Fiserv, Inc.
Q4 2016 Earnings Call Transcript

Published: 9 Feb 2017

[Operator:]

Welcome to the Fiserv 2016 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 Stephanie Gregor, Vice President of Investor Relations at Fiserv. You may begin. Thank you.

[Stephanie Gregor:]

Thank you and good afternoon. With me today are Jeff Yabuki, our Chief Executive Officer; Bob Hau, our Chief Financial Officer; and Mark Ernst, our Chief Operating 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, anticipated benefits related to acquisitions, and our strategic initiatives. 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. You should also refer to our materials for today's call for an explanation of the non-GAAP financial measures discussed in this conference 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 of planning and forecasting for future periods. Unless stated otherwise, the performance comparisons made throughout this call are year-over-year metrics. Also, please note that we will hold our Investor Day on June 20 in New York City. Please watch your inbox for additional information. With that, I will turn the call over to Jeff.

[Jeffery W. Yabuki:]

Thanks, Stephanie and good afternoon. We punctuated 2016 with 16% adjusted earnings per share growth in the fourth quarter. Internal revenue growth in the quarter was 4% led by our domestic businesses, which performed in line with our expectations offset by a revenue miss in our international operations. Adjusted operating margin, free cash flow and sales results were all strong in the quarter. We extended our double-digit adjusted earnings per share growth to 31 consecutive years by registering 14% growth for the full year. Internal revenue growth was 4% for the year, led by strong performance in our Payments segment. Adjusted operating margin for the year was up 50 basis points to 32.2% which is even more impressive when considering the margin headwind from acquisitions during the year. We achieved record free cash flow in 2016 of $1.1 billion, which translated to a 14% per share increase to $4.84. Sales performance was also a major highlight, increasing 21% over the prior year. Let me summarize our progress for each of you against our 2016 key shareholder priorities, which were first, continue to build high-quality revenue while meeting our earnings commitments. Second, build and 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. We continue to add high-quality revenue to our book of business, even as our 4% internal revenue growth was below our initial guidance. Our 2016 performance was led by Payments segment internal revenue growth of 6%, which included strong results across a number of our businesses. As we noted in Q3's call, full-year results would be impacted by the timing of revenue, primarily from implementation and product delays, which as I mentioned was further compounded by a Q4 revenue shortfall in our international business. We believe our strong sales for the year combined with the benefit of client and product implementations coming online, support a step-up in our internal revenue growth rate in 2017. Company-wide adjusted operating margin expanded for the fourth consecutive year. The combination of gains and high-quality recurring revenue, combined with our strong operational effectiveness performance led to a 50 basis point increase in adjusted operating margin for the year. Importantly, this increased performance has been achieved organically, as our recent acquisitions have actually been margin dilutive, which we expect will improve as we integrate and scale these new solutions. Our 14% growth this year in both adjusted earnings and free cash flow per share, clearly demonstrates value creation at the intersection of the hallmarks of Fiserv, a strong business model, operational discipline and consistent capital allocation. Our second priority was to build and enhance client relationships with an emphasis on digital and payment solutions. During the quarter, Salem Five Cents Savings Bank a $4.2 billion institution, selected DNA in a competitive process, along with a full suite of digital solutions from Fiserv, including Corillian, Mobiliti, CheckFree RXP and debit processing. Salem Five has also decided to adopt our newest solution, Messenger Center, for both large commercial and small businesses from Online Banking Solutions or OBS, which we acquired in December. Messenger Center is an award-winning, sophisticated cash management solution differentiating on a mix of digital experience and leading functionality, which fits the size and complexity of the customer. We are pleased to have been selected by Salem Five as a partner on their go-forward vision of next generation technology and expanding commercial capabilities. We were very pleased to have a more than 20% increase in DNA signings as compared to 2015. And importantly, we implemented 20 new DNA clients during the year including seven institutions with assets greater than $1 billion. We signed more than 220 clients to our Mobiliti ASP solution in 2016 while growing subscribers over 30% to 5.5 million. While we are pleased with our growth, the current subscriber base still represents less than 15% of the underlying deposit accounts served with our ASP product. Mobiliti business also continued to prosper, more than doubling the number of live clients on the platform this year and nearly four times the number of end users. We remain very bullish on the size, scale and importance of the digital opportunities. Our third priority was to deliver innovation and integration, which enables differentiated value for our clients. A huge priority in 2016 was to meaningfully enhance our upper end commercial solutions to better enable clients to serve their most important customers. Early in the year, we bolstered our commercial services portfolio through a partnership with AFS to integrate their sophisticated commercial lending services with our account processing platforms. And as I mentioned earlier, we recently announced the acquisition of Online Banking Solutions, which meaningfully extends our sophisticated cash management, digital business banking and secure browser capabilities for large commercial and small business clients. Today, OBS serves 13 of the top 100 banks, which is strong evidence of the quality of their suite of services. These cash management and digital banking services are already integrated with several of our account processing solutions and we are excited about the enhanced value we can deliver to our commercially focused clients. We continue to see very strong client interest in Architect, our integrated online and mobile banking solution that serves both retail and business customers on a single platform. We have more than 150 clients live today and have grown the sales pipeline to six times the level it was when we acquired the solution nearly a year ago. We handily beat our first year sales expectations and integration is progressing as expected. Last January, we acquired an innovative billing and payments platform that now serves as the basis of our next-generation solution dubbed BillMatrix Next. This platform is being extended to include the best of our current Biller platform, providing flexible multichannel billing and payment solutions for all size businesses, along with enhanced functionality for our large billers, and all with much faster implementation times. We are also making these market-leading services available to our account processing clients to help them better serve their customers. As an early proof point, Bank of the Ozarks a $19 billion asset institution, chose BillMatrix Next in the quarter and was able to go live in less than 30 days versus a historical process, which could have easily taken six months or longer. We are excited about this new opportunity to serve the biller market more broadly and faster than ever before. Towards the end of 2016, we also went live with Notifi, which empowers our clients to a highly customizable alerts engine that allows real-time communication with their customers. So far, over 50 clients have selected this differentiated product and are beginning to go live. Notifi is already integrated into several of our account processing platforms, online banking platforms and Mobiliti. These are just a few examples of the new innovation we are bringing to market, to better enable our clients to win in the markets they serve. We expect our new solutions will scale over time, and make meaningful contributions to internal revenue growth acceleration over the next several years. With that, let me turn the call over to Bob to provide additional detail on our financial results.

