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

[Presentation]

Well, good morning, everyone, and welcome to the Baird Conference this year. We're very pleased to be hosting all of you. We're very pleased to be hosting Fiserv this morning with new CEO, Mike Lyons, who's been at Fiserv a few months, and this is one of his first conferences at Fiserv. I think all of you know, Fiserv has been one of the most stable growth businesses, really, in the history of the markets, quite honestly. I think this will be their 40th year in a row of 10%-plus EPS growth. I've been here covering the stock for 20 of them, so it's been a pleasure. And maybe what we can do with Mike is just kind of kick off, Mike comes from PNC Bank and was very familiar with Fiserv, both the merchant side and the bank processing side. Maybe you can give a little reflection on kind of how he viewed Fiserv while at PNC and now how he's viewing the company now as CEO.

Well, first of all, thanks for having us. Good hype video to get the morning going. That's well done. Well done by you all. Yes. I think -- I spent -- I will go back and say even at the time at Bank of America, the last 2 decades of my career have been inside of Bank of America and inside of PNC, both big partners for Fiserv. So I've gotten a chance to see firsthand the value we can add to banks in a world -- and broadly financial institutions, in a world that's increasingly dominated by technology. And the competitive landscape is changing every day on that front. So you take -- we have 10,000 financial institution relationships globally, so the experiences from -- that come from that are incredibly valuable. We have scaled operating platforms, which can be very valuable. And then we have a whole bunch of resources around the world, including 13,000 software engineers. So our ability to help financial institutions in a world I just mentioned to you before at the start, JPMorgan said a couple of weeks ago, they -- at their IR day that they're going to spend $13 billion on technology this year. So the other 9,000 U.S. financial institutions, probably 20,000 financial institutions globally, how do you compete with that without help? And that's where we think we've got a great platform, whether it's CashFlow Central, Finxact, XD, Advance Defense, which is a fraud tool, all these solutions are built for a specific purpose of helping financial institutions modernize, grow, digitize and compete in a world that's -- where technologies become paramount in the banking world. And I think that's really what we're trying to do with the whole -- what we call, the client-first mindset. It's not that innovative, but go and understand exactly what our clients are trying to accomplish. We've got all these resources within Fiserv across both the Merchant side, but any type of payment side and on the FI side, and then deliver solutions into companies that ultimately help them run their businesses better. And our belief is, and you can see it in the numbers, if we consistently do that and stay operationally excellent, you can increase average revenue per FI for a very long period of time. You go through the institution, as I've -- I've met about 1,000 clients over the last 90 days, it's 20 products, 30 products, 90 products, some with over 100 products. So as the world evolves, technology evolves, the payments world evolves, the FI world evolves, we'll continue to expand what we offer them, again, trying to meet them where their needs are. It's a relatively simple model. Obviously, hard to execute, but you have the scale that we have, it's -- I think it's a great business for a long time on the FI side.

Yes, yes. And maybe what we'll do, yes, we'll start more on the FI side. I know there's a lot of questions about merchant, we'll get to that in a bit. But...

If we do all the Clover first, everyone will leave. So...

It's all good. In -- so on the financial side, coming out of from a -- being a bank CEO, and you just talked about JPMorgan spending $13 billion, you guys do, what, $9 billion to $10 billion in the financial segment. So it does seem like there's a lot of room. Do you think there's room for bigger banks to increasingly user -- use you guys? Like is there a big penetration story still?

Yes. We -- I was saying last week, we leave -- I've been struck by the fact that I leave every single -- this is both on the large merchant side and on the large FI side, or even regional banks side. I leave every meeting with a laundry list of stuff to go back to the shop to work on and deliver into it. So our ability, again, to add value and help people compete in this world, it feels like we have a long runway to go on that. So big focus for us, and this concept of average revenue, everyone knows ARPU, this is sort of our peak average revenue per client. We can just, if we understand what they're trying to do and continue to leverage scaled operating platforms, it's the same play everywhere around the world. We just have to get in there, do our job and deliver it.

