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

Welcome back to Evercore ISI's Sixth Annual Payments and Fintech Innovators Forum. I'm David Togut. I lead the Payments Processors and IT Services research team at Evercore ISI. Delighted to kick off the next session with Fiserv, CEO, Frank Bisignano. And Frank, congratulations on recently adding the Chairman title effective mid-May.

Thank you. Great to be here, David. Thanks for having me.

So last week, Fiserv have announced Dylan Haggart to ValueAct partner, which owns 2% of Fiserv's stock, would join your Board of Directors. Is Fiserv evaluating structural value-enhancing initiatives for Clover and/or a change in capital allocation priorities?

Well, I think when you think about capital allocation, we've had -- tried a true format. I think you see it last year. We spent $850 million on acquisitions. We bought back $2.8 billion worth of stock, and we took our leverage down to [ 3.1 ]. So we think that formula is strong. We're always paying attention to how in the future, how we'll get our leverage ratio down and continue to return cash to shareholders, but we're mindful of our ability to acquire assets as we have on Ondot, BentoBox, Finxact and be able to scale them. Our distributions unparalleled. And we're always looking at our portfolio, both if we have thoughts of needs and also do we have things that we think would be in better hands. You saw really what was a financial services for the securities industry asset over the past 2 years. And so I think Dylan joining our Board is a fabulous, fabulous add I think I've always had a shareholder, a large shareholder in the Board room through my whole career. I think it's great to have that in the boardroom. I spent a lot of time with Dylan and feel very, very comfortable that he's completely accretive to our team, and I enjoy the time we've spent together. And he's a constructive board member in a great way. So I feel fortunate that we have him on the board, usually talented and value add for us.

Got it. So looking at the competitive environment in payments across your Merchant Acceptance and Payments and Network business, which account for 80% of your total revenue. Where do you think you have 100% of the product set you need? And where do you see product gaps that you'd like to fill? For example, do you see more opportunities to acquire businesses similar to Finxact in your fintech business.

I think the things we bought, whether I mentioned a few before, Bento, Finxact, Ondot, you look at Pineapple Payments, they were all about advancing at a speed greater than we would have if we built it ourselves. These are all properties that we know, we're involved in. We're investors in. We spent time, we nurtured it and looked over it. And I think in all of them, it's about expanding the total addressable market. If you take Finxact as an example, that's really about a much broader OEM opportunity, banking as a service, embedded finance, crypto and the ability to help our current client base, be able to do things they can do today. And we do think the combination of our assets together are unparalleled in industry. We think we have the best distribution in the industry. We don't walk around feeling that we have holes, no offense, but when we could take it on dive and distribute to our client base and experience that they don't have today, we see the opportunity to be able to help our clients grow their business and, in fact, keep our privileged position as a provider and partner of choice with our client base.

Great. We actually have a couple of questions coming in. One, specifically on Finxact. What capabilities does Finxact have that you decided not to build internally?

Well, I look at as a much broader item than what capabilities does Finxact have that we decided not to do internally. I think it's about the maturity model of where they are and what it would take a classic decision about how long it would take. Remember, we were an initial investor in Finxact, we watched it grow. We thought technically about it, deeply. I think it's native cloud, easy access, API-enabled, is a fabulous complement as probably, in my opinion, the most modern next-gen core out there. I think couple that with the ability to be a digital side car for our clients, so they won't need go through a conversion, maybe to deliver banking as a service or better crypto or digital capabilities. So I think about time to market. I think we've been very, very close to the founders as we are in other companies and feel that it greatly complements our product set, and we feel great about the founder and the team and the cultural fit.

Another question coming in. Does bigger M&A make sense, for example, taking Clover over a much larger merchant acquiring base at much greater scale.

Well, we have a pretty big merchant acquiring base. I think it may actually be the biggest merchant acquiring base. We have a lot of runway in Clover and we're going to spend a little time talking people through that next week as you probably know. So I don't want to take anything away from that presentation. But you've heard us talk before about our ability to expand vertical reach, our ability to geographically expand, our ability to penetrate other distribution channels in a much greater way. So I think our runway on Clover is fabulous, and we continue to build our engineering staff and build out vertical expertise there.

Question about Russia, Ukraine and Eastern Europe exposure. Can you help us size that at least as a percentage of revenue?

It's de minimis. It's de minimis. I mean, we have a business in Poland, but relative to our $15-plus billion of revenue. This is not an effect on our company now. The long-term effect still remains to be determined, but it's not about the geography, its potential supply chain over time or other issues. But we live through what I consider a pretty tough situation in '20 around COVID and the shutdowns, and we still have 12% EPS growth. So I think the resilience of this company and its capability to consistently perform in '21, you saw us produce 11%. And extremely strong EPS number. So we prepare for all types of situations in the world and believe we can deliver results for our shareholders to take it in.

