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

Good. How are you doing?

I'm well. I'm well. Happy to be here with you. It's virtual. Where are you sitting? Where are you sitting?

We're sitting in Midtown, in Midtown Manhattan, in the Lexington Hotel. So next year, we'll get you in person.

All right. Well, we're in downtown. Anyone -- time you want to come to this.

All right. Well, terrific. Thanks to everyone joining us both in person. We have some folks here as well as out online. Delighted for our 10:00 a.m. session to be joined by Frank Bisignano, the President and CEO of Fiserv, and always one of my favorite sessions of our summits. Frank, thanks for being here. [Operator Instructions] But Frank, before we dive in, are there any opening comments that you would like to make?

Yes. I'm excited to be here. I'm always thankful for you giving us time. I'm excited to take to you about business we have. And I think, I'd like to always go back to the merger and what we've accomplished since the merger. If you think about going back to the period of 3Q '18 to 2Q '19, and think about -- well, those last 12 months and then compare that to 2Q '21 through what you just saw in 1Q '22, we've had margin expansion of 480 basis points. We've had adjusted revenue growth of 11%. And we've had adjusted OI 30% growth. So I really think when you look at that, it talks about the resilience of our business model. We performed that through an unprecedented time period. And the strategy of putting these 2 companies together has clearly taken hold. As you see us, even in Q1, produced an 11% again on an organic growth rate, above our guide of 7% to 9%. And now we are completely on track to get done everything we've talked to you all about it. I think also on the capital deployment side and the free cash flow of this fabulous institution we have, we talked about generating $7 billion of free cash. And $4.9 billion went to our tried and true balance approach of returning dollars to shareholders through buyback and by investing in new properties. You've seen the ones we've done in most recently. I think the important part of that, there was another $2 billion that was used on getting now and integration. And as we've declared, the integration of that cash flow will be deployed in the same tried and true fashion. So the macro environment has uncertainty, we feel it at this moment. But we are very, very confident about business model, the resilience of our business model, our ability to invest and grow. And that means grow revenue, margins and operating income. So I'm happy to talk about it all today with you. Our confidence is very high on our model, and how well putting these 2 companies together has delivered in terms of its operating building.

All right. Good. So as you know, I like to start off these discussions with a big picture strategy question to kind of set the stage. Looking across Fiserv's portfolio of businesses, where do you see the most significant growth opportunities over the next 3 to 5 years?

Well, we've been very, very clear, I hope, about how we feel about Clover and Carat and our Merchant business. We laid out that Acceptance presentation because we thought it was so important to simplify for everybody the reality of that business. And we talked about where it was going to go. So I think those 2 assets are very, very strong. I think our international opportunities, we continue to deliver on in the Merchant business. And when you look at all of that together, it's very, very promising. And we feel very, very strong about the growth that we talked about there. When you look at our FinTech segment, you'd have to say we're changing the way it grew. And you see it in numbers of last quarter, and you see us doing strategic acquisitions in there, along with using our digital capability to help drive the client experience, their client experience and our growth profile. And Payments was really a key point of why we put the companies together, and the ability to take the 2 debit networks, and then go and acquire assets, like Ondot and SpendLabs and creates SpendTrack. The digital experiences we offer both through CardHub and through sale. So the power of the debit networks, our great debit processing capability, our fabulous franchise of clients and then the digital strategy around it really gives us a tremendous view of growth in payments for the long haul. I think when you look at our geographic dispersity, when you look at how our client base is from the largest institutions to smaller institutions, our breadth and scale is unmatched. And I think our distribution is unmatched. And I think being an operating system, which is really what we like to do, whether it's from merchants from Carat and Clover, or whether it's being an operating system for banks and credit unions and fintechs, we believe, is a privilege, an honor and also a great opportunity to continue to grow at those paces we've been growing.

All right. Well, let's drill in and let's go straight to Merchant Acceptance, always the hot topic when it comes to Fiserv, and of course, very near and dear to your heart coming from First Data. 40% of Fiserv's revenues, just for folks out there that may be less familiar with Fiserv. And you've established a medium-term growth outlook of 9% to 12% revenue growth in Merchant Solutions. We'll dig into some of the individual components. But at an overall level, what gives you the conviction in sustaining 9% to 12% over the medium term in this business?