Yes. And if we look at the backdrop today, you run an incredibly stable business. That financial business for years, I think in a global financial crisis, negative 1% organic. And in really good years, it's often 6%. I think this year, you're guiding 6% to 8%. So maybe talk a little bit about the financial backdrop. Is M&A picking up help, CPIs inflation escalators? Like what are the few things that move it either way right now?

I'd go back to this just incredible pressure on technology. The demand from clients, consumer clients and corporate clients, is for greater access to their financial institutions and their -- the appetite for ease of transactions, modernized payments, stability, resiliency, automation, digitization is unending. And the banks have to deliver into that. So you take this FI business, it's -- yes, it's sort of slow and steady grower, but longstanding, deep relationships, mission-critical software, we're providing them. It's not like they could just shut off us and turn on whatever they have in the back office. They don't have it. That's the opportunity for it. Our ability to deliver it cheaper by leveraging the scaled operating platforms and the ability to make these into highly recurring revenues with attractive margins is right in front of us. So again, we do business with 10,000 financial institutions globally, 5,000 in the U.S. Over 3,000 of the ones in the U.S., we have -- we're in the privileged position to have the core operating system for, which gives you the chance to deliver all the value-added solutions. And that's not just on the FI side, but on the merchant side, as you put the JVs through and the like. So again, average revenue per client goes through it. We're going -- it's like 5 or 6 major growth initiatives we've got going on the FI side. We're modernizing the U.S. scores and consolidating them down, 16 to 5. One of those 5 is Finxact, which is a totally modernized, cloud-based API core -- headless core, we call it, that's getting great traction in the market, both as part of a nontraditional bank strategy and outside the U.S. is our go-to core. Third big thing we're going after is embedded finance. The shift in our business from merchants wanting to be banks and banks wanting to be payments companies is pretty interesting. And with some of the recent deals in the market, we're the only company left with the construct of merchants and FIs under one roof, and we're leading into it. We think it's the play, not the opposite play. And most -- it manifests itself for us in embedded finance. And you've seen some of the headline deals with DoorDash and then Walmart's One Finance, which is growing at an incredible rate. That embedded finance platform is Finxact. And then it's the card issuing platform, which is another one of our big growth initiatives, and then the recent acquisition we did with Payfare, you put those 3 together, we think we've got a totally differentiated embedded finance platform. And to be able to go out and stand up a ledger and turn DoorDash into a mini bank for their drivers is -- that type of stuff can play all through the economy, and we're hearing the demands for that from more and more people. So modernize cores, leverage Finxact, go after embedded finance, leverage this position in -- our leading global position in card issuing. XD, which is a new digital platform, we're rolling that out. We still have to get it into more and more banks, but it's done and rolling out. And then the last one, which is probably one of the more exciting areas is CashFlow Central, which we view as sort of the killer app for cash management of small businesses, which banks have never been able to solve. So at times, yes, it can be boring versus the merchant side of the business, but we see a long runway of just growth if we do our jobs. We have all the tools to do it. And this shift in merchants and merchants trying to get into the banking business and banks trying to get into the payments merchant business is a good one for us.

And this kind of gets at the First Data and Fiserv merger, I can't believe it was 6 years ago already, but since that -- since the merger, this Financial Solutions business has been growing kind of 5% to 7%, 6% to 8%, I think this year, and it used to grow 2% to 3% often. So what -- maybe describe a little bit what did the merger do. And is there still a lot of room for the synergies to play out?

