Fiserv, Inc.

Welcome to the FISERV 2018 Fourth 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 Tiffany Willis, Vice President of Investor Relations at FISERV.

Thank you and good afternoon. With me today for the call are Jeff Yabuki, our Chief Executive Officer, and Bob Howe, our Chief Financial Officer. Please note that our earnings release and supplemental presentation for the quarter are available on the Investor Relations section of Fiserv.com. Our remarks today will include forward-looking statements about, among other matters, expected operating and financial results, strategic initiatives, and the anticipated combination with first data, including expected benefits, financial projections, synergies, financing, and timing of as well as the ability to complete the transaction. Forward-looking statements may differ materially from actual results and are subject to a number of risks and uncertainties. Please refer to our earnings release for a discussion of these risk factors. Today's presentation is neither an offering of securities nor solicitation of a proxy vote. The information discussed today is qualified by the registration and joint proxy statement that FISERV and First Data will be filing with the SEC. You should review that information carefully. You should also 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. These non-GAAP measures are indicators that management uses to provide additional meaningful comparisons between current results and prior reported results. and as a basis for planning and forecasting for future periods. Unless stated otherwise, performance references made throughout this call are assumed to be year-over-year comparisons. As a reminder, the share and per share amounts in the press release, supplemental materials, and comments are adjusted for the two-for-one stock split completed in March of 2018. along with adjusting the comparable 2017 adjusted earnings per share amounts in each period for the sale of a majority interest of our lending solutions business, which also closed in March. And with that, allow me to turn the call over to Jeff.

Thanks, Tiffany, and good afternoon, everyone. As you know, key elements of our shareholder value proposition are to steadily increase our internal revenue growth rate, Convert that to growing streams of free cash flow. And last, but certainly not least, allocate that capital in a shareholder-friendly way. We accomplished those objectives in 2018 and made important progress in building your company's future success. We achieved an 80 basis point increase in our internal revenue growth rate for the year to 4.5%, and also achieved our 33rd consecutive year of double-digit adjusted earnings per share growth. Results in the quarter which are consistent with our preliminary results announced on January 16th, include 4.5% internal revenue growth and a 33.4% adjusted operating margin, both against a very difficult prior year compare. Adjusted earnings per share increased 24% to $0.84 in the quarter and up a very strong 25% to $3.10 for the year. We also generated an all-time high in free cash flow, and allocated a record $1.9 billion to shareholders, repurchasing more than 25 million shares for the year. Sales were extraordinary in the quarter, finishing more than 30% higher than last year's record sales, including our largest account processing win ever, enhancing our growth profile entering the new year. Before we provide detail on the results, let me make a few comments on our recent merger announcement with First Data, which we believe creates the preeminent global provider of payments and financial technology. We expect this strategic transaction to move the industry forward in new and exciting ways. Early client reaction has been extremely positive and centered on the ways in which the combined solutions can come together to create unique value for them and their customers. The model is compelling, with leadership positions across multiple solutions and numerous ways to grow and prosper. We also intend to enable meaningful new client value along several axes through increased investments in strategic solutions, unique and compelling end-to-end integration, and as important, by identifying new and unique sources of value at the intersection of technology, innovation, and data. We're approaching this opportunity with excitement as well as a steadfast commitment to excellence. We've kicked off integration planning and expect to hit the ground running when we close. Our priorities include unlocking client value, capturing the meaningful synergies, and retaining and attracting the best talent. We have skilled, experienced integration leaders driving the process, accompanied by strong governance and oversight. We are highly confident we will achieve the incremental revenue synergies of $500 million and the $900 million of cost benefits shared in the original announcement. In addition to this transformative transaction benefiting clients, we are equally as focused on creating significant shareholder value. We expect to generate upwards of $4 billion of annual free cash flow over the next several years and will continue to use our disciplined capital allocation strategy to optimize value in the aggregate as well as on a per share basis. Our collective enthusiasm about the combination with First Data is even greater now than it was on the day of announcement. With that, let's get back to reviewing performance and start against our 2018 key shareholder priorities. Our first priority was to continue to build high-quality revenue while meeting our earnings commitments. Next, to enhance client relationships with an emphasis on digital and payment solutions. And third, to deliver innovation and integration, which enables differentiated value for our clients. As I mentioned, we continue to focus on high-quality revenue growth acceleration, delivering 4.5% internal revenue growth in both the quarter and the year. The 80 basis point increase in our internal revenue growth rate for the year comes from multiple sources, including the cumulative effect of adding recurring revenue with a direct link to client value. We also expect another lift in our internal revenue growth rate for 2019. Our strong adjusted earnings per share performance was due to a combination of internal revenue growth, tax leverage, and operational effectiveness. Our full year adjusted operating margin was below the prior year, primarily due to a 110 basis point headwind from the combination of the lending transaction announced in March, and the meaningful internal investments funded by the Tax Cuts and Jobs Act enacted last year. But for these items, adjusted operating margin would have increased 80 basis points for the full year. Our second priority was to enhance client relationships with an emphasis on digital and payment solutions. Now, as you may have seen earlier today, we announced the largest new core account processing sales win in our history. In a competitive takeaway, New York Community Bank Corp, Inc., the holding company for New York Community Bank, with over 50 billion of assets and locations in five states, selected DNA and a package of more than 40 solutions, including debit processing, Carillion Online Banking, Mobility, Zelle, and Dovetail, to deliver differentiated high-value solutions to their customers. The combination of modern... real-time technology with significant flexibility is allowing us to meet the changing needs of larger financial institutions. DNA also continued its momentum with large credit unions, signing Fox Community's credit union with $1.6 billion of assets. Fox Community selected DNA as their business had outgrown their existing core processing provider. DNA provides a platform for future growth, eliminates a number of third-party vendors, and will allow Fox communities to continue serving their members with excellence. Overall, DNA performance was strong, with 30 implementations for the year, including 16 for institutions with assets greater than $1 billion. We also signed 29 new clients for the year, which is indicative of the continuing momentum of DNA. Equally important, We signed 30 new account processing clients to our market-leading premier platform during the year. Interest also remains high for our digital and payment solutions, such as Architect, Commercial Center, and Dovetail. Bank of California, with more than $10 billion in assets, selected Architect and Commercial Center in the quarter to better meet the rapidly changing expectations of their retail and commercial customers. Additionally, Both KeyBank with over $130 billion in assets and BankOZK with more than $20 billion in assets selected dovetail in the quarter. We expect to see more institutions take steps to enrich and extend their payments capabilities to meet the evolving needs of a digitally-centric landscape. Our third priority is to deliver innovation and integration, which enables differentiated value for our clients. We continue to see strong demand around Zelle. As you have likely seen reported, Zelle transactions now exceed 400 million and grew 75% year over year. We expect broad industry adoption to accelerate over the next 24 months, as evidenced by the nearly 100 new clients we signed for Zelle in the fourth quarter alone, which is more than the total signings in the first three quarters of the year. As the leading provider of Zelle services to all sized financial institutions, we have opportunities to package our payments value proposition in unique and interesting ways. For example, in the quarter, MUFG Union Bank, with $124 billion in assets, selected both our turnkey Zelle solution to be implemented later this year, along with the dovetail payments platform to help enable real-time enterprise payment capabilities for their customers. Overall, we believe our leadership as the most experienced standalone as well as integrated Zelle provider will enable us to deliver payments innovation and client value to the financial industry. Lastly, PennyMac, a top mortgage lender, selected a broad suite of products including debit processing, electronic billing, and a unique mobile wallet to meet their customers' expectations. With that, let me turn the call over to Bob for more detail on our financial results.