Well, I'd start off with that, we're highly confident about our growth prospects here. And that's driven by a series of factors. I think if you look at the macro trends, this business does benefit from the macro trends. And the way we look at it, we've been over the period of time since the merger fundamentally aligned with Visa, Mastercard. We think there's still more benefit secularly from this business. And our business outside the U.S. gives us tremendous, tremendous confidence. Also, the way we've been able to grow that. I think when you look at our key drivers to this business, it's very simple. We're going to add more merchants. And we're going to have more revenue per merchant by our value-added service capability, by our platforms. And those platforms really to think about our Clover and Carat. I think if you take Clover by itself, '19 to '21, a 30% CAGR, 39% in the last quarter. Tariff, 21% over that same period and 20% in the last quarter. These are very, very powerful numbers on growth parts of the business. Those 2 operating systems are 30% of today the Acceptance segment's revenue. And I know you remember when they were glimmering alive. And I think successfully adding on value-added services like Clover Capital, the acquisition of Bento, our maniacal focus on verticals like restaurants, all or in front of us sets opportunity. So highly confident, and that would be in tough environments even.

All right. So let's drill in on Clover, crown jewel of Fiserv's business right now. You -- as you highlighted, Clover was $1.3 billion in revenue for Fiserv in 2021. You've put out a very specific goal of $3.5 billion in revenues by 2025. That's a CAGR of 11.5% for this business. What are the major initiatives that are required to achieve this outlook? Like what are some of the mile posts that investors should be watching for?

I think we have a very good view to where we're headed there. And hopefully, it resonates in terms of how we defined it. But I would start off with, we're going to drive ARPU. We're going to drive average revenue per merchant. And we're going to do it through software and services. And we have the platform and we have the client. We're going to focus on vertical. Just hear us talk about the restaurant vertical. And you saw what we believe we could do with the acquisition of Bento, turning that into something that's more like 3x the current ARPU of restaurant, and we have a large restaurant portfolio. So software and services are a key driver. Omni-commerce, small businesses have hearing, we've definitely driven that into our client base. We have the stack. We have the operating system to deliver it in a seamless client journey. And then it's about the value prop, leveraging outleading position with our partners. We have the best distribution network in the industry, and using those channels while growing our direct channel. We've continued to build out our own direct business while being a great partner. And then I think to accelerate globally. You'll see Clover accelerate globally. And those issue, those initiatives, it -- whether it's in Brazil or India, already have presence outside the U.S. in places like Germany. And you heard us talk about at Deutsche Bank joint venture, which will be fabulous. So a multipronged attack, 5 prongs, very focused and great leadership hence.

So Clover is the market leader in the U.S. by volume. There are though a number of these other integrated POS players out there. How -- when you're asked by potential merchants, right, potential customers, why Clover specifically? What are the major ways in which Clover is differentiated? Or is it actually more that you're all just eating away at that traditional base that's not using an integrated system?

Well, I think everybody's headed to an integrated system. But there's a very large base not yet there. Although I can talk from an experience yesterday, in Brooklyn with one of our clients. And when asked, like they've grown their business with us. They started one, then another, and then went actually outside the New York for their third. And when I asked them, why did you continue using our product? The answer was, I run my whole business off it. It is my business management system. It is my timekeeping system. It is my information system. And it's easy to use. So I think ease of access, their ability to get what they need. It's way more than a COS system. It's an operating system for their business. And I didn't know that would be the answer I'd get. It was sure the one I hoped. But it was a validation. And they've grown their business because they'd say, we would not have been able to expand our business without using Clover.

All right. All right. Let's turn to Carat's. Carat is the complement to Clover aimed at large enterprises. What is unique about the Carat platform that's competing again more in the large enterprise space? And are there particular subsegments of the large enterprise market where Carat is particularly strong?