[Robert W. Hau:]

Thanks, Jeff, and good afternoon, everyone. Adjusted revenue for the quarter increased 5% to $1.4 billion and adjusted earnings per share increased 16% to $1.16. Internal revenue growth of 5% was led by strong performance in our Payments segment. Overall, the revenue growth in the quarter was generally in line with expectations with the exception of international business, where revenue growth was negatively impacted by slower sales and some deal slippage. These deals were concentrated in license revenue which created a rather large impact revenue hit for the international business in the quarter. Adjusted operating margin was up 140 basis points to 32.1% in the quarter, due primarily to an easier prior year compare as we mentioned during the Q3 earnings call. We marked the 31st consecutive year of double-digit adjusted earnings per share growth by achieving 14% for the full year. Full-year operating margin was up 50 basis points to 32.2% driven by primarily by Payments segment performance and a continued focus on operational effectiveness. As Jeff mentioned, this performance is even better when considering the 30 basis points of dilutive margin impact from acquisitions. Our Payments segment continued to produce strong internal revenue growth of 6% for both the quarter and the year. Performance in the quarter was led by Card Services, Output Solutions and our risk management businesses. Adjusted revenue, which includes the results from acquired businesses, grew 9% in the quarter to $728 million and 10% for the full year to $2.8 billion. Debit transaction volume growth remained in the high single-digits, and for the year was accompanied by a 10% increase in new client signings to more than 160 institutions. P2P transactions grew more than 30% for the full year, aided by a meaningful increase in Popmoney Instant transactions, which were up a stellar 375% over the prior year. We further expanded our digital footprint, adding more than 220 Mobiliti clients and more than 350 bill payment clients during the year. Mobiliti ASP users were up 30% to 5.5 million subscribers for the year and they were up nearly 90% over the last two years. And as Jeff mentioned, we're still on the early stages of helping our clients capture the unique opportunities presented by digital transformation. Payments segment adjusted operating income increased 8% in the quarter to $241 million, and for the year, was up a very strong 13% to $946 million. Adjusted operating margin was down 50 basis points in the quarter to 33.1% due primarily to the dilutive impact of acquisitions. For the full year, adjusted operating margin increased 80 basis points to a new high watermark of 33.8% driven primarily by strong revenue growth in scale businesses and operational efficiency, which more than offset the 60 basis point negative segment impact from acquisitions. Adjusted Financial segment revenue was $644 million in the quarter and $2.5 billion for the full year, which translated to a 2% internal revenue growth in both periods. We saw solid contributions from our lending and account processing businesses in the quarter, offset by the weaker performance, including FX, in our international businesses mentioned earlier. Although the Q4 international results were disappointing, a portion of the operational shortfall is timing based and should improve the results in 2017. Adjusted operating income for the Financial segment was $217 million in the quarter and $823 million for the year. Adjusted operating margin in the quarter was 33.7%, up slightly sequentially, and our strongest margin performance for the year. As a reminder, we mentioned on our last call that the Q4 2015 operating margin was unusually low, resulting in a comparative benefit primarily from business mix and timing of some of the larger expenses last year. Full-year adjusted operating margin for the segment was 33.2%, declining 60 basis points primarily from the very strong prior-year performance comparison, the international shortfall, and incremental investments in some of our newer innovation-based solutions such as Agiliti and Notifi. In the past few years, we've increased investments in the Financial segment and still the Financial segment adjusted operating margin has increased 60 basis points over the last two years. Corporate and other results were in line with expectations, and generally consistent with the comparable prior year's results. Our adjusted effective tax rate was 35.6% in the quarter, up a full point over the prior year and the full year rate of 34.5% was essentially flat to the prior year. We adopted the new rules on accounting for excess tax benefits for share-based compensation on January 1. As a result, we estimate our adjusted effective tax rate for 2017 to be slightly below 33%. And while the actual adjusted tax rate will vary each year on the basis of excess benefits realized, we anticipate our tax rate to remain generally at this level for the foreseeable future. Our strong business model generated a record $1.1 billion of free cash flow in 2016. Free cash flow per share increased 14% to $4.84, 9% higher than our adjusted EPS of $4.43 and $0.14 higher than our minimum free cash flow expectation for the year. We received a $10 million cash distribution from our StoneRiver joint venture in the fourth quarter and $150 million (sic) [$151 million] (16

[Jeffery W. Yabuki:]

