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

My name is Dave Koning. I'm a senior analyst at Baird covering fintech in payments. I'm very pleased to introduce Fiserv. We have Frank Bisignano, the CEO this morning. Fiserv is really the leader in fintech. They have the most core bank clients that run their technology every day, the most merchants on the merchant platform. And when I first did this, I think in 2006, we had Jeff Yabuki here, the streak of 10%-plus EPS growth hit about 21 years. Nobody in the crowd is probably that age yet, today, we're at about 37, 38 years and probably half of the crowd is younger than that streak. So congrats to Fiserv for that. Maybe we'll kick it off. Acceptance is 45% of revs. Maybe we'll kick it off with really what do you do there? And why have you taken so much share in the last few years?

Well, I think, first of all, Acceptance is a really, really large market. And I think it's a continued growing market. And the growth in that market is around other value-added services. So if you think about the evolution of that business, it's really changed over the long haul. And we've invested in technology. So you have Clover at the front. I think Clover is a standout performer. I think its numbers speak for itself. We're proud of what we've built, and that's a heavy investment that we continue plowing in. And I could talk forever about Clover given the fact, we started with $50-plus million investment and 8 engineers. But then we -- as we evolve the company, we veered into geographies and we built out an ISV business, and we built out Carat. And so it's really transformed itself over the years. I also think that as I was coming here, I kept thinking, these are young businesses. They're not old businesses, right? I think we probably got the first Clover really in market '16. And then when we got that wrong, we came back and did it again and guided a little more right and we continue to work on it. We kind of bought a couple of really good properties that we liked in CardConnect and BluePay and built out a ISV business, we see that having tremendous growth opportunity, and we see the opportunity with Clover on that. I think we've been very fortunate, and we had a start-up in Brazil that turned into a fabulous business. We have great countries presence that we feel very, very good about. And we're leaning into value-added services. And so I think it's no one factor. We play in a lot of space. We leverage the company very well. I do think we have the best distribution in the industry, we love our bank partners. We like to think we're the partner of choice in many ways, and that's in distribution beyond banks, but specifically with banks. We've built out our own direct sales force that we're able to continue to leverage and obviously, that price point. We still have bigger dreams and digital acquisition and probably haven't got that to where we think it can be or should be, but we will continue to lean into that. And then you look at us in the vertical space. We have a deep end on growing out restaurant. We think we know what to do or I should say we know what to do, but I'd like to say I think because you're never sure until you brand to market. We've deployed our capital well in these spaces. There's great competitors in these spaces, and I admire each of them in their own way. But I think it's a large market. It's a growing market. We've invested heavily in the market. We compete in every aspect of the market. And I think we got a great team on the field. Probably longer answer than you wanted but I could one on the whole however long we're here on that alone. Heaven knows we've spent enough time on it.

No, that's great. And I mean do you think you take share in every part of the market in Clover? You've got the little merchants. We see Clover everywhere now big-box merchants. You do online merchants. Are you taking share kind of everywhere?

I think I want to be very, very careful. We compete heavily. We're growing, right? We're growing both in value-added services. We're growing Merchants. We don't -- like we said on Merchant, I thought it was important, and I'd like to always anchor us back to that March Merchant presentation where in my very simple way of thinking about it, the job is to acquire more merchants and to provide more value-added services. Or in simple language, sell more to those merchants with a premise that we're helping them grow and run their businesses better. So I think, in general, we feel like those 2 items causes us to be able to get the growth rates we're getting. And be able to bring more capability into those clients. So -- and that's outside the U.S. and inside the U.S. And we feel very good about our business outside, and we'll have it inside. There's -- it's a very, very large market. Everybody will focus on a few names. But for a long time, there'd been a whole lot of names. There's new entrants. And I think the competition is good for all of us. But clearly, our growth rate demonstrates what we've been doing.

And I think in Q1, I think in Merchant, you grew 18%. The market was probably somewhere in the lower double digits. So clearly taking a lot of share. What have you seen in April and May? I know that the Visa numbers show maybe 4% deceleration thus far in Q2 relative to Q1. I mean you just kind of track the same type of data?

