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

[Audio Gap] that I believe we constructed in a way that's unparalleled and the construction of it was well thoughtout, it wasn't happenstance. So we can talk about that after. But I remember thinking like, oh, geez, I don't want to break the streak. Take this company and break the streak. Do you want to be the person who broke the streak? I also said to myself, I will not allow us to be beholding to the streak to trade off long-term future. So that's a balancing act. How are you going to keep the streak and invest for growth? And I think I will come back later to the construction of the company. But if you look at today, the double-digit growth, I actually think is different than previous double-digit growth. And yes, this is how 40 -- we're going to be 40 years old this year, maybe 40 years old, but I'd like to think that we're really 5 years old post merger. And so we're a young company in a lot of ways. But we keep the value of strong free cash flow model on the ability to invest and the ability to grow the top line at a rate neither company did, which is one of my favorite attributes of the company, like we took a, call it, what would you call Fiserv grow at what, 3%, 4%. And you probably never spent enough time even studying First Data because you guys maligned it so much. I'm over my self-esteem problems. But at the end of the day, I'd say, on a good time, that was a 6% grower. It started as 0. So it's a little odd to take a 6% and 4%, and say, oh, we're going to grow 7% to 9%, which is what we originally guided at that Investor Day. And then we talked about a free cash flow model and people thought when we talked about 7% to 9%, we were like what are you trying to do here. But we always had deep belief in the assets inside the place. So now we sit here 5 years old, on a 40th anniversary, and I do think the ability to generate that top line growth and the double-digit growth. And by the way, construction, if you look at the P&L, we probably have better OI, operating income growth than we did earlier in our life as a double-digit EPS grower and you should expect us to do that, expanding margins, free cash flow, tremendous distribution, the ability to grow the top, the ability to bundle products, all kind of -- that's as excited and I think we're a young company. I feel we're a young company. I think we're a young company. I could see the amount of opportunity for multiple years in front of us, yes.

Yes. Well, thank you. And maybe we can start out with the Merchant segment. It's about half of your revenue, the First Data segment really. What -- I guess, first of all, what are trends in kind of May -- in April and May? Are they pretty similar to Q1? You don't have the leap day benefit, but what are you seeing so far?

Yes. I have this early on -- we built a data store years ago and I'd say, like we should know every day. And if you came up to our offices, you walk by and big screen showing 40% of the U.S. traffic that goes through our veins, what's going on second by second, and I'll look up at average transactions for a second. I'll look at peak transactions for a second. And thus, the birth of the FBSI because I thought that information was tremendously valuable. So there's the FBSI and then maybe there's -- I just made this up, I've never said this before, the FB pattern recognition of what I walked by every day and seeing where America is spending their money. Now we have that same data set across a whole bunch of other businesses and geographies. As you know, we reported a strong April number, actually looking stronger than Q1. We talked about in the beginning of May, feeling a little slowing. It's still a strong number. The April number was very strong. This number has backed off a little bit. So the consumer is spending, the consumer is spending. I don't have June data fee yet. But I'm sure you want to know that, too. It's coming to FBSI at the end of the month. So I think there's no -- and I think -- maybe I should say this because I know last time I said May was a little slower than April, people thought I was trying to tell them something, it was completely within our expectation range just for clarification. Growth is good. I don't -- so that's what we see right now.

Yes. Okay. And you have a lot of pieces of merchant. We'll ask a little bit about Clover and stuff in a minute. But when we look in aggregate, when we look at volume growth and revenue growth, it seems like you're disconnecting in a positive way, where if volumes grow mid-single digits, maybe a little better in the U.S. for the overall Visa, MasterCard, you're even growing a little faster than that. But then revenue is well above volumes. And maybe talk a little bit about -- is that the expectation going forward that whatever volume growth is, revenue will be much better and why?