Thanks, Bob. Sales bounced back strongly in 2016, allowing us to print a record sales year. Sales attainment was 108% in the quarter, and increased 22% over the prior year. Sales were up 21% for the full year, achieving 103% of quota. Q4 sales were led by our account processing and Output Solutions businesses. And domestically, were generally strong across the board. We saw a healthy increase in the number of new large deals signed for the year. And most important, even after a record sales year, our pipeline is very solid entering 2017. Integrated sales were excellent in the quarter, increasing 17% to $105 million and up 14% for the full year to $292 million. We continue to see solid demand in areas such as Card Services, bill payment, custom statements and digital solutions. We realized operational effectiveness savings of $64 million, meaningfully exceeding our $40 million target for the year. Savings were led primarily by procurement and workforce optimization. We also made very good progress on our data center consolidation, combining 18 locations during the year. Our operational effectiveness target for 2017 is $60 million. There is palpable optimism in the banking market on the heels of the election, with increased conviction in a rising rate environment, coupled with regulatory reform. While it's hard to translate this positive sentiment to near-term results, we do believe that it could bias favorably for technology spend over the mid to long term. For 2017, we expect clients to focus their spend on a broad combination of digital services, risk management, and in particular, cyber along with a return to investing in more revenue centric technologies, such as cash management and all forms of lending. Lastly, we remain optimistic about bank focus and commitment on P2P through the Zelle consortium. We are excited to play a leading role in the ultimate system-wide adoption of this important initiative. With that, let's move to 2017. At the start of each year, we provide context to help shareholders assess our overall performance. For 2017 our three shareholder priorities are, first, to continue to build high quality revenue while meeting our earnings commitments; next, to enhance client relationships with an emphasis on digital and payments solutions; and third, deliver innovation and integration which enables differentiated value for our clients. Financially for 2017, we expect our internal revenue growth rate to expand and be within a range of 4% to 5%, which as you may recall, includes any anticipated impact of foreign exchange. We expect our internal revenue growth acceleration to come from a combination of sources, such as the positive impact of higher sales, the recovery of the delayed implementations we talked about in Q3, less EMV deferral, and stronger organic transaction growth in some of our payments businesses such as Biller Solutions. Given the natural ramp of new revenue and the number of larger sales transactions, we recorded in 2016, we expect Q1 to be the low revenue growth point of the year, and that the overall 2017, internal revenue growth rate will be higher in the second half of the year. We anticipate adjusted earnings per share to grow in a range of 14% to 17% or $5.03 to $5.17 for the year. And that the growth pacing through the year would generally near the revenue growth trend. We also anticipate adjusted operating margin will expand by at least 50 basis points for the year. Lastly, we expect 2017 free cash flow per share will be at least $5.45 or minimum growth of 13% per share over last year. We exit 2016 with another year of strong financial results even as revenue was light of our expectations. We delivered our 31st consecutive year of double-digit adjusted earnings per share growth, expanded operating margin, and achieved record free cash flow and sales. Our business model continues to deliver high-quality results and we expect revenue growth expansion to be back on track for 2017. We thank our more than 23,000 associates around the world who work tirelessly, with passion and commitment, to deliver differentiated value for clients and shareholders alike. Finally, we've named Paul Seamon to lead our Investor Relations team as of February 28. Paul has been at Fiserv for 10 years in a variety of financial-oriented positions and is well-suited for this new role. I want to thank Stephanie Gregor for her dedication in IR over the last three years and wish her the very best as she leads our financial planning and analysis organization. With that, let's open the line for questions.

[Operator:]

Thank you. We will now begin the question-and-answer session. One moment please. Our first question is from Dave Koning of Baird. Your line is now open.

[David J. Koning:]

Yeah. Hey, guys. Great job again.

[Jeffery W. Yabuki:]

Thanks, Dave.

[Robert W. Hau:]

Thanks, Dave.

[David J. Koning:]

Yeah. And I guess, first of all, you mentioned the sale to Genpact. I was just wondering about the acquisition in January, any metrics around rough size of revenue and if there is some margin pressure expected from that acquisition in 2017.

[Robert W. Hau:]

Yeah. Dave, it's Bob. Overall, we're excited about the product and the solution that that brings to us. But from an impact to both revenue and EPS, it's a relatively small acquisition. And so you won't see a real impact. And of course it is fully anticipated in our guidance for 2017.

[Jeffery W. Yabuki:]

And Dave, it's really a substantially a product acquisition. They have a nice footprint of clients and we expect that to be both sold – continue to be sold directly, but also – and the most important element of it in our current value proposition is to integrate it into other platforms to make our commercial services proposition substantially more robust.

[David J. Koning:]

Got you. Okay. And then your business is so steady and like every quarter is good basically. So, maybe if I just think long-term about margins, they keep going up. Is that mostly a function of where the most growth is coming from, is it just the highest incremental margin and maybe some of the lower growth products that you have might just be lower margin? Is that the main thing or is it just that you're cutting costs in certain areas and allowing margins to go up that way and maybe how sustainable is this over time, because it's been so good?

