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

We are going to get started here. Thank you, everyone. Thank you, Frank, for being here. Frank, I think, probably don't need an introduction at this point, but...

I do, I do.

All right. I'll do it. So Frank is Chairman, President, CEO of Fiserv. He's been at the helm of the merchant business within Fiserv since 2013 as Chairman and CEO of First Data where he led Fiserv out of private equity ownership, significantly reduced the leverage profile, invested heavily in integrated payments, modernized the product set with the expansion of Clover and the Carat platform for enterprises more recently. And prior to that, he's held a number of senior roles at JPMorgan where he led the integration of Bear Stearns and WaMu and also led their mortgage business through post-crisis housing reform.

Frank, your business is really only starting to take off or your career is really only starting to take off. With that sort of resume, what is next at Fiserv?

Well, I don't know that. That resume [indiscernible] Fiserv were correlated always, but the thing you can determine from that is I'm old, I've seen a lot, and there is some benefit of that. I mean, look, we put the 2 companies together, First Data and Fiserv. And I think what we believe the power of it would be is showing up every day in the top and the bottom, free cash flow generation, but top line growth that pace neither company saw before. Both were -- wanted to be better growers, a client base that's unparalleled. And I think sometimes, one of the crown jewels is a client base and people don't recognize that well enough. I'd like to tell people, there's not a household in America that we're not serving. And then obviously, we have a large global footprint that I think has continued to grow in double-digit fashion over the past -- or in the past 5 years. The assets within this company belong together. When you have Clover on the front end, you have a powerful set of debit products inclusive of the Accel and [indiscernible] network. When you have distribution, both through banks and ISVs and partners, whether it be retail ISOs, our ability to continue to serve our clients is very, very good and strong. I mean, what's next is a continued growth trajectory, continued reinvestment in the business organically and inorganically. Obviously, we are very focused on capital allocation, thinking about the opportunities. You see us capitalize on a lot of opportunities. We believe that we could buy younger companies and grow them. And whether it be Ondot, whether it be BentoBox, whether it be Finxact, all of those to be able to grow the top line and to be able to be that move into the fourth decade of double-digit EPS growth, but do it with a much different top line growth profile.

Makes sense. I mean it sounds like you're very focused on growth for the long term. In the very near term, there's a lot of focus on the macro and what that can mean for the economy more broadly. You guys have a very unique insight into the financial health of both consumers and merchants and financial institutions. So maybe you can kick off by just touching on each of the customer sets. What are you seeing? What are you hearing? And are you starting to see any impacts in the numbers?

Yes. Well, over 12,000 times a second, we have a transaction flowing through. Many times it's more than 5,000 times a second. That's just consumer buying either online or physically. So we have a very good look into the health of the consumer. We have a very good look at tech spending and financial institutions, and we have a good understanding of what our businesses want and need. As you'll probably hear through the course of this, spending has been stable. Stable at the elevated level that you've seen it, and the consumer is out in force. That force may be different today than it was 3 months ago. And at the beginning of the pandemic, you've seen a lot of shifts as life has changed and come back in many ways across the country in different ways. I think what you see in the consumer is the desire to spend. And I don't know if some of that's pandemic induced too, a different thought pattern. Maybe those who grew up, let's say, for a rainy day, maybe not as much of that mentality any longer. That will probably come back with time. The pandemic has changed a lot of patterns. Bank spending is strong. Banks are spending for growth and they're spending ultimately to serve their clients. And those clients go from large institutions to individuals, but it's a digital revolution there. Their desire for more product from us is very, very high, and they're very focused on their strategy on how they're going to be tried and true at what they did forever, but how they're going to serve their consumers, their small businesses and their larger institutions differently. So I mean and we've the benefit of payments, right, it's one of those beautiful industries where it continues to be vital to every institution we serve, but continues to reinvent itself in terms of how things operate. And I think when you look at our clients, they want to continue to change their ways they pay and move it into a simpler fashion. And I think banks benefit from it and credit unions, I think our small businesses or beneficiaries, I think how large retailers or beneficiaries and ultimately SMBs. So I think payments are forever. And so for that, I am grateful. And our job is to serve our clients as best as humanly possible.

It's a great segue into the merchant business discussion. So I think one of the biggest themes over the past year, however long, has been the question of disintermediation and increased competition in the merchant space. I think we recently learned Stripe handles over $600 billion of volume, kind of more establishing them as a scale player versus a challenger. Your growth calls for, I believe, 11.5% top line growth in merchant revenues. I'll call that kind of roughly in line with the industry, a little bit above. How do you -- how does the view of disintermediation internally differ from the perception by investors when you go through meetings?

