Fiserv, Inc.

Welcome to the FISERV 2020 First Quarter 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 Peter Pullian, Senior Vice President of Investor Relations at FISERV. Thank you. You may begin.

Thank you, Ivy, and good afternoon, everyone. With me on the call today are Jeff Yabuki, our Chairman and Chief Executive, Frank Pizzignano, our President and Chief Operating Officer, and Bob Howe, our Chief Financial Officer. Our earnings release and supplemental presentation for the quarter, which includes slides on our updated revenue and cost synergy targets announced in March, are available on the investor relations section of Fiserv.com. Our remarks today will include forward-looking statements about, among other matters, the impact of the COVID-19 pandemic on our business, expected operating and financial results, strategic initiatives, and expected benefits and synergies from the first data acquisition. 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. Please refer to our materials for today's call for an explanation of the non-GAAP financial measures discussed in this call, along with a reconciliation of those measures to the nearest applicable GAAP measures. Unless stated otherwise, performance references made throughout this call are year-over-year comparisons, and all references to internal revenue growth are on a constant currency basis. Also note that non-GAAP financial measures included in our earnings release and supplemental materials include the first quarter of 2019 results for First Data, which have been prepared by making certain adjustments to the sum of historical First Data and FISERV GAAP financial information. And now I'll turn the call over to Jeff.

