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

Welcome back to Evercore ISI's Seventh Annual Payments and FinTech Innovators Forum. I'm David Togut. I track the payments and financial technology stocks at Evercore ISI. Delighted to host Frank Bisignano, Chairman and CEO of Fiserv. Frank, thanks so much for being with us here today. We greatly appreciate it.

My pleasure.

Since Clover and Carat are Fiserv's 2 highest growth payment solutions, let's start there. With both products, you pursued an operating system approach, adding new software applications to help drive growth. With Clover serving SMBs, what new software applications do you expect to add in the next 12 months? And what major new software applications do you expect to add to Carat in the enterprise space?

Yes. I mean, first of all, thanks for having me, once again. And I think when you think about these, they're both operating systems. And the beauty of both of these operating systems is they allow us to continue to bring value-added services to our client base. And if you think about Clover, we like talking about what we're doing with ARPU, how software penetration continues to grow. I think it's also about the digitization and the automation for our clients to be able to help them grow. When you think about us bringing digital storefronts to them, one great example would be what we do with BentoBox on restaurants. I think also when we think about '23 road map, we're very excited in both cases, as we're going to continue to sell existing services and add new services. I mean think about the SaaS stack, think about all the things in there. We have great partnerships, and now we have our own product. I think when you think about Clover Capital. We have great trajectory on that and we'll continue there. We weld the disbursement business and the ability to disburse payments at a greater rate to the total client base, and we see that both in Clover and Carat. Obviously, fraud and data management solution sit in both. All of those are designed to help our clients make more money, right? So I want to go back to -- these are not about anything other than helping small, medium and large enterprises manage their business better, us delivering integrated solutions across the stack and being able to capture more of their wallet, and in some cases, just purely expanding the TAM, bringing new services to them that they don't have. And I think about things like disbursement in that area and Clover Capital in that area, too.

Great. And as you verticalize Clover for restaurants and retail, what are the most important investments you intend to make? And what is your time line to generate substantial additional growth from these 2 verticals?

Well, I mean, I think this has been our pursuit from day 1 on both of those. I think how do we grow them out in a way that helps our clients grow. Obviously, we have a big bent on omnichannel commerce, right? That's really online is dedicated to that. How do we continue to help our clients meet their clients where they want to be met. And that would be a theme across the company in all honestly. It's not limited to this, but it's what we're talking about now. And so how do we deeply integrate Clover and Bento? We take our next table solution and create frictionless commerce for our clients. How do we continue to bringing integration into retail? So we help the omnichannel experience and allow our clients to meet layer clients where they want to be met. We continue to look at the road map in order to add other features to support the gig economy, too, for our retailers and our restaurants and our disbursements products and the products that go on with that. So I think you'll continue to see us lean in, in these. We have a great foundation. We hold ourselves very accountable to ARPU and drive LTV. And you've heard us report on that. We'll continue to do that. I think our solutions are targeted at helping these businesses grow.

What inning are you in, in terms of verticalizing Clover for restaurants and retail?

Well, it's all going to how many innings you think your game is, and there's been 24 inning games in baseball. But I think we are further along in restaurants. But the reason why I answered that 24-inning point is this is a constant journey, right? I mean, Clover has been a constant journey. Carat's been a constant journey. Verticalization has been a constant journey. So we're never satisfied, and we always feel like there's so much more to do. Obviously, we're distributing Bento. We're distributing Clover Capital. We're distributing disbursements, and we're growing ARPU, but I can't imagine at a time when we'll ever say we're in the 8th inning and would probably be in the 8th inning if we thought the game was going to 24 like that did one night at Chase Stadium.

Understood. Just shifting to distribution. Last year, you added 174 ISVs. For this year, what are your plans to expand the ISV channel, direct sales and bank merchant, which itself was one of the biggest revenue drivers in the Pfizer First Data acquisition?

Yes. I mean, we love all of those. And obviously, direct sales and direct acquisition, we've built out over time and is continuing to have great traction. We do think that our partnerships with bank are very, very special, and we do see a lot more opportunity there. Obviously, that was a merger item that I really believed in. And I always thought we had a very great bank merchant relationship that's so expanded within this company. The fabulous and privileged position we have with our core allows us to be able to do things. And I do believe that if you're back to the innings, we're in early innings on bringing all of that capability we have to our bank partners. And I think, look, we started the ISV business by buying properties like CardConnect and BluePay and then built it out and integrated those. So it maybe game our channel. We love the ISV business. We believe we can distribute Clover into the ISV business. We like software-led payments. We think it's growing very well, and we think our assets play very well to be able to help it along.

Shifting to Carat, how far along are you in building out Commerce Hub, a single orchestration layer? How does that increase Carat's growth opportunities?