I think most investors are aligned to our track record. I think they've seen the numbers we've produced for long enough. I think they see that we now had to innovate and build a product from Clover, a company that we probably paid $56 million or -- not to be exact, and turn into an industry leader through our own organic investment. I think the issue of competition and -- so I think investors and management are very well aligned in the trajectory, the job and the track record. Now the issue of competition and disintermediation is one we should all be very comfortable with. It's one that goes on forever in every industry, and you have a choice to either innovate, create, invest organically and inorganically and how to continue to evolve or you run the risk of not being relevant. I think the company as a whole, and if you want to stay to merchant or stay right there where you said, I mean, we saw that effect by the lack of investment at a point in time post LBO at First Data. Right High to say that's land far, far away in a time long, long ago. So our job is to invest. Our job, we can talk about Stripe's volume, we can talk about anybody's volume. I think you got to look at the totality of the property, $6-plus billion, growing at double digits in terms of revenue and clearly investing in the future and that means a BentoBox acquisition, a Pineapple Payments acquisition, all the ad capability to ultimately have a better revenue mix on top of it, which, as we talk about ARPU and LTV of the client. So I think competition is great. I think it's normal. I think it's natural. And I think to my whole career in business, that's always where we see this competition. And if you're an incumbent, you have a responsibility to reinvest in your business while allocating capital the right way for shareholders.

Got it. I mean the build-out of Clover, which as you mentioned, has been a lot of organic investment largely on your part. You put out the target for, I think, $3.5 billion with 25% penetration of software and services. I think that was roughly somewhere in the low double digits most recently. What are you doing to accelerate the software penetration specifically at Clover? And you mentioned a handful of acquisitions that I think can help you move it in that direction. How big of a contributor is M&A towards that increasing software penetration over time?

I don't think that's a large contributor. I think we got the platform. We've built the platform. We make a vertical statement on restaurants. So we go acquire BentoBox. We think that extremely changes the LTV. We think that in a hundreds of thousands of restaurants, our ability to bring Clover and Bento into them give us a tremendous opportunity. You have the platform in Clover that we built a long time ago that naturally generates software revenue. We'll buy a next table, I'm sure there'll be things. But it's not getting to that number through some massive M&A strategy, it's getting to that number the way we've done it the whole time through by investing organically. Now remember, if you wanted to take a look at what happened in the ISV business, right? We were able to turn that into a very powerful from nowhere. Yes, we went and bought something like CardConnect and then we pay both of those without a process and then ultimately have a leading partner solutions business. You'll also see Clover in the ISV business, right? That will be the Clover Connect product, and we'll deliver software beyond what that ISV is delivering today to their clients. Software stack has a lot of elements that we can apply to it. So it's all the elements of our portfolio at work in a synergistic fashion to continue the growth trajectory.

Makes sense. Maybe switching gears to enterprise. I think industry-wide, there's been a big shift in enterprise towards more streamlined APIs, integrated processes, omnichannel offerings. I think Fiserv launched Carat over the past couple of years to kind of match that development. What differentiates Carat relative to some of the competing offerings? And is there anything on the product roadmap further in kind of advantage you might have today?

Yes. I mean I think it starts out with the property that we had. The property that we had was a fabulous processing platform. Specifically for e-com, it was a single processing platform. And then as we had evolved the company from more of a processor to a merchant acquirer, we invested heavily in the front end and specifically serving the institutional clients we already had. Really post our amicable separation with [indiscernible], it allowed us to go out and compete in large scale institutional business. With that, the idea of our geography, the idea of putting a single API on the front and the ability for a company to access us once in many ways while possibly also not only having e-comm but having card-present activity, gave us a beautiful engine for their back end and a beautiful engine for their front end. Now we'll continue to exploit that through other optimizations, through other opportunities to give our clients the capability to, at times, be a payback, at times, to be an acquirer on their own and at times to allow us to be able to direct traffic in ways they want. But in all of these efforts, whether it's ISV, whether it's Clover, whether it's e-com, it will be a constant investment in the product. It will be a content investment in growth and listening to our clients for where they're going. I mean, look, we don't build without talking to our clients what they need. Innovation best happens in the client's office, not back in our shop in Sunnyvale, it has to happen. And so much of our next-generation institutional care product is driven by the largest retailers out there telling us what they need for their next steps.

