Fiserv, Inc.

Q1 2024 Earnings Conference Call

4/23/2024

spk04: Revenue from government clients recently surpassed $500 million. Now let me wrap up with some remaining details on the financials. The corporate adjusted operating loss was $148 million in the quarter, largely in line with our expectations. The adjusted effective tax rate in the quarter was 18.2%. The Q1 tax rate is traditionally below the full-year rate, And we continue to expect the 2024 adjusted effective tax rate to be approximately 20% for the full year. Total debt outstanding was $24.4 billion on March 31st. Our debt to adjusted EBITDA ratio slightly increased to 2.8 times within our targeted leverage range. And we have approximately 7% of our debt in variable rate instruments. During the quarter, we repurchased 10.2 million shares for $1.5 billion, bringing our total cash return to shareholders for the last 12 months to $4.7 billion. We had 42 million shares remaining authorized for repurchase at the end of the quarter. Our longstanding capital allocation strategy will continue in 2024, defined by a strong balance sheet, share repurchases, and complementary and innovative acquisitions. As Frank said earlier, we continue to expect organic revenue growth of 15 to 17 percent for the full year. One quarter into the year, we are maintaining our 2024 organic revenue growth rate outlook. While the interest in inflation tailwind from Argentina eased faster than we expected, further moves in the balance of the year remain unclear while our overall business remains strong. For the full year, we now expect adjusted operating margin expansion to be more than 125 basis points, up from our previous outlook of at least 100 basis points. This translates to adjusted earnings per share of $8.60 to $8.75, a 5-cent increase in our outlook at the midpoint, which is 14 to 16 percent growth over 2023. This performance for 2024 would represent our 39th consecutive year of double-digit adjusted EPS growth. With that, let me turn the call back to Frank for some closing remarks.
spk05: Thanks, Bob. Last week, we published our fourth corporate social responsibility report. In it, we highlight the ways we execute on our four strategic pillars, empower people, advanced communities and society, champion responsible business practices, and invest in sustainable systems. In summary, we believe that doing good is good for business. We are committed to diverse representation at all levels of the organization, including leadership positions. We continue to engage with communities where we live and work including small businesses and minority depository institutions. We recognize the importance of strong governance as part of our overall strategy, and we continue to invest in sustainability. For the first time, our CSR report includes a greenhouse gas reduction goal. Later this year, we will be celebrating two important milestones for Fiserv, our 40th year in business and our fifth year since merging with First Data. On these occasions, you naturally reflect on what it means to come of a certain age. For Fiserv, 40 years old means proven, resilient, and experienced to deliver on our commitments, And we've done just that. It also means scaled, savvy, and well capitalized to sustain strong top and bottom line growth. We are doing that as well. But when you consider the significant change created by the merger, we're also a lot like a young five-year-old company. Five means a fresh foundation to support investment. We have used our cash to invest in products, services, and people, and that's driving higher growth. Five also means a longer-term opportunity ahead, fueled by innovation. And therefore, we see continued, strong, further top- and bottom-line growth at Vicer. The proven strength of 40. combined with the opportunistic growth of five, puts Pfizer in a distinguished position to both lead and drive innovation. And that's exactly what we're doing. All of this is possible because of our over 40,000 employees. I would like to thank them for what they do for our clients, shareholders, and each other. Thank you for your time today. And now, operator, please open the line for questions.
spk07: Thank you. We would now like to open the phone lines for questions. If you would like to ask a question, you may press star 1 on your phone. If you would like to withdraw your question, press star 2. Our first question comes from David Toggett from Evercore ISI. Please go ahead.
spk08: Thank you. Good morning. Great to see Clover revenue growth sustained at 30% with accelerating payment volume growth and higher BAS attach rates. When you look at the picture for Clover for the year as a whole, can revenue growth sustain in this high 20s to low 30s range, you know, when you look at the Brazil market entry, Argentina expansion, and vast growth opportunities?
spk05: Yeah, hey, thanks, David. You know, we've been focused on all of those for quite some time, and we keep unveiling new product, new initiatives, new markets, while continuing to draw on the embedded business we have generating new merchants. Our basic philosophy is increase the number of merchants we have, be able to deliver more products to merchants, and then go into the areas that we haven't been before. So we know very, very good about what we laid out a couple of years ago and what we talked about in November. You can see the traction here, which is kind of above what the CAGR needed to be. But you should expect us to be all cylinders on Clover, as we have a bunch of other parts about the company also, I would have to say. Thank you.
spk07: Thank you. Our next question comes from Tianjin Wang from JP Morgan. Please go ahead.
spk01: Thanks so much. Good morning. Just the increase here in the operating margin, how much of that 25 bps is from favorable mix versus other surprises, maybe the term fee and processing? I know Argentina, of course, is always as a factor there. Just curious on the increase. And then any callouts for the second quarter or the second half with respect to the margin? Thanks.