Well, these journeys are journeys, right? I mean -- so a little bit I keep telling everybody is like, we're always in the early innings, but we're always winning business because our clients continue to help us evolve our products, right? Large institutional clients that we have continue to think about how Commerce Hub can be more capable for them than its current version, not to say that they didn't buy Commerce Hub for the Commerce Hub capability. I mean the fact is, we have Fortune 100 companies boarding onto that solution. And they continue to want to evolve the solution for more capability. We have an unbelievably robust e-com offering. Carat is super strong, and we will continue to invest in. And I think if we were to forecast out who one of you is in the next 2 to 3 years, Carat will be the dominant winner. We have to continue our investment road map. We have to continue what we're doing. But our e-com and omnichannel offerings, I think, are very, very strong, and we're going to continue to bring the surveillance around it to help that enterprise solution sets. I will say we're proud of all the things we do, but I feel like we have so much more opportunity and so many more things to do. And we do think about each year, we come into, as a very pivotal year to help us continue to grow the businesses and take share.

Rolling out a new Clover gateway, which enables easier access to your full range of value-added services and expands the opportunity for Clover to compete for card-not-present or e-commerce business, when will the new Clover gateway be fully rolled out? And how soon should we expect an impact the new business signings?

Yes. I mean we've been on this journey for a while. And for clarity, we had a gateway -- we have a gateway, but this is the most modern cable capability in a much better, tighter integration. That gateway actually existed before Clover. So you can imagine why we invested heavily in bringing this new capability. I think about everything from a virtual terminal to a fraud capabilities, to how we do online ordering, invoicing, payment links, our wallet integration, all of that, will, in fact, get enhanced on this journey. Many of those capabilities exist today, and I believe even in the advanced broad area. I think it's going to help our businesses manage their business better, which I always say our purpose is to help our clients grow their business. We're a purpose-driven company in business to help our clients grow it. And I think it allows them a better single source of truth of all their transaction volume. You're going to see that ramp through the course of the year as we migrate clients to it. And I think it's just another example of us investing in our business where we already have capability but to take that capability to the next level.

Got it. We do have an incoming question for you. Are you ready for a question?

Yes.

Frank, one year ago, at David's conference, you reminded us of the industrial logic of large mergers, the scale benefits. Now there's clearly a property for sale with FIS Worldpay. Does this make sense either offensively or defensively?

Let me just think about that for a second. Look, we put these 2 companies together. And when I sit back and think about what we have here today, and how we've been progressing it, I think we made good progress. I think the merit of what we've done was really being first, I think that was an advantage. I think we have the best client set in the industry. I actually believe in -- its more than I believe and it's fundamentally 100% accurate that we serve every American household. Now people may not realize that, but if you take our bill pay capability, you take our merchant capability, you take our client base from Walmart to McDonald's, to Dunkin' Donuts to Sonic, if you think about, we touch Americans every day. Think about our debit network, think about our retail private label business, and I could go on. How many DDA accounts we have and how many are above. So I think the industrial logic was very strong. I like to believe having the best client set, I think we do have tremendous products that give us a strategic advantage, I think, from Clover to a debit network to Optus, to Carat. Our geographical reach, I think, is fabulous, a few billion dollars outside the U.S. growing double digits and having a lot of runway. So I'd say relative to the property we have, I think we did a good job integrating the company. I think we're back from the pandemic, I would say the pandemic is, I think, probably statistically '19 this might have been the sixth largest merger done. So doing the sixth largest merger and then within less than a year, you have a pandemic, probably it's not conducive to getting done everything you can. So I feel like we have the opportunity for unbelievable operational excellence by the co-location of our staffs, by the investment we've made in technology and people. I do think our management team is highly motivated to take this whole platform to the next level. And so that's kind of where we are. And so I think that's probably the most important part of our journey. And everybody else's journey is their own journey.

Understood. That's very clear. Shifting to payments and networks. In the fourth quarter, you signed large card issuer services contracts with Desjardins and Target Red. How material will these 2 contracts be to 2023 revenue growth? And then related to that, what are the major advancements incorporated into Optus, your new card issuer services platform?