Yes. I mean we're not an exact match to them. We're not really an exact match to anybody. And I'd like to always try to remind us that when we went to Merchant Day, we laid out, we have $1 billion of processing revenue built in there. And we love that processing revenue, but that's going to perform differently. And that shows up in our numbers. So when many times people want to look at volume and then look at what the spread was, we have different elements inside. We have a huge petro business. And obviously, that was coming off a large inflationary period. Now, we don't get paid on dollar. We get paid on transaction. But the natural way for people to look at are those type of swings. If you look at our Latin American business, we're -- it's probably not a very good comp again to Visa. We're clearly against all expectations feeling very, very good about it. But we have this beautiful franchise that doesn't really -- and the way we make our money doesn't really exactly compare to anybody. But we definitely pay attention to everybody. And I would say exactly what in the market, what Visa is saying is what equal what we're fundamentally seeing which we did have outsized comps also around the petro a year ago and other staple products where we have strong business lines. You could take grocer also somewhere in that space.

Yes. No, that makes sense. And the one kind of big thing a lot of investors pushed on last quarter, I think you did 5% volume growth, 18% revenue growth. So that yield spread was like 13%. And there are a few things, there's price, there's mix and there's just selling more stuff. Those 3 things.

That's our favorite, selling more stuff.

Yes, there we go. Any 1 of those 3 a bigger, smaller, like what's really kind of the focus of those 3 kind of mix, those 3...

Well, our complete focus is, first of all, doing the basics very, very well and having leading technology platforms. And then how do you bring other value-added services to the table. We watched a large inflationary period, and we thought value-based pricing made sense. It clearly in the rearview mirror, did make sense when we look at what happened within our book which performed fabulously. Our business mix, once again, I go back to this different -- our business in Latin America always have a different set of metrics than our business, say, in the petro space. But I do think it's -- we're maniacally focused on LTV, ARPU and how in that basic sense we sell them the things that they actually need and can buy from us on the value-added services space. So I think it all came together. I don't really forecast that type of delta. I think you've heard us talk about 10% to 13% as our growth rate as we look at this year. I think you've heard us talk before as an anchoring point on the journey, 11.5%. And so we feel really good about what we laid out last year and where we are this year on a $10 billion journey and $3.5 billion on Clover.

Yes. And why would -- let's just say, a restaurant. Why does restaurant choose Clover? There's toast. There's Square. There's many others. Why do they choose you? I mean I love the white terminals, so I'd rather go to a restaurant that has it because they're cool. But why?

I only go to ones that use us.

There you go.

That's like in my family, you're not allowed to shop somewhere that's not our client. It's really not hard. I'm not really asking a lot of them. Rattling them down, but we would be done by the time I was done naming the names. I think, look it, we have fierce competitors in the space. We're on a journey in the space. We have really good market share in the space. And I think, first of all, Clover is a standout that people like the functionality of. It do everything imaginable, we have still a build. But in the sweet spot of where you want employee management, where you want other value-added services, where you want information, where you want the capability to communicate front to back to store, where you may want Clover Capital, I think those are the places that we win. I do think that restaurants are a place that just has so much opportunity. Obviously, inventory management falls in that category, and yes, we're used for that. I think what really to think about is that it's building function to help businesses run their business better. That's really what Clover and any value-added services we bring. And our full objective across the whole franchise, across all the businesses is to help out our clients grow their business. And when that's happening, it's a very good feeling, and that's really the management of the place.

And you bought BentoBox to get into more software around restaurants when you also sell Acceptance. Are there other verticals that are doing well either with software or where you might consider buying something?

Well, that's like a really, really big, long conversation. But why don't we go and anchor on the things we're highly engaged in, and I put them at retail and services. And so when you think about those, you should expect us to continue to invest in those. Obviously, our investment, we feel as good about our organic investment in the business as we do inorganic. We've been super selective, at least, in my opinion and I think super selective as what we should be in deploying capital to acquisition. We've been super fortunate, and this is kind of across the company. But you look at Bento, we've integrated it well. It's part of the fabric of the company. It's part of our build out that restaurant vertical. We were an early investor with them, so we knew them well. And so you should expect us to do things like that. But it's always -- it's not really about, are we acquiring something because we think it's super special? Yes, but it's really about how do we leverage it across the fabulous franchise we have? How does it fit into Clover? How does it fit into our distribution networks? And that's kind of, to me, part of our formula, our formulas and if you look at all the acquisitions we do, how do we leverage the distribution of this franchise, how do we leverage the technical capability of this franchise and be able to take it to a place that the founder never thought they could? And I think if you go through the track record, you'd find that. But the short answer is retail and services.