Well, go back to even us re-segmenting the company and we -- I did a really bad job for a really long time. That's not really good if that's your like description of yourself. I did a really bad job for a really long time in getting people to understand, we have this -- I used to say it, but I think Bob Hau, our CFO, and Julie did a great job in breaking out processing. So we can end the debate about volume and move it to the categories they should belong, which is our SMB business and our enterprise business. And so our expectation is that we should -- I always kind of said this, we should -- we're not going to really -- you got the numbers coming out of Visa and Mastercard, and they're always going to be a little different because of mix and our numbers will be a little different because of mix when you go to SMB and enterprise, but we should fundamentally -- and I think we had, with the value-added services, we should be able to generally keep the pattern we have. We have software. We have value-added services that are real. We're underpenetrated in all of it in my mind. So that's the journey. And that's why I say this is super early innings.

Yes. Okay. And SMB is about 2/3 of the Merchant segment now. And Clover is becoming a much, much bigger part of us and a lot of people ask us, you did about $2.1 billion of revenue in Clover in '23, so last year, and you're expecting $4.5 billion in '26, I think it's over 25% CAGR. How do you get there?

We will just keep doing what we're doing because all you got to do is look at our CAGR, but that's like the sentence, period. Now we'll give the paragraph sitting underneath it. The paragraph underneath it is we are not overpenetrated at all. Our distribution networks will continue to grow. Our penetration in our distributions will continue to grow. Our value-added services will continue to grow. And then you got international expansion, you got ISV. So it's kind of, for me, very clear. I understand those are big numbers, but when you look at our total revenue and the size of the prize and our total penetration, it's really kind of basically doing what we're supposed to do, right? It's -- yes, it's work. It's work. I'd encourage everybody -- this lady is going to kill me, by the way. This lady is going to kill me positively. I'm going to encourage everybody to watch the Duke Women's Basketball coach [indiscernible]. And she's telling the team, anything that is a really good outcome is hard, right? We never get up, but I grew up in a house where -- I just said to somebody, yes, I grew up a house with some -- in a holiday dinner table with some Hall of Fame athletes. And they pound into my head from a very young age the job -- great athletes make hard plays like easy. Building Clover was not a simple chore, especially if you had First Data as the backdrop. But today, it's kind of forgotten about. So I don't -- it's our job to do this.

And when we think about Clover, it's still a little smaller part. So SMB is about 2/3 of Merchant, right? And Clover is still a little smaller than the rest of SMB. Is a lot of this just moving the rest of SMB into Clover and doubling the yield because you have more software and stuff? Or can that part grow, too?

That part can grow, too. I mean, I've been very judicious about not being early on, on the back book, which I think people have all types of theories, which I have kind of shut down on why we have it. But we got a lot of distribution against the front book. There's going to be a moment -- I really think it's about an architectural moment to get there, which is as we roll out Clover dashboard, as we bring tools and people, Clover dashboard can be used to do things while you're not on Clover, the natural adoption to Clover will be so much simpler. Obviously, we have been very, very clear about -- early on, everybody was like, "Oh, that's back book volume, and then we came and said on Investor Day in whatever year it was, the second -- not the last one, the one before that we're doing 90% net new more. You're going to have clients naturally wanting Clover. But the back book will not be at all fully penetrated within that number.

Yes. Okay. And you mentioned the processing that you've now split out. It's only 13% of Merchant. You do...

Only 13%. Remind me what that number is.

Yes. So in total, it's 6.5% of total. I mean, it's tiny, right?

No, I'm actually saying something different, like I think that's like a $1 billion number. That's like a big number where I grew up. I didn't even know what that number is. I couldn't even make that dollars early on.

So -- but what's interesting to me about that breakout, right? You process for BofA, for Wells, for Citi. And there's this thought among, I think, the investor community, like how is everybody growing well? And my thought is I was -- and maybe you could tell me if I'm right or wrong here, those banks aren't as good at selling. So there's a huge pot of, I guess, volumes to go after for Clover and even for some of your competitors, like that pot, you don't make -- you make just little thin spread, but there's a big chunk that you guys can go after there, right?