Thank you, Jeff, and good afternoon, everyone. As you've heard, we are pleased with our strong 2018 performance. Adjusted revenue was up 2% in both the quarter and the year to $1.5 billion and $5.5 billion, respectively. Internal revenue growth was 4.5% in the fourth quarter and full year, driven by solid performance in both segments. The fourth quarter results were even stronger when considering last year's comparative performance of 6% internal revenue growth. Adjusted operating income, which was impacted by the lending transaction, was in line with the prior year at $492 million for the quarter and up 1% to $1.8 billion for the year. Adjusted operating margin in the quarter was 33.4%, which is a decrease of 60 basis points compared to last year's record results. As we've shared all year, our adjusted operating margin performance includes structural headwinds from the lending transaction along with the investments funded from tax savings. These two items had a negative margin impact of 160 and 110 basis points in the quarter and year respectively. Adjusted EPS was up 24% to $0.84 in the quarter and increased 25% to $3.10 for the year. marking our 33rd consecutive year of double-digit adjusted EPS growth. Our payment segment has had strong performance all year and did so again this quarter. Adjusted revenue was 9% to $865 million in the quarter and up 8% to $3.2 billion for the year, which includes two months of impact from the acquisition of the Elan Debit Processing business. Integration with our card services business is in flight and progressing well. Internal revenue growth in the segment was 6% in the quarter and 5% for the year, led by strong performance in card services, bill of solutions, and electronic payments, partially offset by lower periodic revenue. Organic debit transaction growth was high single digits in both the quarter and year. Adjusted operating income in the segment grew 9% to $315 million in the quarter and 8% to $1.1 billion for the year. Adjusted operating margin performance in the quarter was a very strong 36.4% in line with last year and expanded 20 basis points to a new high watermark of 35.3% for the year. The client-focused investments funded from tax reform negatively impacted the payment segment results by 120 basis points and 50 basis points for the quarter and year respectively. An important element of expanding high-quality growth is extending our digital and payments footprint. Along those lines, Mobility ASP subscribers grew 21% in the quarter to cross 8 million. We also continued to add clients to our unified digital platform architect. with seven implementations in the quarter and 19 for the year. In addition, we signed 26 new architect clients in 2018, further demonstrating the market opportunity and importance of digital. Lastly, P2P transactions from both our PopMoney and Zelle solutions grew a combined 74% for the quarter and 44% for the year, showcasing the strong growth potential of these important DDA-based payment technologies. Zelle volume alone in 2018 was up more than six times the prior year. For the financial segment, adjusted revenue was down 8% to $615 million for the quarter and down 5% to $2.4 billion for the year, both of which were significantly impacted by the lending transaction. Internal revenue growth was 3% in the quarter and 4% for the year, driven primarily by solid performance across our account and item processing businesses. Adjusted operating income was $208 million for the quarter and $798 million for 2018, both of which declined due to the lending transaction. Accordingly, adjusted operating margin contracted 140 basis points in the quarter to 33.7%. And similar to my comments on the total company results, the financial segment adjusted operating margin was negatively impacted by the lending transaction and tax savings reinvestment. totaling 190 basis points in the quarter. But for these items, adjusted operating margin would have expanded 50 basis points even in light of reduced periodic revenue from the very strong fourth quarter performance last year. For the year, adjusted operating margin contracted 20 basis points to 33.3%, which reflects a 150 basis point headwind from the combination of that lending transaction and tax savings reinvestments. We expect the combined impact of these items to be fairly muted on our total company adjusted operating margin results in 2019. The adjusted corporate operating loss was $31 million for the quarter and $122 million for the year. Both the quarter and full year results were in line with our expectations. The adjusted effective tax rate for the quarter was 23.9% and 21.6% for the year. both lower than prior year due primarily to the benefits from the Tax Cut and Jobs Act. We expect our tax rate for 2019 to be in a range of 22% to 23%. We generated record free cash flow, exceeding $1.3 billion this year, highlighting a hallmark of our business model, significant free cash flow generation. Free cash flow was up 7% for the year, which includes a reduction due to the lending transactions. Free cash flow conversion was 146% in the quarter and 102% for the year. Conversion was slightly below our initial expectations, primarily due to higher working capital and increased CapEx, which we expect to moderate in 2019. We repurchased nearly 9 million shares in the quarter for $689 million and over 25 million shares in 2018, returning a record $1.9 billion to shareholders. Since inception of our share repurchase program, we've retired nearly 482 million shares for $11.4 billion, or more than 60% of the shares outstanding at the start. And as of December 31st, we had 393 million shares outstanding and 26 million shares remaining in our share repurchase authorization. As you know, in conjunction with the first data announcement, we have deferred any additional share repurchase until the transaction closes. Total debt outstanding at the end of the year was $6 billion, bringing our debt to adjusted EBITDA ratio to 2.6 times. With that, let me turn the call back to Jeff.