[Jeffery W. Yabuki:]

So, that's a great question, Dave. And we'll probably tag team this a bit. It is – we have the very good fortune of having a business, which has any number of scaled businesses, whether it'd be an account processing platform like Premier or our debit processing business or bill pay, we've got a number of towers of businesses where we put lots and lots of money into the infrastructure. And as we invest, we can move those investments over large blocks of clients and large numbers of transactions. And because they're large processing engines, they tend to have higher incremental margins on the way in. So, that's number one. Number two, as you know, we have had – we're in our third phase now of operational effectiveness, and we've done a pretty good job. We got, I think we got around $64 million in 2016 in terms of taking cost out of our infrastructure. Some of that drops through to the bottom line, but a lot of that goes back into product and allows us to invest into product in a more substitution way or pattern instead of it just being incremental. So we've got that as well. And then the other thing is, several years ago, you may remember we were investing in some technologies like mobile, where we were having to invest in front of the curve. Because we tend to build these larger technology stacks and infrastructures, we have to build them before the revenue comes on and that compresses our margin. When the revenue starts to come on, we make it up here. It's one of the reasons why in Bob's prepared remarks, he mentioned that we are now starting to put more money into the Financial segment. And so, we would expect to see Financial segment, which has really grown rapidly over last several years, maybe start to moderate a bit because we're putting these big investments in or putting the investments in there, some of them are larger, and then over time that will scale back up. But we've said for a long time that we believe that we have a lot of room to continue to grow margin over time, even in the face of competitive pressure, because of the proactivity we have frankly in managing our cost base and some of the towers of scale technologies.

[Mark A. Ernst:]

I mean the only thing I'd add to that is things like datacenter consolidation, this is something Jeff commented on in the – or Bob maybe did in the prepared remarks, but we are really in year two of a five-year process. There is a lot of opportunity remains and something like that. There are any number of these things where we know we can become much more efficient and it actually enhances the delivery that we have for our clients, because of the efficiency that we're able to put into our operations. So I would agree. We got a lot of room to run yet.

[David J. Koning:]

All right. Great. Well, thank you, nice job.

[Jeffery W. Yabuki:]

Thanks, Dave.

[Operator:]

Thank you. Our next question is from Andrew Jeffrey of SunTrust. Your line is now open.

[Andrew Jeffrey:]

Hi, guys. Thank you very much for taking the question.

[Jeffery W. Yabuki:]

Sure.

[Andrew Jeffrey:]

Jeff, I'm just wondering if you can comment a little bit, in the U.S., I'm thinking particularly about the credit union market, but generally on the competitive environment and whether you've seen a change there. You've obviously done very well with DNA. So maybe you can discuss takeaways and maybe in pricing perhaps on some of those wins. I'm just trying to get a general sense of what you're seeing out there.

[Jeffery W. Yabuki:]

Sure. And when you say credit union, Andrew, I assume you mean the core account processing piece of the credit...

[Andrew Jeffrey:]

Yeah. Exactly, right.

[Jeffery W. Yabuki:]

Yeah. I would say that across credit union and bank, and frankly everywhere, the market is competitive and it continues to be competitive. And as we've talked about on several different occasions, there's a dynamic in the market where there are more competitors chasing less financial institutions, and that's a pretty good formula for intensity. And so we continue to see that. It is one of the reasons why we have been investing in the way we have in some products, such as Architect, as we mentioned earlier. And in fact, even Financial Messenger by OBS will also – our Messenger Center by OBS will also allow some of the larger credit unions to provide commercial services to their clients. So I think that's – we are looking to build a broader formula for differentiation around our account processing core value proposition. Frankly, we think that DNA is the strongest – what's the right way to say it, is the strongest account processing engine facing off to the credit union market today because of the modern elements of the platform and the workflows, et cetera, et cetera. And frankly, we're going head to head with competitors that I'm sure you can imagine on a regular basis. As far as takeaways, we typically don't give those numbers. But we're winning over our fair share of the beauty pageants that we're invited to participate in. So we feel good about where we're going in that space.

[Andrew Jeffrey:]

And don't let anybody ever say you're not good looking, right? Would you characterize the environment competitive we have as, I know you said consistently it's competitive, has it gotten more so in your view in the last 12 months?

[Jeffery W. Yabuki:]

So again, one of the problems is because all of us, all of the core competitors have both core and other products, it depends on what you're talking about. If we're talking about digital, everything digital is very competitive in terms of, you've got some competitors that you know about, you've got seven kids in a garage building new technologies, and it's pretty easy to put stuff out there. So those, the fringes of the core processing platforms or the value – some of the interesting value elements of the core processing platforms are more competitive. And even in the credit union space, there are companies such as Corelation that weren't in the mix. A couple of years ago, you've got some folks coming in from outside. So I would say that the processes are more competitive. I frankly don't see a lot of different movement in the market as we sit here today, but it is incumbent upon companies like us, and I can only speak to us strategically, that we're building value propositions that will allow us to continue to prosper over the mid to long term.

[Andrew Jeffrey:]

Okay. That's helpful. And one quick one, Bob, could you perhaps quantify the benefits in your EPS guidance from the excess tax benefits from SBC?

[Robert W. Hau:]

Yeah. I think the way to think about it is the slightly less than 33% tax rate is call it 1.5 points below what we've seen over the last couple of years, so 34.5% in 2016, 34.5% in 2015. That equates to in order of magnitude about $0.13, $0.14 benefit in 2017.

[Andrew Jeffrey:]

Okay.

[Robert W. Hau:]

And again, as we mentioned in the opening comments, that is something that we expect to see for the foreseeable future. So this is a step down and then holds for that – for a period of time.

[Andrew Jeffrey:]

That's the non-GAAP tax rate, that 34.5%, okay. (32

[Robert W. Hau:]

It's an adjusted tax rate, that's correct. But this change in accounting is GAAP driven.