spk04: Yeah, it's Bob. Good morning. I think overall the 25 basis points that you're describing are full year outlook moving from previously at least 100 basis points margin expansion to now more than 125 is really driven by continued volume leverage, strong growth in the overall company, as well as continued progress on productivity. The termination fee in the processing is relatively small in the grand scheme. Obviously, it matters a bit in the processing line for this quarter, but in terms of the overall company's margin improvement, it really is continued volume leverage and a focus on productivity.
spk05: Yeah, and I'd just add, you know, when we think about running this company, our investment in technology is really around new product development. improved service, and the ability to deliver the next dollar of revenue at a better incremental cost by investing in productivity. So that will be for the rest of our lives. And AI and those type of items just allow us to do more of it. We're at the tip of that, but, you know, we can see our way very clearly this year.
spk02: Come on. Thank you.
spk07: Next, we'll go to the line of Dave Koenig from Bayard. Please go ahead.
spk09: Yeah. Hey, guys. Great job again. And maybe just on the financial segment, digital slowed a bit this quarter. I think it was 5 percent. It was 7 to 8 percent the last few quarters. Wondering just about that and if REG-II, if you've kind of fully benefited from that or if that still has incremental room to benefit and accelerate growth in that part.
spk04: Yeah, David, good morning. On the Reg II, I'd say that there's still probably more opportunity ahead than what we've seen. Remains to truly be seeing what that means. We're seeing good uptick in our network business, whether that's really driven by Reg II or just continued progress in our debit business. I think it's just more continued progress. In terms of a, quote, slowdown, I wouldn't read anything into it other than quarterly fluctuations and a tough comp against Q1 prior here.
spk09: Gotcha. Thanks. And if I can just do one more quick. SMB grew so fast, 45%. Clover grew 30%. So non-Clover is actually growing faster, which I assume is just Argentina. But maybe how is non-Argentina, non-Clover doing? And is there room for that to keep growing well, too?
spk04: Let's see, non-Argentina, non-Clover. I'll have to pull up my Venn diagrams here. Obviously, tongue-in-cheek there. Bottom line is we're seeing good growth, obviously, across the entire SMB business. That small business certainly has good growth from Clover, and you saw the 30% growth in Clover. We continue to see real opportunity there. On the non-Clover side, There's certainly impact from Argentina. There's a small piece of clover Argentina there, but the 30% growth is really heavily driven by the United States growth there. On the overall segments, you heard us talk in the prepared remarks about the Argentine impact from organic growth. We continue to see that easing later into the year. It was a bit lower than what we expected in the first quarter, i.e., inflation and interest eased a little bit faster than we anticipated. In the last earnings call, we indicated we expect about a 14% impact from Argentina for the full year in the merchant business. Q1 came in a little bit above that. We expect that to ease into the later part of the year. That certainly impacts the non-Clover business, but overall non-Clover is growing quite well, and we continue to see opportunity. It's not just about adding Clover and small businesses. It's supporting them wherever they want to take merchant acquiring solutions. The other thing I would add, and it's an impact to the first quarter that we expect to ease into the balance of the year, is in Q1, we saw the benefit of a better-than-expected lift on the use of foreign-based currency credit cards in Argentina. This is, some people may have heard the term, dollar turista. The Argentine government has a program sponsored by the central bank, to encourage foreign currency-denominated credit cards. And we saw that pick up in the first quarter. That is a program that the Argentine government has at their discretion to help the economy. Obviously, they're seeing the economy improve. So I would certainly not anticipate a 45% small business organic growth into the future. And we're seeing some of that kind of transitory impact this quarter.
spk09: Gotcha. Great job. Thanks, guys.
spk04: Thank you.
spk07: Next, we'll go to the line of Timothy Chiodo from UBS. Please go ahead.
spk02: Great. Thank you for taking the question. Looking at the gap between the 19% volume growth and the 30% revenue growth for Clover, you hit it pretty well, I think, on the VAS adding about 900 basis points. It just implies that there's a small component there from direct mix, hardware, and pricing, as you mentioned. So I just wanted to see if you could provide some context on the path to the $4.5 billion, how we should think about those other contributors, direct hardware and pricing contributing. And maybe a different way to ask it is, should we expect the volume growth to stay in this sort of high teens range, or should we expect slightly higher cover of volume growth?