Thanks, Bob. Sales in the quarter was up 31% to an all-time high, which is even more noteworthy when compared to the record level in last year's fourth quarter, and was 114% of quota. Sales for the year was up 5%, and we attained 91% of quota. Integrated sales was also very strong in the quarter, up nearly 30% over the prior year and 131% sequentially. Importantly, we exited the year with a domestic pipeline that even after our record sales remains nearly 20% higher than at the same point last year. We are pleased with our sales results and market momentum. We made excellent progress on our operational effectiveness initiatives during the year. We achieved another $12 million of savings in the quarter and $57 million for the year against our $50 million target. As of the end of year three, we have already booked $200 million of the expected $250 million five-year program. In the aggregate, we have captured nearly $800 million of saves over the last dozen years. For 2019, we expect to achieve $50 million which would close out our $250 million five-year program one full year early. Before we get to guidance, let me provide some perspective on the environment. We continue to see the market moving to places where we are focused, such as payments and risk, all things digital, and delivering a world-class core account processing ecosystem. We believe this evolving paradigm will require market participants to increase their investments in technology, focus on data insights, and re-engineer their customer journeys. Given these trends, coupled with the current macroeconomic environment, we believe M&A will continue to be active, an example of which we saw earlier today. We firmly believe financial institutions will increase their technology investment and, where possible, spread that across larger scale, extend their deposit gathering capabilities, and create differentiation in how they go to market. On balance, These trends are very consistent with our strategic hypotheses and reinforces the actions we have taken to position your company for long-term success. Now, looking ahead to 2019, we expect our internal revenue growth rate to step up and be in a range of 4.5% to 5%. We expect adjusted earnings per share to be in a range of $3.39 to $3.52, representing growth of 10% to 14%. which is measured against a revised 2018 result of $3.08, which reflects the remaining impact of the lending transaction. We expect our adjusted operating margin to expand by at least 50 basis points, and we anticipate our free cash flow conversion to be more than 105% for the full year. For modeling purposes, we anticipate that our financial performance will accelerate into the second half of the year, creating additional momentum as we go into 2020. Importantly, our guidance does not include or anticipate any impact from the first data transaction, which we expect to close later this year. In conclusion, we're pleased with our financial, operational, and strategic results for the year. We further strengthen the business and are excited and optimistic about the future of your company. We were recently named by Fortune magazine as a world's most admired company for the sixth year in a row and received high marks for long-term investment value, financial soundness, people management, and social responsibility. This important recognition underscores our commitment to excellence and innovation as a global leader in FinTech. As we look to 2019, we remain committed to delivering high-quality results including an increase in internal revenue growth, strong free cash flow, and disciplined capital allocation. Lastly, let me recognize and thank the 24,000 Fiserv associates around the world who are committed to delivering excellence for clients and shareholders each and every day. I'm proud of what we've accomplished so far and even more optimistic about our collective future. With that, let's open the line for questions.