Yes. Well, I'd back up the second. And I frequently think about when we had Investor Day virtually in December of '20, that one of those highlight moments of pandemic. And we talked about $120 million of wins that we were ongoing to onboard. We talked about it in the terms of 3 top 25 issuers. And at that moment, we were thinking it was kind of like, what I would like to phrase it, they're 100-year floods but I've come to recognize like many things. 100-year flood doesn't happen every 100 years. It happens at a much higher interval. And when we talked about that $120 million, we were so darn proud of it and thought it was an incredible number. As we onboard these and other wins we've had, we've actually exceeded the $120 million number. And I do think that leads to the question about Optus. Optus has become a much digitized modular platform that has been enabled in a manner that allows clients to have the best of everything from loyalty to fraud capabilities. So it may have been at one point non-Optus, it was something else. And the investment we made in that somewhat parallels the way you should think about Carat. Keying a bunch of capabilities to the next level in a fully integrated fashion to serve our clients in a manner that we think is state-of-the-art for them. We will always be investing in modernizing our infrastructure. I love to remind people, people talk about cloud and all of this, so Clover was built in the cloud in 2014. We don't necessarily talk about the advances of about infrastructure because we think that's a mandatory requirement. And we don't talk about it as necessarily a strategic advantage. The strategic advantage is the functionality we build around it to allow our clients to run their business better, so they can grow. So I think it's exciting. I think the work done by that team has been significant, and they've been market share gainers.

Got it. Also in payments and networks, you announced a large e-commerce client win for debit routing in the fourth quarter. Do you see other large merchants planning to sign up with the STAR network effective July 1, once dual unaffiliated debit networks are required to route every online debit transaction per the Federal Reserve?

Yes. I actually don't believe. Honestly, one and the other are correlated. So I think people think they're correlated, but they're not. It wouldn't be the first piece of debit routing business we have done through our career -- as a matter fact, we started the network as a very good capability and is desired, recognizing it as more than Star and Star ACCEL is the #3 network in debit and has held that position for a while and it was much smaller at a point of time, and then it has tremendous capability and tremendous bandwidth. It helps us grow. I do think that we've yet to see what actually will happen under that regulatory change. And of course, we're working hard on thinking through it, but nowhere in the wins we've had in debit is driven by that change, is driven by our pure capability. And I would hope that, that change is accretive to us. And I'd say we don't have anything in our guidance around it.

Understood. Within payments and networks, what do you see as a growth outlook for electronic bill presentment and payment? What's the path forward for this business?

Look, I think one of the things to think about this company is, as Brent decides its capability, whether it's the NOW network, whether it's Zelle, whether it's our biller capability, whether it's our bill pay capability, whether we could spread our bill pay capability in a wider range. So the reason why we sit with a payment segment is our objective is to provide every possible option to our financial institutions and to consumers, right? And it's very important that as Fed now comes in, we will be a major player and a major leader in that. We've been a leader in Zelle. We've had the best bill pay product in the industry, and we think there is, at one point in time that was going in a direction that we didn't love and I think we've changed that direction. So I want you to think about the largest form of P2P and P2C and C2P. And what we want to do is ensure that we give our client base and their client base every possible capability, and we believe that we will continue to have payments and payment presentment as a strategic asset inside the company.

We do have another question coming in for you, Frank. This is your first real year to get your hands dirty with improving operational efficiency after having to focus on the First Data integration, COVID, work from home, et cetera. How excited are you about this opportunity, i.e., improving operational efficiency? And how much low-hanging fruit do you see that you can address in 2023?

Yes. I've never thought about low-hanging fruit. It's just not my terminology, but I think about this way, this actually my first year running the company not in a pandemic. Which means, it's my first year running the company with people sitting next to me, side-by-side, every day driving operational excellence. And operational excellence really has a series of items underneath it. How do we elevate our game with our client, and I'm committed to be the best in the clients' office. I think we have a track record over a long, long period of time, if you check this management team's track record. And obviously, a pandemic is not conducive to driving culture or efficiency. I think we've done a great job in getting as much done as humanly possible during the pandemic. But if you ask me how excited I am, I'm on fire on the topic. It's in every meeting I'm in. We are going to be intellectually honest with analytical rigor in every corner we turn. We're going to analyze everything we do and figure out how to do it better. We come from an engineering bent, and we have a manufacturing mindset while driving high quality per client. I think we could develop our systems faster. I think we could deliver a better product for our clients. I think we could actually eliminate a lot of things within the companies that are reduced. And so I don't -- I'm glad on us taking this to a place that most people actually don't think are as possible, but inside this company, we know we'll get done. And I could go on forever. You can ask me about anything on that topic from -- by the way, we have spent the past 3 years building systems that allow us to drive this operational excellence and management information allow it from how we interact with our clients, to how we build our systems, to bringing artificial intelligence into the client experience, to continuing to build out RPA in manners. We now can deploy it. We've moved people into facilities with thousands of people who are all at home and disparate. I think it gives us an unbelievable strategic advantage. And we were the people who were crazy enough and dumb enough to take new facilities when it was going to be 100% remote world, and we just had a different strategy, and I think that strategy is probably coming our way.

Well, on this topic, are you going to start setting targets like Fiserv did pre First Data, which was $250 million over 5 years, routinely beat. Should we start to expect targets from Fiserv on multiyear cost takeout or how will we see this manifest? How we'd be able to track it?