Yes. I mean, I think the merger was -- is sound. It's proving to have been a sound combination of the businesses. It's just not a lot of separation. So you go into a large FI, and we had a meeting last week, we go into them and we've got this -- FI had 32 or 33 products with us, been with us for 30-something years. Every year, you had 5 products. And this meeting, they have not been able to reignite their small business growth strategy. So we go in. We show them CashFlow Central, we show them Clover, and you start -- 2 minutes into the meeting, you're no longer -- like you and I, because you do your segments and we do, you're in the FI world, in the merchant world, but you go in and talk to a bank about helping small business customers, this is client-first mindset, and within 2 seconds, you're no longer in any of our world. And the client certainly doesn't deal like, "Okay. I'm going to shift over to the merchant side of the table. Why don't you tell me about Clover?" They just want to hear about how they can do more business with their small businesses. And the small businesses are telling them they want an integrated suite of products and services that's highly intuitive to use and highly accessible. And that's what Clover is. And when we put CashFlow Central into Clover, sort of runs the -- starts to increase the space of it. So the world is shifting. Banks -- not every small business walks into a branch anymore and says, "Hey, I'd like -- I'm going to start a small business." Like they go to the Internet with ICs. They go to Intuit. They go to all these other ways. So how do the -- you got 10,000 banks in the U.S., highly, highly profitable customer segment. So it just goes to your question of, like, if this is far more symbiotic than it may appear to the world. We don't step -- there isn't the 11th floor at the headquarters for FI and the 12th floor for Merchant. They just start to mesh into each other. And now the merchants are saying, "Hey, I want to stand up a ledger and pay my employees. I want to stand up a ledger and do my own embedded finance." It's -- so we like it. We're going to lean into it and keep rolling with it.

And when we look at the business, I mean, we do like to look at the subunits. There's the issuing business within financial. There's the digital business, and there's like the core banking business. With the wins of like Verizon and Target in the issuing business and CashFlow Central and digital, I mean, could those units actually grow like into the double digits at some point just based on the backlog and pipeline, et cetera?

Yes. I think -- not to go back on the second question, but I think the first thing I'd point out is we -- again, we -- the 3 segments within FI, if FI and Merchant merged together, the 3 segments within FI have started to merge together. So we don't think about them as 3 separate segments, and it's hard to have a conversation with our clients as 3 separate segments. And sometimes, our -- obviously, our clients sometimes, I don't even know which ones -- products we put in each -- but the core is super. The core banking, obviously, it's been the legacy business. It's a little bit slower growth, nice margins, highly recurring revenue, very competitive market, but it gives you the chance for all these surrounds. Issuing, we talked about, we've got a great position in issuing, one of the leaders globally in it, 25 of the 50 largest issuers in the U.S., 80% of the private label market, which starts to have that feel of merchant and bank together. And then we go global in the issuing business, 6 of top 8 in India, 3 or 4 of the top -- 2 or 3 of the top 5 in the U.K. And that's been a good business for us. We're investing into it. We think the competitive landscape is interesting there and potentially opportunistic for us. And then on the -- and so we should -- it's an opportunity to grow there. We've invested in 2 platforms, Optus in the U.S., and we're super excited about Vision Next, which is almost ready to launch. We got our first win, which is a U.K. bank called Vanquis. But our ability to take Vision Next globally. So yes, we see a good opportunity for growth on the issuing side. And then on digital side, to your point, it's got some of our more exciting new products in there, both CashFlow -- I would point out CashFlow Central. And then underappreciated, but maybe has climbed out from under the rock, is our debit networks on the heels of the Capital One, Discover transaction, we think there's a lot we can do in the payments world with STAR and Accel. So all of it's embedded in the 6% to 8% guidance. We don't try to parse it through. But I think you got to think about it, pretend you're in the client meeting with us, we don't say, "Hey, we're trying to grow 10% this year in this segment, so I need you to buy some of this stuff." We're just saying, "What are you trying to do?" And this most recent clients, I want to grow my small business base, so that brings in Clover, that brings in CashFlow Central, it brings in Commercial Center, it brings in Advance Defense. And -- so back to that client-first mindset, understand what they're trying to do. You got to listen, be with them, listen, this is basic sales techniques. Then go back into a shop with massive resources and massive product sets and put together a solution, promptly deliver it, and stay operationally excellent. If we do that, it just keeps rolling. It's a beautifully virtuous cycle. But obviously, it takes work and execution.

Yes. Great. And then maybe last on financial, just the stablecoin and crypto that's in the news a lot. You're in an interesting position with both merchant relationships that could accept some of that at some point and banking relationships with consumers, they could hold it in their accounts. Like you're in an interesting spot. How do you see it develop? And how do you play in those?

