Fiserv, Inc. (NASDAQ:FISV) Q4 2022 Earnings Call Transcript

Fiserv, Inc. (NASDAQ:FISV) Q4 2022 Earnings Call Transcript February 7, 2023

Operator: Welcome to the Fiserv Fourth Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode until the question-and-answer session begins following the presentation. As a reminder, today’s call is being recorded. At this time, I will turn the call over to Julie Chariell, Senior Vice President of Investor Relations at Fiserv.

Julie Chariell: Thank you and good morning. With me today on the call are Frank Bisignano, our Chairman, President and Chief Executive Officer; and Bob Hau, our Chief Financial Officer. Our earnings release and supplemental materials for the quarter and full year are available on the Investor Relations section of fiserv.com. Please refer to these materials for an explanation of the non-GAAP financial measures discussed on this call, along with a reconciliation of those measures to the nearest applicable GAAP measures. Unless otherwise stated, performance references are year-over-year comparisons. Our remarks today will include forward-looking statements about, among other matters, expected operating and financial results and strategic initiatives.

Forward-looking statements may differ materially from actual results and are subject to a number of risks and uncertainties. You should refer to our earnings release for a discussion of these risk factors. And now over to Frank.

Frank Bisignano: Thank you, Julie. And thank you all for joining us today to discuss the strong ending to a pivotal year at Fiserv. 2022 marked a year of great progress for us with better-than-expected growth against the challenging backdrop. The integration of First Data and Fiserv wrapped up in the first half and we are entering 2023 with a focus on growth and operational excellence to drive quality and productivity to the next level. We laid out a plan for our merchant segment that includes extending Clover’s leadership and are on pace to achieve our 2025 objectives. We won awards for our new enterprise omnichannel solution, Carat, and continue to roll out this unified commerce platform with a leading number of value-added services.

In payments, we completed the three major credit issuer implementations and followed them up with two major new wins in the fourth quarter. And we advanced our core banking cloud roadmap for new and existing clients with the acquisition and integration of Finxact. Through all of that, we navigated the return to office and are seeing a boost in productivity as our employees come back together many in new state-of-the-art facilities. We head into 2023 as a unified company that’s better than the sum of its parts. One with faster growth and deeper investment that still holds a tradition of strong operating leverage, high recurring revenue, and value-accretive capital allocation. Our progress over the last two years is undeniable after consecutive years of 11% organic revenue growth, 370 basis points of total adjusted operating margin improvement, and over $5 billion in share repurchases.

We delivered on our guidance with a steep ramp in the fourth quarter with 12% organic revenue growth, 360 basis points of adjusted operating margin improvement and adjusted earnings per share of $1.91. This led to 2022 results within the guidance range, which we raised twice last year despite unexpected FX headwinds. For the year, organic revenue growth was 11%. Adjusted operating margin expanded 120 basis points to 35.1%, and adjusted EPS was $6.49, up 16%. Free cash flow conversion was 84% as we continued to invest for growth. Each of our operating segments recorded strong performance, led by merchant acceptance, with organic revenue growth of 16% and 17% in the quarter and year, respectively. Our Clover and Carat operating systems are driving segment growth well above pre-pandemic levels.

Our newer products, such as Data-as-a-Service, Pay by Bank, disbursements and EBT online widen the value proposition to clients and bolster our strong positioning in card and non-card payments. Expanded ISV and direct sales channels extend outreach to merchants and help us capture more of the value in each transaction. Payments and network revenue had a superb year of growth, up 10% organically in the fourth quarter and 9% for the year, above our medium-term guidance range. Performance was led by implementations of three top 25 credit issuing customers and continued growth with existing customers. We followed this up with two major new credit wins in the fourth quarter, with Target, one of the largest retailers in the world and with Desjardins, the largest credit union consortium in Canada and the fourth largest card issuer.

We are very excited to bring one of the world’s largest retailers onto our platform, and we’re pleased to expand our geographic reach in Canada with Desjardins. It is another example of a major in-house card issuer, partnering with us to achieve industry-leading capability and it’s our first connection with a major Canadian issuer, giving us important scale in the key market. We’ve already begun working with both clients and anticipate revenue starting in 2024. In fintech, we delivered 8% organic revenue growth in the quarter, rebounding from third quarter, as expected. For the full year, we generated 5% organic growth at the midpoint of our medium-term guidance. Core wins were robust over the last several quarters and continue to go live, adding to an already strong recurring revenue base in this segment.

