sides. And we declared a $900 million of expense synergies. We've upped that to $1.2 billion. That was supposed to be over $900 million over 5 years. We're playing a bow on the $1.2 billion on kind of Christmas Eve. And we'll declare it a day. And we'll then continue to run our productivity management and our quality initiatives that also we have a deep belief that as we drive quality expense, actually, you get more productive, continue to invest, and you should expect us to continue to generate that positive operating leverage and the expanded margins from all of it over the long haul.

All right. Great. Well we've unfortunately come to a close here. But I just want to make it, again, a special thanks to you, Frank, and also to Bob and [ Shub ] for traveling here to Arizona to be with us. It really is a pleasure to host your team.

Our pleasure to be here. Good to see you guys. Thanks for being here.