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

Okay. Thank you all for being here. Let's get started on our next session. I'm Ashwin Shirvaikar. I'm Citi's Global Head of FinTech Research. And it's my pleasure to next introduce Fiserv. And from Fiserv, we have Frank Bisignano, who is the Chairman and CEO. Thank you for doing this.

Happy to be here.

Not as happy as I am.

H ow do you know?

I'm going to just kick off with the macro question because that's top of mind, and you guys are sort of a lot of size and scope and a good look onto sort of all the retail commerce in the U.S. So as you look at your dashboards, what's your read on the health of the U.S. consumer?

Well, we've seen an environment that, over the past 2 years, we never saw before. And that has a lot of dimensions to it. It is money being brought into the system. It had tremendous suppressed spending and then accelerated spending. And when you look at our company, a large player in grocery, large player in petroleum, large player in QSR, so we have a very good look at a lot of the very strong stables. And the consumer is healthy. The consumer is healthy. I don't see it necessarily taking off, but if there's any pullback, it's very, very, very, small, if there is any. So I think the consumer is still out in force. Their behaviors -- I think the pandemic changed a lot of things, probably every person here has changed to something more. So I'm not sure that the dynamics are exactly the same as pre pandemic to post pandemic, and I see a strong consumer right now.

Okay. And as we extend that to enterprise clients, which you also have a lot of, particularly within banking and a lot of merchants, what are you seeing in terms of their appetite from an enterprise spending perspective?

Yes. I don't really think of it as enterprise spending maybe. And I get asked the question a lot, too, about banks and IT spending, and I think embedded in their questions at. And what we see is demand for products, demand for digital product, demand to be able to connect with their clients better. And that would be both on the merchant side and on the bank side. So I don't think it's about spending as much as it's about clients growing their business. Look, I like to say, and I said this for a very long time, that we're a purpose-driven company, and we're in business to help our clients grow their business. And that, today, is in -- had to connect in a mobile, digital fashion, had to deliver capability to small and large merchants, had to be the operating system both for banks and be the operating system through Clover for merchants. So it's more about helping them grow their business. But demand is very strong in those categories.

Right. Right. So let me just juxtapose that with how many investors feel, which is that there's a downturn looming coming. We're going to see one. We kind of look at economic data points and so on. If there was a downturn, should we have a downturn, let's say, a regular downturn, not a particularly strong one, not an easy one? What, in your business, is more defensive versus what isn't? And how would you adapt?

Well, you know, a few things. We like to think about our business as 85% recurring revenue. So I will start with that. I'd like to think that 2020 was quite a downturn, and we had 0 revenue growth in 2020, but we had double-digit EPS growth. So I think the resilience and the durability of our model, the mission-critical nature of our services, yes, sell merchant business will be affected by consumer spending. But recognize that we have a lot of, what I would call, staple-related products that we have very, very large market share in. And I think our banking set of operating systems are of mission-critical nature for our financial institutions. We also have changed the profile of the company. We took a 4% grower and a 5% and 6% grower maybe, and turned it into what we guided at 7% to 9% and producing 11% for 2 years in a row, that's a different company that actually is investing a whole bunch more. And we want to say, "Hey, we would stop investing." But the beauty of that is, you could take more time, you could slow it down. We have a bunch of discretionary spend in our base. We know how to manage expenses very, very well. We know how to lever up and lever down. So I think the nature of our business is highly recurring. I think we've demonstrated a completely different investment and growth profile. And I think behind all that, I like to believe that we're maniacally focused on what we need to be, on what things to pull back and what things to continue. And we know our levers and know how to manage the expense line. And we've managed it through this whole merger in order to, in some ways, be prepared for tough times, too.

Okay. Just to round out the sort of the comments on macro. If I could ask you to sort of talk through the impact to inflation and impact of the strong dollar, what that has had on your business model?

