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

Guys, why don't we kick it off? Again, I'm Darrin Peller from Wolfe Research covering payments and fintech. Really happy to have Frank Bisignano, CEO of Fiserv, with us today. A name that we spend a lot of our time doing research on and we've been recommending for some time now. Also happy to have Bob Hau, who's the CFO, there he is, in the room. And I know investor relations...

Julie and Heather.

Heather and Julie here also. There they are. Guys, thank you all for joining us. Really appreciate having you. There's probably nobody -- I was just saying, there's probably no one better to ask about the financial system and the chaos we're going through with SVB and with Signature and others than frank. I mean, he's been through such a background on different financial crises, banking crises, that I think your perspective is would be welcome.

So before we even get into Fiserv, maybe just a quick update from you on what you're seeing in the landscape.

Yes. Everybody talks about '08. I'm sure people are saying about '08. But I'm old, so I was in -- I was buying banks from the RTC in 1990 and understood what bank failures -- I was at the S&L crisis, actually. And I think these things have lots of different attributes. And I last week was in Pittsburgh; was in Topeka, Kansans; was in Springfield, Missouri; Summit, Missouri. Had a client in Raleigh, North Carolina. And they're not really focused on this. And one of the things I like to -- I only started asking this question today. Like what happens in a bank on Monday morning, right? Somebody says, "Hey, that's when bank management has their management committee." Well, before that, they have an asset and liability committee meeting. And that's, every bank I've ever known and have been in. And I would think that's true for our clients. And when you go see a less than $10 billion bank in Topeka, Kansas that was run by a grandfather and then run by a father and then run by the son, that bank really has not veered very much from its ways. And I had dinner with a client last night that kind of talked about their business. And over the weekend, nothing changed in their business. So I'm not saying we don't have a problem in the system. But I think there's a lot of very strong -- and when I think about it, for us, it's not the majority -- whatever is the 90-plus percentile of the institutions we serve have not veered from how they thought about their ALCO committee, their ALCO structures and what they do to run their bank. Yes, we're a key partner for them many times in their digital transformation, not in changing banking the way it happens in Pittsburgh or in Topeka, Kansas. So we have a playbook, one that I remember from the '90s, we used in '08, and it's really about how you batten down the hatches, how you protect the franchise, how you take care of your client and what you're prepared for during a crisis. We'd meet at 7:30 in the morning, and that would be true on Sunday morning, which was probably 6:30 in some people's mind. And our team in California, it was more like 3:30. And get back together late that night and make sure that we're doing that. But what was interesting, I was in these clients' offices on -- with bank CEOs, while it was Thursday. And obviously, back home, we were shoring up the defense and thinking about offense. But the bank CEOs weren't distracted because they were concerned about what was going to happen. Yes, there is a list of names, and there's always a list of names. I've never -- I'm not proud that I'm old, but I've been through a bunch of financial crisis-es, and there's always going to be a list of names and there's always going to be actions and there's always going to be regulators. And then there's always going to be people like us, who are figuring out how to serve our clients really well and go on offense for our clients' benefit and our shareholders' benefit.

So what do you think? I mean, we're -- we now have seen 2 banks stepped in, fail, are closed...

They got closed.

Yes. And so when you think about...

I'm not sure if some people are declaring they failed.

All right. But either way, I mean, in terms of the ramifications on the system for your other customers, have you seen anything changing?

I would say, like I said, large majority, super low -- whatever high 90% is, I don't know. It feels like that's even past supermajority. Their volumes on Monday in and out were exactly the same. Whatever names everybody here has on their list, their volumes were higher. Our client base, many of them see opportunity. opportunity to do more with clients in their regional jurisdiction.

Frank, I mean, just maybe speaking more specifically to Fiserv then. I mean, you guys -- I think you do core processing for SVB, for Signature. Again, we've estimated it at probably less than 0.5% of your revenues. But it's probably not that material. Maybe you can put more color, I don't know. Regardless, the...