spk04: So a number of elements to that question. First, in order to achieve the $4.5 billion goal that we set out to hit by 2026, we need kind of a very high 20%, call it 28%, total clover revenue growth. As part of that goal, we've indicated we expect VAST to achieve 27% penetration from what the current quarter he wanted at 20%. So certainly a big part of it is additional bass. And we've talked about this in the past, the secret recipe to growing clover to four and a half billion dollars is actually not so secret. It's get new merchants, sell more stuff to those merchants and grow with those merchants. And that's exactly what we see here. To your point in the current quarter, There was a big part of the overall revenue left, certainly the delta between revenue and volume was driven by VAS. We kind of gave the sequence in order of importance, and I think that will continue as we progress over the next couple of years as we march towards that $4.5 billion. VAS will be a big part of it. This is always price, depending on what's going on with inflation, what's going on in the market, but that's, you know, probably the third of the three important factors.
spk02: Great. Thank you.
spk04: Thank you.
spk07: Next, we'll go to the line of Jason Kupferberg from Bank of America Merrill Lynch. Please go ahead.
spk06: Good morning, guys. I had a two-part question on merchant. The first is just, do you have the total segment volume and transaction growth for the quarter? Not sure if you're going to continue to provide that going forward. And then the second part is just on the April comments. Frank, I think you indicated actually a little bit of an uptick in April relative to Q1, which could be viewed as a bit of an upside surprise considering Easter timing and how that fell this year. So just curious which parts of Merchant might have performed better so far in April versus Q1. Thank you.
spk05: Bob, take the first part. I'll take the second.
spk04: Yeah, so the first part of my question is, in our prepared remarks, we gave small business volume growth at 8% and enterprise transactions growth at 12%. Given the way we're reporting now for that merchant solution segment and the three business lines, we felt that the volume for small business is the driver of revenue, and for transactions, it's enterprise. Transaction
spk05: activity in small business is not a revenue driver and volume for enterprise is not a revenue driver so we thought providing the the key metrics that really are driving the business was important yeah and uh just uh on clarity you know a small tracking a small uh growth you know i wanted and uh i put it in the non-discretionary buckets If you're thinking about where it occurred, obviously that's, you know, an early indicator. It's not necessarily, you know, how the whole quarter is going to play, but we always feel committed to be able to talk to you about what we see given the vast amount of volume we have going throughout beans, both in the U.S. and around the world, and I consider it a small increase.
spk07: Thank you.
spk00: Next, we'll go to Dan.
spk07: Yeah, we'll go to Dan Dohler from Mizuho. Please go ahead.
spk11: Hey, guys. Great results. I just have a quick question on PayEasy. Can you maybe give us some context on the conversion to Clover, you know, about roughly timing and contribution, and are there any other conversions that we should be expecting? Thanks again.
spk05: Yeah, great question. The way we think about PayEasy, it was a processing system that we retired and then built out both Commerce Hub and brought some of that volume, which already existed through Clover to the future new merchants. That's completed, migrated, multi-year project that we built out in a way that allowed us to build out Commerce Hub, that allowed us to deliver BAS into Commerce Hub, and also have PAYZ operating within our SMB base. So we feel great about closing the books on that from a conversion standpoint. And we're seeing on the enterprise side, you heard us talk about 200 Commerce Hub users, you know, and a strategic platform for us going forward.
spk11: Great. Thank you, and great results again.
spk07: Next, we'll go to the line of Ramsey Ellisall from Barclays. Please go ahead.
spk10: Hi, thanks for taking my question this morning. I wanted to ask about M&A and what you're seeing out there. It feels like there's a little more opportunity, maybe urgency on the side of sellers in the sort of fintech industry. What are you seeing and what's your appetite right now for doing a deal?
spk05: Well, you know, I don't know about urgency on sellers' parts as much as, you know, valuation and understanding what real valuations are. Now, you know, we have a really great model, which we talked about, you know, our ability to generate cash flow, investing in our business, and the ability to deploy capital. I think we've done a very, very good job in the assets we've acquired, integrated and grown. And so I think our appetite to acquire properties is always high. I mean, we're always trafficking. I think, on the other hand, we want to be very, very, very clear that it fits within our strategy, which I think is holding tight. It's within our structure and the ability to distribute the product. to a vast client base, both on the merchant side and on the FI side. So I like to believe that we're always engaged and working and thinking through it, and we're highly selective to make sure we're using our shareholders' dollars as appropriately as possible. And I think we've got a pretty darn good track record in that so far.
spk04: Randy, I think I'll carry your analogy one step further in terms of the question on appetite. Appetite's good. It's a strong appetite, but we're not hungry. So, you know, you go to the shopping mall or to the grocery store, when you're hungry, you buy a lot of stuff. You get home and you realize you didn't need all that stuff. We're certainly seeing a lot of activity, but we're not hungry. And while we have tremendous capacity on our balance sheet and could do deals, We're making sure that what we see is of good value and brings value to our shareholders before we go ahead and strike on it.
spk10: Fantastic. Thanks. Thanks, Remedy.
