Fiserv Inc (FISV) 2019 Q2 法說會逐字稿

Welcome to the Fiserv 2019 Second Quarter Earnings Conference Call. (Operator Instructions) 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 Hau, 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 and the timing of and the ability to complete the transaction.

Forward-looking statements may differ materially from the actual results and are subject to a number of risk and uncertainties. Please refer to our earnings release for a discussion of these risk factors.

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 the reconciliation of those measures to the nearest applicable GAAP measure. 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 prior year's year-to-date adjusted earnings and adjusted earnings per share amounts in the press release, supplemental materials and comments are adjusted for the sale of a majority interest of our Lending Solutions business, which closed in March 2018.

And with that, let me turn the call over to Jeff.

Thanks, Tiffany, and good afternoon, everyone. We're pleased with our financial performance in the second quarter against our most difficult comparison of the year. We delivered better-than-anticipated results in the quarter and the first half, and are well on our way to meet our full year financial targets.

Now before we talk about the financial results, let me provide a brief update on the First Data transaction. We've received all required regulatory approvals and plan to close the transaction on July 29, well within our original expectations of closing in the second half of the year. As anticipated, we received all of our approvals without any conditions. We continue to prepare for Day 1, and are focused on moving from integration planning to actual integration.

We've announced a number of our senior leadership roles and the entire organization is ready to kick off the new Fiserv. Clients and prospects are excited about the opportunities that they see for us to deliver differentiated value and build their businesses in new and unique ways.

We've been working on meaningful incremental growth opportunities such as bank merchant, credit solutions, biller services, network and international. We believe that integrating the solutions of our 2 leading companies will create incremental opportunities for clients to better serve their customers, generate additional revenue, operate more efficiently and better manage risk. Our client-first focus should translate to more revenue for Fiserv and may ultimately allow us to exceed our $500 million revenue synergy target.

We've made strong progress on cost synergy planning with a focus on delivering more efficiently for clients and with higher quality. Our teams are focused on the absolute dollar value of the opportunities as well as increasing the pace and timing of those savings. Upon closing, we will fully deploy our teams with a targeted outcome of exceeding the $900 million target.

One of the unique benefits of this transaction is our commitment to increase organic solution investment by $0.5 billion over the next 5 years. We're acutely aware of the potential competitive advantages to making the right investments in this time of transformational market change. We're in the early stages of scoping the first round of these investments, which we believe will ultimately further accelerate growth and profitability.

We recently raised funds to refinance First Data's debt in a more favorable interest rate environment than we anticipated at the time the acquisition was announced. At today's rates, this translates to additional annual savings of approximately $120 million ahead of our original expectations.

All of this taken together reinforces our belief that the combination will produce more than 20% accretion to adjusted EPS in the first 12 months, and more than 40% accretion at the full synergy run rate.

We're thrilled to be on the precipice of closing this transaction and moving forward together. We're even more convinced that this transformative combination will extend leadership in value for clients, create important opportunities for associates, and deliver above-market returns for shareholders for many years to come.

Now back to the financial results. Internal revenue growth was 4% for the quarter and adjusted earnings per share growth was 9%, both against a very difficult prior year compare. For the first half of the year, internal revenue growth was 4% and adjusted earnings per share was up 11%. Momentum remains strong as sales increased 17% in the quarter and is up 14% through June 30. We fully expect to achieve our sales objectives for the year.

We held our annual Client Conference Forum 2019 in May, hosting over 6,000 professionals at keynote addresses, solution showcases, thought leadership sessions and numerous client networking events. We also had nearly 400 prospects in attendance, and lead generation on site was nearly double the total contract value compared to last year. We believe Forum is becoming the must-attend client event of the year.

With that, let's review performance against our 2019 key shareholder priorities, which are: first, 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 mentioned, we're pleased with our second quarter's performance and strong position exiting the first half of the year. Company internal revenue growth in the quarter was 4% including 5% growth in the Payments segment, and was up 2% in the Financial segment, even in the face of a very difficult compare.

Adjusted earnings per share was up 9% in the quarter and 11% year-to-date. Adjusted operating margin for the quarter was flat to the prior year, which was better than our expectations given the license revenue grow over. Adjusted operating margin in the quarter was up 50 basis points sequentially as we began to see the early signs of the tax reinvestments abating, continued scale benefits of our high-quality recurring revenue, and positive impact of our operational effectiveness program. Free cash flow through June 30 was up a very strong 23% to $602 million, and our free cash flow conversion was 91%.

Our second priority, to enhance client relationships with an emphasis on digital and payment solutions. The demand for Fiserv account processing solutions continue to be strong with 13 wins in the quarter, 6 on DNA, which included a strong showing with larger credit unions. For example, Rogue Credit Union with $1.6 billion in assets, expanded their Fiserv relationship by selecting DNA and other complementary solutions, including teller capture, item processing and Nautilus to support their growing commercial and mortgage portfolios.

In addition, Hiway Credit Union, with over $1 billion in assets, and Velocity Credit Union, with over $800 million in assets, both selected DNA in the quarter to utilize our modern and open technology platform to enhance their members' experiences.