Yes. It's a great example back to the client-first mindset. We are hearing -- to your point, we're hearing from financial institutions, what happens if one of the acts passed and we suddenly have to stand up, wallet and custody, and we're told to do it in x number of months. And boy, that seems like a significant investment. And then we're hearing from merchants about, hey, maybe something gets done off the rails and maybe that's got less interchange. So that's interesting to us. So how do we stand this up? So for us, it's a great opportunity that plays right into our strengths of understand what our clients are doing and present a solution to them. And in, I don't know, next week or 2, we'll come out with something that talks about standing up some infrastructure to support all of our core clients, which is a significant base of the U.S. to give them the basic capabilities to custody, create wallets, move P2P on stablecoin. And then same thing on where we do business with our merchants, help them develop the capabilities to do it. So I don't know if it's specifically stablecoin that's super interesting, but what's super interesting to us is with each development, this is where I go back to start, is technology changes the world. Somebody needs to help how does a credit union in Colorado stand up a stablecoin wallet. And so we love that. We'll stand -- we've got -- and again, how do we do this? It's got Finxact in it. It's got Payfare in it. It's got -- so you got a core in it. You've got Merchant Solutions -- obviously, our Merchant Solutions business, you got Carat in it. It's got all the tools we have. And we got -- as I said, we've got 13,000 super smart engineers, and you give them a project and they can put -- stand up a solution really fast. And so that, to us, is sort of what we love about the business and the opportunities that show itself. And I can go to agentic commerce. You can go -- whatever it is, we can -- whatever people want to monetize and do, we can stand up and do it. And on the payment side, it's nice. We don't -- it doesn't have to be on a specific rail. It's just our merchants want to facilitate sales. Our banks want to win new customers and make them happy. And that's where we're going to put solutions in and do it.

Yes, yes. And if we move to the Merchant segment, so the other half of revenue, the Street's gotten a little uncertain around -- we've talked about Clover and just that industry in general, just the multiples have been quite low. When you walk in now to Fiserv, do you think -- is the investor community just too negative on what seems like a pretty good growth business?