Well, I'd say, first of all, think of it as a great omni-channel experience. And remember, sometimes, we start physical and move to Carat. Other times, it's physical and Carat. And sometimes, it's Carat. And sometimes, it's going the other way, Carat to physical. So all of that occurs. It has manifested itself as an operating system. And that was through a lot of engineering and a lot of depth. But clearly, it chooses an operating system for our enterprise plans. It also brings other services with it and other connectivity with it. And when we look at a Carat client, many times, they have revenue far exceeding even their Carat revenue through other value-added services that they're buying. So I view it as a system that help drive not only the payment capability, not only the omni-channel capability, but also beyond full stack, including ability to take new client payment flows, alternative payment methods, and do it globally, right? A simple API connectivity across the globe. I think when you take our scale and our partnerships with our clients, we're standing up digital wallets in there. We're doing their mine movement and their settlement in real-time multicurrency across border. So I think when you think about the strength and depth of it, its ability to serve markets, players of all sizes and the ability of the ease of access is why we've seen the type of growth we have seen there. And we're going to continue to build on it. Obviously, when we talk about alternative methods, when we talk about other forms of payments, we continue to expand on that capability. And our client base, we want to make sure that we're there to provide whatever commerce they want to provide.

All right. I know Fiserv also has a pretty sizable processing business. You called this out when you did your deep dive on Merchant Acceptance as well, that this is a business that you expect to be pretty stable over time. How should we think about the strategic and financial value of the processing business for Fiserv?

Yes. I mean, we have a $6.5 billion merchant business. As you know, that was growing at -- or has grown significantly, and obviously, grew 20% in Q1. And this processing capability may have been what the business was before we converted into the business we have today. So we have banks that were in the process of for -- it's a mature part of the portfolio. We've always had a strong processing business for the ISO community. It's a very stable, mature business that we like because of our capability, but it is not the growth engine of the company. And if you think about the transformation, and you've watched the journey, Lisa, the transformation, it was the processing business that we turned into a global merchant acquiring business. And we began building out our own direct channels now, our own capability. But we always maintain that this was a strong stable business that we would continue to be in, whether it was for joint ventures, whether it was for institutions that wanted processing only. And we think it's a good scale -- stable business with $900 million of revenue.

All right. Last question related to Merchant is about the international piece of the business. 25% or so of Merchant Acceptance, historically grew in the mid-teens type of rates, outclipping the U.S. business. What are the major initiatives internationally to expand the Acceptance business? And how should investors think about that piece? Is that -- should it continue to outgrow the U.S. business?

Well, this business has gotten bigger when it grew the domestic business by a fair amount, if you went back 4 or 5 years ago. But given the growth inside the U.S. and given the way we look at international, the delta between them will not be that large any longer. We love our businesses in the regions. We have a specific global vent on our product set. So these businesses run within a global product set. I think if you think about EMEA, I think about that as a low double-digit, a TAM has demonstrated itself continue when we went into Brazil. We went in there, didn't know a lot really. And today, we've started up a business that gains market share over a year. Asia Pac, we feel very, very good about our differentiated capabilities, whether it's Australia or India. And all of these are going to have market launches for Clover. And we think that's another place where Clover will penetrate and continue to help the business itself grow. So it's a -- whether it's a small client in Ireland or an institution, a large institutional client in Australia, we like to drive the operating system concept for them and we like to grow the businesses. So you should continue to see them to be double-digit growers for us.

All right. Let's switch over to Payments and Networks, another 40% of Fiserv's revenues, but a segment that is really a composition of a few different subsegments. Can you just maybe articulate for investors how you think about this segment? So like what are the natural subsegments within it? And what are the -- how should we think about the different growth profiles of those segments?

Yes. We've talked about this in the medium term to be 5% to 8% grower. I would expect during the course of this year is for that to be at the higher end of that range. And if you want to think about what sits inside this, I'd start with what we call issuer solutions, and that's really global credit processing and output solutions. And that's about 40% of the segment. And I could talk a little more about that. You've heard us talking about how we sit there and what we're doing. And we feel very, very good about that piece of the business. Debit processing and debit networks, and that would talk about STAR and sell and debit processing businesses that we provide, I think about that as 1/3 of the segment. And then really digital payments, and that could be Zelle bill pay and our prepaid assets, is really the remaining piece of it. And all of these are to us key components of our clients' buying behavior. So they face off very well done in one base.

So when synergy from the merger between Fiserv and First Data was bringing together that issuer solutions and that debit processing businesses under one roof, how -- what kind of momentum are you seeing in terms of cross-selling or -- those products are being able to bring an integrated offering to banks around the world?