Well, first of all, I don't know if you know this, but like my whole life was in financial institutions. So when you say banks aren't good at selling, you're like talking about my family. So be careful, right? First of all, we love financial institutions on both sides. Banks are like one of our greatest distribution partners, and of Clover, right? And then back in the day, pre-pandemic, we have Clover sitting inside bank branches and help them actually sign up SMBs for a wider swathe of that. And then we go do the merger and really one of the big premises in the merger was bank distribution, bank distribution, bank distribution. And I'd say, that's still early innings as hard as it is to believe, yes, we've signed up hundreds and hundreds, but we're going to sign up hundreds and hundreds more. The population that's never talked about or thought about very much is the ISO population, right? And we love -- there's a tiering to it. We have agents that just go out and sell our products, right? But they're fundamentally agents of only us. They only have retail ISOs, which fundamentally are only us. And then we'll have wholesale ISOs, which are a little broader, and that's where a lot of -- there's a lot of processing volume coming in from them. They're kind of the market that nobody recognizes. And you can't really tell whether that's growing or contracting. And then you have ISVs also which probably 10 years ago where -- some were ISOs who converted to ISVs. So you have this large swathe. And many times, we're on the front and the back. Somebody is distributing Clover with their processor. And over time, we've done a good job in my mind, even when we acquired an ISO of then getting them to grow, that would go back to even the start of CardConnect and BluePay when we bought them and we've done that subsequently with others like Pineapple Payments. So I think growth continues. We pay a lot of attention to new business formation and try to be in that process. We've spent locally, you'll find us, we feel like in many cities, we should have the dominant share because of our position, we spend time with Chambers of Commerce and banks and anybody and everybody who could distribute us. So maybe a longer answer than you wanted, but I feel like there's infinite opportunity in the [indiscernible], including our bank partners' ability to double the size of their penetration with their clients. Is that helpful?

Yes. Yes, that's helpful.

Yes. I know I talked longer than I should on the topic, but I spent a lot of time on it.

Good. Yes. And I guess last question on Merchant. So we've already talked SMB, the biggest part, growing really well with Clover, way above market. We talked about processing. Enterprise is the last quarter of the Merchant segment. You're doing really well, you compete with Adyen and some other really big companies, but how are you competing there? Why are you gaining share here?

Well, I think there's multiple parts to it, right? First of all, whether it's an SMB or whether it's an enterprise or whether it's in processing, there are great competitors out there. And I will always feel that the better our competitors are, the better we can be as long as we keep our head screwed on straight about innovating and staying in the client's office. I think, first of all, our ability to be omnichannel is highly respected. Our ability to be omnichannel and global is highly respected. Now innovation around Commerce Hub is getting traction, which allows us to be able to bring VAS in and really expand the pie for ourselves. And I think you'll continue to see us. I'd also say, as you look further in the future, this phrase, embedded finance, which took me a while to figure out what people were actually saying. And I'm like, "Oh, we already do that." We may just not represent it where a fray is, kind of like, I was always saying e-comm. We were the largest e-comm processor, but that was by a construction issue as we were a great partner with Bank of America, and they were a great partner with us. So I think ultimately, we're the only company that can run a ledger for like Finxact and have Clover and have a gift product and have e-comm, bring it all together. So I think there's tremendous runway as embedded finance takes off for us to be an industry leader in it.

Great. And one thing I forgot for Merchant, Argentina, we cannot forget about Argentina. It's about, I think, 10% of the Merchant segment. It's kind of within SMB and enterprise. How fast is that just growing by itself without -- like if we take out inflation, we take out currency because there are so many movements...

Yes. I mean, I'm glad that when you did that video, you didn't instead play don't cry from me Argentina. Always anybody do a video or something, I thought it was going to be the walk-up song here. And I'm glad we now got it down to the I-forgot-to-ask question as opposed to the main event. When you peel it all out, look at -- Argentina is a country that you really got to follow history and actually understand it. We were -- it was a fundamental, you can call it, single acquirer market, you either acquired Mastercard or you acquired Visa. We spent time and we were instrumental in getting that change, we brought Clover into that market at the same time, that was right pre-pandemic. And we have a great business in Argentina and somehow -- like just me talking to you guys, somehow that gets forgotten in the discussion. It is a very active market. And so -- and then we love to tell people like when you get to the bottom line, the offset to all the inflation and other stuff is currency. So when you get to OEPS, you get to -- it's fundamentally net neutral, some days I hear negative, but maybe even bigger on other days. And then when you peel it back, I mean, you take it all out, then you take it out of the business. If you peel out all the excess, we're kind of above our high-end in the company and in the business line. So I just -- I think that's coming across. I know you guys have done a good job of understanding it. We probably got better at explaining it. But it's on the other direction now. I think it's kind of -- I mean, yes, we paid through the election and through all of it, a lot of attention to Argentina. I think everything we told people it was going to be and how we're going to perform is what happened and we're on the back end of it.