Yes. And then AI, that's a big theme everybody is talking about today. Is that something that -- whether it's Acceptance or really any of your businesses that you would use to either help generate revenue, save on expenses? Is it a threat? Like how do you see AI as we sit here?

I just think we've been at AI for a long time. And maybe I was sitting here 2 years ago and somebody would say cloud, and I was like, well, Clover was built in the cloud. So some of these things, because I think at heart we're technologists and we run a technology company, the amount of AI we've deployed in the services part of our business for a very, very long time has been there. We applied it in the fraud and those types of areas. I think you'll see us do more of it. I haven't got up here and talked about the AI that we've used for 3 or 4 years that actually plays into our margin expansion story in a lot of ways, our ability to grow at a rate that I believe creates very good, strong positive operating leverage in the core businesses we have. So I think it's part of our fabric, whether it was using bots early, whether it was then moving on to taking all about servicing capabilities and using it to fundamentally answer questions or clients and whether it was to give us better algos ultimately to provide around fraud but also in the front end of some of our business products or fraud detection.

And I guess you mentioned margins. Margins, I think, 32% last year in the Acceptance business. Some of your competitors are like high 40s, and I know a little of that is just accounting or probably a lot of it is accounting, but is there still, do you think, plenty of room?

I think it's probably business mix, too. But I'd anchor us back to what we've said, you should expect us this year to grow margins across the company greater than 125%. There's multiple elements to margin expansion. Us, the element we like best is positive operating leverage that continues to drive growth, investing in the business while running constant vigilance around operational excellence. And a lot of the AI elements we talked about are really an operational excellence to better serve your client and get better outcomes. So I think we have continued to expand margins across all the businesses, and you should expect that from us.

Great. And maybe if we move to the fintech business, 20%, 22% of revenue, something around there. You came on about 4 years ago, now you get to run that part of Fiserv. Is that really fun to run? And maybe how close do you think, if you are to say today what 2030 would be, I mean it's such a stable business, could you get pretty close to getting with the revenue right, you think?

Well, fun is an interesting word. When fun pops into my head, it might be watching a perfect game at Yankee Stadium or something. That may sound like fun to me or hanging out with my family and kids. Although work is fun, I mean -- and we got a great company and there's a great team. So I'll start off, I do get up every morning fired up about what we're doing in serving our clients. I think your underlying question probably is like, hey, you got this 85% recurring revenue business with these long contracts that really gives you great visibility. Does that feel better than a 10x levered first 80 with 0 revenue growth? Yes. If that was the question. Now through 2030, geez, I get up every morning, the first thing I want to do is read the front page of the papers to figure out what the h*** is going on in the world now and what I missed between 11:00 p.m. and again up early. But I would say our visibility is very clear. Our opportunity is very large. But the thing that I would say, and I thank you very much for your kickoff, because I got really good visibility into double-digit EPS growth for a really long time, 37 years record. And if we're able to produce that during the pandemic, I think you could be pretty sure that, that journey will continue in a very strong way. We always talked about when we just kind of -- when we said 4% to 6% is a range, I don't think we ever actually had a 4% straight up. And we did 4%, then we did 5%. We acquired Finxact. So I think it is a fun business. It's got unbelievable opportunity. I think the reality is our surround products, coupled with the capability and then even things like we did with acquiring Ondot, creating CardHub, putting it -- integrating it to 1,000 banks into the mobile banking app, just talks about the ability, as I like to say, to get at a greater TAM than we actually realize existed. So we have great aspirations for where we can still take that business even though I think when we said 4% to 6% people wondered like, can you actually do 4% to 6%? And we did 4%, then we did 5%, and we're feeling and those are straight up and we're thinking those are -- and then when you look at banking as a whole, which is a good way to think about it, those numbers have performed extremely well when you bring the other elements of it. We have a privileged position. The fun -- if you wanted to find the fun part, it's the privileged position of being able to go see those clients, understand their strategy and then figure out how we help fit in their strategy to drive their growth. That's the fun part, the privileged position.

Well, great. And I guess, a few years ago, there was a lot of fear that new fintechs were coming into that space and could displace core processors. I'd say today that fear's a lot less. And you have Finxact actually now, too. It's maybe 0.5% of revenue in that segment or something, it's not very big. But what's the outlook for that? Do you think you could shift a lot of your cores onto that newer platform?