Card solutions continued their strong sales, signing First Mid Bank & Trust, with $3.5 billion in assets, to our debit processing solution in the quarter. We also added Alabama Credit Union, with nearly $1 billion in assets, who selected a full suite of debit, credit and card production services, to facilitating more integrated and enhanced member experience.

JD Bank, with more than $800 million in assets, enhanced their Fiserv relationship by selecting ATM Managed Services, one of our newest card capabilities coming from the Elan acquisition. This service will allow JD Bank to update their ATM fleet to the forefront of upcoming software and compliance mandates and better serve their customers.

We've signed 7 clients for ATM Managed Services and have added more than 250 institutions to the pipeline since the transaction closed last October.

Our third priority is to deliver innovation and integration, which enables differentiated value for our clients. Payments modernization continues to be top of mind for progressive financial institutions, which translated to 5 Dovetail payment hub decisions in the quarter, including Sterling National Bank, with nearly $30 billion of assets. We also signed Eastern Bank, which is one of the largest and oldest mutual banks in the country, with over $11 billion in assets and locations serving communities in Eastern Massachusetts, New Hampshire and Rhode Island. We signed a very large bank in the Middle East, which selected Dovetail to advance their capabilities through a single platform to process payments transactions globally.

Lastly, First National Bank of Pennsylvania, with nearly $34 billion in assets, chose our Dovetail Payments Platform, along with our Immediate Funds solution as another way to drive value to their customers by supporting demand for real-time access to funds and improving the overall deposit experience.

We remain bullish about the strength and leadership of our full complement of end-to-end payments capabilities both now and into the future. With that, let me turn the call over to Bob to provide more detail on our financial results.

Thank you, Jeff, and good afternoon. As Jeff mentioned, we feel good about our performance for the first half of the year and are in a strong position to achieve our full year goals.

Adjusted revenue was up 7% to $1.5 billion in the quarter and 6% to $2.9 billion year-to-date as a result of growth in high-quality recurring revenue and new revenue from the Elan acquisition. These quarterly results were particularly encouraging given a significant prior year license revenue compare.

Internal revenue growth was 4% in both the quarter and year-to-date, led by strong performance across our card services, electronic payments, output solutions and account processing businesses. Foreign currency negatively impacted internal revenue growth by 20 basis points in both the quarter and year-to-date periods.

Adjusted operating income increased 7% to $470 million in the quarter and is up 5% to $927 million through June 30. Our year-to-date results include a headwind from our Lending Transaction that closed in Q1 of last year.

Adjusted operating margin in the quarter was flat at 32.4%, which is better than our internal expectations. The expected decline in license revenue, the Elan acquisition, and continued investments that we described in Q1, had a collective 90 basis point headwind on adjusted operating margin in the quarter. Sequentially, adjusted operating margin improved 50 basis points on stronger operating performance and lower investments.

Year-to-date adjusted operating margin was down 40 basis points to 32.1% compared to last year and was better than our internal expectations for the period. The first half results include headwinds of more than 80 basis points, including more than 50 basis points from investments and 30 basis points from the net impact of acquisitions and divestitures.

The investments in client implementations and the tax reinvestment carryover expense, which we described during our first quarter earnings call, began to abate this quarter and will further moderate in the second half of the year. The acquisition impact will anniversary in the fourth quarter.

Adjusted earnings per share was up 9% to $0.82 in the quarter and increased 11% to $1.66 year-to-date, positioning us well to achieve our 34th consecutive year of double-digit adjusted EPS growth. The Payments segment adjusted revenue was up 11% to $855 million in the quarter and 10% to $1.7 billion year-to-date. Internal revenue growth increased sequentially 120 basis points to 5% in the quarter and is up 4% year-to-date, led primarily by our card services, electronic payments and output solutions businesses.

Adjusted operating income for the Payments segment grew 12% to $303 million in the quarter and 9% to $590 million year-to-date. Adjusted operating margin was up 140 basis points sequentially to 35.4% in the quarter and increased 40 basis points over the prior year. The year-over-year improvement was due primarily to continued high-quality revenue growth and gains in productivity, partially offset by a 60 basis point negative impact from acquisitions.

Adjusted operating margin for the first 6 months of the year was down 50 basis points to 34.7%, which includes pressure from the Elan transaction and the impact of first half investments, which will subside in the second half of the year.

Debit transactions grew high-single digits in both the quarter and year-to-date. Mobiliti ASP subscribers grew 16% in the quarter to nearly 9 million as consumers continued to embrace digital banking services. We also saw mobility business clients increase 20% as commercial customers also migrate to digital experiences.

P2P transactions, which includes both Popmoney and Zelle, were up 120% in the quarter and grew 21% sequentially. Zelle transactions, again, nearly quadrupled in the quarter and the number of live clients more than doubled sequentially. We also signed nearly 60 clients in the quarter, and remained enthusiastic about the growth prospects for Zelle and the positive impact it should have on the banking system.

For the financial segment, adjusted revenue was up 2% to $604 million for the quarter, and for the year-to-date was generally consistent with last year at $1.2 billion, which includes the Lending Transaction impact which anniversary-ed at the end of Q1. Internal revenue growth was 2% in the quarter and 4% year-to-date, led by our account and item processing businesses. These results include the very difficult license revenue compare in the quarter, which shows the benefits of underlying processing revenue grew growth.

