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

Good morning, everybody, and thanks again for joining us on the Wolfe Fintech Forum day 3. As you've seen, we've had a lot of content so far. We have a lot of great content coming up, starting now with Fiserv and the CEO, Frank, who we've spent a lot of time with over the years and -- whether it's First Data or even before, frankly, and since with Fiserv. So Frank, thanks for joining us. Really great to have you, as always.

Great to be here, and congrats on a great conference.

Thanks, Frank. Listen, maybe we just start off. I mean if we talk about Fiserv's positioning today versus a couple of years ago when the pandemic hit, obviously, a lot has happened. And so what's your view on the company's structural positioning where we are today versus a few years back even?

Yes. I think it's good to go back to '19 and think about the company. We just closed the merger, and we were beginning to integrate the company. We come back in 20 -- the start of '22 and you see really us fundamentally putting a bow on the integration, $1.2 billion of cost saves or commitment of $600 million of revenue synergies. And then you look at the investments we made over that period of time, both organically and inorganically, a deep commitment to Clover; the ability to build out Carat; the ability to continue to invest in our digital surrounds in our core business; the acquisitions of Ondot, SpendLabs, Pineapple Payments, BentoBox coming forward this year with Finxact; our ability to, over that period of time, return over $4 billion to shareholders through repurchase come. And while doing that, deleveraging fundamentally to historic levels that we've seen on a leverage ratio and continue to grow the top line, right? And so we've had an acceleration. If you look at what we've done on margin, tremendous margin expansion while investing. So I think we feel great about the position we're in 2 years later. The pandemic had all types of changes. Our people platform is strong, our client platform is strong, our ability to continue to invest and deliver strongly when you think of the acquisitions we've made and the organic investments while continuing to drive productivity. So feel great about the positioning going into '22.

When we think about where the business is in terms of recovery, right, volume levels and if you just take a step back and think about where we are versus where we were in '19, I know there's still some parts of your business that probably aren't totally back to where they should be just based on the pandemic alone. Can you give us a sense of what some of those areas might be?

Well, I think if you look at post-Omicron recovery, it's interesting because we have the pandemic and then we had -- we've had dips and spikes and turns, but in particular, in the U.S., January, as we had talked about, was strong. February, very, very strong also. Obviously, Europe is coming back from restrictions, and APAC is in a different place. We are seeing a shift in debit and credit. And I think when you look at us and you see the published data from the networks, we're fundamentally aligned. I'd say international is not back. But this is a strong, robust business. We have lots of parts of the business that are not dependent on that. And if you look back, we probably had our best year in Fintech ever last year, and we continue to feel strong about that also.

Yes. Okay. Very quickly, before we go further into the business strategy and operations, when we think about Ukraine and Russia and the unfortunate conflict going on there, maybe you could just touch on -- just remind us if you have much exposure there at all. And then any peripheral read-throughs that you could think could impact the business?

Yes. I mean, look at -- we are not in Russia or in the Ukraine fundamentally. We do have a Polish business. So -- not to mention, we have a big European business. We do have plenty of people whose families are affected by this conflict. And so for that, we spend a lot of time thinking and trying to help out people through this journey. I do think there has been this constant supply chain issue. And this -- we've managed it tremendously. We've always had it in the category of oversight of risk management. It was always -- supply chain is always on OS. So further conflict, further issue can cause concern. But our direct business does not have a direct effect on it because of it. But it's hard to ignore and not get up every day and think about how to mitigate world conflict.

Yes, of course. In terms of a secondary implication, just to be clear, your comments on recent trends didn't sound like there was much in the way of a read-through around higher gas prices, for instance, on the consumer, and you see a big percentage of the consumer. And so I mean, have you seen any yet in terms of demand impact?

No. But I think it's very early.

It's early.

I think it's very early. I think it's very early. And I think people are adjusting. So we'll keep a close eye on that as all other categories and also the geographic nature of issues because that's really as the U.S. and Europe and how it bleeds through. But right now, I'm not seeing much of anything.