Got it. Makes sense. I mean you touched on a lot of different distribution methods. I think that's one of the things that stood out the most to me going through the business is just the unparalleled distribution you have through JV, the alliance, partners, ISVs, direct sales, ISOs. What's the mix of distribution channels today? And is there an ideal business mix that you want to get the business to over time?

Yes. I mean, first, I'd say, I'd go back in time, right? I think it's very important that we were a much larger processor in 2013 and maybe embedded in the lower growth rate was just that fact. As we evolve the business to be more direct as JVs, some went away. And as we also built out ISV and I think became an unparalleled partner of choice for banks. I think given what we've put together now, it's unparalleled because of the capabilities we can bring to a financial institution, which is a great distribution partner. But I think we don't really sit down and say we want 20, 13, 15, 18 of each one of those. It's how do we serve the most merchants and get the best economics while being a good partner. Now we're always going to have a fabulous direct business, and we've continued to grow that out and as is tremendous. But I think fabulous distribution with very strong manufacturing is a winning formula. And if Deutsche Bank comes to us in Germany, and so you've got this great product set, we have these great SMBs. Let's go figure out can we do something together, then we go and work on it. And if we think it's good for our shareholders and it's good for our clients and it drives the growth profile we want, we do it. We didn't say, hey, we're looking for a JV in Germany. But we had a fabulous German business. We had Clover business. And actually, one of the biggest banks says, hey, you're the guy, I think that's probably a statement to itself.

You take their call.

Yes. I'm living well, I take the call, we go to work on it. And then we get it done, and then we turn into our P&L. It's like more than announcement. It actually hit the P&L is what really matters.

So you focused a lot on the transition from a processor towards an acquirer and a more of a direct sales strategy. I think the general rule of business, the closer you are to customer, the more price you can command. You guys don't talk about yields. And I know that's not -- it's more of an output of the business, and there's so many things that impact yields. So I guess, maybe can you talk about longer term, with all the focus on getting closer to the customer away from sort of that processing relationships, is there any general statement you can make about how the strategy might affect yields over the next couple of years?

Yes. I love to talk about yield.

I know you do.

It used to be RPT, it got more sophisticated. Now we're going to call it yield, though it's the same stuff. I think when you have $1 billion processing business, right, it's hard to take that volume and the volume from SMB's e-com transaction, put both volumes together and then get a yield and think that's your yield, right? I mean, it just happens to be so. I always say like judge us on revenue growth and margin, right? Yield is -- we have a lot of things that go into that $6 billion plus or revenue going to $10 million, right? But what I would say is you could count on us having more revenue per unit. Selling more to every individual client, right, because we have so much more in our capability. And that was always part of the formula even way back where, if you're serving a large institution, we don't sell them acquiring. We sell them a series of products that help them lower their cost of acceptance, which is inclusive of managing their fraud. So I think in the calculus, what -- I've always looked at calculus as very simple. Have more merchants, sell them more products and do a good job, right? And if the yield -- you don't like our yield, but you like your revenue and you like our bottom line and you like our margin, we're probably actually doing what we're supposed to be. And maybe we have the only mix in the industry of its sort, including geography, including distribution, including a front-end product like Clover and including our processing environment. So I think you should say maybe yield matters if you're single dimensional. But if you're -- if you got a multidimensional offense, right, points on the board is what matters most. So we can keep trying yield, but we're never going to get there in this company. In some other company is more pertinent. And by the way, I say it at a time where yield is higher than volume, so I'm not trying -- it's not a cop out. It's just we understand how we make our money.

Makes total sense. I wanted to switch gears over to the fintech side of the boat. It's been a little over 3 years since the First Data deal was completed. And given the progress you've made on executing, delivering more than the initial synergy targets thought it might be helpful to just remind us how you view the synergies between the core banking and the merchant acquiring business. You said at the top, these businesses belong together, but what have been the kind of proof points of that over the past couple of years?

Well, I think if you look at the amount of banks we signed up to have merchant partnerships, you should start there. I think also the ability to put 2 very good debit networks together and bring more cardholders and more capability was very, very strong. So -- and I -- by the way, we were -- we at First Data was an initial investor in fintech because I had a deep belief over the long haul, having account processing, that core processing business, would be accretive to both our debit network and to our financial institution clients. At that time, there was no thought that we would merge with Fiserv. But there was a thought about how valuable having account processing, what merchant acquiring, what the debit network would be. So bringing those altogether -- and then if you take a look across this company, and you can think out about all the possibilities, P2P, we're the leader in it through Zelle. And the capability to bring those capabilities to our merchants and to our bank clients, as you go out further, will be very, very critical. So I think the story of the synergies occurred both on the bottom and on the top, both significantly exceeding initial targets. But I think you got another 5 years of synergistic growth and opportunity from the platform that we have.