Adjusted operating income in the financial segment was up 1% to $203 million in the quarter, and for the first 6 months was consistent with prior year at $402 million. Adjusted operating margin was down 30 basis points to 33.7% in the quarter, primarily due to the tough compare from prior year's strong license revenue. Adjusted operating margin through June 30 was up 10 basis points to 33.5% due to growth in revenue -- excuse me, growth in recurring revenue and solid operational execution, partially offset by product investments and the difficult compare in the license revenue.

The adjusted corporate operating loss was $36 million for the quarter and $65 million year-to-date, which is in line with our expectations. The adjusted effective tax rate for the quarter was 21.6% and 18.8% for the first half of the year. We've seen some additional tax benefits in the first half of the year, and accordingly, now expect our full year tax rate to bias towards the lower end of our adjusted effective tax rate guidance range of 22% to 23%.

Free cash flow was strong in the quarter and was up 23% to $602 million through June 30, an increase of more than $100 million versus the prior year. Free cash flow conversion was 91% for the first half of the year, which was pressured a bit by tax payments along with the timing of capital expenditures, which were planned a bit heavier in the first half of the year. We continue to expect our free cash flow conversion to be at least 105% for the year.

As you know, our share repurchase program remains deferred in conjunction with the First Data transaction. There were 393 million shares outstanding and 24 million shares remaining authorized for repurchase at June 30.

As Jeff mentioned, we have raised the funds to refinance First Data's debt, with $12 billion in senior notes in June and July across multiple currencies. We raised $9 billion of U.S. dollar debt, EUR $1.7 billion in euro-denominated notes, and $1.3 billion in sterling-denominated notes. These senior notes have an average tenor of 11.6 years.

Including the impact of hedges, the combination of a public debt, along with the $5 billion term loan, leads to a combined interest rate of [3.4%] (corrected by company after the call), which is roughly $120 million lower than the expected annual interest cost at the time of the First Data transaction announcement.

Total debt outstanding as of June 30 was $13.8 billion, which includes the proceeds from the U.S. dollar portion of the debt raised. The additional USD 3 billion raised in Europe was not completed until July 1. Upon closing, we expect 75% of our debt to be fixed. We had a pro forma debt to adjusted EBITDA of 2.4x after netting the proceeds received in June against our total debt balance.

With that, let me turn the call back to Jeff.

Thanks, Bob. Sales performance was up a strong 17% in the quarter and is up 14% year-to-date. We saw solid performance in several areas, including our account processing businesses, card solutions and Dovetail. Sales performance has been increasing significantly, up 22% over the last 9 months, which we believe is especially meaningful in light of the First Data transaction.

The domestic pipeline also remained strong and up 3% in the quarter and 11% sequentially. Integrated sales was up 22% in the quarter and is up 4% in the first half of the year, reflecting the compelling Fiserv integrated value proposition. We continue to demonstrate our operational effectiveness competency, achieving $13 million of benefits in the quarter and $25 million of savings year-to-date, driven largely by procurement and labor initiatives. We are on track to meet our $50 million target and close out our 5-year, $250 million program a full year early.

As for guidance, we're on track to achieve our full year financial commitments buoyed by a stronger-than-anticipated first half of the year. We continue to expect our full year internal revenue growth rate to be in a range of 4.5% to 5%, and that second half growth will be moderately higher than the first.

We continue to expect adjusted earnings per share to increase between 10% and 14%, in a range of $3.39 to $3.52 for the year, with a bias at or above the midpoint of the range. We also expect adjusted operating margin to expand by at least 50 basis points for the year, and that free cash flow conversion will be more than 105%.

Lastly as a reminder, our 2019 guidance does not include or anticipate any impact from the First Data transaction, which we expect will close Monday. However, we will provide updated guidance for the combined company, along with a very preliminary look into 2020 when we convene our third quarter call. We also expect to provide historical financial information in mid-September using our go-forward accounting treatment for the combined company.

For modeling at close, we suggest you combine the guidance provided by both Fiserv and First Data in today's earnings releases and incorporate adjustments such as stock-based compensation for First Data, which as you know we include in our numbers, lower interest expense and also include a modest estimate for synergy benefits for the last 5 months of the year. We expect synergies to ramp through the balance of 2019 and deliver a much larger P&L impact next year.

For Fiserv historians, you may know that on July 31, we will celebrate our 35th anniversary. We're fortunate to have been part of the proud history of Fiserv and are even more excited for what we believe will be an amazing next chapter for the company. The opportunity to partner with our clients to help them serve their customers is a compelling reason to exist, and at the same time we've created meaningful value for shareholders, delivering a more than 33,000% return since going public in 1986.

And as good as that sounds, we know our success is a result of the thousands of associates who have contributed to Fiserv over the years, along with the more than 24,000 current associates who come to work each day, singularly focused on delivering excellence to clients. We can't wait for the next 35 years to start.

With that, operator, let's open the line for questions.

(Operator Instructions) And our first question is coming from Lisa Ellis with MoffettNathanson.

Great to be joining your call for the first time. I wanted to ask a question about the rollout of contact list in the U.S. It looks, I guess, tentatively, like that might actually be coming. Can you just comment on how your bank customers are thinking about the rollout of contactless? Meaning, do they have specific planned for issuing contactless cards? And on what time line? And then how do you expect that to impact your business over the next 6 to 12 months?