Frank, just given how many different ways you can invest and point this business, how many aspects of the company you can invest in, as CEO, I mean, talk to us about where you're prioritizing your time. Where are you really focused on if you had to sort of rank order your areas of interest?

Well, I think we run a large client franchise. So listening to our clients on their changing needs and their developing needs. We run a very large technology company with tremendous operating system platforms. You've probably heard us talk about a couple this week, Carat and Clover. Any investment in those and thinking about the next generation of how software and services will evolve for our client base and leaning in pretty heavily on that. But it's really a client-driven business and how we serve our clients' needs, and that's everywhere from our SMBs to our large enterprises to our community banks to our credit unions. And so when you look at capital allocation in an inorganic fashion acquisition, you just saw us acquiring an asset like Finxact, you saw us acquiring an asset like BentoBox, very digital in nature and very complementary to the platforms we have. And that's all by having listened to our clients and where their needs are going and our ability to lean in because we have these strategic operating systems that allow us to create more lifetime value from our clients by bringing more digital experiences.

Spending time with customers effectively is where you're spending most of your time, which makes sense.

Yes.

But the incremental dollar, if you're going to invest in an area, it seems like it's been spread between the merchant acquiring business and now Finxact obviously. So those areas are ones that excite you more than others or that just happen to [indiscernible]

Well, I'd say look at -- if you look at Ondot and SpendLabs, they complement our card businesses, but they integrate to our whole ecosystem. If you look at Finxact, it complements our fintech business, but stretches across the card and total ecosystem experience. And then you look at Pineapple Payments and BentoBox, and you say that's gearing into the merchant business. So there is no place that we're saying this segment, we'll underinvest in. But if you look at them in totality, what you're seeing is an increased digitization of the ecosystems using our strategic platforms as operating systems to allow us to expand our TAM, right, and be able to improve lifetime value of our business.

Okay. You gave us guidance for 2022. And then you also have medium-term outlook, but 7% to 9% organic growth, 15% to 17% EPS growth. Can you just talk about what went into those metrics in terms of your assumptions on recovery for this year on maybe as much as you can remind us on the segments? And any areas of conservatism or upside potentially?

Well, I'd step back and remember, we had laid out this guidance at Investor Day 2020 where we said this is our medium-term guide, and that really took us through '23. And that medium-term guide was a 7% to 9% and then that's full company. We talked about being at $7.40. And when we look at what we talked about then and where we are now, our confidence level is superbly high. And if you just look at the EPS guide, you could see where we feel highly comfortable about our ability to drive further there over the time period. If you look at merchant, we talked about 9% to 12%. And then we came back this week and tried to bring a series of clarifying information and took it out further and put it out there at 11.5% over that period going out to '25. And then if you look at Fintech, we laid it out at 4% to 6%. 4% was where it performed last year. I think that was, if you take a historic look, that was probably the highest performance level that business has ever had as an absolute. And then we talk about continuing to accelerate that while seeing Finxact over the longer term potentially changing that structural growth rate. And then we look at Payments, and we've talked about all the wins we've had there. You hear us talk about the addition of Ondot and SpendLabs to bring capability. So when you put that all together, right, we feel very good about the guide of this year. We feel very good that we laid out why merchant will actually have a continued acceleration and for the longer term, the dynamics of that business having more software and services because of the operating system of platform and the operating system of Carat. And then in Payments, we were always bullish on our ability to win. We talked about the wins in the credit business. We talk about our ability to win in the debit business and build that out. So our visibility is very good. Take that and then look at our strong sales that we've generated. And I think if you look at historically and through the merger, the execution capability, the organic technical ability to build systems, and I think you can point to Clover as one specific, the ability to go in and build out a place like Brazil over time, which all gives us tremendous distribution capability on parallel. So I think the summation of that is as confident at that medium-term guide as ever, feeling great about where we laid out because of the operating systems and the dynamics and what we've produced over time in the past in the merchant business and where it's going. And then the ability with Finxact for the longer haul on the Fintech segment. So I feel very, very confident and very strong. And you should expect us to expand margins through that whole period.