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star one. Please unmute your phone and record your name clearly when prompted. Your name is required to introduce your question. To cancel the request, press star two. One moment please for the first question. Our first question is from Darren Peller of Wolf Research. Your line is now open.

Darren? Hey, Jeff. Can you just start off with any market feedback you're hearing from customers either on either side, First Data's customers or perhaps your own banks since the deal was announced? Just love to hear a quick spot check on the sentiment.

Yeah, sure. Obviously, we've spent the substantial majority of time with our clients, although a number of clients have multiple relationships. I have to say the client reactions have been incredibly positive, both in terms of Two strong companies coming together. As you know, Darren, Frank and his team have done a great job in rebuilding First Data. And I think the fact that we're coming together, people see the opportunities, those opportunities that we've talked about, whether they be around bank merchant opportunities, around network enhancement and enriching the payment, the end-to-end payment opportunities. and even some clients who have said, hey, now that you guys are together, we want you to take a look at this business that we would not have otherwise done had you not come together. So the feedback's been great, positive, probably more positive than you would have thought to the date so far.

That's great to hear. Thanks. And just a quick follow-up. I mean, look, we saw the New York Community announcement today, and obviously you're showing strong integrated sales again. I guess... First of all, if you gave us a little more color, what drove the win on New York Community? I think it was a competitive process. And then on the strength on the integrated sales, I mean, if you could just maybe rank order the top three areas you're seeing differentiate yourselves right now in this quarter, next, last quarter, that'd be great. Thanks again, guys.

Absolutely. Thanks, Darren. So the world, as the world becomes more digitally centric, we're clearly in an environment that is real-time. Many of the core banking systems in the U.S. are not real-time, and so there's been a lot of focus on, do I take the step to real-time now or do I wait? In this case, New York Community made a determination that they wanted to go with real-time. The second thing is they wanted the flexibility of an API-based system, more modern technology. And then third, and just as important is the suite of products that we bring in, everything from online and mobile to payments hub technology, and including, had we already been closed on first data, I'm sure we would have looked at this as well. So the belief that we're going long into digital payments and real-time payments is the thing that helps move that end of the market in. So from that perspective, that's all great. On the integrated sales front, it's really around digital. So whether it be architect or mobility, a lot of movements on payments, dovetail payment hub, Zelle, and then a fair amount of energy on just risk and fraud to make sure that as the the more complex digital ecosystem comes together that they're able to protect themselves. So a lot of focus in those areas.

Okay. That's great, guys. Thank you.

Thank you. Thanks, Darren.

Our next question is from Brett Huss of Stevens Incorporated. Your line is now open.

Good afternoon, guys. Hi, Brett. Can you talk a little bit more about Dovetail? It sounds like we're seeing more traction, at least, than I expected on that. I know it's a bit of a Swiss Army knife asset. Can you give us the main drivers? Is this a payments hub, future-proofing kind of thing, or are there specific use cases that people are going after, or is this a cost-savings focus? Can you just illuminate that for a little bit for us?

Sure, Brett. I mean, it's a little of all of those things, although I do have to say I like the the Swiss army knife metaphor, because it actually fits pretty well, where you have some trends going on, as you know, in the market that are having people take a look at the payments back office infrastructure that you have. So whether it be around TCH or other real-time use cases, the opportunities to pair up, dovetail with Zelle and have a different way to move money. There's also a fair amount of focus going on right now around updating and enriching wire capabilities. So those use cases are making it more tangible to think about it. The other beauty of Dovetail is we can install the hub and toggle capabilities as if and when clients need them. So in some cases, you've got clients who want In other cases, they may only want wire, but we're enabling everything and then giving them what they want when they decide to need it. And it was consistent with our strategic thesis when we bought Dovetail. It's taken us a little bit longer. We said throughout the year it was part of why we were seeing some slowness in sales is is these are longer, more technical sales, but as we're seeing them ramp up, they're beginning to get some nice momentum, and we expect that momentum to carry really for the next couple of years as all-sized institutions think differently about ACH as really the standard and moving it more to a real-time or near-real-time capability.

That's helpful. And to follow up another product question, can you talk about bill pay and the fact you have a market-leading bill pay position? and have also kind of migrated some of those things to the Now Network. How does that fit in with the new group of merchants that you all are likely to have once this deal closes? Are there any specific ways or rails or things that we should be thinking about on how you connect the bill pay with some of those merchants?

Yeah, I mean, we're very excited about the fact that First Data has, you know, call it order of magnitude, somewhere around a 40 share in the U.S. in merchants, and that is in fact an element of a rail. And so we're certainly examining is there a different way to electronify the standard consumer to business payments. We're also quite excited in thinking about combining some of the capabilities that we have in our cash management technologies along with not just the retail piece of of RxP but also the business to business piece of RxP and the size of the merchant databases which are quite significant. And then looking at really how can we expedite about payments not just in the consumer side but in the business to business side as well. So we see a lot of optionality there. It's one of the areas in which we believe will ultimately invest to help enhance the way businesses move money.