spk07: Next, we'll go to the line of Christopher Kennedy from William Blair. Please go ahead.
spk03: Good morning. Thanks for taking the question. So we have good targets for the value-added solutions for Clover. Is there a way to think about the opportunity for some of the other operating systems, such as CARAT, DNA FinZac, or Optus?
spk05: Well, I think we have not articulated goals around them, but they're clearly embedded in our guide and the things we think about our growth rates. I think what we think about, even at a more broader standpoint, is what those are. And you can go across the board from our fraud integration products, like Advanced Defense, to how even we bring in Cashflow Central. You heard us talk about that. And that really hangs both in the SMB space, through our own distribution and then, you know, obviously attached to a banking product. I think, you know, over time we probably should come back with better clarity around some of it. Having said that, we've been selling value-added services to our clients. We've sold a gift product into our enterprise for a long time. We've sold different forms of data and information to them. So I think really the way we look at it at the large macro level and enterprise is really that you can go back to the circle that we used to have about we're going to sell a core, but really all the revenue comes when growth comes from debit, credit, digital, And, you know, in their own right, those are value-added services hanging off a core. The same is true in our enterprise business and merchant. So I think, in reality, when you look at how we report, we are reporting, you know, our economics and some of those actually value-added services as business lines also. So, you know, I'll go think about it a little more, but I think, you know, It's encompassed in the economics and how we show our business lines.
spk07: Next we'll go to the line of Jamie Friedman from Susquehanna. Please go ahead.
spk13: Hi. Good morning. And I wanted to mention I appreciate the incremental disclosures. The segmentation is really helpful. I wanted to ask about government. Frank, if I mess this up because the transcript's not out yet, but I thought you said it's a $500 million category. Again, I apologize if I heard that wrong. But what I wanted to ask is, is it correct that that rolls into the financial solutions segment? And if possible, if you could unpack where in there, is it issuing specifically? And generally, how are you going to market with government? Thank you.
spk05: So why don't I start with how we go to government, how we go to marketing government. You know, we've been focused on government as a very large vertical, call it. And that is everywhere from state and local to federal. And so we have a team, and their sole job is government. And the traffic in the transactions, you've even heard. And our thought was always it transcends the org. That's why we have a dedicated client sales force to it because at times we have opportunities to bid on merchant acquiring. At times you've heard us talk about delivering Finvac. You know, the government, you know, is, you know, we called out the half billion because it demonstrated where we started, which was very, very small, to the growth, but it transcends both segments. And, you know, on any given day, almost any one of our products can play in the government space, right? You know, so I don't know if that answers your question, but I think about it as dedicated coverage model, right, transcending the businesses. And it can be anywhere from Alcor, Finzac, which we just delivered, to Money Network, to merchant acquiring. And we really love this segment, vertical, however you want to think about it. You know, and we have a great, great team that knows how to cover government, and, you know, we've been very fortunate in LN.
spk13: Great. Thanks for the call.
spk07: Thank you. And our final question will come from James Fawcett from Morgan Stanley. Please go ahead.
spk12: Great. Thank you very much. I'm wondering if you can help us understand not only where you're seeing success with Clover in the market competitively, but how you're thinking about continuing to improve its positioning in the market. I mean, it seems like value-added service is a key part of that, but are there other things or aspects we should be thinking about? And I'd love to get your sense of what your win rates, if you have any idea of that, versus other competitors in the market. Thank you very much.
spk05: Well, I'll try to be as clear as possible on this. Clover covers the whole SMB market and expands a little further because you've heard about the thousands of Clovers we delivered in the quarter to venues, right? You know, it's a 30% grower today. We, you know, have talked very hard and have work to do to finish the swing. on restaurant, but feel very, very clear about our ability there. You know, you'll see us go deeper in professional services and in retail. Remember, it's a horizontal platform that we brought vertical expertise to. And then, you know, we have great demand outside the U.S., as you heard us talk about. along with the ability to continue to distribute through our channels, like more in our ISV channel. So I think it spans the landscape of SMB. Obviously, our growth, which is through new business acquisition, has demonstrated at the 30% mark. And, you know, it's an open platform that we continue to add, you know, more software to. And so when you put that all together and, you know, where we started with, I like to remind us inside the house and outside the house that we were seven engineers and three patents. And now, you know, we have more than a thousand software engineers across the world operating on it. So we're going to continue to invest that money, and you should expect us to grow across the world. That's great. Thank you. Well, good. And I'd like to thank everyone for their attention today. Please reach out to our IR team with any further questions, and have a great day. Thank you.
spk07: Thank you all for participating in the FISER first quarter 2024 earnings conference call. That concludes today's call. Please disconnect at this time and have a great rest of your day.
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Q1FI 2024

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