Sure. Thanks, Lisa, and great to have you. We are actually seeing -- starting to see an uptick in demand for contactless or dual interface. We had not planned very much for that in our numbers, in 2019, thinking that we would start to see that tick up in 2020 and 2021. And having contactless available in places like the New York subway, we think, is helping that and obviously, the brands are focused on that.

So we issue about 100 million or so payments cards, or produce 100 million or so payment cards per year. We think that could actually be impactful. We don't see it having a significant impact in 2019, but we're optimistic that we'll see that roll in certainly in 2020 and 2021 as we see that move throughout the system.

The other thing that we're seeing just as interestingly, is we also do a fair amount around the prepay providers, and we're seeing the prepay providers start to issue EMV. And we believe that a number of them will actually jump straight to contactless. So we're feeling good about that. We like that as a tailwind, and we'll continue to monitor that.

Our next question comes from Dave Koning with Baird.

So I mean as a historian, looking back at the last 10 years, it seems like both you and First Data are putting up some of the best core underlying growth that you have. And I'm wondering, a lot of it seems company-specific. Both of you are doing well in the market, signing well. How much of it's just the backdrop getting better? And maybe, what is driving that right now.

Yes. Thanks, Dave. I mean we're -- obviously, we are both continuing to run our companies separately and we'll continue to do that until Monday morning or we expect to continue to do that until Monday morning. We know that First Data has been making a number of investments both inside the U.S. and outside the U.S. We're just as pleased as everyone else to see GBS North America post a nice 5% number.

And the rest of the world is looking quite strong, and I think that's just a matter of seeing the cumulative effect of the work that Frank and his team have done. And it's one of the things that we talked about as you know, Dave, we really thought that there was a mismatch between the work that the team had been doing and the way that investors have been looking at that. So from that perspective, we see that coming together.

And we believe that as you put us and them into a single integrated company focused on driving innovation and excellence for clients, so that will drive incremental growth to the extent of the -- at least $500 million of synergies and hopefully more.

And then you're seeing on our side just the continuing aggregate effect of bringing on high-quality revenue, and then having some nice successes in the sales area, whether it be DNA, Architect card. And then the entire digital ecosystem. So Mobiliti continues to do well. We talked about Zelle. We're seeing real momentum in Zelle and we're excited about that. And we believe that, that will continue for the next -- probably, for the next 6 to 8 quarters.

Okay. Great. And just one, I guess follow-up, this is kind of just a financial question, but included in the guidance for standalone Fiserv, are you including that month of $12 billion or so of extra debt? Or is that almost like a -- you're not including that in the $3.39 to $3.52 guidance.

Yes, Dave. We are not including that. That's a transaction-related cost. So you'll see that adjusted out of the non-GAAP results.

The next question is from Jim Schneider with Goldman Sachs.

Congratulations on the strong results. I guess if you -- I mean, Jeff, you articulated several areas on the revenue synergy side. Most of which you talked about before, but in the time you've had to contemplating transaction for the last 6 months, which is maybe one or 2 revenue synergy items that you're most incrementally excited about or that you didn't really anticipate before. I think international, you mentioned as one, which I don't recall you talking about before. Any color on that will be helpful.

Sure. Thanks, Jim. We have been very pleased at the work that the teams have done in identifying large categories and synergies. Everything from expanding the way technologies such as point-of-sale lending will look, focus on how do we help merchants get their money faster, the use of data in terms of thinking about how to make better decisions around fraud and the like. And then, outside the U.S., we -- one of the things that -- because we were pretty small in Fiserv outside the U.S. and First Data's much larger, we've been able to take a number of the solutions that we have and move them through the -- or sorry, not move them through, but look at how do we move them through the First Data distribution system or the First Data network outside the U.S.

So we think that's going to be interesting. And also looking at where we have some larger clients where First Data may not, trying to leverage those kinds of relationships. So I don't see us creating a lot of new innovation in terms of putting the international businesses together per se in the base business, but we do see interesting ways that we'll invest there in the future.

That's helpful. And then maybe, sort of a macro comment, in terms of your bank clients and what they're telling you right now. Just wondering if the, a, the change in the interest rate environment and the reversal there; and/or b, any change in the M&A environment is impacting their spending plans as you see ahead heading into the back half of this year and 2020.

Yes. And it's a good question, Jim. I mean we obviously know banks are not excited about the fact that the Fed has changed their stance on interest rates. I think it was a little bit of a foregone conclusion or it has been at least for the last quarter or so. That said, we are not seeing any change in the demand structure for the institutions that we're serving and that's showing up both in terms of the large event, Forum, that we hosted back in May. We can see it in our pipeline and then the manifestation of course in sales, and the fact that we're going to -- we believe that we will achieve our full year objectives.

So that's all to say that the need to spend money on technology is not changing. You can see that in how the large banks talked in their calls and we see it, and we continue to see money shifting from supporting legacy technologies to trying to do some of the newer, call them digital based or front-end kinds of experiences.

So right now for what we can see, we continue to feel like the spending environment remains consistent for now. We're obviously watching it closely. And so that looks in good shape. And then on the M&A front, we continue to see generally the same amount of activity. As you know, when rates come down a little bit, you'll see banks looking more for scale and that's certainly happening.