That's great to hear. When we look at that merchant business, the data points you gave us on Tuesday were obviously helpful to help us understand the growth trajectory at that 11.5% rate. I mean there's obviously still a narrative in the market of competitive dynamics and whether things have gotten more fierce in the last couple of years, given maybe the names that have gone public or maybe it's just more on e-comm. Whatever it may be, it doesn't coincide with your forecasts that are calling for not only sustainable, but potentially accelerated growth on the segment. So Frank, I mean, just address that for a minute. There's -- there are bigger competitors than there have been in the past in some cases. However, your growth rates are probably better than before also. So how do you propose to...

Well, I think firstly, competition's forever. Innovation's forever. We started -- as I said, there has been a long journey of low growth to higher growth. And that journey happened to us, right? All you got to do is draw the line of the past and then see the amount of investment. 560,000 Clovers and those -- that doesn't include the Clover Go product in the micro, is that 22% growth rate is very, very strong with lots of future distribution, whether it's outside the U.S., whether it's inside our ISV business or whether it's our own digital and direct capability. And we think it's a great platform. We continue to invest heavily in it. And I think the -- we've always had competitors, but I think that plus our enterprise business, which is very, very strong. We have fabulous names in it. So fundamentally, if you look at the growth rate relative to network forecast and you look at what we said, which was in the range of what we had originally talked about back in 2020, but brought more clarity to it. If you look at acquisitions like BentoBox and our restaurant size and scale and half, I think it's a great position we have. We get up every morning knowing that we're competing heavily. We have a great distribution, both internally in our sales force and externally. So I think when you look at the operating system, you look what already has been built. You and I have talked about this for a long time. And I think what we talked about is now completely in place, whether it's geographic distribution, whether it's ISV, whether it's Clover, and now is an extension of execution against the platforms we already have.

The Clover side of the business, which you gave us a lot more information on last -- a few days ago, I mean, the growth rate at 50% for the year on top of 20%, 30% a year before, which was the pandemic year, obviously, says a lot about the sustainability of that business. And so clearly, it's resonating. If you just touch on what you think it is that's resonating on the -- for the product in the market. And the competitive landscape is getting harder, but the growth rates aren't changing. Second of all, internationally, I'm curious what your views are on Clover moving more and more internationally given you continue to outperform there as well.

Yes. I think if you look at Clover, and obviously, it started with some patents and 8 people and it's what it is today, which is a credit to the Clover team right? And it's a credit to lots of people inside our houses, technology prowess. Its capability to be omnichannel is very appealing. Its ability to do digital online ordering, right, its ability to bring a software stack, and then now we're moving to the verticalization of the product, right? You've seen us lean into restaurants, you watch that. You see that -- what we see is the combination of Clover, Bento and its surround will get us 3x the value of a non-Clover restaurant. And that's a large swath of our portfolio over time, and we continue to add restaurants. Secondly, if you look at our ability to expand internationally in markets that will adapt appropriately, we feel great about it, right? So if you think about our Brazilian business, which you remember starting from 0 and capturing market share and now having [ a Caixa ] coming into that market with a software-enabled product we feel has great adaptation capabilities. So in -- obviously, Germany, we were already in Germany, but the Deutsche Bank joint venture just puts us at a different level there. And so if you think about its penetration outside the U.S., we've talked about its size and scale. So there's tremendous upside there. There will be local, as I call it, nuances and different ways to think about the economic value, but the lifetime value we know increases with the software-enabled Clover platform. And so we're going to expand our TAM, continue to use our strong distribution, continue to integrate and invest. So I think it's got tremendous runway, and we've positioned the operating system that we have now to be able to add more and get more TAM.

Just quickly, your Carat initiatives and e-comm and omni more broadly, I mean, do you feel that you're well positioned in what you need to have structurally to compete well there? It sounds like -- I mean, I know you've talked about it quite a bit, but the other assets [indiscernible]

The short answer is yes. And the longer answer is all these platforms are constant investments. And our scale and distribution allows us to invest while still getting margin expansion, right? We're able to generate earnings in a way because our core distribution, our expanded distribution with our scaled platforms is really unparalleled. And so our ability to invest the next dollars to continue to innovate. And so Carat will be -- like Clover, will be a lifetime journey, right? And I think you'll see that happen also in our core ecosystem, where we will continue to invest with platforms that expand TAM through a more digital presence.