Great. That's what I needed. Thank you.

Thank you.

Our next question is from Dave Koning of Baird. Your line is now open.

Yeah. Hey, guys. Congrats on a lot of fronts.

Hey.

Yeah. So I guess, first of all, in the FI segment, the margin decline has gotten bigger over the last three or four quarters. Is that just, you know, you were having a pretty good year you were kind of flexible in terms of what you could spend on investments. I know the lending – that sale obviously contributed. Is that what was kind of happening, and does that allow the margins to grow at an increasing rate through 2019 in that segment?

Yeah, Dave, it's Bob. Probably the biggest driver of the margin into the second half of the year is really the ramp of that tax savings reinvestment. We announced that and launched that at the very beginning of the year, and by the time we really got it ramped and running, it was really into the third quarter, into the fourth quarter. And so you saw more of a significant headwind of that in the second half of the year than you did in the first half of the year. And, of course, that will abate somewhat into 2018. So we'll hope to see margins lifting as part of the 50 basis point margin expansion we've forecasted for next year.

We also had, Dave, a fairly meaningful decline in periodic revenue in the quarter, of which a big block of that comes in the financial segment. So that also had a real impact in the quarter. That was a big driver for fourth quarter. Yep.

Yeah, okay, gotcha. And then the follow-up question, I guess, in payments, does Elan have significant seasonality, and is there enough cost savings and margin improvement that that actually drives some of the margin expansion in payments, or is that a little bit of a drag still in the first full year?

Yeah, I think you should think about it as a drag in the first full year. We've obviously accounted for that in our 50 basis points of, or at least 50 basis points of positives. margin expansion this year, but it is going to drag us throughout the year. I don't see them having different seasonality than the rest of our card business, but there is going to be more card utilization in Q4 versus what we would see, for example, in Q1.

Great. Thanks, guys. Congrats. Thanks, Dave.

Our next question is from Jim Schneider of Goldman Sachs. Your line is now open.

Excuse me. Hey, Jim. Hey, how are you? Thanks for taking my question. I was just wondering, and I apologize if this has been answered already, if you look more broadly at the bank landscape, what do you think today's merger announcement says about the prospects for seeing additional actions, more down market in your traditional client base, and maybe just talk about what you see in the bank consolidation environment generally speaking, please.

Sure. So, I mean, we talked a little bit about this in our prepared remarks. I mean, in my opinion, this is an example of a couple of good, strong banks who decided that they're going to go harder at some of the larger banks, and they're going to look to consolidate to create more capacity to invest in technology. I think there's a real recognition of of that importance, including an announcement where they're going to increase their technology spend meaningfully. I think that is what we're seeing across the ecosystem in terms of looking for different ways to spend money on technology. There's a real need to do that, whether it be digital, retail, risk, payments, all of those areas, many of the things that we've talked about and weaved in throughout our prepared comments. We have been saying for a couple of years we've been seeing a fair amount of M&A. I think that's going to continue because scale is going to matter. There's a lot of focus on deposits, deposit gathering. And for us, the good news is even though we will continue to have the same kind of consolidation in our base that we've seen for the last 30 years, I do think that the places in which we are going along are the places in which the investments are occurring. And I also think that – I think it will send a message to the industry when you're seeing companies that are both strong come together to be a better company. We think 22 days ago we made a similar announcement. But, Jim, I think that's what the message is in that announcement today.

That's helpful. Thanks very much. And then maybe just as a follow-up – Can you maybe talk about relative to the revenue synergies you expect to see over the five years post-transaction close, which are the one or two items that you think you could see soonest in terms of either the cross-sell opportunities or on the network side or the card processing side or just the pure cross-sell of acquiring services? Maybe just kind of talk through what you see kind of coming and materializing first, second, and third in the progression to the $500 million.

Sure. So, I mean, I think as part of our original announcement, we said we expected nearly $100 million of actual revenue synergy in the first 12 months post-close. And a big part of that is because we believe by the combination of the networks and the ability for routing opportunities and different forms of network innovation that we will be able to, by virtue of the combination, without having to go out and sell and implement and have lead time, but just doing things in a more cohesive way with the scale of the companies coming together, that will create some incremental value there. I think the second thing is, We're going to have a good amount of success in the merchant bank space. One of the things that we've been very pleased about is that the feedback coming from the community institutions all the way up through the largest banks, there's a lot of interest in how can we take the things that we're doing today, whether it be digital and core, and integrate them with merchant, and we will work on that and have success. you know, be as expeditious as we can in getting that into the market. So I think we'll actually see benefits coming from that fairly early in the process. Again, part of the nearly 100, but I think we'll see sales ramp up a little bit faster than we originally anticipated. And then we'll have a number of different products to sell across both sets of client bases through the normal, think about it as our integrated sales, and I think that will probably be third in that order.

Thank you.

Thank you.

Our next question is from Ramzi L. Assal of Barclays. Your line is now open.