Interest in Finxact is exceeding our expectations and we’re excited to extend our leadership in cloud core banking by going live with digital bank Cello. We continue to believe we have the most clients in production in the cloud. We are carrying this positive momentum forward into 2023. This year, we expect organic revenue growth of 7% to 9%, adjusted operating margin expansion above 125 basis points and adjusted earnings per share of $7.25 to $7.40, which assumes a mild recession in the US. Our guidance reflects internal confidence in the face of external uncertainty. This confidence is built on the strength of our unparalleled client base, our industry leading distribution, a broad and growing product portfolio and our best-in-class management team.

We have the revenue base, the profit-driven cash flow and sturdy balance sheet that should sustain us through a tougher economy. It’s times like these that make it good to be an industry leader that continues to invest in new and innovative products. Nowhere was this strong positioning more evident then in the many noteworthy contract extension and product additions signed with existing clients in the fourth quarter. These wins are a reflection of four factors; first, our list of clients is vast, high quality and full of opportunity and our relationships with them are deep; second, we have the broadest portfolio of solutions supporting both growth and operating efficiency for our clients; third, our client-first relationship model is off to a strong start; and fourth, our vision for the cross-sell opportunity between Fiserv and First Data offerings has become reality.

The promise of the merger is being realized. Synergies are apparent, for example, between acquiring an core banking and embedded finance and card issuing services across multiple verticals. In merchant acceptance, for example, we expanded our global relationship with ExxonMobil. This energy giant will move to the Carat platform to support its retail utilizations in the US and Canada with gateway acquiring and fraud security services. We also renewed Carat’s contract, were one of the largest beauty retailers in the US and added network tokens to their e-commerce system to help increase authorizations, reduce cost and limit fraud. And a major restaurant operator will extend our merchant acquiring and prepaid business to more of its brands in the Payments and Network segment in addition to the significant Target and Desjardin wins, we expanded our existing relationship with the State of California.

After a successful rollout of the middle-class tax refund program in the fourth quarter, we were awarded another prepaid mandate supporting California’s unemployment and related insurance programs. This, along with disbursement support for the Comptroller’s Office announced in October represents longer term recurring work for the state and marks our leadership in payments for the government vertical. We also signed a large e-commerce payments company for debit network services. This client will enable our Star and Excel networks for its millions of merchants as an alternative to the larger debit networks. And in Fintech, as a proof point of our deep relationships, ability to cross-sell products and seize synergy from our merger, we continue to add solutions for Webster Bank since its merger with Sterling National Bank earlier this year.

In addition to the account processing win we announced in the third quarter, we’ve now added the Optus platform and ATM services to the growing list of solutions we provide. Similarly, Bethpage Federal Credit Union has also added several of our payments products to its existing core banking platform. In keeping with the emerging trend of core modernization, Innovation Credit Union of Canada will be the latest client to move from a licensed solution of DNA to a hosted version in the Microsoft Azure cloud. This is one of a couple of dozen DNA customers migrating to the cloud for more flexibility and resilience in their infrastructure. It highlights the modern architecture of DNA, Fiserv’s experience in the cloud, and further migration from license to ASP revenue.

Outside the US, we made important progress in EMEA, adding Absa Bank in Mauritius as a client of our Internet gateway. This will allow Absa clients to tap into the fast-growing e-commerce segment in Africa and grow with key corporate clients that are active in this well-known tourist destination. It also opens the door for us to enter eight other countries in Sub-Sahara Africa, where Absa operates today. In Latin America, we extended a large bank acquiring relationship to include several more countries. And in APAC, we in India’s Tata Motors for loan processing and attained a major payment institution license in Singapore. This will allow us to expand beyond merchant acquiring into domestic and cross-border money transfer services, a market that has $180 billion of payment flow.