The next question is from Darrin Peller with Wolfe Research.

Congrats on the approvals on the deal closing, first of all. But look, you just alluded to the strong growth at First Data, especially in the merchant acquiring side. And again, I touched on this last quarter. But are these trends the type of growth rates you guys anticipated in your deal accretion and pro forma run rate? Or are they coming in better than you thought.

And then, just while I'm on the topic of First Data, is there anything you can update around the JV relationship with BAM, just given how much noise has been in the market around it?

Sure. Sure. So I would say that when we put our original models together and thought about it, I don't know that we were deeply focused on what would be happening in 2019. It was our belief that First Data had been doing things both organically and through the allocation of capital, that would show up, and that we didn't believe that investors were giving First Data all of the due that they should. And I think we're seeing that manifest now, and we're hopeful and strategically focused on making sure that we make the right decision so that will continue. So we feel -- I would say that we feel quite good about the performance that we've seen to date as well as the guidance for the remainder of the year.

As it relates to the JV, I mean, obviously, we've had lots and lots of questions about the JV, which expires next June. Both Fiserv and First Data have long-term, multi-solution relationships with Bank of America, and we have every reason to believe that's going to continue. And we know that First Data and Bank of America are continuing to work on a plan that makes sense.

What I can say is, during the diligence process, we put a lot of time into understanding all of the outcomes or the likely outcomes at least, that we expected could come through the JV. And since that point, we've continued to make sure that we're working with the bank to understand what's going on, and we're quite comfortable with all of the different scenarios. And what I can say, and I think this is really important, is that, currently, we don't anticipate a financial outcome that creates any meaningful negative impact to First Data's earnings and free cash flow for at least the next 3 to 5 years. And there are absolutely some scenarios in which a structural change could be accretive to the numbers once you get past that point in the future.

So from that standpoint, we feel pretty good about that. From a timing perspective, we do expect this issue to be better understood in the third quarter. So we think that the parties are coming together to create a situation that makes sense. I would also say, very importantly, that the Bank of America JV, the different outcomes that we can see, the scenarios, are fully factored into our transaction accretion estimates, which as you know, is 20% to adjusted EPS in year 1 and 40% at the full run rate. So Darrin, we think that we've done the work. We think we understand the risks, the pluses and minuses, and we just don't see it having a meaningful negative impact post close.

That's really helpful, Jeff. Just one quick follow-up. It's just one of the exciting parts of these synergies we were hoping for is that Clover would be cross-sold through the banks pretty quickly, given, I think, sort of cloud-based approach where you guys manage the -- the banks help manage the bank's websites. And just curious if you still think that can happen soon in terms of maybe even second half '19 where Clover starts to be distributed in the near term.

Yes. And Darrin, we are -- we said at the time and our planning teams have been working well together on the idea of bank merchant. I would say we are actually a bit more bullish today even, and we were pretty bullish then, but we're even more bullish today, and it's really on 2 factors. The first one is that traditional and branch enablement of Clover, and then we're also doing some really interesting things on the digital enablement front. And we fully expect that after we close on July 29, that we will be in the market and see proof points come in the second half of the year about the power of the combination, in terms of providing value to the merchant customers of the banks.

The next question comes from Brett Huff with Stephens Inc.

Congrats on getting closer on the deal. Question on the mix of front and back office tech spending. What have you kind of heard over the last 18 months, I think you guys have seen this too, folks certainly not ignoring the back office and trying to untangle the spaghetti there, but definitely shifting more towards switching those onboarding on the front. You mentioned a little bit about that. Could you illuminate any acceleration on that side? Or any changes in how people are perceiving this? Specifically, are there more and more banks that are now on the category of, they need to do better digital onboarding? And kind of how fast is that evolving?

Yes. Brett, there is no question. The majority of the emphasis at in really all-sized institutions, have been focused kind of at the edge of the bank, right? So at the point of intersection between the customers and the financial institution and creating whether it be digital onboarding or any kind of digitization of the variety of financial experiences that customers engage in with their institution. So that's been a big piece of the focus.

What we are seeing is -- and we announced one of the proof points of it today was around our Dovetail, our market-leading payment hub technology. We had, I think, 5 signings in the quarter. And that's really above enabling pieces of the back office, so think about it as payments modernization, to keep up with what the real-time, right-now world that's happening at the edge. And so we are seeing a lot of exploration into that, call it the end-to-end that is necessary to ultimately deliver those experiences to the retail and the commercial customers and the small business customers of the bank. So we are seeing that happening.

If you said, is it more about the, using your words, the spaghetti? Or more about the experience? It's more about the experience. But I will say that the need to bring the solutions together is making its way back into some of the infrastructure and turning kind of some of the legacy into more modern systems. And it's going to take a long time to get done. But that's where we see people into RFPs and taking a look at what do we need to do serve, you see more end-to-end on that front.

That's helpful. And a follow-up, another kind of product question is, I and I think others are excited about having a couple of these big mega deals companies kind of own, if you will, the relationship both on the funding account on the consumer side, the DDA, and then the merchant point-of-sale, and seeing some maybe some interesting near-term easy wins to make transactions more frictionless, but maybe also a little more science fiction down the road. Can you -- now that you've studied this combination for a while, can you talk any more about how you're seeing those opportunities evolve?