Hi, guys. Thanks for taking my question. I wanted to revisit the BB&T SunTrust deal. Can you help us understand to what degree there would potentially be an impact to your P&L from that transaction? Are they both customers of yours, or is there any risk of consolidated pricing there or of losing some of the business? If you could just speak to that, I'd appreciate it.

Sure. So both SunTrust and BB&T are good long-term clients of ours, and we expect that that will continue. Of course, it's only been a few hours, but we have no reason to believe that that that will not continue. The kinds of services that they are using from us, we think are fairly well provided across the base, and they're not generally the kinds of things that you can combine. So bill payment would be a good example. So we think that that will continue to be, will work well for us. They are also clients of First Data. And I assume that they will continue to be good clients of First Data. So for right now, we feel like there will be opportunities for us to do as much, if not more, given some of the things that we're doing and some of the investments that we believe they may make, given the transaction.

Got it. And my follow-up, I wanted to ask about DNA and this New York community banquet, which is impressive. This is kind of a proof point that DNA definitely appeals to a larger asset-size institution. I mean, what does the pipeline look like for larger-size deals here? Is this kind of more of an outlier, or are you really seeing the momentum moving sort of upmarket with DNA?

Yeah, Ramsey, that's a great question. Thanks for the kind remarks. We have been, interestingly, for the last couple of years – we have been very pleased at how we have played in kind of the larger bank RFP process. So we have basically in every large deal that has been done over the last couple of years, we have been a finalist in an RFP process, so in the competitive process. And frankly, one of the things that's been a little bit of a challenge is it's hard to win your second one until you've won the first. And now that we have won this, we've won several banks that are in the $30 billion range. We now believe that this takes us up to the next level. And we are the only real-time modern technology platform in the U.S. that's U.S.-based and U.S.-centric. And we do think this will help us. Now, we also recognize that there are not a hundred of these going a year, but there are enough of them to matter. And as you know, we typically are really great in payments and digital and mobile and risk and those products up in that end, but we have not had the momentum in core, and we think this is a great step in the right direction.

Great. Thanks so much.

Thank you.

Our next question comes from the line of George Mihalos. Your line is now open.

Hey, guys. Thanks for taking my questions. Sure. Just, again, maybe thinking about the first aid acquisition and all the assets and the services that that brings to you. Now you obviously have the merchant capability. You're more robust on the issuer processing side. You also get sort of a stronger switch. Is there an opportunity, as you think of sort of, you know, recreating a network to, you to sort of put something in place kind of similar to what a very large bank like Chase has done with sort of a ChaseNet-type product. Is that something that's on the roadmap for you guys?

I would say at this stage we are in the process of evaluating a number of different opportunities, certainly looking at all of the different ways in which we can create network value for for our issuer clients and our merchant clients is quite high on the list. Frankly, our focus at this stage has been more around where are the opportunities to innovate in the progression of the merchant capability and where are the ways to integrate in the progression of the issuer merchant connectivity. And so we see some really intriguing opportunities there around digital enablement, around real-time connectivity between what's happening at the point of transaction all the way back through cash management and back into the core account processing system. Frankly, we believe that one of the things that makes us unique is not just that we have the issuer and the merchant, but we have the core engine as well wrapped up by the back office payments. And so we see a lot of opportunity there, especially as the world moves more to real time. So a little bit of a long-winded answer, but we're still early in the process of evaluating those kinds of opportunities.

Great. I appreciate that. That's very helpful. Then maybe just a quick follow-up, sort of a housekeeping item. How should we be thinking about the term fees in 19 versus 18? And maybe if we look at the 50 bps of margin expansion, kind of thinking about that between the financial and payment segment. Thank you.

Sure, thank you. For 2018, it was down a bit. I would expect 2019 in total from a periodic revenue standpoint down. to be up modestly, call it flat relative to what we saw in 2018 actual.

Our next question is from Chris Shutler of William Blair and Company. Your line is now open.

Chris Shutler Good afternoon. Jeff, could you give us a sense when you look at your FI customers, how many have merchant bank capabilities today and how many of you view as kind of viable candidates for merchant acquiring?

It's a really interesting question. And it's only interesting because there's really no bank or in many credit unions who don't have connectivity to merchant. What we have found in the community space is is an incredible amount of fragmentation. Very few institutions have going all in with a single source. It's much more around letting the merchants, to some extent, make those decisions because people like us haven't built out the technological advantages around integration that we believe we're going to be able to build. We think it's very much a greenfield space, and the key is going to be how will you begin to prioritize the combination of front book and back book and how the institutions are focusing on their end market. And again, the second piece is how do you make it easy through integration into the core system to for banks to be in a place where they can better serve their merchants and create some economic value for them at the same time. And we think there's a reasonable amount of value for banks to capture, and we like being in the point where our technology is actually making money for banks as opposed to costing them money.

Great. And then just one cleanup. The 2019 guidance for EPS, can you just confirm whether there are any share repurchases in that guidance?

We've essentially in our overall guidance 10 to 12 percent growth off of the 2018 actual result incorporated the deferment of our share repurchase through a lease close and that range essentially encompasses a variety of potential outcomes there.