[Andrew Jeffrey:]

Understood. Thank you very much.

[Robert W. Hau:]

Thank you.

[Operator:]

Our next question is from David Togut of Evercore ISI. Your line is now open.

[Rayna Kumar:]

Good evening. This is Rayna Kumar for David Togut.

[Jeffery W. Yabuki:]

Hi.

[Rayna Kumar:]

For 2017, could you please quantify expected organic revenue growth and margin expansion between Payments and Financial segments and maybe just call out the drivers?

[Robert W. Hau:]

Yeah. From the standpoint of the 2016, we actually don't break that out – 2017. We don't break that out between the two segments in our 4% to 5% guidance for the internal rate of growth. You can certainly expect like we've seen for the last several years, our Payments segment will grow faster than our Financial segment. But we don't give specific guidance between the two segments.

[Rayna Kumar:]

Got it. What percent of your customers have completed the EMV card reissuance and maybe if you can just tell us what that breakdown is between credit and debit?

[Jeffery W. Yabuki:]

So you'll remember that, we're substantially a debit provider. And most people know that debit was kind of in the back seat relative to credit issuance, because of the differentials and potential fraud risk. We would say we're kind of in the middle innings of the reissue and we expect to continue to see benefits this year and next year. We also mentioned earlier in the year that we had our first major institution go to contactless. And we expect that that will also start to create a little bit of momentum in the market going towards the end of 2017, but certainly into 2018 and 2019.

[Rayna Kumar:]

Okay. And one last one from me, if you can just call out term fees in the fourth quarter and how that compares to last year, and your expectations for 2017?

[Robert W. Hau:]

So, for term fees in the fourth quarter, as expected, we did see some growth year-over-year for the quarter. But on a full-year basis, as we described in our Q3 earnings call, we did see term fees down year-over-year. Overall license and term in aggregate was up call it about $10 million on a full-year basis. For 2017, again, we don't give that specific guidance.

[Rayna Kumar:]

Okay.

[Robert W. Hau:]

But certainly incorporated in our overall internal rate of growth of 4% to 5%.

[Rayna Kumar:]

Got it. Thank you.

[Jeffery W. Yabuki:]

Thank you.

[Operator:]

Our next question is from Ramsey El-Assal of Jefferies. Your line is now open.

[Christen Chen:]

Hi. Good evening. This is Christen Chen in for Ramsey. I guess maybe to piggyback off of Dave's question, just on the 2017 guide, aside from operating leverage and operational cost initiatives. Are there any other items to call out in terms of impacts on margins? I mean, potentially the acquisitions you all made in 2016 that was dilutive. Could make some contributions or are there any other items that we should be thinking about? And then also, does your guidance assume any share buybacks?

[Jeffery W. Yabuki:]

So, on the margin question specifically, our guidance for the year is at least 50 basis points. We would expect that as we grow the acquisitions that we brought into the family that they would probably have some fairly de minimis impact on margin this year, because we have to sell and then it has to convert to revenue. There could be something small, but the majority, the substantial, substantial majority of the margin is coming from a combination of revenue growth against scaled solutions and our efforts against operational effectiveness.

[Mark A. Ernst:]

And on share repurchase.

[Jeffery W. Yabuki:]

Yeah. All of the uses of capital that we contemplate during the year would be included in our guidance.

[Christen Chen:]

Okay. And then just switching gears a little bit, we've seen some of the PIN debit networks get more aggressive in terms of rolling out PIN-less debit and kind of authentications solutions that are relevant to signature. How far along are you all with that kind of process in terms of being able to handle signature transactions, and how do you guys see that debit market evolving now that Visa has backed off of some of their EMV related routing strategies?

[Jeffery W. Yabuki:]

Yeah. That's a really good question. We have been working on this technology for a couple of years in preparation for a day when the market could be more open and so we're, let's say, well prepared to take advantage of those opportunities where they exist. And we're excited about how the market is moving.

[Christen Chen:]

All right. Great. That's all from me. Thank you very much.

[Jeffery W. Yabuki:]

Thank you.

[Operator:]

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

[James Schneider:]

Apologies. Can you hear me?

[Jeffery W. Yabuki:]

Yeah. Hi, Jim.

[Robert W. Hau:]

Yeah.

[James Schneider:]

Sorry. I guess, apologies if this was already answered, but can you maybe talk about the outlook you see for bank consolidation this year and whether that's any kind of factor in terms of your outlook for this year and kind of maybe the impact further on out?

[Jeffery W. Yabuki:]

So, we don't anticipate bank consolidation to be any, in any way meaningfully different than we saw in 2016. Although there is certainly significantly more optimism at this stage of the year than there was last year, the banking business is still tough. And there will continue to be winners and losers in the acquisition and merger wars, and we'll continue to win and take, hopefully, our fair share of those. So we haven't accounted for it specifically. We don't sit here and say, that there's going to be a significant change in both termination fees or anything else. And specifically, with regard to 2017, because of the timing on deconversions, typically we have a good idea already of what that's going to look like. And so we would have factored a lot of that into our numbers already.

[James Schneider:]

That's helpful color. Thanks. And then, not sure if I missed it or you mentioned it, but can you maybe talk about the DNA wins that you kind of achieved in 2016 and whether you expect 2017 to be better or worse than that?