Appreciate that, Frank. Last question on the screen now is does Finxact aid in the move-up market in the banking segment?

I think the answer to that is 100%, yes, but I want to be very clear. We have a notable set of wins that are in the larger and it's already with NYCB and NYBCB and Flagstar. You can look at Valley. You can look at the combo of First Midwest and Old National. So we continue to move up market, Finxact, obviously, obviously, start serving larger institutions and has the capability because of its native cloud nature. So we think that combo of what Finxact has and what we were building out and then our digital front end, like mobility with Ondot give us a great chance to serve all of the banking and credit union community in a way we weren't may be able to do completely before.

Through 2020, Fiserv managed itself for maximum sustained free cash flow conversion exceeding 105% of adjusted net income. However, last year, free cash flow conversion reached 94%; and this year, you've guided for 95% to 100% free cash flow conversion. Is Fiserv entering a period of sustained higher CapEx largely to drive a faster pace of innovation?

I think when you look at the profile of the company and you think about a 7% to 9% grower as we've guided to, and you think about innovating and the speed of innovation. That's how we guide to the shares guide. If you think about investing in products and solutions, stepping up our piece of integration. BentoBox is being integrated already. Ondot already integrated and having millions of consumers on that platform. That's a different cadence and a different outcome. And in investing heavily in physical and technical infrastructure to allow for future growth. But I would just point to -- we talked about $30 billion of capital to deploy in Investor Day, and nothing has changed on that outcome. I think you see us what -- very strong EBITDA growth, very strong growth and a path very clearly to the $30 billion that we talked about in December of 2020.

If we look at the 7% to 9% midterm organic revenue growth guide. Last year, Merchant Acceptance drove most of your organic revenue growth with Payments and Network and Fintech really toward the lower end of your midterm growth ranges. This year, do you expect accelerating growth from Fintech and Payments and Networks relative to what we saw in 2021?

Well, I think you'll see a balanced approach. I mean if you think about 9 to 12 for Merchant, 5 to 8 for Payment, Fintech 4 to 6, I think our expectation is clearly to be within the ranges. And I think our expectation for the long haul is to see accelerating growth in all of them. So you should expect to see accelerating growth. I think you should look at something like Fintech for the longer range that have an effect on the structural growth. In all these cases, we're expanding TAM. And that's why we feel so strongly about our ability to continue to accelerate growth. Obviously, Merchant was an outsized number this year, but we feel very, very strong about how Merchant will perform along with the other two.

Understood. If we break down the merchant acceptance growth drivers for this year, when you look at your 2022 plans for Clover and Clover Connect, you see Clover GPV growth sustaining its year-end rate of 50%? And how do you see Carat and ISV growing this year?

Look, those are all fabulous assets and pillars we have. So I thank you for highlighting them. And look, we are very focused on geographic expansion around Clover. We're also focused on Clover Connect and moving into the ISV channel and bringing more capability. We also are very focused on value-added services growth and the vertical expertise we talk about. We feel great about the fact we have 200,000 restaurants in our portfolio, and now with the addition of BentoBox and a bunch of work that was done in the restaurant business to expand capabilities, we think our ability to continue to grow really, if you think about average revenue per merchant in these places. So you should think about us in restaurants, you should think about us in service, you should think about us in retail and you should think about us continuing to invest for growth there, while having geographic expansion in Latin America and India and Australia, partnering with Deutsche Bank and JV in Germany. So that's how I think about it. If you want to talk about Carat also, that's about e-commerce a single interface capability and to be able to be a single point of integration globally. So we have expectations that these businesses will continue to grow. We have expectations that ultimately will expand their total addressable market within our capability. And for that, we ultimately see the path to more revenue per merchant.

Got it. Thanks for that, Frank. What do you see is the product in road map this year for Clover, Clover Connect and Carat. And does Clover have access to enough capital within Fiserv to achieve its growth objectives?

Well, why don't we start from the back and move forward. I talked a little bit before about really the growth profile of those were taken on both from a client perspective, a vertical perspective, a geographic perspective. But we are -- have the benefit of a fabulous balance sheet, tremendously talented management and a good look at what our priorities are in resourcing our priorities. We believe that we're strong in execution, and we're strong in innovation. And that capital against strategic initiatives will never ever be injured. So like I said, these are global growth initiatives. They are vertical growth initiatives. They're targeted at delivering more for our clients and ultimately delivering more for our shareholders. You should expect these as long-term investments that will continue to get funded very, very strongly without a powerful free cash flow model and us to be able to continue to take share.