Okay, Chris, and I think I would clarify by saying Bob really meant to say 10% to 14% of EPS guidance. I think what we obviously are not buying back shares at this point, and we have to get to close. I think what we would say is our 10% to 14% assumes whatever the different scenarios are that we believe will happen throughout the year.

All right, thank you.

Thank you.

Our next question is from Glenn Green of Oppenheimer and Company. Your line is now open.

Thanks. Good afternoon, Jeff and Bob. Hi, Glenn. I wanted to go back to sort of the booking and sales environment. You know, the 30% plus number in the fourth quarter was obviously great, but I'm curious how broad-based it was, or was it skewed by New York Community Bank? How much? And obviously you've got the pipeline up 20%. So it certainly feels like the environment's really good. And just sort of a secondary question on that is New York Community Bank scheduled to convert at all in 19, or is that more of a 2020? I'm trying to understand if that impacts your organic growth in 19. Yeah.

So I would say, Glenn, that the sales for the quarter were incredibly broad-based, a lot of activity across virtually every line. And again, Many, many of the sales were on an outsourced ASP kind of cloud environment, so a lot of future recurring revenue that's going to get booked. Part of it is the second and third quarters were not great, and so we had some pickup in the fourth quarter for that, but the fact that we had such a big quarter ended up up for the year, year over year, even though a little short of quota, and the pipe is still up nearly 20%. We, like you, view that as being quite positive, and we like what's in the pipeline, the kinds of transactions that are in the pipeline. As far as New York community goes, there will be a bit of positive impact in 2019, but the substantial majority or the big boosts will come in 2020 and beyond.

Okay, and then just quickly, I don't know if you have any more thoughts. It's only been three weeks since you announced the merger, but the $900 million of cost synergies, you know, just getting a sense, trying to get a sense if there's any other sort of low-hanging fruit you've found, and would you be willing to share a little bit, sort of thinking of the timing of how quickly you might have realized that?

Yeah, so I would say that, you know, as we referenced in our prepared remarks, that we're highly confident in both the $900 million of cost synergies and the $500 million of incremental revenue synergies over the period. I think when we talked about this, we talked about the fact that it's a little bit of a barbell. We expect to get a lot of benefit in the first couple of years. We're talking about a net 20% accretion, which obviously also takes into account the interest saves, which are not part of the the $900 million. Then you start to get to some things that are a little bit tougher. You do work and you have it come back in. I would say at this stage we've gotten the integration kicked off. We're taking a look at things. Depending on if you're asking Frank or me, we're more bullish on the timing. Bob and his counterparts are a little bit, they're going to try to give us the Heisman on that a little bit. I've You know, we feel very good about the 900. We feel good about the timing that we've talked about. And you can be sure that just like what we do in our operational effectiveness work, we're going to do everything we can to bring that in early. And we'd like nothing better, although this is not guidance, but we'd like nothing better than to get done earlier than we anticipated so we could get to the phase two and three and four and five and six and everything else. to build upon the muscle that we've built in Fiserv for the last 12 years.

All right, great. Thank you very much, Jeff.

Thank you.

Our next question is from Chris Brendler of the Buckingham Research Group. Your line is now open.

Hi, thanks. Good afternoon, and thanks for taking my question. One quick question on the merger. I look at the cash flow projections on this pro forma company. pretty powerful. And your leverage guidance, I'm getting a pretty significant variance as I pay that down. Can you talk about potentially the merger and sort of integration costs and how significant those might be in your plans? Thanks.

Sure. Thanks. And Chris, it's good to chat with you. So I would say that our plans around generating the free cash and the call it $4 billion-ish over the next few years. I mean, we're certainly feeling quite good about that. I think on balance we've said that we expect the – and Bob, correct me if I'm wrong – we basically expect the one-time cost to be somewhere in the area of the $900 million of synergies. And so I think that's the general rule of thumb that we're using, and that will probably go a little bit ahead of the synergies because you typically are spending the money as you book them and not – or as you lock them down and not necessarily as they come into the P&L, but I don't think there will be gigantic differences in the flow of that. And then as it relates to the leverage ratios, remember that what we've talked about is that we're going to suspend or, sorry, defer share repurchase between now and closing, and then we'll reevaluate what we have going on. We think the combination of the growth in EBITDA and the payback potential out of the significant free cash flow that we'll generate will allow us to pretty quickly get back to our more normal capital allocation strategy, which typically includes buying back shares. So we think that there will be a combination of tracks, paying down debt, repurchasing shares, and probably doing little solution-oriented acquisitions again at some point with the first two taking precedence. Bob, does that? Yep, exactly right. Okay.

That makes a ton of sense. Thanks, Jeff. And if I could ask a follow-up on, you mentioned on the merger call the opportunity with Clover potentially within the Fiserv client base and I'm just sort of fascinated by that possibility. Can you just give me sort of how you view Clover, both as part of the merchant business and potentially bring that into banks today and offer them a square-leg solution, and also what you're thinking in terms of the core business, the core processing business, and how they could use Clover? Thanks.