[Jeffery W. Yabuki:]

So wins in 2016 were roughly 20% – a little bit more than 20% greater than they were in 2015 in terms of number of institutions. 20 institutions went live. Of those institutions that went live, seven of them had assets greater than $1 billion. We did sign our largest DNA client ever in 2016 in terms of asset size. So we're quite excited about that installation. It actually opens up a new segment of the market that we're focused on right now. Momentum in DNA is very strong and the combination of DNA, coupled with the steps that we've taken to enhance our commercial services capabilities, we think is a winning combination. So we expect to have pretty good pipeline building during the year and hopefully a few more wins. But over time, we expect that to be a very powerful combination, the pairing up of real-time straight-through processing commercial capabilities that already links up to our, what we would say is, best in the market retail proposition.

[James Schneider:]

Thank you.

[Jeffery W. Yabuki:]

Thank you.

[Operator:]

Thank you. Our next question is from Ashwin Shirvaikar of Citi. Your line is now open.

[Ashwin Shirvaikar:]

Thank you. Hi, Jeff. Hi, Bob.

[Jeffery W. Yabuki:]

Hi, Ashwin.

[Robert W. Hau:]

Hi.

[Ashwin Shirvaikar:]

I guess my first question is with regards to CapEx and what are the top two, three areas of investment that you're doing. I am specifically asking this question because, Jeff, you highlighted innovation, so that's where I want to go with.

[Robert W. Hau:]

Yeah. I would say Ashwin that probably that the largest by a good amount right now is the data center work that we've got going on, both in terms of the consolidation, as well as improving the overall efficiency of those data centers and actually preparing to lower cost in the short-term, as well as gain scale in the long term. As we consolidate those operations, we build in best of class capability, as well as scalability. So, we see some long-term benefits of that investment. That definitely would be the highest one we've got right now for 2016 and 2017 for that matter.

[Jeffery W. Yabuki:]

And Ashwin, we are making a lot of different investments in innovation, make no mistake about that. But for better or worse, almost all of the investments that we make in innovation tend to be around people and we have a pretty conservative posture that we take on cap software, and therefore it's running through the P&L. So, that's one of the things – one of the reasons why we highlighted the margin, the change in shift from the Payments segment, so starting to move some incremental investments over to Financial, because they – we don't capitalize the majority of them and they run through the P&L. That's where they're going to be seen.

[Ashwin Shirvaikar:]

Understood. And then going back to the topic of competition and I appreciate the answer you gave a short while ago but when core deals come up for renewal nowadays, do you still expect that the percent won by incumbents would stay relatively consistent? I mean, there are, at least the way I look at it really the top two, three players tend to win most of the stuff that comes up and that's how it's been. And is that going to change? I mean, I'm kind of wondering why you brought up the topic of competition, heightened competition and FIS had done the same so.

[Jeffery W. Yabuki:]

Yeah. I only brought it up because someone asked a question. Ashwin, I would say again it depends on the market. If you were talking about mobile banking, there could easily be 30 or 40 competitors for mobile banking, where frankly six years ago there were probably the account processors, the core processors and Digital Insight. And now it's a much broader space and that has spread to some of the payments capabilities and everything else that gets dragged along. There is more competition on the credit union side of the house, certainly around core processing. And we have some non-U.S. competitors in the larger end of the market that we were not seeing before, who are in the market trying to take share. Conversely, what I would say is, at least, our data would say that less clients are switching nowadays. And so, the incumbents do have a – they do have a strong position, in that people are saying, I'd rather not switch my core because there's all these other things that I need to do, whether it's put in a new commercial cash management system or a new mobile experience or whatever the case may be, that's tending to take more priority than swapping core.

[Ashwin Shirvaikar:]

Understood. My last question is with regards to, in your prepared remarks, you talked about how banks are at least beginning to look at some, let's call it, I think the term you used was, revenue centric demand which is a great term. I guess the question there becomes, as your clients invest in this demand, is it more advantageous to potentially sort of lead with some sort of consulting or people-based capability? Do they look for that kind of thing? Being focused more on revenue growth, does it produce (45

[Jeffery W. Yabuki:]

Sure. So, I'll give you my perspective and others may want to add as well. It really depends a little bit on the size of the institution and what's their DNA. There are some larger institutions that do everything through or do – make a lot of their bigger decisions using a people-based consulting services to help them get to a place where they can make a technology decision. And sometimes those consultants will have an impact or bearing on the actual technology that's ultimately selected. But for the majority, the substantial majority of the market, these decisions are not made via kind of the people-based services that you're talking about. Sometimes there are independent third parties who are helping the institutions to intermediate the buying decisions, they're running processes, buying processes and things like that. But for the most part, on the kinds of products that we're talking about here, whether they'd be new commercial cash management or commercial lending or some of the consumer lending types of products, the solutions that are going to drive real tangible revenue could also be digital account opening, those types of capabilities, we're not seeing a lot of intermediation there. Mark, I don't...

[Mark A. Ernst:]

I think that's exactly right. We just don't see that going on very much in the market. I mean, certainly there's anecdotal situations where that occurs. But it's more, far more the exception when we see it, than it is any kind of a trend. And as a result, we don't feel compelled to have to solve that problem.

[Ashwin Shirvaikar:]

Got it. Thank you, guys.

[Jeffery W. Yabuki:]

Thanks, Ashwin.

[Operator:]

Our next question is from Kartik Mehta of Northcoast Research. Your line is now open.

[Kartik Mehta:]

Hey, how are you Jeff, Bob and Mark?