Yes. I mean, on -- Clover is a great business. It's got a really strong growth outlook, and it's going to be an important part of our story on all sides -- we've already talked about it, on all sides of our business for a really long time. Walked into a bit of a firestorm on it. I think what we've said and what we've tried to say over the last couple of weeks, we've tried to highlight the puts and takes that impacted volume in the first quarter and then try to give some flavor on the second quarter. I don't have anything new to add to that. But I think the key takeaway is if you exclude the gateway conversion, Clover volume growth has been in the low double digits for a sustained period of time, and that's what we indicated for Q2. So at least, as the new guy coming in and studying the business, as I said, it's a great business. The growth ex the gateway conversion looks really stable. So we haven't seen a deceleration in growth, excluding the gateway conversion. We haven't seen -- you go through all of the other Clover KPIs, and we had another regular update on Clover yesterday, there's nothing indicating, flashing in some section that there's something broken about the business. Actually, it continued to perform well. The competitive landscape was the other thing we've heard. It hasn't materially changed. I mean, I haven't been -- I've only been here for a short period of time, but if you talk to any of our people, it's been competitive. We have great competitors and continues to be competitive. There hasn't been a major change there. And then we don't feel any saturation in the market. We just opened -- announced the opening of a new facility for a lot of our employees in Kansas City. And you go to Kansas City, we don't have anybody selling Clover in Kansas City. So it's not like we've tapped out every part of it. So again, we think it's great asset. The revenue growth that we did in the first quarter was in line with the expectation that they had come up with to get to $3.5 billion. And we're going after Clover growth. We spend our days when the true operational meetings were in the sort of -- we go through Clover in 5 different areas, the build-out of the horizontal capabilities, that's CashFlow Central into it, that's ADP into it. And then we -- there's a number of other capabilities. I'll go back for a second. I tried to explain this last week. The -- what the banks and the SMBs are telling us they want is this highly integrated suite. They do not want to make 20 phone calls to run their business. They're already the CEO, the CFO, the CIO. The -- so they want a set of a very intuitive, easy-to-use set of software. They don't want 1,000 apps and a thing that they have to search through and the like. So they want payroll. They want payments processing. They want employee management. They want insurance. They want taxes. They want accounting. They want website set up. Really basic stuff. And we're in the process of filling out -- that's what the ADP thing is. We could have bought -- we could have gone out and bought a payroll thing to stick on there. We went out and got the #1 payroll provider in the U.S. and created a partnership with them and increased our distribution in the back end of it. We'll have several other announcements to continue to build out the suite of software. But that's what we're being told they want. So horizontal build out is huge. CashFlow Central in there is incredibly important because they've never gotten a tool from the banks that is an effective cash management tool when you -- when -- and we did it. Same thing at BofA, PNC, we tried to port down a middle market -- upper middle market cash flow solution, and they just drowned in it. One is too expensive and don't have the functionality. So CashFlow Central, we're building with Melio. Great partners, incredible engineers. They have built the app that small businesses want. We got to finish it and get it to them. But that will be super important. And then every bank partner we have and every small business we have and us will look at a screen that has every receivable and every payable on the screen. So how that multiplies what you can do with Clover Capital and the like, I've spent my life lending on deep-in-arrears financial statements, a fax of -- a copy of a fax, scanned, mailed in a broken down thing, that's what you get from some small businesses. Now you see every payable, every receivable real time, and that's a great product. So what we're trying to build is the horizontal -- build out the horizontal thing is number one. Second is trying to build out the verticals. We're hearing increasingly, it's got to be specific to me. So we had a great business in small restaurants, but getting beat by somebody else in the upper restaurant. So we've introduced Clover Hospitality and put the functionality and -- to putting us in a position to compete. We're going to come out with something on health care, something on professional services. We already were strong in retail. Third big area is the international growth. Our clients -- we're an international company, our clients internationally want Clover. And so we're giving it to them. We've launched in 5 countries this year. Brazil is probably the most interesting. Fourth is just better operational excellence. As you go through those KPIs I talked about, none of them are running at the your awesome meter where you're doing everything perfectly right and there's nothing left to do. So we try to pursue operational excellence. And the final piece is just continue to expand the distribution channel. We think, because of the bank partnerships, for sure, but then hundreds if not thousands of ISO partnerships, agents, now ADP, just how many different ways can you have people distribute Clover for you for no cost. And so all of that's important on what we're trying to do. But it's a -- I think your question was right. It's an important asset. It's going to be a good growth engine for us for a long time.

And you've talked about $3.5 billion of Clover revenue this year, $4.5 billion next year. And that growth next year, close to high 20s growth. Volumes, low double-digit. Revenue, high 20. So there's a pretty big gap. Is that value-added solutions? And if companies use those, are they more sticky, meaning they just -- your clients don't leave once they do the value added?

Yes. I think the most often question we get on -- around Clover is, like, why don't you drive some more of this or why don't you drive some more of that. And the basic -- it goes back to the point I was trying to make was it is an operating platform for small businesses. Every small business in different verticals and in different countries, based on the rules, and I go through some of the nuances, use -- we want them to use the platform in any way that makes their business better. We don't wake up every morning with some set outcome that you should do this and do that. Same thing with your question around banking, issuing, digital. We just want to bring solutions to banks. So we're giving this operating system to small businesses, and we want them to engage in it as much as they want. So if they engage, if we can listen to them and continue to put on the platform all the solutions they want, naturally, we want them to buy as many of the value-added solutions as they can. And the gap between revenue growth and volume growth will be high. And that's okay. And it will differ a lot by countries, right? You got Brazil and Argentina settled. Sales, T+15 and T+30, there is no small business in the world who can process the sale and wait for 30 days for the cash to come. So they use anticipation. We don't wake up in the morning and say, "Let's go grow anticipation." It's just how the client engages with the platform. And yes, if they engage with the platform in ways that they think are valuable to their business, one, you get paid for it; and then two, they tend not to leave, right? Which one of us leaves a product that we like and use a lot, right? So yes, the idea is to continue to build out the suite of value-added products and services and then put it in a way that it's easy for them to use. And we've got -- on growth item #4, which is operational excellence, we've got ground to take. We've got to execute it. We can make the experience better. We can make the software better. We can make it easier to use. We can make the customer service. There's all kinds of things we can do to help that. But we've got to continue to build it out and then put it in their hands to use it in any way they want to use. But I think it's relatively well time tested is they'll engage in the products and services. And our VAS today is well below the VAS of some of our peers. We think ADP is going to be a strong growth area for VAS and all the products that come alongside -- other products we're going to put on the software suite alongside those. Clover Capital is an area where we haven't executed as well as we should have, and we've been very, very conservative in the platforms. Good opportunity there. So there's a lot of VAS to still put on the platform and there's better work to do with our current VAS to get our customers to use it in a way that's valuable to them. But that should drive -- the net outcome of that is you should have revenue growth in excess of volume growth.