So -- and Brett, obviously, you know -- you've known us for a long time, you know that's one of the areas that we've been focused on really since back to 2012 when we bought CashEdge to really accelerate our focus on P2P through Popmoney, and obviously now Zelle. I mean, we're very, very excited about the opportunity to use the -- you called it the funding account, the transactional account, as a way for consumers to interact with any of their providers in a more frictionless way.

And I think that's going to manifest in a variety of different forms over the next several years. And for us, we just want to make sure that we're in this. With think the scale of First Data with kind of roughly 40% of the merchant footprint and the scale of Fiserv with over 100 million transaction accounts, we like that. We like the optionality, and we're excited to work with our partners, with the financial institutions, and ultimately, with some corporates to see what's out there that can deliver a better service.

I think for now we're really studying that. We'll be able to study it a lot closer once we close, but we're very excited about that. And we're going to continue to plant flags around areas like Zelle because we think that is one of the differentiators to make some of that, I think you called it science fiction, some of that actually happen.

And the next question is from Ramsey El-Assal with Barclays.

I wanted to ask about revenue synergies more in the context of timing. Now that you've had a little plan to dig in and look under the hood. What is your kind of most updated thinking on which specific opportunities are most kind of realizable or in the near term sort of quickly realizable, understanding that your -- the bulk of the benefit we'll see probably in '20 rather than '19, which opportunities feel the most sort of readily achievable?

Yes. I mean it is, when we had talked about this originally, we talked about kind of the payments and network innovation opportunities playing an important role in the nearer term, call it over the next 12 to 18 months. We are going to be very, very focused on the -- on selling. I mean, we're excited to have a chance to get out of the blocks a little bit faster than we thought. We think base merchant is a very good opportunity in the near term. And the reality is, is that we have businesses like our Biller Solutions business, where we do a little part of the overall acquiring with these providers and being able to bring First Data in and having them be able to bring us in. We see a lot of, we call it integrated sales, but a lot of real high-value cross-sell that can move pretty quickly.

Again, we won't know until we hit. But the problem that we have to the extent that there is a timing problem is as you know, Ramsey, we have to sell it and then we have to implement it, and then it has to go live. We like bank merchant. We think some of those things can happen quickly. Some of the network and payments opportunities, we think, can happen quickly. And so we see those to be a little bit faster than the others, but we're going to be focused on that and you'll hear us talk about how we're doing on that each and every quarter.

Great. I want to just -- one follow-up I wanted to ask about the industry more broadly. It just seems like the universe is scaling up to your M&A. What's your view on how this broader processing industry looks in 5 years. Do you think this space just continues to really dramatically pull up? So even players with the scale that you guys are sort of amassing will get larger, and larger, and larger? Or do you think there's a measure of stability that we've achieved with these kind of specific deals kind of having been consummated recently.

Yes. It's a really great question and I fear that we won't have time to go fully back and forth. I would say that if you would've asked many of the industry participants that you're referring to 5 years ago, if they would've thought that 5 years later that the industry would've taken the steps that it had taken, I suspect that people would say no, and certainly if you ask how quickly it had all changed, I think you will get an absolute, "No. You've got to be kidding me."

From our perspective, we see opportunities to deploy capital every single day. But it's important for us to stay really focused on one of the key drivers to the more than 33,000% return we've had over the last 33 years as a public company, and that's making sure we're allocating capital to drive value for shareholders. So we're going to remain focused on -- with the capital allocation strategy that we've used. And if occasionally there's something meaningful to do, we'll certainly consider it. But we see lots of ways to drive value without having to do major scale transactions.

I think we'll have to see how they come together over the next few years. We're just really, really focused on how do we drive as much cash flow for shareholders that we can, and make sure we deploy that capital to build the most value possible.

The next question comes from Daniel Perlin with RBC Capital Markets.

I have a question about the kind of the fintechs in payments and really other areas increasingly becoming these kind of quasi-deposit gatherers. And here I am thinking like Square's debit and Venmo's debit card, where they're -- they're clearly trapping cash now where they used to let it kind of be more of a straight through process with these entities.

So I'm just wondering, Jeff, when you look at your portfolio, what are the -- what are the products or services that you've created to help kind of combat those competitive threats for your bank today?

Yes. It's really -- it's an interesting time, and whether you're talking about the Chimes, or the N26s, and lots of other things that are going on, whether they'd be traditional banks or nontraditional banks, PayPal, of course. And I put Venmo as the hero example of what has to happen to make sure that the payments -- I'm sorry, that the deposit balances are being trapped in the banks. I think that's one of them.

I think to the extent that we can make sure that we are enabling more commerce to happen at point-of-sale, and whether that be through better decisioning models, or point of sale lending, credit being available at the point of thought, those kinds of things so that consumers don't go to other places.

I think the whole intersection of digital experience, better decisions based on data, I think we'll see that become very important.

Venmo is a little bit of a capsule, and what can you put in it and around it to make sure -- not Venmo, I'm sorry, Zelle. What do you put around that to make sure that it's driving value for the financial institution clients.