Yeah, sure. So, I mean, we were really very bullish about the ability to bring Clover into the community banking system. For a couple of reasons. First of all, we like the fact that we can drive, we think, a really powerful end-to-end integration advantage. We can digitally enable that to make it easier for merchants to be able to select on their own that technology if they decide to open an account online. We envision being able to also sign up as a Clover merchant in that same process, so of the value chain. And then most importantly, it's a really attractive technology. It will be in a place where banks can combat Square if they so choose. And then lastly, and probably most importantly, is we believe that by integrating this into the core account processing systems that we'll be able to create a data advantage for the banks vis-a-vis what they could have done otherwise and allow them to better serve their SMBs and also to optimize their revenue, which we see happening in some of the larger institutions. So we're really excited about that, and our banks are as well.

Great. Thanks, Jeff. Really appreciate it, and I just can't wait to see how this comes together.

Thank you very much. Appreciate it.

Our next question comes from the line of Jeff Cantwell of Guggenheim Securities. Your line is now open.

Hi. Good afternoon.

Hi, Jeff.

Hey, thanks for squeezing me in. Can I just circle back on something? You sort of just touched on this. I guess a little context for you here. We cover a community bank that's a client of yours, and they're excited to see what you do with Clover, right? So I guess the crux of the question, you know, should we expect Clover as a potential offering, you know, by your bank partners using online? Because we know that, you know, from First Data's standpoint, digital distribution was a big initiative of theirs with their larger JV partners. I guess, you know, what I'm trying to drive at is, you know, is offering Clover on all of those financial institution websites a realistic outcome from all this, even if it might not be a near-term focus. Give us your thoughts there.

Yeah, and Jeff, thanks for asking the question. I mean, we realize as well as you do that one of the issues has been a lack of digitally enabling the selection of Clover or other merchant capability. and First Data has done a great job of building out basically the procurement capability but have not been able to enable the whole process. One of the beauties of what we bring to the party is not only do we have the core system, but in many, many cases we are also the digital enabler, hosting websites, doing lots of those kinds of things. We're serving somewhere in the area of 110 million digital users today in the U.S. We have 140 million accounts that we're processing for. And so when you bring that together, we do see opportunity. Now, to your point, we think it will take some time to figure out the right way to do that, But that's pretty high on our list, just given the opportunity that we see and the opportunity that the clients see as well.

Thanks very much. Thank you.

And our last question comes from the line of Joseph Areci of Cantor Fitzgerald. Your line is now open.

Hi. Thanks for squeezing me in, sir. I had... I should ask like a multi-part one, right? It's been a long day for me too. Yeah, so everyone's asked about sort of the cost synergies. I wonder just two parts, and I'll ask them up front. First, on the $500 million of revenue synergies, can you break that down for us? Is that cross-selling versus new products versus other products? And then the second part of that question, which I'll just ask up front, Traditionally, having covered FDC and having covered Fiserv and the core processors, you're selling it to different parts of the bank with different decisions and different people. I'm wondering, as you start to see this come together, how do you bridge that gap? Would a core processing system necessarily, or someone who uses a different core processing system necessarily convert because you've got merchant acquiring or or is it all from the outside in, as you talked about with Square, et cetera? Thanks.

Yep, absolutely. So let me take the first part of that first. So when we announced the deal, we talked about three distinct buckets of value. We talked about a couple hundred million dollars of revenue synergies, so 40% of the 500 would really be around merchant bank acquiring services, The second bucket was around really payments, network innovation, expanding our payments offerings and network innovation. That was around $250 million. And then the last $50 million was around integrated sales, just generally cross-selling across all of the things that both of the companies do, and that's really around the world. And again, we provided numbers that we were highly confident that we would be able to achieve. I would also put in one other caveat. We also talked about the fact that we made a $500 million incremental investment into technology, into supporting the technologies, and that is separate from the $500 million. So the benefits of that $500 million aren't accounted for in the 500-year revenue synergy. So we continue to feel good about that, about that aspect of it. As it relates to the second part of your question, really around to your point about the core processors and payments, in the largest banks, clearly that's going on separately. You've got the back office payments people looking at payment hubs, and you've got front office payments looking at cards, and you've got core processors. looking, no one in the largest banks is really, for the most part, looking at core, but certainly that would go into a different place. In the core, even in the New York Community Bank level, that size institutions doesn't have the fragmentation that you're talking about, and these things look to be bought together. And because we have such strong relationships, whether they be Digitally based or payments based or core based in the in the call up everything, but the top 10 banks They're less fragmented than then Having to literally go to a bunch of different people once you and maybe it's 15 but for the most part the relationships that that we have and first data have are going to be extensible and and not going to be as murky as it will seem on the surface to go in and be able to talk through the value. In fact, many, many, many, many clients are wanting to do that already. Of course, we have to wait until we close to be able to go out and do that. But the conversations and enthusiasm is certainly out there right now, and we're not seeing any issues around that kind of of fragmentation or silos coming from the financial institutions or the merchants. Thank you. Thank you. And thank you, everyone, for joining us today. We always appreciate your support. If you have any follow-up questions or need additional information, please don't hesitate to contact our investor relations team and have a good evening.

Thank you. And that concludes today's conference. Thank you all for participating. You may now disconnect.