[Jeffery W. Yabuki:]

Hi, Kartik.

[Kartik Mehta:]

Jeff, you talked about, in the beginning of the call, banks feeling better obviously interest rates improving and also them hoping for regulatory relief. Has that yet resulted in better spending or is it that the banks just are anticipating this and when it happens, you'll see the spending?

[Jeffery W. Yabuki:]

It would be more the latter than the former. It is right now, manifesting in conversations. So for example, I've had a couple of conversations this year with CEOs that I haven't had in a while and the conversation went something like this. So why don't you tell me what you have that can help us build our business? That's a different conversation than, why don't you tell us what you can do to help us save some money on our technology spend. And that, that – I'm using that only as an example to say that, that is the feeling in the market right now. But as we said in the remarks as well, I see this to be much more of a mid to long-term benefit because, first of all, some things are going to have to happen. I mean opinions are changing, but something is going to have to happen that has people say, all right, I'm going to be able to lock in some benefit and now I can do something different with it.

[Mark A. Ernst:]

At this point, this is a 60-day phenomena.

[Jeffery W. Yabuki:]

Yeah.

[Mark A. Ernst:]

I mean – and we think it's going to continue, because of where rates are going and because of the prospect of regulatory kind of easing, but there's a long way between there and spending.

[Jeffery W. Yabuki:]

And I would say that right now as we sit here today, our guidance clearly does not contemplate any kind of meaningful change in buying behaviors in the market.

[Kartik Mehta:]

And Jeff, if you look at the momentum behind the organic growth improvement for you in 2017, compared to 2016, is that the result of innovation, is it the result of that the banks needed to spend on things that you're offering? And just to take it one step further, what would change that momentum into 2018?

[Jeffery W. Yabuki:]

So, the big drivers going from 2016 to 2017, probably the first – the most important item is sales. We had a pretty weak 2015, we had a weak Q1 and we had a very strong Q2, Q3 and Q4, and we have a fairly strong pipeline entering 2017. And so, a 20% increase in sales which obviously will have to get implemented over time much of those sales get implemented over time. We feel like that is something that is on the shelf, and now it's a matter of us getting implemented and having making sure that clients and the way we partner with clients gets that done. And we talked about that in Q3, how that actually had a little bit of a negative effect on us because we got delayed. But that's point one. Point two is, we have some products that we talked about today, Notifi, being one of them. But Notifi, and Instant Issue, CardValet, IPS some products that we expected would have bigger benefits in 2016. And we're seeing some continuing aggregate demand there, and we expect that that will now start to come online and help us for better or worse coming off a lower compare in 2016 than we had originally anticipated. We also, as we mentioned, are having some good traction in products like BillMatrix Next and Architect, which were previously not treated as organic revenue growing products, because they were in the first year of acquisition, and so we'll get some tailwind from that, little bit more EMV. Mobiliti will continue to grow, and then, probably the last thing I would say is, Zelle, right. Zelle is predicted to go live in June, and if it goes live, we'll get some benefit. But the beauty there is, it has everyone looking at their retail payment strategies and how they fit. And some of our technologies like our IPS experience, which is a single-landing idea for account-to-account transfers, bill pay and P2P. We expect things like – technologies like that to have an impact. We talked about Popmoney Instant transactions I think being up nearly 400% for the year. I think those are the areas that give us some comfort going into 2017. And frankly, the thing that could derail us is if something happens in the market where clients freeze up and they're not implementing or they're not moving forward. That is where I see the big risk in our numbers this year.

[Kartik Mehta:]

Okay. Thank you very much. I really appreciate it, Jeff.

[Jeffery W. Yabuki:]

Thank you.

[Operator:]

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

[Chris Charles Shutler:]

Hey, guys, good afternoon.

[Jeffery W. Yabuki:]

Hi, Chris.

[Robert W. Hau:]

Hi, Chris.

[Chris Charles Shutler:]

So I guess, first, just wondering what happened in the quarter in international, maybe just a little bit more detail there. I'm assuming it was around Agiliti, but maybe just quantify what happened in terms of the shortfall over how much was timing versus something else. Thanks.

[Jeffery W. Yabuki:]

Yeah. It wasn't Agiliti at all.

[Chris Charles Shutler:]

Okay.

[Jeffery W. Yabuki:]

In fact, Agiliti, we had a couple of go-lives in Q4, which actually went pretty well and Agiliti is longer tailed revenue. So, an issue with Agiliti, we would have known. It was all really license-oriented revenue. So, high amounts of sales converting to impact revenue. The majority of those got pushed into 2017. And so we'll look for that lay in, in 2017, all things being equal.

[Chris Charles Shutler:]

Okay. Great. And then on DNA, would you mind just running through those numbers with us again and I'm curious how many of the DNA signings and implementations have been new clients versus existing ones?

[Jeffery W. Yabuki:]

So, sales in 2017 were up 22% – institutions in 2016, sorry, were up 22% – 20% (54

[Chris Charles Shutler:]

Okay. Got you. And then lastly, Jeff, when you talked about sales, sales were up I think 22% in the quarter. So strong number. Is that sales number measuring TCV sold in the quarter or is that kind of an annualized revenue from sales? I'm just trying to understand that.

[Jeffery W. Yabuki:]

It's TCV.

[Chris Charles Shutler:]

Okay. Could you give us some sense of the annualized revenue growth? I just – I asked because I know that in the market, there have been a lot more sales that have been in kind of longer – longer and longer timeframes?