Yes. And it's -- I mean, it's huge growth at Clover. One question we get increasingly as well, okay, if Clover is growing high 20s and the total business is growing, I guess, you're guiding 12 to 15 this year, what's happening with the non-Clover? Is that declining? Are you increasingly pulling non-Clover clients into Clover with -- like how is that balance? Can non-Clover grow?

Yes. Non-Clover, it's about $4 billion in revenue, so it's sizable. It's still growing. They're small businesses. And if a small business wants Clover, we get them Clover. We don't deny anybody Clover. But we've been careful. I guess, it goes back over time with messaging between investor and the Street that not to flood the system with back book conversions, and we've left it open. 2026, we've talked about -- we've been testing back book conversions, but we haven't done any broad-based efforts around that. We've tested them inside the U.S. and outside the U.S. And over time, we've had some -- we've learned stuff as we go. And I think we haven't done anything significant to date, but as you go into 2026, you'd see more focused efforts to convert back book into it. But again, there will be some base of customers where they don't want a full Clover platform and they're not going to use all the software and services. But we think, going forward, Clover is clearly the platform for small businesses that will be Fiserv's platform for a very long time. So eventually, the back book will get to the Clover book. And even more importantly, on the Carat enterprise side of things, we continue to invest in Commerce Hub, which is the front end, which is the gateway for large business. We'll eventually put Clover into Commerce Hub, so large enterprises can take -- big companies, big merchants, they don't use Clover, but over time, you can do that. So again, there's -- we're not sitting here having drained the ideas for Clover growth. It's a good asset you grow for a long time.

Yes, yes. And maybe one last question. Organic growth in Merchant was 8% in Q1. Full year guide is 12% to 15%. Was there something in Q1 specifically -- like I know Argentina rates, Caribbean rates came down from like 100% to 30% year-over-year, and they're stable the rest of the year. So maybe that helps. Like what gets it to 12% to 15% for the full year?

Yes. Argentina helps. There's -- we had the big termination fee in the Caribbean. You've got Clover, obviously, accelerating. Commerce Hub continues to grow, bring new merchants into Commerce Hub. And the rest is just core organic growth. You've got it right, some of the comps get easier largely because of Argentina.

Yes, yes. So when we put it all together, I mean, it seems like backdrop is if anything good, it's quite good, right, stable and good.

The macro?

The macro, the -- just your backdrop in general, demand, et cetera.

Yes. I think on the business side, we talked a lot about it, we did the Fiserv Small Business Index. You put your pitch out before the thing. This is our pitch for the Fiserv Small Business Index. We want to get it like the ADP Jobs Index. But we put that out yesterday. May was basically in line, up 3% year-over-year. It was basically in line with the 3% growth. I think it was 3.3% in May, 3.2% in April, so it was in line. First quarter was 4.3%. So 100 basis points down on the Fiserv Small Business Index quarter-to-quarter. Interestingly, we've gone through a long period of -- and we haven't drawn any conclusions from this, nor has the FSBI team, but we've gone through a long period where foot traffic has been up and average purchase has been down. And this month, it reversed itself. Foot traffic was down and average purchase was up. So I don't -- we caution about any -- we certainly haven't drawn any conclusions to it. But it's different from the last couple of months. So we took note of it.

Yes. Well, good, that's all the time we have. But please join me in thanking Fiserv and my clients.

Thank you.