And the other thing is I think that you'll see us as part of the $0.5 billion that we're going to invest, I think you'll see a fair amount of that go to the points of intersection between financial experience, commerce, and making sure that banks are winning with their deposit gathering.

That's great. The follow-up question I had is, the $120 million of interest savings that you just talked about on the financing. Just philosophically, how should we be thinking about that? Are you planning on letting that flow through into the pro forma model early? Or are you viewing that opportunity as a way in which to invest more quickly in this transactions integration?

Yes, Dan. It's Bob. I would look at it as an opportunity to grow our earnings per share from a standpoint of invest back in the company. We're certainly planning to appropriately invest as needed to get at the synergies as well, both on the cost and the revenue standpoint, and that's fully baked into the model. As Jeff pointed out in the prepared remarks, we're very comfortable that we will achieve the at least 20% earnings accretion in year 1 and 40% at full run rate synergies. That $120 million of lower interest certainly helps with that. It also generates some cash flow and allows us to pay debt down faster and get back into share repurchase.

The next question is from Matthew O'Neill with Autonomous Research Company.

My only question at this point, really, is just a follow-up I think to Darrin's question earlier around the BAM's JV and how that process is going. I know it's still a little premature for you guys to talk about it. One thing, Jeff, though that you said that I was hoping I could just glean some more color from was that there'd be no impact for 3 to 5 years. Is there any kind of read through to that, that there's this view that the ownership percentage might come down, and maybe some discussion around the exclusivity ending, and so certain merchants might be rolling off as their contracts kind of expire over that sort of 3- to 5-year phase? Or was that just a, this is how far we can sort of confidently see into the future for now, and we'll update you more as we hear how the deal progresses?

Yes, Matt, and thanks for asking the follow-up. What I was trying to say is, for at least the next 3 to 5 years, and it really is a matter of -- it's hard to look that far into the future in a scenario that is not fully baked. But there's no cliff at the end of that. It's just a matter of saying we think that should give investors confidence that there's nothing to really worry about at this stage. And that as the ultimate facts come to life, we'll work very cooperatively with -- and no matter what the scenario is, to make sure that both sides are being optimized in what they're doing.

And I do think one of the unique things here is this is not -- this arrangement, no matter how it ends up playing out, it's not a win-lose scenario. It's going to be a win-win scenario. And everyone feels like that's been the case. Obviously, we haven't been in the direct conversations, but that's -- that that's really the outcomes that are being driven here.

Got it. And then, just as a final follow-up on that, if I can. Has there been any sort of cross discussion with Bank of America regarding the CheckFree relationship, which I think is next up in, maybe, 2023? I suspect not, but just figured I'd try.

Yes. And we -- just to be even more blunt, we have not had any direct conversations with the bank. We're operating as separate companies on the joint venture discussion. And there hasn't -- on for Fiserv, there hasn't been any specific conversation pointing out that. We have a very good relationship with the bank on that front, and we're always looking to make sure that we're helping Bank of America to continue to be the #1 digital bank in the U.S., and that's an important part of its strategy.

And the next question is from Andrew Jeffrey with SunTrust Robinson Humphrey.

Jeff, you mentioned and highlighted Dovetail as part of Fiserv's real-time payment structure offering efforts. Bill pay is a product that -- or a service that is back of the news these days. And I wonder if you can just elaborate on how you think that market's evolving, whether or not the consolidator model maybe can claw back some share from biller direct. And to what extent, if any, the merger, maybe, adds value and helps you accelerate that shift, or drive more bill pay volume across your platform?

Yes. Thanks for the question. That's actually one of my favorite topics. It's an interesting thing because your point of it's a little bit kind of a little bit in the rearview in terms of people talking about it. It's so interesting because you see all kinds of people trying to get into the business, and you're wondering, well, why are they trying to do that? I think they're trying to do that because we all understand that the ability to facilitate payments for a consumer or for a small business, especially through this consolidated model is way more convenient than website-hopping to make that happen.

The key is, is how do you bring in the biller and merchant information to make that experience topnotch? The other piece of it is, ultimately, having real-time money movement, real-time payments, that you can consistently and constantly use across all kinds of billers, is I think, the next big twist and the next big point that's going to change that value proposition.

And so, again, we're working with a number of our partners. It's one of the things that we're very excited about, to work with First Data. We think they've got a lot of interesting connectivity to make that happen. And I do think that it may take longer than people understand, but you're going to see bill payment be at the front of real-time consumer payments. And so whether it's -- whether you're using your illustrative hypothetical wallet to make a bill payment in real time, or to engage in commerce in real time, or to make a P2P payment in real time, I think you're going to see that come together. And it's one of the reasons why technologies such as Dovetail are so important as you see new clearings coming online, especially here in the U.S.

And as a follow-up, that -- I always appreciate your insight on the subject. As a follow-up, do you see debit cards, generally, or even in specific verticals, playing more of a role in bill payment? Or do you think the sort of direct ACH bill pay is going to be the -- is still going to be sort of ubiquitous?

Yes. I'm -- again, this is a little bit of the world according to Jeff, and I want to make sure that I'm clear about that. The -- if you think about the card space as a pan-based space, right, the 16-digit number, and then you think about the transactional account as an account number model. I see them both having pluses and minuses. The connectivity to the debit card implies speed, real-time, safe -- safety and securely, and I think that matters. And so figuring out how to bring them together, I think, is an interesting way to look at it.