We do SVB DINB is our client, right? There was SVB, and now they're Santa Clara.

Yes. You're still helping them out, in other words.

Well, no, we -- the way this kind of works, and maybe it's useful to talk about it because like, if you're old like me, you've been doing this stuff for a long time. I used to do it as a banker. Now I have the benefit of serving thousands of banks across America. They will all have a different flavor, but the FDIC steps in, and they come and run the bank. And we talk to them and they say, "Hey, continue doing everything you're doing." You should...

And you're going to get paid for it.

And you're in business with them. And we're not going to continue to do that, unless we get told to or else we're going to create risk in the system. So we're -- and that's part of the playbook. So your number is significantly higher than accurate. And today, in some strange way, we actually are doing more for them than we were on Thursday. We're doing -- and remember, if you want to take '08 and think about today, I don't think it's the same thing. I'm not really sure what thing it is. It has all types of characteristics. But we get paid for transactions and accounts, right? From '08 to today, only one thing has happened to transactions and accounts, they've completely significantly grown, right? So our expectation is that, that will be true. And our expectation is, given the company we've built through this merger and the investments we've made in technology and the digital transformation, that the first thing was to do, to play defense to make sure the defense is shored up, make sure we know how to get everything we need to do. They're in a semi-crisis, or at least a crisis, at SVB. And once you've got everything locked down and you're lined up with your new client, right, like something like -- the other day said, "Our new client wants to know if we could do this." And they were talking about, fundamentally, the FDIC was happy to hear that's how -- they're all go ahead now. And then ultimately, those accounts, no matter what happen, are going to end up somewhere. And given our market share and given everything we do, I expect to be servicing more accounts, not less, and doing more transactions. Remember, we were not the -- we had a growing relationship with Signature that was very, very strong, but we weren't their core. But I think the macro is like, yes. And like Bob and I would say, if you go back to '08 and you use what we used as organic growth. Obviously, that Fiserv and this Fiserv a completely different company, but has all the good bones that original Fiserv had. That year, revenue went down 1%, and that was a pretty big problem.

A lot worse than this. So it sounds like you're seeing -- what you're seeing in terms of your exposure and you're seeing in your customer base hasn't changed your view of your capabilities on your targets for this year much.

Not at all. Not at all.

Okay. And if we go back to the recent trends from last quarter for Fiserv, I mean, they clearly continue to show strength across the industry, across all segments. But let's just go into a couple of them now. I mean, Merchant and your Acceptance segment has been leading the industry across the board on revenue growth rates. And you're seeing the benefit of not just sound volume and some mix improvement, but I think pricing and just your ability to offer more value-added services.

Yes. I mean, look, you and I have been talking about this business for a long time. And I remember when we didn't have a Clover in market, and then I'd say you're going to see Clover all over. And you were kind enough not to laugh at me, but a lot of people did laugh at me. And I think today, I have tremendous respect for all our competitors. And today, we continue to believe our job is to grow merchants and bring more services to merchants and fundamentally ARPU and LTV. I think that journey has proved itself. I think the assets we have hang together very, very well. One thing I believe across all of Fiserv and it's true the Merchant business, but true across the whole company, but I think specifically, really, really true in Merchant, we have the best client base in the industry. If you got the best client base in the industry and you're continuing to grow with them and helping them grow and bringing more product to them, this flywheel effect has really taken hold. And you see we came out and we felt very committed to take every question about Merchant off the table. And in March, we stood up and talked about that $10 billion business and the $3.5 billion in Clover, and we feel great about that trajectory. And you should expect us to do everything we said we're going to do.

The underlying drivers in Merchant, I mean you mentioned some of them: Clover, Carat, obviously, and e-com and omnichannel more broadly, international has been a strong point for you guys, right? I mean, just touch on those drivers for a minute. Maybe you can go through each one of them in terms of the trends you saw last quarter, and if you see those trends sustainably in the next -- over the next year and beyond.