That's really helpful. Maybe we just shift gears for a minute to Fintech. There was 48 new core wins in '21. I think you had 60 or so in 2020. If you could just -- I think you also highlighted 13 of the wins this year were with assets -- banks with assets over $1 billion. So it seems like a little bit more is happening upmarket for you guys. I don't know if that's just this year or a trend. But can you touch on that for a minute? And then I really want to go into what Finxact can do. I mean our checks on that asset have been very positive in terms of its cloud native capabilities. So I really want to understand what you think you can do to leverage that in the market.

Well, thank you. Look at -- I think we've been winning, as you said, 108 cores over 2 years, and that's why our confidence level is very, very high about where that acceleration can occur from its current point and why we felt strong about it in 2020 when we came out at 4% to 6%. We have made a conscious decision to be able to compete at any bank size. That's a very conscious decision. It's an investment across all aspects of the company. But it's also because it's just not about core processing. If you put Ondot with mobility on the front, you're giving your clients, many of them, a strategic advantage that they can have. So the digital banking surrounds the card processing, the output solutions, the ability to expand beyond core resonates in the client's office and in the CEO's office because they're really thinking about how to serve their clients. They're not focused on just what is their core. But -- and as I like to say all the time now, there's not many bank clients that come in and ask about their core system. They ask about their mobile banking. They ask about their DDA. And I think we have a good understanding of financial institutions and what they need and how they think. And DNA is a very, very powerful asset, right? So that has definitely increased our digital focus in our FI's clients and has allowed us to be able to compete. And then we've taken Abiliti, which is our new technical surround that sits on top of it. It's a cloud-based platform, and clients have really, really seen it and want it. So I think that all combines to why we feel so darn good about Fintech. And yes, I do think we're competing in places we may not have competed at the level we're competing. But I think it's about the full array of products coming together and our continuing to lean in an integrated digital experience. Ondot creates an integrated digital experience, not a multipronged digital experience for banking clients. And then Finxact's been a journey, too, right? We were an initial investor in Finxact, and we were on the Board of Finxact, and we had an understanding of Finxact. We were always very, very, very fond of the partners that built Finxact. And we thought, at some point in life, could complement very, very well our other banking products and, if you think about expanding our TAM to digital banks, embedded finance, banking as a service, act as a sidecar potentially for an existing core that wants a digital bank. And so when we put all that together and granted it's further -- a lot further along than Clover when we bought Clover, it's a lot far along, but its ability to structurally change our growth rate is very, very good. And we think we have really a next-gen system that's at the top of the heap that gives us long-term growth and is about the future of the company and for our clients. This is when I say we go out, talk to clients and listen to clients. This is an outcome of that.

I can see that. I can see that. Let me just, in interest of time, touch on a couple of the P&L items. So margins, for a minute, I mean, you've always been very good at efficiencies in any business you run. But when we think about the path forward, I think your medium-term guidance of greater than 125 basis points per year, there were some investors wondering if your big 150 bps margin expansion this year could mean less in out-years and kind of interesting questions. But I'm curious if you could just reiterate your conviction in margin expansion. [indiscernible]

No. Yes, well, I mean, I have -- I think a good way to think about my conviction on margin expansion might be if you went to '19, I think it was 29.7%. And if you look at '22, it's 35.4%, I think, forecast. If you went to '18, it was probably 28.7%. And I have a deep belief that we can invest, we can drive service and quality, we can drive productivity, and we could increase margins while continuing to grow the top line. That's just a formula I deeply believe, and I would not extrapolate the greater than 150 or at least 150 to anything other than that's this year's number.

Understood.

I would not make any assumptions around other than we have a deep passion to always be more productive. We believe our technology spend is our great enabler. And so that spend is very, very valuable to drive margins. And we believe our new business acumen and our sales allow us to expand margin, our scale and breadth.