Yes. But it's still growing while it's just decelerating. Is that a fair way to...

Oh, yes, it's a good growth market. It was always -- there was good growth market before. It will be a good growth market when the whole same normalizes. It's just smaller than the U.S.

Yes. Yes. Good. And then the Financial business...

By a lot.

Yes. The Financial business, the other half of revenue, this is kind of Fiserv's legacy business that grew well for decades and decades. It used to grow 3 to 4, you found a way to now make it grow 5 to 7. And so it's -- what has been the catalyst? As First Data come in and the synergies there have been just helped to grow faster? What do you think about...

Well, I think that's -- I think, first of all, all these things are multipronged offenses. Go back to the construction of the company. If you really -- I mean, I'd like to go back to this because people like to talk about strategy and how things happen. At First Data, we were an initial investor in Finxact. And so when we raised $3.5 billion and we paid down $3.5 billion of debt, we kept $1 million investing in Finxact. That's a true story. And so why? Because we had a debit network, we had a merchant acquiring business and I believe if we had the capability in my language, because I didn't -- in the institutions I grew up, the word core was never a word, it was deposit system and loan systems. I believe that we had that deposit and loan system capability, we could grow merchant acquiring better, grow our debit network better and have an ecosystem advantage. I concluded on the journey that by the time that happened, we might miss markets. And so we did the Fiserv First Data merger. And so it wasn't in that merger that thought arrived. That thought arrived much before it. And the merger allowed us to accelerate. So the construction of the company, as I said, that you could go into a financial institution, you look at now we're talking about CashFlow Central, another new product. Another new product, remember, a merchant acquiring and our CashFlow Central would be revenue at 100% margin to our partners. That's a very strategic position to have to be able to do more with them, right? So I think we have had a strategy which was fabulous that lasted us very, very well, Cellcore and all the surrounds. Well, now we can start with merchant acquiring and get to a core opportunity, right, bring our debit network in at a much larger scale than we had before. So I think the construction of the company has actually allowed it. And I'd say, like that too, I know it's 5 years old. We had a pandemic and a merger in that 5-year kindergarten company, right? You talked about 5-year-olds, they are generally in kindergarten, right? I think we got a lot of runway in that business. And a debit processing capability, a bill pay capability, our ability to use our bill pay capability to think about CashFlow Central, debit processing to think about more people in Star and Accel. And then the core sits at the center when we could come in, and that's a very strategic privileged position. We have credit unions now. We're talking to about merchant which was not something that they would have talked about before. And that will just strengthen our ability to bring more value-added services and then grow financial solutions if that makes sense to you.

Yes. Yes. And you have one of the biggest, maybe the biggest debit processing platform and credit processing platform and you do both. One investor fear is Mastercard and Visa volumes in the U.S. have started to decelerate to being pretty close to retail. So that's been a little bit of a bear thesis on those stocks for some people. But for you guys, while you have that you might still have some of that pressure, you can sell value-added solutions and a lot of other things. Do you think can that business actually grow just as faster even if volumes come in towards retail?

Well, look, we've seen our credit business and especially on the subprime side be slower. It shouldn't be a surprise to anybody. We get paid on it. In that business, it counts on file. So volume -- but our ability to bring value-added services really has proven out well, makes it stickier. I also -- we found a little bit of a secret sauce and the ability to sell credit and debit to our smaller financial institutions where in the last company, we didn't have that opportunity at this scale. So I still think our ability to grow credit over time besides the wins we've announced like Target or Dejardes, which are all not onboarded yet, is good. We feel good. I was what -- was one of our big clients yesterday. Those are great relationships. So yes, I think having credit and debit is valuable together, I think. And I think the merger actually brought that to a completely different level in this company.

Yes. Well, you guys have certainly done a great job and that's all the time that we have. Please join me in thanking Frank. Bye.