Well, if you go back in time, the 2 debit networks were very strong assets in both companies. One company had large issuer solutions and the other company didn't have that much in the credit solutions capability. We took our large issuer capability and migrated that to also serve the smaller end of the market. And we've seen tremendous traction in selling into the community bank space, our debit and credit capability together. We invested heavily in it. But you should consider that as a very good-performing synergy for us. Now obviously, we had debit processing in both companies. We brought that together. And you should think about that as us serving everyone from the largest institutions to community banks. And that has come together very well. While we're doing that, we also were hugely successful in winning new mandates. Besides on the community bank side, you heard us talk about ADH, heard us talking about the Atlanticus, Genesis, those who are all part of our investment in our platform strategy and continuing to grow at [indiscernible] . And then we also came through and said, what other assets we ought to bring the table? And what on dot and -- allowed us to offer a CardHub solution. We bought SpendLabs, which gave us an SpendTrack, built out our loyalty, built out our AI and fraud solutions. So within this whole portfolio around, what came together, not only did we get the synergistic benefit, we invested and we signed up a very large scale digging plans to put us in a very, very good position for future growth.

All right. I'm going to switch gears actually over to the Financial Technology business. That segment, the final piece of the Fiserv puzzle about 20% of revenues, where you're providing core bank processing for small- and medium-sized banks here in the U.S. primarily. Your medium-term growth guidance for this segment is in the 4% to 6% range. But as you highlighted earlier in the conversation, this is one where you're kind of trying to structurally migrate that -- the growth of that business a little bit faster. What gives you -- what are the major growth drivers in this segment? So what are you working on to continue or even accelerate that kind of 4% to 6% growth rate?

I think it's more of a beautiful mosaic than a puzzle. Just...

Fair enough.

Right. And this part is a beautiful mosaic is really fundamental strategic business for us. Having a privilege to serve the banks we serve, the credit unions we serve and the fintechs and be their operating system, we found to be beyond the benefit of fintech, actually a benefit within our company. You heard us early on in the merger talk about how many merchant deals we signed up with banks that were original banks that we were able. So I think it's a privileged position, and we take it very, very seriously. We definitely accelerated our ability here. We had 120 wins since January of 2020, a robust pipeline. We've added Finxact, and that will take a while to ramp. And it's additive. It's not designed for cannibalization as much as to expand the TAM. We have surrounds that go around in digital nature. And then when we take Ondot and put it into Mobiliti, it gives us the ability to give a single instance of mobile banking to our clients. And whether it's a DNA platform or whether it's going further up in the -- our Architect digital capability or any of us around, it's really about bringing fully integrated solutions and serving our client base. And I think our focus on the client has made a difference here. And I'm encouraged by what we've already accomplished when you were us producing 6%. And yes, we call out 1% of nonrecurring revenue there. But that's licenses many times. And those things are normal in the growth rate. So I think our growth rates, we're happy with where we are. But we're not happy with where it is. And when you look at the addition of Finxact, we think that structurally changes that will go off the term.

So let me come back to Finxact in a minute. But first, I want to ask you about the health of the customer base for this segment coming out of the pandemic. Often, a lot of the questions we get from investors on the Financial Technology segment isn't so much about the stability and quality of your business, but more concerns about the health of the small bank community bank environment in the U.S. So talk a bit about how those banks, your customers, are faring coming out of the pandemic and kind of how they're faring in a world where we've seen some of these more neobanks or digital banks emerge.

Yes. Well, the data is quite compelling about their desire to spend more. And the amount of them that are looking to not spend more is a low single digit, a very low single digit. And the amount of them that are looking to spend more because they believe it's their digital journey. It's their need to compete. As you know, people talking about spending 10% of orders. China end up 1/4 of our client base. So I think our client base is healthy. Now the next question is, implied maybe in that question is, well, you serve the smaller guys and the bigger guys. But the smaller guys generally, how's that all figuring? Well, if you check our track record, we've done very, very, very well in that situation and one-on-one competition, with us ending up with larger institution.