Got it. And on the back of that, as you think about bank spending trends over the next couple of years, I mean, as a recovering bank analyst, I'm keenly aware of the benefit that most of the customers set gets from higher interest rates. How are you thinking about that impulse to...

What do you mean, just so we all understand, by recovering bank analysts?

So I cover banks for about 7 years, including regional banks, credit card...

We have run them for 5x that. And I don't consider myself recovering, I consider myself fortunate.

I have I very much enjoyed the transition, but yes, maybe you can talk about that industry tailwind and how that impacts the bank spending trends that you see in the business.

Well, it's kind of interesting. Having, let's call it, in early '90s, been a critical part of the regional bank turnaround at First Fidelity, where I then ran all the lending businesses after we put the whole bank together and a career at Citigroup with Sandy and Jamie, then a career at JPMorgan with Jamie, where I thought we had an unbelievable run as always had in a city, too. I never thought of this tech spending issue, the way I get asked it in this job. And I've overseen it for a long, long time. Tech spending was really about growing the business. And so right now, as I've been in this industry, we're now getting to 10 years, I haven't seen one person want to not spend on growing their business and technology. I mean, I'd say backlog is very strong. Pipeline is very strong. People are looking for how to change their client experience. And of course, like every provider, the buyer was -- like to get the best possible price, but they're not in a -- well, that number, I wouldn't do it. So I've yet to see this. And maybe it's just my duration but my duration includes a pandemic, by the way, where I saw everybody wanted more capability, not less, and I still see it. I don't ever think that -- and I talked to bank CEOs multiple times a day. Nobody is saying that thing I want to do to save money on my tech spend. That's how I'm going to have a more valuable bank franchise. I think it's quite the opposite that they'll best to have the opportunity to serve them.

Absolutely. I mean it makes a ton of sense. And yes, I think one of the things that we've written about is just the impact of higher interest rates on the ecosystem. But when margins go up, it's just more money to flow into those projects that they want to spend more and more on. You completed the acquisition of Finxact, cloud-based core banking provider. How do you frame the opportunity with this acquisition? There's clearly an element of TAM expansion being able to serve a different type of customer. What are the capabilities it brings to you? And what does it also bring to the installed base of existing Fiserv clients?

Yes, I think much like Clover was usually strategic and maybe not well understood on day 1 and maybe on day 3, it was the question of could it ever become something. We've done a couple of things. I would go back to our Ondot acquisition where we took a bunch of capabilities to control cards. And it looked like it was a card control system, but we actually coupled it with our mobile banking system, and then give our clients. And we'll probably have over 1,000 financial institutions in the first quarter on it. The ability to give a single instance one touch on their phone access to all their banking information. So that was very strategic, in my mind, in terms of how we want to help our clients serve their clients. Finxact, once again, I said we were an early investor in it when we were at First Data. We're in the boardroom. We understood the company. We knew the company, we collaborated with them on a building of code. We did the acquisition, Fiserv, First Data. We stayed on with it, with them. And when you looked at the possibilities for Finxact and for ourselves, it became very clear going to market together with all else surrounds, with our client base, with the possibility of both brand new clients, and we're doing that in embedded finance, in fintech, in banking as a service in a very simple manner, while still giving our current client base the opportunity to maybe have a digital core without having to convert. So you'd call it something like a side car is what I would like to call it. So we've created tremendous optionality for our client base. The synergy between in us and Finxact, we knew it would be strong because we were a kindred spirit from day 1 when they were initially funded by us. And so what do I think? I think we have the most modern capability in the industry with a great set of technologists like we've done with Ondot, like we did with the initial crowd at Clover and built it out. We put 400 more technologists on the job. One of the beauties who I found there and love being a company as they get to put their company on a spending level that they couldn't, one manage, or 2 afford and we're technically aligned. Ultimately, we're a technologist talking about how to bring a platform to the next level. I think everybody would say Finxact is probably the most modern product. It's got a management team that we're well, well aligned with and know a very long time. And our ability to bring new clients in faster, have a better stack for those single instance like a fintech, like embedded finance, like banking and service while still offering our current client base and other prospects an unbelievable digital experience and how well it hooks into all our other surround products. So if you're a current institution, you want to have a digital bank or you want to get somebody up and running on crypto, and you don't want to have to do something unnatural to your whole client base is a sidecar and we bridge it up top technically.