We have a follow-up question coming in regarding $30 billion of capital capacity you've highlighted for the next 5 years. Question focuses on your interest in doing larger scale M&A. You see more potential to do larger scale M&A versus some of the more tactical transactions that might be in your pipeline?

Well, I like to believe that things like Finxact, BentoBox, Ondot were strategic, not tactical. They by no means were tactical. When you deliver an integrated restaurant solution that will increase your ARPU in the restaurant vertical, I consider that strategic. When you acquire a next-gen 3 capability that can give an expanded TAM, I consider that strategic. And I think we never feel constrained about our capability to do transactions. I think -- we think we're pretty darn good at integration and execution. I think if you look at Fiserv First Data, we delivered $1.2 billion instead of 900 or delivering 600 on the top instead of 500, and we accelerated the pace tremendously. So I think we believe that we're good at integrating companies, but we also feel great about the hand we have. And obviously, there were opportunistic opportunities that were very, very good for our shareholders when we go think about them. But right now, we feel great about our M&A strategy and the assets we acquired and what they're going to do to the long-term growth rate.

Understood. That's very clear. So Visa recently launched the Visa Acceptance Cloud to enable merchants to move embedded payment processing software from individual devices to the cloud, essentially eliminating the need for payment terminals, while offering value-added services such as fraud management to BNPL. Will Fiserv First Data adopt the Visa Acceptance Cloud? And would this materially reduce your processing costs if you did?

Well, I think you want to think about there's constant evolution to this space. One of the beauties at Clover is not its physical nature, but it's software platform nature. And it's ubiquitous platform that has performed fabulously in the cloud from inception when we began to build back in '13. And I think the combination of these is doing and platforms like Clover can allow our clients to get a much better experience. So I really think it's about driving client experience. Clover was never designed to be a hardware platform. It need a physical form factor. But clearly what we deliver in its dashboard and its capability and its gateway and its digital nature will allow it to partner very well in all the spaces that Visa Cloud was talking about. I think we have a leading operating system that our clients enjoy and continuing to invest in that, while partnering with new entrants and new initiatives is how we've always dealt with it. You continually see us whether it's Alipay or [ Club ]. If our job is to bring commerce to our clients and allow them to operate in a way that's best for them. And I think we've continued to say it's about merchant choice and we're very happy to give merchant a choice.

Appreciate it, Frank. Very clear. Just touching on your earlier point about kind of First Data cost synergies, now $1.2 billion, up from the $900 million target. Do you see $1.2 billion as a top end goal at this point? Or do you think you would substantially expand your cost takeout plans at this point?

Well, I think we put a ribbon on the expense takeout and were past integration. But we have a deep belief in driving operating leverage. We've always been a positive operating leverage company. We will invest for the future and invest for growth. But that investment will also drive quality and productivity within the shop. And so I think it's a natural operating leverage model. We're very focused on efficiency always. And I think as we drive forward, you should expect us to continue to drive operating leverage.

Got it. Just staying on First Data synergies. Do you see additional revenue synergies from First Data beyond the $600 million target?

Well, I would just look at our sales numbers, right? Ultimately, it's about sales and revenue growth. And we've opted to declare these -- the milestone post, but that doesn't mean you won't continue to see excellent sales growth. And at some point, we just felt it was past the time to call everything a synergy. We put the company together $1.2 billion and $600 million, but we've demonstrated more than 20% sales growth on the institutional side of the company. And you see our SMB growth. We did a great job, I believe, in signing our bank partners, and there's a lot more to do there. But it's not about raising the synergy number, it's to deliver in the revenue growth.

Historically, Fiserv has been a dealer to banks and credit unions, helping them fend off competitors like PayPal and Square, who are moving more into the bank tech space. In its current form, does Zelle offer enough P2P payments capability? Or do you see Zelle evolving into a more robust set of payment services over time?

I think Zelle has been a fabulous asset. Our bank adoption has been off the charts. We're an industry leader in Zelle. I do believe that Zelle has a lot more runway and a lot more achievability. I think when you think about different payment types, including at point of sale, including in the bill payer in -- there's a lot more to do at Zelle. And I think our member banks feel that way, and we feel that way. If you think about safe, real-time payments without contact, cardless in other words, Zelle is tremendously attractive to our client base. And so over time, it will become more robust. And I think it has a lot of runway, and we've been very fortunate to have the growth rates we have, and we count on you to having other use cases across the ecosystem with it.