Yes. Maybe take a step back for a second. I wrote a shareholder letter that kind of anchored on fintechs, right? As probably some of you know, I spent a large part of my career in I can say the finest financial services firms with the best leadership around, and I was privileged to be able to do that. And I always have a view of what fintech was, and that was companies we engage with that provided technology, and Fiserv was one of them. And then I feel a period of time, as I was in this industry, that fintech started to mean disrupting financial services. And I always thought, well, that's not the role we have. The role we have is this simple purpose-driven company to help their clients grow their business, bringing better solutions, bringing better technology. And there was a moment where people questioned this issue of legacy companies and I always felt it interesting because I go back to growing up in institutions that were legacy companies. But the one thing we do here like those other companies is we invest for growth. We invest in ourselves. I like to say Apple is really a legacy company, but nobody calls them a legacy company. So put all that aside, we were -- my view is our job is back to what the job was, and there was this brief period of time where people thought we are all going away. And some greater newer set of assets would take over. I'd say the beauty of that is it probably speeded innovation inside companies and creativity around the innovation. And when you take that whole vision and then you say Finxact, because that's where you started with the question, am I looking to replace my clients' operating systems? That's generally what I call them. I like to say I grew up in -- for 30 years in financial institutions where I oversaw a lot of these things and around businesses, a lot of these things, and we never called it that 4-letter word. And then I came here and I thought they were talking about a part of my body or something, and I realize what they were really talking about was the operating systems that we might've called [indiscernible] systems. I don't think it's about taking out all of our clients to Finxact, it's about those who want to and for a purposeful reason, yes. Although we think DNA, we think Signature. We love our platforms and they all exist for a reason. The ones that don't, we've already retired. If you look at a great company they're generally not one-platform companies, they don't scale the one-platform companies. They have different features for different client basis and different needs. Finxact will be a great company. Finxact will be a growth engine. If you remember, I kind of -- I've said and I want to change it. Over the long haul, it will have an effect on our structural growth in a positive fashion. It's too small to have that conversation today. But I think is the best asset for the next generation. I think what we're getting to do right now with One and Walmart gives us this unbelievable strategic opportunity to put this front and center is a very large processing platform that can serve any client of any size. So I think over the longer haul, as we talked to you, you will see us talk about structural growth or changes. For right now we're who we said we are, 4% to 6%. You're going to have quarterly fluctuations, but it's a very visible business what the big pipeline does.

Yes. Great. And maybe to talk about payments for a minute. One thing I think is underappreciated, payments is a little over 1/3 of revenue, and about 1/3 of that is debit. So about 10% of total revenue is debit. I think you've been growing 10% plus in that just based on disclosures from the 10-Qs well better than Visa and many others in the industry. So you're taking share also in debit. What's driving that? And secondly, with the new debit online routing rules, can you take your merchants online and push them more towards STAR?

Well, I'd never push my merchants anywhere, I would collaborate with them on solutions. But think about it this way, the ability to take STAR and Accel allowed us to be able to have a very, very good offering. We have a strong debit offering for our banks in general, and I've always believed the combination of a debit network and a merchant-acquiring business with the other assets around we have affords us a lot of long-term opportunity. If you think about how we participate in the retail private label space on credit and you think about the opportunity to bring that credit offering, that merchant offering and a debit offering to that swathe of retailers, we believe that's another vision in capability. And I do think the reg change you'd have to put as a positive. We weren't able to compete in a place that we can't compete now and that has to be good. We'll see how it unfolds, but we can see demand through inquiry and through opportunity right now around that. So I think we also have done a very good job and probably not spoken enough about any integration of our debit and credit product for our smaller institutions that gives them a very strong one-stop shop that neither company had. It's one of those synergies that we probably haven't shouted loud enough because people want to talk about and we do talk about the big target, Desjardins, the big pipeline of wins. But we definitely had wins on the low end of credit and continue to onboard and created a credit- and debit-integrated offering and bringing other services like CardHub with Ondot that really has expanded back to this concept of the expandable TAM for us, which allows us to grow at a different rate than we did before in debit and everything around it. I think that debit-credit thing, we had a vision for it. We use what we call the Optis platform, which really has been fueling large merchant capability, but also when you drop down -- I mean a large issuer capability when you drop down, it's very good for small issuers.

Yes. Well, great. And that's about all the time that we have, so please join me in thanking Frank and Fiserv.