The next question is from Kartik Mehta with Northcoast Research.

Jeff, I wanted to ask you a little bit about share repurchase. When you look at after the companies combined, are there benchmarks that you're looking as in? Is it strictly a leverage ratio issue? Is it that you have achieved a certain amount of cost savings? Is it that you've invested so much money? Is it what the economy is doing? How will you -- what's the decision point for you to go back in the market and kind of do you what Fiserv has always done which is return a ton of capital back to shareholders.

Yes. Thanks for asking that question, Kartik. Primarily because this was the first quarter, I think, in my entire tenure, where we were unable to buy back a share of stock. And I don't -- for people who know Fiserv and know me, that's not what we aspire to do.

So our objective is to look at our leverage ratios, to pay down debt, to grow EBITDA, and to deploy the capital that we're going to create, the $4 billion or so of free cash flow that we're going to have a few years out, so that we can make sure that we're building shareholder value in a way that we have -- or consistent with how we have over the last, at least the last 14 or 15 years.

And it'll also, obviously, depend on our valuation and everything else, and we'll continue to use the same methodology that we have historically. And so the real answer is, we'll do it as quickly as we can. As you know, we did not suspend our program, we deferred it. And so I would expect us to get into the market as soon as we have the right level of comfort that we've met our commitments to the rating agencies, and that we can build shareholder value effectively, and efficiently, and consistently.

And just one last one, Jeff. As you look at your community and regional bank customers as you know, they're dealing with the net interest margins to create possibly, but they're also dealing with investing in all of these digital solutions, but unable to get rid of some of the other legacy solutions cost continue to increase for them. How do you see them managing that? And do you anticipate that the investment that they're continuing to make will -- that they will be able to do so in the future?

Yes. I mean it's a -- there is a bit of a squeeze in the community bank space, on whether they'd be banks or credit unions in the community financial institutions space for the reasons that you're mentioning. And I think one of the opportunities for us is to build products and solutions that will allow these institutions to take advantage of digital, which is a more cost-effective way to interact, but also to build revenue. It's one of the reasons why we're even more excited today about the bank merchant opportunity because we think we can see a lot of whitespace out there, where community-based financial institutions are not optimizing the amount of merchant revenue that they can create. And we're looking at how do we help, systemically, using our technology, to better optimize revenue?

So it's a combination of how do we create more revenue? There's certainly going to be -- there's going to be always pressure on cost as there have been for the entire 35 years of our existence.

And then lastly, it really is about how do you use this digital ecosystem to be more efficient? I think that's the trifecta that we're at least focused on.

The next question is from Glenn Greene with Oppenheimer & Co.

Thanks. My questions have actually been answered -- asked and answered. So thanks, and congrats on the close.

Thanks, Glenn.

Thanks, Glenn.

The next question is from Timothy Willi with Wells Fargo.

Just a housekeeping question around the balance sheet and sort of a discussion around debt and interest. So I think you said you did $12 billion of notes across a variety of currencies. First Data had roughly $17 billion. Could you just sort of -- any insights around that $5 billion gap in terms of if that's sort of the priority to pay down first? Or if there's possibly some other activity that'll happen regarding that, that we should think about?

Yes, Tim. Thanks for the question. We have arranged a $5 billion bank term loan that will round out the $17 billion we need to refinance. So the combination of that $5 billion term loan and the $12 billion of notes that we raised in late June, early July, will cover the full $17 billion needed.

Our last question will be from Vasu Govil with Keefe, Bruyette, & Woods.

I wanted to extend my congratulations for getting all the approvals. Jeff, I just wanted to follow up on the discussion regarding international synergies before. Could you elaborate a little bit on what type of products you are focused on there? Are we thinking about potentially starting core banking products in the First Data's distribution outside? Or more on the payment side?

And then if you could also talk about what kind of capital investments might be acquired to enable that?

Sure. So I would say -- right now we have one core banking platform called Signature that we sell outside the U.S. We also have a -- we also sell that inside the U.S. And so we'll continue to focus on that. But really, we're most excited about leveraging the existing First Data footprint to try to go to market with some of our digital products, which we have a good footprint around the world. Dovetail, we're very excited about Dovetail. Payment hubs, the modernization of the payments ecosystem is happening, actually, more rapidly outside the U.S. than inside the U.S. And Dovetail is -- or was a U.K. company when we acquired it with most of their presence outside the U.S. And so for us, gaining more distribution is a great example.

We also have some strong, cash-oriented products, risk products, some fraud products, data warehousing, a number of different products that we can just add on -- or hopefully add on to the relationships that we have. And we don't see those being significant investments. The other thing that we have is First Data has a nice footprint of data centers outside the U.S. We don't have data centers outside the U.S. and the ability to take some of our products and not just deliver them on a licensed basis, but deliver them on a hosted basis, will allow us to build, not just revenue, but really the high-quality recurring revenue that we strive to deliver.

Thank you. And thank you, everyone, for joining us today. We are -- we always appreciate your support, and we're really excited to come Monday to close the transaction with First Data and start the new Fiserv.

So thanks, everyone. Have a good evening.

And that concludes the conference. Thank you for your participation. You may now disconnect.