A key to our new and follow-on wins is the significant investment we have made to bring new product to market, increase our value to existing customers, open the door to new customers, and grow our TAM. Let me recap just a few of our innovation and advancements this year, starting with merchants. In the SMB space, we serve small businesses wherever they want to conduct business. Through cloud-based operating systems like Clover, through our channel partners, including ISVs, banks and ISOs and on platforms that act as payment facilitators or PayFac. At Clover, we integrated the BentoBox acquisition into the Clover platform to add more e-commerce and digital capability to our offerings in the restaurant vertical. Catering services and hotel restaurants are emerging sub-verticals for us now, and we know that when Bento and Clover are sold together, we see an over three times increase in average revenue per user.

We also rolled out lower course hardware and partnered with major providers of retail technology to offer web and point-of-sale inventory solutions to this large SMB vertical. We’ve begun migrating merchants from our existing Internet gateway to a new Clover gateway, where they can more easily access our full suite of value-added services. This positions Clover to compete more for card-not-present business this year from a position of strength. Value-added services penetration, an important driver of Clover growth and ARPU, reached 16% in the quarter from 13% a year earlier. One example is Clover Capital, a product we continue to invest in, is growing rapidly and favorably impacting customer attrition in the SMB segment. In the ISV channel, we’ve added 174 ISV partners this year and continue to benefit from the high growth and lower customer acquisition costs of this go-to-market approach.

Since our acquisition of NetPay, we continue to build PayFac, marketplace and software platform solutions, including real-time boarding, underwriting and split pay services. In the quarter, Fiserv continued to expand and deepen our platform integrations with partners that include PayPal, offering our customers more flexibility in their service offerings. We look forward to exploring other integrations with current and future partners while expanding our capabilities across this market. Carat, our leading enterprise omnichannel solution, continues to expand its capabilities, including payout choice and flexibility. With the introduction of several products this year, including digital checks, prepaid cards and crypto wallets, followed by our multi-purse wallet, a white-label solution that holds multiple sources of value, including loyalty and prepaid.

We continue to onboard large merchants for Pay by Bank, which lowers the cost of acceptance for merchants and is an easy way for consumers to earn rewards. And we have seen a strong early uptake in our new Data-as-a-Service offering, partnering with Snowflake. It enables our merchant customers to access their payments data in near real time to better informed business decisions. We also have a growing number of financial institutions lined up to pilot our Open Data solution offered in partnership with Snowflake. Open Data enables near real-time access to data across customers, accounts and activities, bringing relevant insights to support strategic decisions. In Payments and Network, our strong growth in issuer solutions can be traced directly to the investments we’ve made in our operating platform, Optis.

This includes a robust set of APIs, AI-based fraud management, cardholder experience technology via the Ondot acquisition, integrated output solutions plus ongoing cloud enablement of key features. We have multiple payment innovations underway to take advantage of emerging trends such as real-time payments. The clearinghouse RTP network, Zelle and Fednav, all work differently than legacy networks, creating demand for an end-to-end solutions provider. We are leveraging the Fiserv NOW network to be just that this year. In fintech, we’ve been taking an open-source approach to serving our clients. We’ve pre-integrated third-party digital solutions into many of our cores and made these solutions discoverable to clients via our app marketplace. We’ve also made our platform attractive to the developer community by exposing our micro-service APIs through our developer studio.

Building on its Webby Award last year, this product won a DEVIE award from DeveloperWeek in January for best innovation and financial services. With these advancements, we are driving Fiserv to become the destination of choice for embedded finance, integrating card issuing and processing, merchant and core banking capabilities for a variety of nontraditional providers, including retailers, QSRs, payback and government entities. Another highlight of 2022 was the Finxact acquisition, our new cloud-native banking solution, which we’ve been integrating with our existing digital surrounds selling to our existing clients as an innovation platform or a side car core and winning new logo sales. Our pipeline is particularly active with pioneering digital banks and big issuers entering the banking market via embedded finance.

Photo by Towfiqu barbhuiya on Unsplash

Finxact offers them faster time to market, greater flexibility and scalability and the largest product portfolio available, making it an ideal way to conceptualize, create and launch new banking products. With all of this new product development and the client wins that validate, I hope you’ll see why we remain enthusiastic for 2023. So let me pass the discussion to Bob for more detail on our financial results.