I think you should track it through what we tell you in guidance, right? Like, we're talking about how we improve in every element of the company, right? So like I kind of work it like this and do what you want whatever I'm going to say, and I may get booed at a stadium, but that's okay. We took a 3% and 4% grower and a 5% or 6% grower and came out and told you we would grow 7% to 9%, and I understood, but I wondered why the hell did we say in that. Well, just because we knew we could do better than that, and so I was producing 11%. We came out and talked in the beginning of the year about second half synergies and what we're going to get. And I think when your scoreboard lit up at the end of the year, it showed the outcome we talked about, right? We believe in margin expansion. We believe a more high-quality margin expansion, right? High-quality margin expansion means, in fact, that we're driving quality and productivity. Anybody can take expense itself. That's not really hard. Grow the top line, get the next dollar of revenue at a higher quality, expand your margin, and in fact, drop more to the bottom line. So I think you should hold me accountable and my team accountable at that. And I think that's the metric that I would drive us off of.

Understood. Well, you've set a target of 125 basis points for this year for adjusted operating margin expansion. That is above the long-term target.

Yes. I think, actually, if you go to the tail of the tape, which I don't like doing, I'd say, we laid out a stuff, a bunch of things in 2020. I do believe we didn't hit the free cash flow conversion rate, and I put that all on me. And I said this the other day just to somebody, what people probably thought was 7% to 9% was never happening. And what we didn't realize is, we had never traveled at that altitude before and what it would take to get 7% to 9% and that 100 or greater in 7% to 9%, I've been struggling to find companies that actually do that. So I would take that. But I think if you look at the scoreboard, revenues outperformed; margin, EPS, all while we probably had a longer pandemic than we thought, higher inflation that we didn't count on and a bunch of puts and takes. But all this accountable to what we tell you we're going to do and you should expect us to get top line benefit out of the way we're going to drive operational excellence because it's going to be felt in the client's office, not just on margin.

Very clear. We have another question coming in for you. Can you talk about capital allocation now at 2.8x leverage? You announced the big buyback authorization increase and recently were in the debt markets. How are you thinking about buying back stock today versus potential deals, as it seems the M&A pipeline is heating up in the industry?

Yes. I mean I don't know that this word big is -- I guess, as an absolute, it's big. I think if you look, we had announced $60 million, and now it's come back with $75 million. I think we've been a very good acquirer of properties, and we haven't done anything huge in scale. But I think Finxact, BentoBox, Merchant One, Ondot, all tremendously valuable to our long-term growth story. We will always be looking at opportunity. I think we're very good at integrating companies, integrating them. That means getting the economic benefit and the long-term benefit of the value of putting the 2 together. You could get economic benefit, but not have integrated the property, so it runs in a manner that's long term efficient. You look at what we did with Ondot, we were an investor, we bought it. It was a card control and digital card capability. And we moved it into mobility, and we made it way beyond what it had ever been. And we're about to tiers of 100 banks and really usage up 4x for those banks. So the banks won, their clients won, our shareholders won, that's my favorite, right? And I'd say that you should expect us to be trafficking all the time. I would not read anything into our authorization for repurchasing same shares. I would not think anything about that other than it was our job to go in authorization. There's nothing time-bound on that number, and we feel great about our balance sheet. We feel great about our firepower, and we feel great about our businesses. And we think if we were to buy some point, we'll have to integrate it very well.

That's very clear. As we're coming up on time, I'd like to close on the FinTech segment. One of your primary competitors continues to highlight elongation of sales cycles in their bank technology business, albeit in the large bank space, this being FIS. What factors continue to drive demand and revenue strength in your own fintech segment?

Yes. I mean it's -- I got to say, I really can't -- I work in this company. And I go see bank CEOs, it's not every day. I talk to them weekly all the time. There's tremendous demand for our product. The opportunity is very large. I don't know about a slowdown. But I'm not saying that there's not somewhere, it's just not in our pipeline. We've added to our sales force. We will continue to do that. We feel we are forward leaning. Our surrounds are off the charts good. And I think the combination of our deposit systems, our loan systems, our surrounds, our client base, our ability to continue to go up the stack on clients, too. I think there was a point in time where we were viewed as handling a smaller client base, but you could see even in mergers at times where we have a bigger bank and a smaller bank, didn't really matter whether what we kept, what we could compete. And now we have good old Fintech, right? So that hasn't yet turned into Clover, but like Ondot has done what it has done, like BentoBox has continued to do it, it's done like other acquisitions over time, including DNA which has turned out to be a great landing platform. I think Finxact is world-class, and it will be good for our clients and for our prospects.

Frank, thanks so much for your time and insights. Greatly appreciate the wide-ranging discussion. Have a great day up ahead.

Season baseball season.