All right. Now let's go to Finxact, your most recent acquisition in Financial Technology. Finxact was certainly one of those companies that was on a lot of investors' radar screens as a new entrant in this space, a cloud-based corporate banking platform. So you were highlighting, you think of this as an augmentation to your existing business. Just talk about the strategy for integrating Finxact into Financial Technology.

Yes. I mean, I think we should go back to beginning probably of Finxact because it's a start-up. It was a startup. And we were an initial investor in the start-up. And we kind of wondered how did it end up us doing a deal. We were shoulder to shoulder from the first days. And it was actually, I believe, the first investment that we had made in First Data after we raised a private round. And we had a point of view of the founders. And we had a point of view of the technology. We didn't know that we would end up here today. But we were in the boardroom. We understood it. We were helpful to their design principles. We were always shoulder to shoulder. So it's one of those situations where we knew the property very well. The founders knew us very well. We had a same mind share around technical and how it could work. We believe both at least with the point in time was right because the market wanted it. And our scale and our ability to fund it will allow it to grow a lot faster than it would have on its own. And so when you think about it, it's going to serve fintechs. It's going to serve embedded finance. It can stall to serve the largest banks in the world, in the country. It can be a side car to a bank that likes what they have but needs a digital bank or wants to create capability for crypto products or other capabilities. So we believe around current client base it's all about moving them from one platform to the other by giving them that side of our capability. We believe it gets us to markets that we wouldn't have got to at the speed we can this way. And we think it's the most modern product in the industry right now. And we're completely geared into its growth potential over the next 5 to 10 years.

All right. I'm going to transition to some overarching questions looking across Fiserv, and I'm taking a peek at my dashboard. I have a couple of questions coming in. One is a good overarching one. So Clover, now a STAR at Fiserv, was originally bought by Fiserv back in, I think, 2013, if I remember right, back in the First Data days.

First Data.

First Data, sorry, the First Data days, and then incubated internally, and it has now become a shining star. So what's next? What's the next Clover in your portfolio? That's the question coming in from the audience. Do you have assets in there that you think are candidates to become the new Clover?

Well, I mean, I think, if I remember, I would give like $56 million for Clover, and it was a couple of founders and some patents and a dream. And I love taking that journey with them. We have great technical talent inside this company. We've done over the long haul a very good job of keeping founders. And I think that's important. They bring in different DNA, no pun intended, to our core DNA product. But they bring in different type of DNA. And so I've always thought Ondot had Clover-like characteristics. And our ability to bring to every community bank, medium size bank, credit union, a completely integrated mobile banking experience, we thought was very, very strategic and very, very important. So that scale, you got millions of users on that. And I think Finxact is still a start-up. It's bigger than Clover, but will be Clover-esque in a lot of ways. And then inside the company, we organically know how to create that, too. And I would look at -- you see us make a few announcements on data. I think you should imagine that -- and not only imagine, but hold us accountable to build out a great data business. That's nowhere in a model today that we talked to you about. But you've heard us announce some partnerships. We have tons of great technology talent. I spent time with the data team last week. We think we have a tremendous business that will be built go over the next 3 to 5 years in the data space, put real use cases and revenue growth with tremendous margin.

All right. I'm going to go directly to giving you an opportunity to refute the bears. So you have established medium-term growth guidance. As we highlighted, 7% to 9% revenue growth, mid-teens EPS growth over the medium term. However, Fiserv's share price would suggest that some investors don't believe that you'll achieve that goal over the medium term. Just saying that very bluntly. So what would you say, in your view, that you think that the investor community is missing about the outlook? Like how would you refute to that bearish outlook?

Well, first, I'd think performance is the most important element of everything. And what the numbers show are what they've been. Now yes, we've had a pandemic in the middle there, and that had some effect. But even during that, we had double-digit EPS growth, right? We had double-digit EPS growth. And we had flat revenue in a pandemic. We've come off of that with 11%. Our Merchant business has performed very, very strongly. Q1 was 11%. The free cash flow generation of the company has been $7 billion, with a bunch applied to synergies that we're going to get back here. I think Clover is real. It's hard to deny. I think $6.5 billion, Merchant business, 9% to 12% is -- we didn't raise our guide coming out of Q1, and we were very specific why. The uncertainties of the world, not a lack of confidence in our ability as a matter of fact, it's -- it gets clear our ability every day to serve our clients, to create new products and build more. So I think the resilience, the strength, it's all very, very in the numbers. I think it's -- this is the year. I'm very, very -- I mean I am looking so forward to closing out this year. And then you'll probably ask me this question next year again, and I'll point to this year and why we did exactly what we did [indiscernible] .