Yes. I mean, obviously, we have a business outside the U.S. And we're proud of that business, and we love to grow that business. But the strong dollar has seen things that we've never seen in the European landscape. Obviously, over our careers, we've seen it in the Latin American landscape. We've seen these type of volatile situations. But they've definitely been a strain. We've still produced outstanding numbers. But if you look at the currency, you'd put in the headwind category. Inflation, I think we've been pretty vocal about the size. Think about it at company-wide, if you want to think about 1.5% on the top. My larger reminder is, fundamentally, the large majority of our expenses is inflation affected. And I think in this cycle, inflation plus supply chain was a doubling factor, right? When we secure the chips, when we secure the items we needed, they were beyond inflationary. They were supply chain affected was another level of inflation. So we've seen 1.5 points on the top. We've seen a little more in the merchant business. And ultimately, you'd say, we've seen it on our expense line. Also, we saw a compounding factor, I like to say, on the expense line because you also had the issue of securing goods at a premium price. But I like to say this. When I go in these meetings is -- and they don't ask me a question, but I'll give you the answer anyway. We recently were in -- awarded the #6 company in the American Opportunity Index. Now you probably never heard of the American Opportunity Index because it was the first time it was ever run. They took the top 250 companies in the U.S. and said, how do they treat their blue collar hourly workforce? And we ranked #6. Number six. And you might say, "Well, like what are you trying to say to us?" By the way, we have a lot of production facilities. We produce a lot of plastic. We produce a lot of stimulus payments that are needed to go out the door. And we did the whole thing, every bit of it, for our clients, for governments. And we never had an hourly worker issue. Now I don't know that any one of -- I'll probably get in trouble here, that each and every one of you could say that you kind of got into some place that might employ hourly workers and maybe you just had to go through the drive-through because they can't get that workforce. We, early on, paid that workforce to never leave in a manner that was probably, at the moment, people thought, "Wow, that's a lot." But we kept that workforce in there, and we're able to get the job done. And we delivered for the clients, and send out numbers, both on the top and the bottom. But that may sound like a -- to you all, that may not sound all that interesting. To me, that's about running a company with preparedness, keeping a workforce in place and being able to reward people for doing a good job here and have your clients be the beneficiaries of us not having delays in production for them.

Okay. No, that's -- I have not heard of that index. But...

Go check it out, man.

Absolutely.

It was only covered in like Fortune and the Wall Street Journal, the only 2, that really talked that much about it.

So the only 2...

Just [indiscernible] I'm the cover.

The only 2 publications [indiscernible] .

[indiscernible] cover.

Yes. No, no, let's talk about...

I got to get you out of those other things you read. What are you reading? The National Enquirer? Is there still such a thing?

It's a fun magazine. Anyway...

You brought me here.

Anyway, let's talk about growth in merchant, okay? You used the term recently, bend the curve. And when you talk about taking a 4%, 5% grower and taking it to 7% to 9%, doing the 10.5%, and you've got a $10 billion -- so it's not like it's a tiny company. You do have a $10 billion segment revenue target for 2025. If the bend the curve sticks, you're going to hit that. I don't know how many people believe that, but you're going to hit that, right? You do. But in the audience...

All right. Everybody believes it. Not to believe about it. When we had no Clover's, it might not have been believable when I told you we'd have more GPV than Square. But by now, you should start believing it.

Yes. But at a high level, how do you -- can you talk about the growth outlook to get there?