Yes. I mean, look, I'm of the belief that our ability to grow and continue to grow because the pie is so large, right? And we don't have to grow really at the expense of a competitor. We can grow because we bring more software and services. I do think that the ability to take all the software and services in Clover and our industrial strength nature and our global footprint, and that means what we can do in Brazil, in Germany, in the U.K., and I can go on to Australia and continue to go, gives us the confidence in what we're doing. And really, if you look at the amount of capital we're deploying in these businesses, we're not at all concerned about continuing to grow software as a service for our client base. We're not at all concerned about going into geographies and continue to bring more capabilities in Brazil, in Germany. And so you should see it grow. I think we're very focused on how to have Carat be best-in-class. And we definitely know where that heavyweight fight is as we know where the heavyweight fight with Clover was. But we respect all our competitors. We think -- we really believe that we can also address growing TAM because we're going to bring more capability to our client base. And they want more capability from us. And if you wanted to think about a phrase for the large institutional clients for us: Embedded finance. How do we take all of this and bring it in a way that allows them to do more with their clients?

Yes. Clover was $230-plus billion of volume last year. So it's not -- obviously not small anymore, and it was still growing over 20%, right? When you think about the trajectory and the ability for that to keep growing at a healthy rate and support overall merchant growth, what's going to drive that? I mean, you seem like you've reached a bigger base. And I don't think you've gone to the back book yet really much, right?

No. And I mean, it's -- this was really hanging out there with the supply chain challenge. And I think I passed the IQ test, which was would you prefer to get a new client with this piece of software and hardware? Would you give -- rather sell it to a current client? And none of my current client who wanted it, got it. But deploying and managing through the supply chain, we never ended up with a client issue through that supply chain. And we invested a lot of capital early on, on everything...

You bought a lot of stock, of inventory up front...

From buying chips for inventory to buying months and months of inventory, which was not cheap, but I think was the right thing to do for the P&L of the company and for our client base. I mean, ultimately, we run a client franchise. So I think when you think about, okay, yes, the back book at some point, we'll have an attack plan, and maybe sooner not later. But in our growth algo, that's not really part of my growth algo. The growth algo is more merchants, more services to merchants, longer lifetime value and continue to drive that. And I think we got a clear trajectory to it. So I mean, I know people look at the big number and go, "Well, that's a lot. And you think you can still grow that amount?" And the answer is yes and yes and yes. And I think -- I see lots of large institutions I've been in my whole life. They grow very, very well, even when you got a big revenue number up top.

So what you're seeing now is still the sustainability of Clover...

100%.

And when we think about what we saw last quarter, this big, big spread between your revenue growth in Clover and Merchant, and volume growth widened out even more. What's driving that, value-added services benefit or pricing?

You're doing a good job without using that other word, yield, the one I won't talk about. But look, I mean -- I mean look, software has become a component. And you look at that software spread and the penetration of value-added services is -- really matters. And then when you look at -- like I've always tried to say kind of -- you've heard me on this for years, Darrin, like we have an unbelievable portfolio that is very well balanced. But like you saw on Investor Day, we have $1 billion of revenue from processing, and that's a volume number. That increment on that dollar revenue is sure different than a direct Clover merchant. So sometimes, that volume to revenue gap has lots of components. And when I'd say that in the old days, I'm old, so everybody can wonder in the old days, where people thought it was like an excuse for -- a number is just kind of a reality. And that's why I loved, at that Merchant Investor Day, to recognize we do have this $1 billion of processing revenue. We don't see it as a big grower, but it's sure a good base, and that will have volume fluctuations to it. But I put software penetration and VAS at the top of the list.

A lot of that is Clover, right? But not [ all of it ], I guess.

Yes. 100%, yes.

Okay. And then moving to Fintech for a moment. I mean, again, an area that you obviously made an acquisition that's been helpful on more real-time, cloud-native, core processing, right, Finxact.

Yes.

So just touch on the dynamics there, what the trends are that you're seeing in that business. Especially now with -- I think, banks are there -- are banks going to kind of take a pause? Or is that really unrealistic to think?