Bob Hau: Thank you, Frank and good morning everyone. If you’re following along on our slides, I’ll cover additional detail on total company and segment performance, starting with our financial metrics and trends on slide four. Fourth quarter and full year results reflected our focus on delivering on our commitments with momentum in all three business segments. Total company organic revenue growth was 12% in the quarter with ongoing strength in merchant acceptance, further growth in our Payments and Network segment and a rebound in the Fintech segment as previewed on our last earnings call. For the full year, total company organic revenue grew 11%, in line with the higher guidance we provided 90 days ago. This performance was led by the Merchant Acceptance segment, which grew 17%.

Fourth quarter total company adjusted revenue grew 8% to $4.4 billion and adjusted operating income grew 20% to $1.7 billion, resulting in adjusted operating margin of 39.2%, an increase of 360 basis points versus the prior year and a sequential improvement of 400 basis points. As we anticipated, four factors drove this margin improvement; first, the final ramp-down of integration expenses and resulting productivity benefits; second, operating leverage on increased revenue and improved inflation comparisons; third, actions taken late in the third quarter and fourth quarter to tighten spending in light of the uncertain macroeconomic conditions across the globe; and finally, the divesture of our Korea business and two small low-margin nonstrategic units.

As expected, the fourth quarter performance brought the full year adjusted operating margin to 35.1%, an increase of 120 basis points over 2021. Fourth quarter adjusted earnings per share increased 22% to $1.91 compared to $1.57 in the prior year. Full year adjusted earnings per share increased 16% and to $6.49. Volume, productivity, and operating performance more than offset the foreign exchange headwind of $0.25 for the full year. This was much higher than the $0.11 assumed in our guidance at the start of the year. Free cash flow came in at $1.4 billion for the quarter and $3.5 billion for the full year. Free cash flow conversion was a strong 115% of adjusted net income for this quarter. For the full year, free cash flow conversion was 84%, roughly in line with our expectations for approximately 85%, with a slight increase in accounts receivable on some slower collections.

Now, looking to our segment results, starting on slide six. Organic revenue growth in the Merchant Acceptance segment was a healthy 16% in the quarter and 17% for the full year, well ahead of our medium term segment guidance of 9% to 12%. Adjusted revenue growth was 9% in the quarter and 13% for the full year. This is well ahead of the 11.5% annual growth rate needed to achieve our Merchant Acceptance segment revenue outlook of $10 billion by 2025, as laid out in our March 2022 Investor call. As we’ve said, we grow and create value in three ways; first, attracting more merchants to our operating systems, our Clover active merchant count grew 9% in 2022. Second, expanding our merchant relationships, the adoption of more value-added software and services, Clover VaaS penetration reached 16% in the quarter, up 13% from last year; and third, by growing with our existing customer base, our average revenue per Clover merchant expanded 12% in 2022.

In the quarter, merchant volume and transactions grew 6% and 3%, respectively. For the year, they grew 10% and 6%, excluding the loss of our processing client in mid-2021. Volume in local currency was up 8% for the quarter and 12% for the year, excluding the client loss. This is in line with our typical spread relative to the card networks. Factors that drove faster revenue growth include value-added services, new payment flows and value-based pricing. Turning to our merchant operating systems, Clover and Carat. We continue to post robust growth, and we’re on track for $3.5 billion in Clover revenue by 2025, as presented at our Merchant Investor Call this past March. Clover revenue grew 23% in the fourth quarter on payment volume growth of 16%.

For the full year, Clover revenue was up 25%. We posted above-average growth in Clover Capital, Clover Software and Marketplace SaaS. Clover Connect for ISVs continues to post very strong revenue growth and added 48 ISV partners in the quarter, totaling 174 for the full year. Carat, our enterprise omnichannel solution also had a strong quarter, with revenue growing at 15%. For the year, Carat revenue grew 18% on important new client wins and enhancements for existing clients. This includes our new client experience portals, which improve service and access to data, while positioning us to sell more products, from Data-as-a-Service to fraud services, to emerging flows. In 2023, we will complete the build-out of our single orchestration layer known as Commerce Hub, which will allow our clients to more seamlessly integrate with the breadth and depth of our products and services and enhance our e-commerce capabilities.