Yes. I mean, let's put Clover at the center of it. If you remember, we came up in March, and we talked about this really to being a 9% to 12% grower. We put that $10 billion. We talked about the billions of dollars that we'll generate through Clover. And we started on this Clover journey with 8 people and a bunch of patents. And we had a point of view, we had a point of view. We didn't get it right exactly early on. By the way, like anybody who says they do something like that and they get it right the first time. We had just thought that Clover would be the iPhone for small and medium-sized businesses, and we run a bunch of apps on there. But that was a failed thought, in some way. It met some criteria, we came to understand later on. We needed to verticalize better, and it allowed us then be able to spend more time in verticals and think about the growth pattern. And you've seen the Clover growth. And I know there's always this question, when are you going to the back book? When are you going to the back book on there? And I think the short answer today would be, in a world of supply chain, I'd rather capture front book. And when supply chain isn't so demanding, we could think about back book. And we do turn over about 10% of the new merchants from the back book. But then there's Carat, and you might have watched. We were always a large e-com processor, and we converted ourselves into an acquirer. That really happened at the breakup of BAMS, where many of the things we couldn't do as BAMS processor, we then became leaning forward in, in e-comm and built out Carat. And we do have a very large processing business. It's a good base. It's stable. It won't have the growth factor in there. We have an international business that I think is unparalleled. And we have the best distribution in the industry. So when you take all of that together, because the knock-on question for everybody is, well, how do you explain your numbers versus others? What might be best client base in the industry, best diversity of the industry, best geographic footprint in the industry, and Clover and Carat and put that all there? And so I understand that, at one point, this business 10 years ago didn't have its current growth trajectory. But we invested a boatload, we consolidated platforms, we built front ends. And so I think doing $10 billion plus is the job. And if you look at our geographic reach, our vertical reach, our ability to serve the largest guys in the industry and be loved and served at the pizza store in Brooklyn -- everybody knows I'm from Brooklyn, so I like to talk about pizza slice there and get them on Clover. So I think it's not hard. I don't think it's hard. I think it's -- the hard part has been done. The hard part has been done. Look at why an American franchise, people thought you kind of grow a business in Brazil when we started, and now we got a dominant business in Brazil. And people like Caixa is our client. Remember, we had 0 market share in Brazil. So I don't know if that answers your question.

It does.

Good. I just want to make sure.

But let's talk about a couple more pieces. So verticalization, you mentioned that. And then geographical distribution. Could you sort of take us the next level down with regards to how you're thinking of verticalization with Clover? And then geo-distribution, again, just sort of the process -- the thought process of what's attractive? How do you determine that? Because you're also coming out of certain countries. So can you explain that puts and takes there?

Yes. I think we came out of 1 country, Korea. It took a long time to get done. But I think that was very, very good for us. I think we made a decision that the first vertical that we would work this verticalization discipline on was restaurants. And we saw a good restaurant footprint beyond our QSR capabilities, which is industry-leading. And we went and bought BentoBox, and we leaned in with Bento and that founder. And we want in and other products to the portfolio, which allow us to believe that we could have as competitive a product over the longer haul than anybody in restaurants. And that's really the objective there. And then that took a little while because we're very horizontal in nature, serving payments. And when we got deeper into software and so are the ARPU value, the LTV value and saw how we could turn restaurants. It became very clear. We will take that same discipline to retail -- to retail and then further to services. And you should expect that to happen over this duration, over the next 3 years. But I think, given Clover, given other assets that we add to it, given our depth of other products like everywhere from marketing to payroll and how we can package it all together, it's back to we're in the software business. And to us, we are going to sell software capability while having the best payment processing capability, and both matter a lot. Both matter a lot to SMBs.

Okay. And the...

And geographically, look at -- you can only go into geographies that are prepared, right? So perfect one is Germany. We take 2 businesses, we take Deutsche Bank's business, our business, put it together. We already had distributed Clover in Germany, and now we believe it will expand that much more. We see Brazil as another place where software will be accepted and be able to be monetized. And we had bought a company there, Software Express, and we -- it became a gateway for us to help us drive our e-com business. And that business, plus our point-of-sale business, we believe, gives us a great opportunity to bring Clover in, capitalize on omnichannel capabilities and be able to drive more economics in Brazil. And in Argentina, also, we were pretty mission-critical in opening up that market and changing that market dynamic, so we could take a large market share on one side and expand it across all payment types.

Okay. Just back to the verticalization. Do you think that's going to be primarily an organic push? Or are there inorganic opportunities that you see?

We know BentoBox was an acquisition. We knew the company well. We love the founder. She's here with us. Does a great job, loves the restaurant, runs the restaurant vertical for us. So there will be inorganic things to help us get our product out, and I will take BentoBox as an example.

Okay. All right. In terms of your enterprise solution in cash, can you talk a little bit about sort of the go-to-market there, how it's evolving and some of the -- maybe the growth and profitability characteristics?

Yes. I mean, I think if you go back to -- we had a great processing platform, and we converted into a single API merchant-acquiring capability that can be multicurrency and serve large institutions. And as we went down that path, we saw our clients wanting that capability. Clients also wanting the capability of omnichannel, so our physical presence gave us the opportunity to market our e-com presence in a different way. And I mean, I think we find ourselves competing everywhere on the product. So there was once a question like, hey, can you ever be any player? Maybe 5 years ago, there was that question. And today, you look at that growth in Carat and you look at the omnichannel growth in general, and I think in both card present and card not present, I believe, we're market share gainers.