Well, I mean, I could get through this week and figure out what really the heck is going on. I'm not -- I was concerned yesterday morning. I'm as concerned this morning. Let's see how this manifests itself. I'm not prepared to make any predictions on these type of things. But I think the bigger strategic question you're asking is what are financial institutions looking for in terms of capability? And so we had a very good real-time core in DNA that we believed in a lot. And that's really what's been fueling growth. Finxact is not a growth engine yet, but it is definitely attracted more clients than probably any other defined cloud-native core out there. And I do continue to say that 4% to 6% that we guided to did not contemplate a contribution from Finxact in any real manner. And at some point in time, we'll come back and talk as Finxact continues to show strong traction, but not at the expense of our client franchise, that we should talk about what we think of the future growth rates for that Fintech segment are.

Okay. And moving to just payments for a moment. I mean, the other -- there's a combination of areas, but whether it's bill payments or it's our issuer processing, I mean, do you think you have the right assets to do what you need to do in those categories? How are the trends there?

Well, let's kind of tick down the stack a little bit. You heard us talk about Target and Desjardin. That was off of the back of 3 other large wins and us talking about $120 million. I actually saw one of those CEOs that we onboarded last night, and we had a wonderful talk about how great his conversion was and how that business is growing. And by the way, there's somebody who says they didn't necessarily see anything change in their business from last week to yesterday. So we see a lot that we're engrossed in, but there's a lot of the country continuing as they were the day before, and none of that's lost. I mean, I don't think '08 had that feeling or effect. So I think our issuer [ roster ] is very, very strong. I think we have in the combo of STAR and Accel and how we bring that to our institutional clients really is helpful to their business model. I think you're going to watch us continue to invest in bill pay and roll out some capability in SMB space that we hadn't had before, which really is an open opportunity for us. And we continue to serve our client base in this space. I think our clients are very bullish on payments. And if you think about how we organize the place, sort of banking division and RM focus and ability to deliver the full franchise to our banking clients, these capabilities are very, very large. And so we feel great about our growth rate. I think we ended the year strong, and you should expect us to continue that trend.

So that looks good for the year, too. Putting it all together, when we think about the guidance you gave, I mean, I think it was 7% to 9% organic revenue growth, 20 -- 12% to 14% EPS growth, right? Just touch on the assumptions you built into that again. The macro assumptions, doesn't sound like anything's changed from your confidence level around it, but...

Well, I mean, it's an interesting comment because like I thought about this some time between, I don't know, over the weekend, whatever time it was. We weren't battening down the hatches and preparing for offense. And I was like, well, we had 7% to 9% with a mild recession. I'm trying to think about how this is playing into that. I don't feel bad about 7% to 9% with a mild recession right now. I've kind of felt generally good about how that top is performing. And we got to take a deep breath and see what happens this week. But we did say, without a mild recession, we thought about the opportunity to be at minimum on the high end, if not, do something else. But...

See the macro and how things shaped out. Yes.

Yes.

Good. When you think about what's happening in the market now, though, I mean, there's been questions we're getting over flow of deposits to maybe larger financial institutions or spending changing. Does that change your views and your priorities on investing going forward, maybe trying to move more upmarket? Or anything else?

Well, I mean, I don't know about trying to move upmarket because I think what you've experienced from us, is wins is at a weight class that we didn't compete all that much 3 years ago. So I think we already hit -- kind of began starting that journey. We have mastered that journey. And these are long-cycle deals that -- but I think our capability to, and our propensity to want to, serve all financial institutions is very, very high. And specifically, where some of us came from, larger institutions, are pretty normal to us. I'd say, secondly, I don't -- I didn't walk into a meeting on Monday morning and talk about how we're going to spend less or do less, because as I actually talked about how we're going to spend more time with our clients and do more with our clients and create more opportunity to grow. So that's kind of what's on my mind about what's going on right now.