Thanks, Peter, and good afternoon, everyone. To say we are living in interesting times is an understatement. As an example, Bob and I are here in Milwaukee, appropriately social distanced. Frank and Peter are joining from separate locations in New York, and many of you are likely at home. We are all adapting to this transitory time as we approach a new normal. We're incredibly proud of how the FISERV team has responded. protecting your company while executing on our number one priority, keeping associates and clients safe. We activated our business continuity plan quickly, starting in Asia and continued around the world. Today, about 85% of our associates are working remotely, and the remainder are following rigorous safety protocols to protect the health of the team. Additionally, hourly associates whose jobs cannot be performed remotely have received a 25% increase in pay while we navigate the COVID crisis. We are supporting clients by providing them with the leading edge solutions they need to serve their customers. Our account sales and service teams are adjusting to the changes required in this new world, including travel by tech, connecting with clients through individual and team-based video capabilities. The substantial majority of our implementations are progressing as scheduled, and sales in the quarter held up reasonably well, coming in just shy of the prior year. We entered Q2 with a solid pipeline, and in fact, our preliminary sales results for April were up more than 20% over the prior year. We have a strong, resilient business model, which is buttressed by the delivery of mission-critical solutions to financial institutions, corporate clients, and merchants around the world. We also believe leadership matters. and having more than our fair share of experienced executives who have successfully navigated the global financial and economic events of the last 30 years will contribute to even stronger results as we navigate these changing economic times. In early March, we communicated meaningful increases to our five-year synergy targets, including a 20% increase in revenue to at least $600 million, and on the cost side, we increased our target by $300 million to a total of $1.2 billion, which, as you will recall, does not include our sizable interest expense benefits. From day one, we believed that our significant synergies would help mitigate the potential adverse impacts of a recession. In addition to the quantum, we are intently focused on the speed to attain those synergies, all of which Frank will discuss later. The financial results for the first 10 weeks of the year were quite strong, even with some limited weakness outside the U.S. The last two weeks of the quarter got progressively worse as shelter in place and other restrictions ramped up around the world. The majority of the business displayed resilience, with the largest negative impact in the merchant business, along with pressure in our debit-oriented transaction businesses not seen in previous downturns. The circumstances also spurred some incremental growth across several areas, including payments and digital. Global merchant transactions are generally on the upswing, with some variability by country, but with meaningful improvements from the lows seen in late March and early April. In the U.S., we've seen early signs of recovery in later April and May to date, with comparative transactions down in the low double digits after declining nearly 30% in the last week of March. Since then, we've been seeing continuing gradual improvement in merchant transaction recovery, including into May. U.S. debit transactions were pressured but also showed improvement in the second half of April, finishing the month with low double-digit declines, a substantial improvement from the approximately 20% drop we saw in the last week of March and into early April. Overall, we are quite optimistic about the improvement we are seeing in the current trends, I believe we will see further acceleration as shelter-in-place restrictions are eased in the US and around the world. Given the uncertainty around COVID-19, we are withdrawing our previously communicated 2020 financial outlook. Consistent with the trends we have seen, we expect meaningful pressure on Q2's results and anticipate improvements throughout the second half of the year. Given the strength and resilience of our business model, including the significant synergy opportunities, We see a solid, actionable path to achieve double-digit adjusted earnings per share growth again this year. You will recall that we had expected our first quarter's results to be the weakest of the year due to a difficult compare and the ramping of synergies throughout the year. Given that, along with the impact of COVID-19, we produced solid results, including internal revenue growth of 4%, adjusted earnings per share growth of 16%, and free cash flow increasing to $760 million for the quarter. Our capital allocation strategy was in full force, including closing the sale of a 60% interest in investment services, adding to our merchant capabilities through two small acquisitions, and repurchasing 8.6 million shares in the quarter. Importantly, we are making excellent progress on integration with a focus on value creation across strategic, operational, and financial fronts. The privileged relationships we have in our account processing businesses continue to expand, adding 12 new clients in the quarter, including five on DNA, such as John Darke Credit Union in Massachusetts, with $1.5 billion in assets, and Nelnet, an existing output solutions client that selected DNA to support its mission of helping students make their educational dreams possible. Clover growth payment volume started strong, up 40% through February, and despite the COVID hit, still ended up 29% for the quarter. Clover devices' shift was up about 25%, and the adoption of add-on software services such as Virtual Terminal and our new Order Ahead functionality continues to expand rapidly across the base. We saw important momentum in e-commerce, adding 36 new direct clients globally, including Total Wine & More, the country's largest independent retailer of fine wines, the U.S. Army Installation Management Command, USA Technologies, and Regus Salons, the largest hair salon chain in the world. We also added the German grocery chain Tagut and MediaMarkt Saturn Retail Group, Europe's largest consumer electronics retail chain with over 1,000 stores in 14 countries. E-commerce transactions remain strong in the quarter, up 26% in the US and 20% globally, reflecting our market position and opportunity in digital commerce. Our integrated payments value proposition also continued to expand, growing partners more than 20% in the quarter. Impressively, ISV revenue grew more than 55%, even in the face of late March weakness. We continue to see strong opportunities to grow in this important space. Overall, total contracted merchant locations globally grew 12% in the quarter. We also had very strong Zelle results, implementing eight times more clients in Q1 compared to the prior year, and payment volume skyrocketed, up nearly 90% in the quarter. And we saw even stronger growth in the second half of April as people looked for new ways to pay in this new environment. We continue to see a significant value creation opportunity at the intersection of cards, DDA-based payments, and our merchant scale around the world. Importantly, we remain fully committed to deploying our $500 million innovation investment. We've identified important opportunities in areas such as enterprise digital, card, merchant e-commerce, ISV, and Clover. We also see expanded opportunities across the data horizon including risk fraud and decisioning with a specific emphasis on authorization rates, network innovation, and next generation integration. We will continue to invest in 2020 and over the next several years to ensure that we are focused on where the market is going and what we need to do to win. Lastly, as you have seen, we announced our CEO succession plan earlier today. which elects Frank Bisognano to succeed me on July 1st. I will serve as executive chairman for the remainder of the year, working closely with Frank to ensure a smooth transition. We will also work closely together to continue advancing our longer-term strategy, which will be heavily based on the well-honed capital allocation discipline, which is embedded in the DNA of the company. Given my 15-year tenure, The board and I have been engaged in deep succession planning conversations for a number of years. It has been my long-held belief that organizations benefit from changes in leadership and have used that principle to maintain a fresh approach over my time at Fiserv, including most recently through the first data acquisition. My conviction has gotten even stronger given the current pandemic and resultant need to manage and lead differently. Frank will bring new energy and perspective to the company, while fully embracing the strategic foundation of Fiserv's value creation playbook. I've had the pleasure of working closely with Frank over the last 18 months, and it will be two years since the announcement when I ultimately depart. In addition to the things that you know, such as Frank being an accomplished executive with vast experience in large, complex organizations, including doing a fantastic job as CEO of First Data, He's further established himself with our team, leading our businesses and integration, exceeding goals on our synergies, and working closely with me to establish the foundation for our future success. The board and I feel great about Frank, and he has our unanimous support as Fiserv's next CEO, only the first fourth person in our 36-year history. I'm incredibly happy for Frank and his family. and offer my heartfelt congratulations to him as a business partner and my friend. It has been an honor and privilege to lead your company for what now amounts to a quarter of my life. Over that time, we have transformed Fiserv into a global leader in payments and FinTech and have been named a world's most admired company for seven consecutive years, all while building a sustaining culture of delivering differentiated value for clients, associates, and you, our shareholders. My primary objective has been to leave the company stronger than when I found it. And while some may say we accomplished that objective, I firmly believe that the best days for Fiserv lie ahead. With that, let me turn the call to Frank.