Yes, yes. And when you think of the rest of merchant, the part that isn't Clover or Carat, right, and I know Carat extends into other parts of your business, what's the plan with that with regards to, is that a continued penetration opportunity? Do you want to sort of whittle it down? How do you think of that?

Well, I mean, we have a great client base, right? So I think, ultimately, our job is to continue, and this is across the company, whether I'm in the banking division, whether I'm a merchant, whether I'm an issuer, how do we get more products to our client, right? So if you're not a Clover client, you might be an ISV, and we think, over the long haul, there's opportunity across Clover Connect to [ franchise ]. We certainly think we've got a great set of software products that we could bring into that ISV. So to me, our portfolio is a growth opportunity. Maybe processing as a standalone is not a grower, but it also -- and we demonstrated this in our Merchant Day, it's $1 billion of very stable revenue that required -- that won't have the growth rate of Clover or Carat, but also as a fabulous anchor tenet that is a requirement for many of our clients for us to provide them processing capabilities. So I think the rest of the portfolio, they won't grow at Clover-esque rates. But to us, the job ultimately is to sell more product into our clients. So we don't have a very complicated strategy. It's grow more clients and sell more to our clients, and I think you see it in our numbers. Now that may not be a complicated strategy, but you need execution, you need product, you need talent, you need sales, you need ops, tech and all the things that we do very well to deliver the outcome we've gotten for the past few years.

Great. Okay. Just shifting gears to sort of your payments and network. We're also seeing some pretty good acceleration. Could you kind of talk about the elements of that acceleration? What's led to that?

Yes. I mean in the issuer business, we have been usually fortunate to have some more key wins, whether it was ADS, whether it was Atlanticus, whether it was Genesis. And I'd like to remind us, we announced $120 million, I believe it was, in 2020 of business that we were going to onboard. And we're just at the final throes of that onboarding. When we said that, I'd say, we thought that was an unheard of number. Three of the top 25, and maybe it was one of those -- whatever it is, one of those floods, like once-in-a-hundred-year floods, you ever hear about those? Or hurricanes, they seem to happen like every 3 years, right? I guess those are just different. Well, I think the same thing happened to us. You'll watch us continue to have as good a pipeline today as we had back then. And the opportunities just continue to come now. We have new players in the market who want new capability. Our platform is an industry-leading platform. And so we've been very fortunate there. I think the power of STAR and Accel, this is still in the payment business, a different item, we're the third largest payment network. I think world likes the third largest payment network. We give optionality both to issuers and to merchants. We've invested in that capability, and we've -- have very, very strong capability there, both in the processing side and the network side. I do believe we have the industry-leading bill payment platform. And granted bill payments will change over time, but we're the largest enabler of Zelle. And I would expect you're going to see the same thing in Fed now from us. So payments are our life. And our clients need payments. It really is the lifeblood of it. And you can think -- and this is nowhere in our calculus, but you can think forward that the power of the amount of payment assets we have and our merchant assets can afford very, very good opportunity for our clients. I wouldn't say there is a calculated plan there by any means, but we spend a lot of time in the client's office talking about innovation. And that whether it's a financial institution or whether it's your favorite going-at brand, whoever that may be, because whoever they are, they're our clients. So on both sides, we're always talking about it. So I think this portfolio -- and one of the things -- you don't ask me, but I'll tell you anyway. I think our portfolio of products and our capabilities and our distribution is our strategic advantage, along with our client base. And that allows us to continue to invest, continue to innovate and continue to build and bend the curves in other areas.

Yes. No, that makes sense. Just going back to a couple of things you said. The recent dual-network optionality clarification that we got, what's the opportunity from that for you? I mean have you sized it internally? What's the go-get process?