Okay. Frank, you've told us, I think Fiserv has had, what, 38 years, including this year, if I remember correctly. This will be the 38th year of double-digit EPS growth for Fiserv.

Yes. Wait. We booked 37.

You guided to another this year. And the margin coming out of last year was up almost 300 basis points into the fourth quarter. Where are these areas of efficiencies coming from? Do you still feel confident you could show margin expansion this year, next year and beyond?

Yes. I mean, look at, we had talked a lot during last year on how the year would play out. And it played out how we said it would. We said, "Look at, we brought M&I into the year. We took it into our expense base." When we go to the end of the year, we'll have our dual staffing come down. We'll be able to single-staff. We'll co-locate people. We are a in-office company, so you can boo me at a stadium for that. But that's just kind of the way we run our company. We expect, we serve all our clients, serve their clients in physical locations. And I feel like we need to represent our client base in the manner. So we got those benefits and now it's what you saw in Q4. We spend a lot of money thinking about -- or we spend a lot of time thinking about, and that money applied against how to just do the work better. I mean, we're deep in the details of how we do everything. In some ways, we have a manufacturing and engineering mindset on how the processes inside the company work. And so I hold us accountable to do a better job every year. And that's -- we still got opportunity inside the company to be better.

I'm going to ask one more and then turn it to the audience if we have time for a couple of questions. So just on capital allocation, Frank. I mean, you guys have obviously made some very good acquisitions. Clover was one of them years ago. But even beyond that, whether it's some of the more recent deals around integrated payments. Going forward, touch on your thoughts on allocating capital, whether it's M&A or buybacks or other sources -- uses of capital. And then also free cash conversion. I think you talked about just under 85% free cash conversion embedded in your guide. Is that what we should expect now consistently more going forward?

Yes. I hope I didn't say just under 85%, Bob.

Well, it was a dollar number greater than, I should say. Yes.

You scared me for a minute. I think a couple of things here. We like to return to our shareholders. And so it has been a tried and true formula about deploying free cash flow to buying back shares. I think we've been very balanced, If you look at over the past few years, how we allocated our capital by investing in growthier assets also. Not really buying EBITDA, but actually buying an asset and thinking about how we take that asset, whether it's Ondot. Ondot's a beautiful example of something we're an investor in. And we like to invest in smaller properties, get to know the smaller properties, get to know the founder. We like keeping founders. So invest in the property, come to understand the property and think about how you bring the property into the company. What comes with that is more cap -- when you're really integrated, so we took Ondot, which was really a card control capability that was best-in-class. But we not only did that for our cardholder base, we embed it in our mobile banking product that allowed us today to have almost 1,000 banks with a fully integrated mobile banking product that then allowed them to have higher activation rates on their card usage capabilities through it. So we're helping our clients make more money. We're making more money. We are spending more cash on the integration besides the acquisition. But customer sat up, customer loyalty up, helped our clients grow their business. So we like to buy those type of properties, that I think we actually created a larger TAM than it had, and an opportunity beyond what we had, and a banking experience that you probably only find in the largest institutions, and we spread it across 1,000. So you're going to see us do things like that, and you're going to see us buy back our stock when appropriate. And I think we've been balanced on it. I think it's working well. We're not concerned about leaning in. This might be a market where we're going to lean in more on opportunity. We think we know how to buy things we need. But I wouldn't try to overread my lean-in comment. It's just the world has got more opportunity and I kind of think we got a good hand. And I think we're -- people think we're going to acquire, and we treat them well, and we help build their business past what they could have built it.

Good. All right, guys. Happy to take a question or 2, if you have.

I bored the hell out of them.

I think you answered everything.

Just in terms of acquisitions. When you talk about leaning in, more opportunities out there, any particular areas?

I mean, look, I think about e-comm, I think about digital, I think about products that we can distribute through our large distribution, our large client base, that can advance the journey we're on. I don't -- if I had something I want to tell you, but if I had it, I would give you a better hint.

Thanks. Any other questions, guys? Okay. Why don't we leave it there then. Thank you very much.