All right. Let's -- you mentioned free cash flow in there. Let's go to that. You've guided for 95% to 100% free cash flow conversion in the near term, getting to over 105% over time. Within the investor community, as you imagine, you have people on both sides of that view, right, some that just want more cash, conversion and others that would like more CapEx and more investments back in the business. How do you think about the trade-off between those 2? And kind of what's the journey to get from 95% to 100% to 105%?

Well, I don't think I'm talking about 105% right now. I'm talking about 95% to 100%. Because the growth profile of this company had been tremendously cash flow rich in my mind, when you're talking about the $7 billion free cash. The profile of this company is to be a high single-digit grower, which is different than a 105% company. And the dynamics of that, we work through and understand very well. But I don't manage to get through cash flow as much as we managed to deliver growth, deliver margin expansion, deliver high OI. And the output will be in the 95% to 100% range, right? It's not to drive to a target of 95% to 100%, it's to get the best possible OI outcome to continue to expand margins, which we have deeply. And we think we know how to manage productivity at every aspect of the way. And then I think that's a very good free cash flow outcome, 95% to 100% for a high single-digit grower at this size and scale.

Yes, yes. All right. Let's touch quickly on M&A and divestitures. M&A has long been a very core part of Fiserv's value creation mechanisms. And in your time at First Data, certainly, you did a lot of pruning and augmenting the portfolio, a lot of portfolio adjustments. How are you thinking about M&A right now, particularly with the deterioration in valuations of some of the fintechs out there? There must be some tantalizing things looking at laying about. Are you thinking primarily about tuck-ins only, additional scale acquisitions? Why? Why not? What's your current perspective?

Well, first of all, anything that we projected was not counting on anything other than the assets we have. So anything in our guidance, anything in our models is about driving the business we have. Obviously, we spend a lot of time ensuring our capital allocation methodology, right? And that means looking continually at what we have in the portfolio and ensuring we should still have it. And secondarily, or as important, are there things that we should buy that like a Finxact that we believe we can grow a lot better, create tremendous shareholder value for the long haul. Yes, valuations have changed. And we do think continually about where we should be investing in M&A. We do like buying back the stock, and we like to be very, very balanced about it. And I think if you look at the amount of stock we've bought back over time, we've been very disciplined about our capital allocation. And we had debt pay down in there. And we feel that now that we hit the 30 mark, we can -- we'll continue to take leverage down a little bit, but our ability to buy assets or return dollars to shareholders, to buy back will continue to go on. So you should expect us to focus on digital assets, right? Digital, digital, digital, and things that expand our total addressable market while complementing the business we have. And anybody has got a great idea for me, they're welcome.

Yes, yes. Well, I'm sure you've got the Fiserv Ventures portfolio is a good place to start. All right.

It's where we've done most about shopping.

Yes, yes. Exactly. Good. All right. Well, I'll go to my final closing question because I have the yellow blinky light going on in front of me. In closing, why don't you give the audience your 30-second or 60-second elevator pitch for an investment, why investing in Fiserv? The beautiful mosaic, that is Fiserv or -- right now.

Well, first, I think about unmatched scale, unmatched distribution, and with that size and scale, willing to transform itself, transform itself with Clover, transform itself in many ways with Finxact, with Ondot. So the ability to continue to drive growth -- growth scale and distribution, while organically and inorganically transforming. 2, resilience, double-digit EPS during a pandemic, resilience, unparalleled resilience while investing in growth. And we have differentiating platforms, Clover, Carat, right, Ondot, all of these differentiated platforms that I think have outperformed the market. So I think if -- as an investor, we will always be a large cash generator. We will invest our money wisely and prudently. And we want to be the best operators in the industry at scale.

All right. Excellent. Wonderful. Well, thank you, Frank. That was fantastic. Thanks a lot for being with us.

Always my pleasure. Good to see you, Lisa.

All right. Terrific. We'll see you soon. All right. Thank you. Thanks, Frank. Bye.