Great. A question coming in on Clover. Based on Oracle disclosures, it appears Clover plus e-commerce plus ISV will be close to 50% of the North American merchant acceptance revenue run rate in 2022. Is this ballpark right? And if so, does this mean that the legacy North American Merchant Acceptance business is now flat or even possibly declining?

I would invite any and all to come visit us next Tuesday for a fabulous merchant event that Bob Hau, our CFO; and myself, will host. And I think it's much better to say and I know we have great listeners on the phone. So David and I hope you don't mind me using this for an advertisment for what's going to be a great merchant event.

Understood. No, definitely looking forward to that and looking forward to a deep dive into the Merchant business. It should be very interesting. Just segueing to capital allocation, which we talked about before. So last year, Fiserv closed last year with 42 million shares remaining in the repurchase authorization. This year, when you look at the price of your stock compared to the opportunities in your acquisition pipeline, how aggressive do you intend to be on share buyback versus acquisitions?

I think when you think about last year, like I said, $2.8 billion allocated to share repurchases, $850 million to M&A and take our leverage ratio down to 3 1. You should expect us to be active in returning money to our shareholders through share repurchase. It has been over the past couple of years, the largest usage of our cash while we've drove the top line, while we drove operating at a very, very strong rate. So you should expect us to continue and maintain our tried and true capability of buying back shares to report our shareholders through the process.

Very clear. Incoming investor question on the Payments and Network business. Can you please discuss the growth drivers of the 3 main business lines within the Payments and Network businesses. What are the growth rates of the 3 main businesses that comprise Payments and Networks?

We broke out for everyone in a previous probably earnings call, the components of what's in Payments and Network. We've never or will we guide to a subsegment businesses. But having said that, let's say, look, we have a very powerful debit network capability with Accel in store. We feel very good. We think it gives an advantage to our bank clients and to our merchant clients and it's been an excellent performer. We also have a very strong debit processing business. If you look at our credit business, as you know, you heard us talk about the $120 million, which you began onboarding, but we'll really onboard more in credit with the likes of ADS and Genesis and others. And then we have some very strong assets, industry leading assets in bill pay. So it's a combination of all of those that get us to where we guide in the range of 5% to 8% with an expectation of continue to grow that business in a very good way. So hopefully, that helps.

It does. Thanks for that, Frank. Apple recently announced its plans to convert the iPhone into a payments acceptance device, excluding the dongle, leveraging cap to pay technology from Visa and Mastercard and working with Shopify and Stripe. Do you see Apple's new initiatives in payments representing more of a challenge or as an opportunity for Fiserv to partner, especially as Apple looks for distribution and merchant processing partners as it moves up market.

Yes. I -- first of all, I think it's great. We have a pilot on [indiscernible] out of Europe with thousands of merchants already participating in a large pipeline. So I think it's consistent. I have always seen Apple as a great partner to us in many different ways. So I think it's natural evolution, natural partnerships, natural competition, and really serving a market in a manner that they want to be served. So I think it's good for everybody and have been an evolution, and we're completely embedded in it.

What do you see as Fiserv's most underappreciated strengths?

Well, I have to say the resilience of this company. Its ability in 2020 to generate 12% EPS growth and $3.6 billion of cash. The strength of the totality of the enterprise, and then $15-plus billion, growing 7 to 9, the amount of capability it brings to its client base and the amount of return it can bring for its shareholder. So I think it's a totality enterprise through thick on thin, through tough times and good. We come off of a 12% EPS with 0 revenue growth and come back with 11% mid-20s EPS growth, just the resiliency of the model and the ability to generate free cash and be able to deploy to the benefit of our shareholders.

Very clear. Flip side of that, what do you see as the greatest business risks facing Fiserv in this environment?

What's hard to us not take the macro as the biggest risk. I mean at a moment where if we thought we were coming out of the back side of COVID, then Omicron and now the world disruption. To me, those sit -- the macros sit as the largest risk. We're an operating company, and we pride ourselves on execution. I think we know how to deliver against the set of initiatives and objectives. But obviously, the biggest thing we have to do is avoid execution risk. And I think if you look at the merger, you look at the type of revenue growth trajectory the company now has versus the past. If you look at our ability to acquire and integrate properties. I think we need to continue our execution prowess and our innovation prowess. I think we have to continue to innovate. That's why we believe deeply investing for growth. Embedded in that is a slightly lower conversion rate on free cash flow.

Great. Understood. Let me just pause for a minute to see if we have any final questions for you. Great. Well, it looks like we've covered, certainly all of the key incoming investor questions in all of our key questions. So Frank, thanks so much for spending the time with us today. Greatly appreciate your time. Greatly appreciate your insights, and thanks again for your great participation in the conference.

Pleasure to be here. Thank you.

Thanks.