Adjusted operating income in the Merchant Acceptance segment increased 22% to $648 million in the quarter, with margin up 350 basis points to 34.8%. Full year adjusted operating income improved 16% to $2.3 billion and margin grew 100 basis points to 31.8%. The improvement in both periods was led by operating leverage and productivity. We completed the acquisition of Merchant One in late December, folding in this long-term Fiserv customer. This should enhance our direct merchant acquisition capabilities, extend the reach of our Clover product line and create cost synergies. We also acquired Yacare late in the quarter, expanding our capabilities in Argentina by enabling us to bring our QR code payment acceptance to our merchants there. We stand to rapidly become a significant QR code provider, as we get this technology into customers’ hands.

Looking into 2023. In January, overall volume growth was stronger than volume growth in December. This is partly attributable to an easier year-over-year comparison, but also indicates the ongoing strength of the consumer and the Fiserv brand. Turning to slide seven. On the Payments and Network segment. Organic revenue grew 10% in the quarter. This growth was enabled by a variety of drivers across our business lines. Our North American credit active accounts on file grew 17%, driven by both new business onboarding and a favorable credit environment. The California Middle-class Tax refund program was also an important contributor to revenue during the quarter. While the revenue is mostly one-time in nature, we’ve signed two additional contracts with the state that will bring in recurring revenue in 2023 and beyond.

Full year organic revenue growth of 9% was above the upper end of our medium-term outlook range of 5% to 8%. Fourth quarter adjusted operating income for the segment was up 14% to $811 million, and margin was up 230 basis points to 48.5%, driven by strong operating leverage. For the full year, adjusted operating income was up 10% to $2.8 billion and margin expanded 120 basis points to 45.3%. Moving to slide 8. In the Financial Technology segment, we posted 8% organic revenue growth for the quarter and 5% for the full year right in the middle of our 46% medium-term guidance range. The rebound in nonrecurring revenue portions of this business: license, professional services and termination fees, was a meaningful contributor to growth in the fourth quarter as we expected after those revenue slowed in the third quarter.

Meanwhile, customer momentum continues, and we had 14 core wins in the quarter, including eight competitive takeaways. Over the last three years, we have 155 core wins and a healthy backlog of implementations that offer solid visibility to revenue for 2023. Adjusted operating income was up 18% in the quarter to $340 million, and up 7% to $1.2 billion for the full year. Adjusted operating margin in the segment increased 400 basis points to 41.3% in the quarter, helped by higher periodic revenue and productivity. Full year margin increased 70 basis points to 36.5%. The corporate adjusted operating loss was $88 million in the quarter, slightly improved from the first half run rate and $444 million for the full year. The adjusted effective tax rate in the quarter was 19.3% and was 19.6% for the full year, in line with our expectations.

We expect 2023’s adjusted effective tax rate will be approximately 20% for the full year. Total debt outstanding was $21.4 billion on December 31st. The debt to adjusted EBITDA ratio dropped another one-tenth of a turn to 2.8 times, within our target leverage of being below three times in the second half of the year. We have approximately 19% of our debt in variable rate instruments. During the quarter, we repurchased $750 million of our stock, bringing our total 2022 share repurchase to $2.5 billion and $5 billion over the last 24 months. We had 17 million shares remaining authorized for repurchase at the end of the quarter. Our long-standing capital allocation strategy will continue into 2023, defined by a strong balance sheet, share repurchases in complementary and innovative acquisitions.

As we look through the mixed indicators on the 2023 economy, we are taking a measured approach to our outlook and assume a mild consumer spending recession, lower inflation and higher interest rates. As Frank said earlier, we expect organic revenue growth of 7% to 9%, in line with our medium-term guidance with adjusted operating margin expansion of at least 125 basis points. This translates into adjusted earnings per share of $7.25 to $7.40 and or 12% to 14% growth over 2022 and would represent our 38th consecutive year of double-digit adjusted EPS growth. This strong operating performance in a weaker economic environment reflects our continued investment in growth opportunities at a time when others may be cutting back. We are redirecting our free cash flow guidance toward dollars instead of conversion, since this aligns more directly with how we run our business.

We estimate approximately $3.8 billion of free cash flow for 2023. In the past two years, we increased our level of investment in growth initiatives, and it led to back-to-back years of accelerated 11% organic revenue growth. We see tremendous opportunity to do the same this year to invest in our growth platforms and continue to grow faster than our markets. We retain our focus on long-term free cash flow as a driver of long-term value for our shareholders. With that, let me turn the call back to Frank for some closing remarks.