Makes a lot of sense. We have about 6 or 7 minutes left. I want to transition over to the Payments and Network segment. I think the segment includes a number of different product lines. I thought it might be helpful if we could just maybe touch on the biggest pieces within the segment? And maybe what are the building blocks in that business to get to the growth target that you've outlined in the past?

Yes. Well, I mean, if you remember at Investor Day, we talked about the elements of it. We talked about our credit business. We talked about our debit business. We talked about our digital payments business, which includes both Zelle and bill pay. And so why don't we can dissect a few of those, right? We have these 2 debit networks. They operate independently, but they're used by our client base, both STAR and both Accel. We brought the Ondot product in and our debit processing solution is very, very strong for our clients. And our networks are very strong. And there's a reason why we're the third largest after Mastercard and Visa. And we'll never be them, but it's very good for both our banks and our merchants how our debit business is. And -- we're pretty proud of the work we do there. Now many of our debit clients, we were able to, and this was going to be a synergy that I think we've done a fabulous job to sell our credit product to in the smaller end banks. Historically, our credit processing product was really a large institution product. And you hear the wins we rattled off in Atlanticus, Genesis, ADS, those are big credit clients. And we have some -- we have the top 10 banks in our credit products. But now we've extended it down to community banks and to regional banks or in that fashion, we're having a tremendous uptake. Interestingly enough, when we announced like the Atlanticus and the Genesis and then A, we were so darn proud of the size of our backlog. And we thought it was unheralded. It's kind of like 3 top 25 issuers within 18 months, and that's a big onboarding. By the way, they're all onboarded now. And our execution, I think they would say, like these guys were on time and did exactly what they say. But interesting and boiling enough, we don't have 3 more top 20 players, but we have as big a backlog as we had when we had those. So you should expect on constant question is, oh, well, you're going to lap your growth and what going to happen. I think we're going to have a long time at booking new business in that business, and we've been very, very successful. I think when you look at our growth in places like Zelle and digital payments, we have -- those were always large growers, but now they've gotten to a much higher scale. Our bill pay business has always been an industry-leading bill pay business. And you can count on some reinvention there that we see for greater growth going forward because we see the different patterns of how people are paying bills and the different capabilities to bring to them. So I think if you look at our year-to-date performance, it has been very strong, and you should expect it to stay that way.

Makes a lot of sense. I wanted to ask a specific question on the debit networks that you guys have. I mean, there's a lot of talk right now about credit routing and there's, I think, more questions and answers there. I'm curious if you have any commentary around the proposal, I think from last year, around card-not-present and Durbin switching. It seems like you would be very well positioned for that. The precedent is that PIN debit networks took a lot of market share in the aftermath of Durbin. How are you thinking about how that plays out in the card-not-present environment, if that were to go into effect?

Well, I think it's just more volume, but I'm not really in ensured to that. Everything else I talked about so far, I'm physically working on making better. That's beyond my ability to do that. But I do think that merchants believe that Durbin was meant to be 2 networks on a card. And at that time, it probably didn't really contemplate e-com and fast forward, we have a much bigger e-com world. So I leave whatever it is, we'll be fine with. But if it went through, that would probably mean more volume.

Yes, makes sense. Makes a lot of sense.

I don't know what happened to yield. I'm joking.

Turning to the financial side of the business. I think one of the biggest questions post earnings, I think it was the guidance for year-over-year margin expansion in the back half of the year. In the last minute or so, wondering if you could just talk through a couple of the moving pieces in the ramp in both margins and cash flow conversion for the remainder of 2022.

Yes. Well, I've said a whole bunch of times, so it makes it easier if you keep saying the same stuff. It's sooner or later. We -- and I think there's -- on the margin, it's kind of a very simple explanation. We had M&I period. The M&I period ended at 12/31. That M&I period had a series of expenses that went in M&I and a set of desired outcome. We talked about $1.2 billion, and then $600 million, $1.2 billion expense, 6 going north. We originally announced those as 5-year numbers and move them in to really be done at the end of 12/31. And as that clock expires, if you were still spending money on those efforts and they were still going on because we had said identified them, they came into your P&L. So we had expense actually go up for synergy work that we're completing and in the second half of the year and that expense goes away and the synergy benefit accrues. So you get a double benefit in the second half, and that's really the ramp or the model one should look at. And obviously, the third quarter doesn't get as benefited as the fourth quarter for that. But it's not a complicated problem, and it's not a hard problem.

Got it. Makes a lot of sense. All right. Well, we are out of time. I greatly appreciate the time and you joined me. Thank you.

It's my pleasure.