Frank, when you think about $30 billion of possible capital to deploy over 5 years, including everything from free cash to keeping leverage levels steady, just remind us of your view of where you want to allocate that between M&A and buybacks and especially where the stock is now between the different categories.

Well, I think I'd use our past 2 years' performance as a good indicator. I don't think there's anything schizophrenic in our capital allocation methodology. Obviously, at these levels, we believe, and we have -- like I said, we've bought back over $4 billion over the past 2 years. So we will always use our tried and true capital allocation. You did see us have -- buy the most assets we've ever bought in the history. And I think it's a sign of us leaning into digital, us leaning into growth, us being able -- I think we do have a great track record of buying smaller assets and scaling them with -- inside the franchise, not doing anything other than surrounding that property, but allowing it to thrive. You can see that on Ondot. You can see that on Clover. You can see what we're going to do in Finxact. So we do like getting assets like that and then putting them against our scale and distribution. You should expect more of that as time goes on. So I think we feel like we'll finish the swing on our leverage. As I said, we're fundamentally at historic levels. We have a little more to do there, but we [indiscernible] that and then deploy it in a way that will be accretive to shareholders continually.

The -- all right. That's really helpful. The free cash flow metric was guided 95% to 100%. I know it used to -- it was over 100% historically over the last couple of years. When we think about what you think is the new norm, I mean, you're a higher growth company than you were before. So there might be a balance there. But can you touch on what your view should be or how the company should operate in your mind?

I think 95% to 100% is a good number. I think if there's nothing to build and invest and grow, then you probably get a different outcome. I can't really see that in the foreseeable. So I think 95% to 100% for the company we have is a good strong number. And we'll talk to you about it every year, and it will take into consideration everything we're doing. But investing for growth while expanding margins, while continuing to use that $30 billion to both buy back shares and buy assets that we can grow at a rate better than where they are today and improve our growth rate is really how we think about it.

Yes. That makes sense. Just last one for me is there's obviously been a lot of value investors coming into the stock ValueAct. And in fact, as we saw added -- it was added to the Board. And I think they also increased their position. Just touch on your relationship there and their input.

I'd say my relationship there is great. I mean I've been talking of ValueAct for probably more than 8 months. I think one of the things -- I come from a position where my whole CEO tenure, I've had a shareholder in my boardroom. I had KKR in my boardroom.

KKR, yes.

And they were the greatest partner ever, and I feel ValueAct is the same exact. And we're completely aligned on our objectives and their view of the properties we have equal our view of the properties we have. So I think it's great to have them in the boardroom.

Let me take one. We're out of time, but I want to try to take one question. And it's on -- if you could break down the model for volume versus transaction base, just trying to figure out inflation exposure here. And then maybe I'll weave a couple of [ questions ] together. Actually, this is a good one for you, just given your operations and efficiency abilities. A lot of the competitors have talked about less reliance on own data centers. Is that an opportunity for Fiserv as well?

Well, why don't we start with we probably consolidated over -- since the merger, I think, a number in the 20s of data centers. We've -- we were always a large cloud-enabled company. Remember, start going back to the building of Clover was a cloud-enabled. You see where we hit with all of Finxact. So we are very good, and I think we have a great technology team that knows how to drive efficiency and utilize cloud infrastructure and the hard infrastructure in the right balance because you need to use your cloud infrastructure in an efficient, effective way. And there's some stuff that should be in private cloud. There's some stuff that should be in the public cloud. There's some stuff that you run in your data center. I think we've optimized that model. I think we're very clear about that model. We have a great team against that. And the merger was a tremendous opportunity to do that. It wouldn't have been something that I come out and talk to you all about that much because I kind of consider it more of the inside of the company, and I'd like to talk to you more about the client-facing technology, but I think we got a great distribution, and we had a fabulous strategy from the merger in.

Okay. I think we actually have to leave it there. Frank, thank you so much for joining us. Honestly, it's always very insightful and helpful. For everyone on, the next one is in 2 minutes, actually, the CEO of Western Union. But Frank, thanks again for everything, and we'll talk again soon hopefully.

See you. Bye.