Frank Bisignano: Thanks, Bob. In the quarter, Fiserv provided back to business grants to 13 veteran and military spouse business owners through our partnerships in Atlanta. We also launched back to business in New Jersey, committing $1 million to small local minority-owned businesses. For the year, we awarded 241 such grants in total. The CDP published our GHG emissions results for 2021. They improved from the prior year, in part because of the COVID shutdowns. We are encouraged by the future direction of our program since receiving LEED Gold status for our 1 Broadway space, awaiting LEED Platinum status for our new technology innovation center in Berkeley Heights, and pursuing LEAD Gold for offices in Milwaukee and Dublin, Ireland.

Overall, I am excited about what the next five years can bring for Fiserv. We are off to a great start in 2023. Having just been recognized as the world’s most admired company by Fortune Magazine for the 12th time in 15 years. I’m especially proud about two most admired attributes, innovation and financial soundness, two particularly important qualities in the current environment. We delivered beyond expectations in the past year, and that was not by chance. It was the result of specific actions and thoughtful investment. The groundwork is laid for more strong performance to come; leading products, bigger TAM, expanding geographies better service and streamlined modern technology are in our grasp. The years I’ve spent at highly successful businesses have taught me that our reach must exceed our grasp.

There is always room for improvement. So my leadership in him and I are focused on driving greater productivity and better processes this year in the quest for operational excellence. I’m confident in our more than 40,000 Fiserv associates around the world, you come prepared to meet our high bar every day, and I thank you for all you do. With that, operator, please open the line for questions.

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Q&A Session

Operator: Thank you. We would now like to open the phone lines for question. Our first question comes from Tien-Tsin Huang from JPMorgan. Please go ahead.

Tien-Tsin Huang: Hi, thanks. Good morning. Solid results here. One question. I’ll ask Frank, if you don’t mind. You spent some time talking about how Fiserv is better than the sum of the parts with the cross-selling and the synergies, et cetera. Has your thinking on synergy contribution to growth changed at all in the last year or two? Any way to size that in terms of contribution to growth maybe for fiscal 2023 or the mid-term outlook in general? Thanks.

Frank Bisignano: Well, I think if you look at this year’s growth rate, obviously, at 11%, we can fill the power of the franchise coming together, right? And, obviously, I like to step back on that question a little bit, too. Remember, we announced merger, maybe top 10 mergers in a year in 2019, and then we had a pandemic. And that definitely did not accelerate our ability to see clients sell, get in front on offerings. We managed through it. We saw the tools available. But I think today, when you look through the company, the opportunities are larger than we thought. Remember, we said we’re going to stop really talking about the synergy number. We put a bow on it. We closed out M&I and then continue to still working. But I think embedded in what you see in our growth rate, and what we believe the promise was, is much larger.

And I think it will continue. It’s just natural cross-sell now, but it’s bringing — we love talking about merchant acquiring and core banking another than the asset of those banks. We like to think about the opportunities that we’ve got it by taking out larger capabilities across the company and delivering more product to the government vertical, you see the things that we’re doing that neither company did before, but the two together did. And I’d say I simply always think that this is a completely different company fundamentally in its fourth year, a new company where we took the two growth rates and exceeded either one, and we’ll do that for the rest of our life and with the exception of a pandemic. So I think it’s bigger than we ever thought.

And I think you’ll continue to see it, and it definitely had an effect and dense effect of the difference in the growth rate. So we see the two combined companies and then from what we originally announced, and how it shows up in today’s numbers. So thanks for asking that. It really does matter a lot. It’s really, we are getting the benefits of what we told all we do, and it’s better than we thought.

Operator: Next, we’ll go to the line of Lisa Ellis from SVB — MoffettNathanson. Please, go ahead.

Lisa Ellis: Hey, good morning. Thanks for taking my question. Frank, another one for you as well. I was hoping to follow up on the growth in payments and networks and specifically, the 17% growth in North America credit account growth. I think this is several quarters in a row now, you guys have highlighted mid-teens growth there, and then you highlighted two additional wins. Can you just elaborate a little bit on what is going on in the credit issuer processing space? Like, you guys have a ton of momentum here right now. So kind of what’s changed and what’s driving that really strong momentum. Thank you.