Well, I think, look, this is really in the hands of many others, right? We have the capability as a network. I think if you go back in time, card not present was not anywhere near in the shape and form when the regulation was originally laid out. So it's not too odd to think that the world fast forwarded and said, well, if good for card present, why isn't it good for card not present? And that just creates a bunch of opportunity, both on the issuing side and on the merchant side. And you could size this 50 ways. The way to think about it, simply, if you're me, and for those who know me, I like to try to think about things simply, we could do things very complicated, but let's talk about them simply. We didn't have the ability, and we do have the ability. We have issuers, we have merchants, and we have the third largest network. So we're going to talk to our clients, both on the issuing side and merchant side, and do exactly what they want, and that should be worth more than 0.

Okay. Let's talk about the Fintech segment. And in terms of just the competitive environment that you see there, what's the confidence that whatever you saw in 3Q '22 is sort of timing related? Why should it accelerate back up? What are some of the factors that drive your confidence on that?

Well, I think if you look at historically, right, which is probably the best indicator to look back at, I think you'll see '22 will probably be the best year we've ever had in this business. And we've been in this business a long time. Seeing you might ask the question, well, why? What's different? How come? I think it's multidimensional. I think it's an approach to banking in total. And bringing all the capabilities, we'll bring them in an integrated fashion. We made a bunch of very tactical moves inside the company, creating a relationship management function, which, I believe, would face off to banks in a manner that, in my career, banks face off to their clients. I thought, secondarily, we made great investments in our DNA product while continually investing in-house Signature and Precision and Premier. And although people would question sometimes, "Do you have more platforms than you should?" I frequently remind people I was asked that question at First Data. And I said it's more important to have Clover on the front end. And maybe grocers want one set of products and maybe petroleum wants another. And I would remind many of my friends in financial services that if Solomon and Smith will merge, we're going to take the mortgage-backed system and the equity system and put them together and say, we're going to run 1 trading system, but we brought complementary products. And we may have had settlement engines that were the same, but not necessarily our trading front ends. And why do I tell you all that? Because then we go out and acquire Finxact. And we think Finxact has a very distinct capability. And we think, honestly, Finxact has more clients on it than any other cloud-native core in the industry. And we don't think we have to convert clients off of their current instance if they want a digital or an embedded finance capability or banking as a service, but they can run it as a sidecar, and we've kind of proved it. So you got the growth of -- and, I think, what you found is -- and I think a little bit of it is in the DNA of the talent in the company, where, maybe we had a great hand than we did in the $1 billion to $5 billion, we now go way further north, right? Many of us grew up in larger institutions, understand larger institutions, and believe we know a larger institutions. Need. So you hear us announce a Webster coming to us, even though they were the acquiring bank. And we had Sterling, the bank, that they had bought, that would be not that conventional in the past. Or you watch an NYCB grow and continue to come with us. So you see us going further north. So if you look at the current growth rate, go back to where you started, if you look at the current growth rate, you say they got Finxact, they're going further north, and they're gaining market share. That's exactly what's happening, and we actually understand banking. I think we understand banking.

Okay. I need to end with the cash flow question. Obviously, this year has been a cash flow disappointment relative to expectations. But it has -- you've done way better than expected on growth. Is that sort of the dynamic you expect in the future, where you're going to keep growing at a very healthy, robust pace given the [indiscernible]?

Well, best cash flow year was 2020. We had 0 revenue growth. So -- and our worst cash flow year, albeit 11% revenue growth, I don't think it's coincidental. More revenue, more receivables, more working capital. And so I'd hold us accountable to a really big eye-popping cash flow number, right? I mean, the multiple billion dollar cash flow generation number. And I don't think you're going to find a lot of 11% growers on the top, and all of you could help me know because I'm looking for the NIM of 11% on the top and north of $100 million in cash flow conversion. Anybody got a NIM? Yes, that's the one I have, too. So I mean, I don't think there's anything different about I think we will generate expanding margins, right? And we will grow the top, and we will have more receivables, and we'll have more working capital, but we'll have an industry-leading business. And I think -- I hope that's what you want us to have.

Okay. Yes. The conversion rate, not so much, but the dollar value of the cash flow. You got that?

Yes.

Okay. Cool. That's a good note to end on.

All right.

Thank you very much.

Good to see you, man.

Yes. Absolutely.

Thanks. It's always my pleasure. Thanks, guys. Appreciate it.

Thanks.

Yes.