[Jeffery W. Yabuki:]

Yeah. I mean, we don't provide that information. I will say that, that – the – the best way to think about it is the implementation cycles for the things that were sold, there were a couple of items we mentioned – a couple of big sales we mentioned in Q2 that we thought we were going to have shorter cycles. And lo and behold, they're going to end up being 12 to 18 month cycles. So I would say for the most part, the tracking of the implementation cycles is about on par with where it has been historically.

[Chris Charles Shutler:]

Okay. Thank you.

[Jeffery W. Yabuki:]

Thank you.

[Operator:]

Our next question is from Joseph Foresi of Cantor Fitzgerald. Your line is now open.

[Mike Reid:]

Hi. Guys, this is Mike Reid on for Joe. Thanks for taking the question. I was wondering if you could give us maybe some color on some of the new initiatives, CheckFree, DNA, Mobiliti, Popmoney, and even some of the newer ones. Does one of those, do you think, have opportunity to move the needle this year, maybe more than some of the others?

[Jeffery W. Yabuki:]

We're all sitting here, thinking, we're contemplating the question. I think in the aggregate, they'll move the needle. The ability for any one of – I mean, the beauty of our model is it's a recurring revenue model and it builds in transactions over time. The difficulty in our model is it's a recurring revenue model, which builds in transactions over time. And so, from our perspective, we care a lot more about how well are we doing at building the products and putting them into the market and having them drive value, so they're going to be adopted and drive revenue. So yes, in the aggregate, they're going to move the needle a bit in 2017. But when you think about 2018 and 2019, that's where it's going to matter. And I would use Mobiliti as an example. I think Bob mentioned in his prepared remarks that Mobiliti users have grown 90% over the last two years, and that to 5.5 million. To the extent that some of these products have the ability to do that and they do, in fact, products like Notifi are much broader based than something like Mobiliti. They can have meaningful impacts on the company for a long period of time, in terms of driving growth. But more importantly, they create differentiated advantages for our clients – for us, and therefore, our clients and that's why these solutions are so important.

[Mark A. Ernst:]

But the net effect of that is almost nothing can kind of pop in a given year and move the needle.

[Jeffery W. Yabuki:]

In those kinds of products.

[Mark A. Ernst:]

In those kinds of solutions.

[Mike Reid:]

Okay. Individually.

[Mark A. Ernst:]

Yes, that's right (58

[Mike Reid:]

Okay. And then keeping it on 2018 then, do you think that could be an acceleration year if the momentum continues? And then what would be an early indication of that taking hold?

[Jeffery W. Yabuki:]

So, the answer to the first part of the question was, yes. And the answer to the second part of the question is, I think that's a better discussion at Investor Day.

[Mike Reid:]

Okay. Thanks, guys.

[Jeffery W. Yabuki:]

Thank you.

[Operator:]

Our next question is from Tien-Tsin Huang of JPMorgan. Your line is now open.

[Tien-Tsin Huang:]

Hi. Good afternoon. Good to catch-up. I jumped on a little bit late, but just I guess, Jeff, following up on your comment around the potential for freezing of client spending, that makes sense, which reminded me to ask, is compliance revenue – how big of a contribution has that been in terms of new sales in the last couple of years and how big is it in terms of revenue now? I'm curious if that's an area where you could see some delays or deferrals.

[Jeffery W. Yabuki:]

So while compliance was at the top of everyone's list, I was frustrated that we weren't moving fast enough to put products into the market against that demand. So now when we think maybe compliance products will be a little bit more out of vogue. I'm not too concerned about the impact on our revenue.

[Tien-Tsin Huang:]

Okay, good. And I figured so much. And then just overall big picture, just thinking about visibility, I know you've gotten a lot questions around it, but just thinking about visibility in this environment today versus 12 months ago. How would you characterize that?

[Jeffery W. Yabuki:]

Revenue visibility?

[Tien-Tsin Huang:]

Yeah, I'm sorry, revenue visibility, earnings visibility, however you want to handle that?

[Jeffery W. Yabuki:]

Yeah. Pretty, I mean, pretty high. We are blessed with, again, a business model that as you know has a pretty high degree of recurring revenue. And for the most part, we can see what's coming. The beauty of any number of the products and services that we've been building is, we're selling them fairly early. They're getting queued. The biggest issue that we will have is, if clients make decisions that delays implementations, especially large ones. Yeah. That's – and to the extent that some of these products are dependent upon consumer adoption. Obviously, you've got an issue because of the intermediary role that the institutions play. But on balance, I think we're in reasonable shape.

[Tien-Tsin Huang:]

Good, good. Thanks, as always, for the update.

[Jeffery W. Yabuki:]

Thanks, Tien-Tsin.

[Operator:]

Thank you. Our next question is from Paul Condra of Credit Suisse. Your line is now open. Paul Condra - Credit Suisse Securities (USA) LLC Hey, everybody. Thank you. Just a couple of quick ones, I guess, you didn't size that impact on the international kind of timing issue in the Financial segment?

[Jeffery W. Yabuki:]

No. Paul Condra - Credit Suisse Securities (USA) LLC Okay. And then, you mentioned dilution from the acquisition. Can you quantify that, the amount of margin impact? I'm just kind of curious how much you outgrew (01

[Robert W. Hau:]

Yeah. So we talked about it, in terms of the full year impact in 2016. Had we not had that dilution, the margins for the overall company would have been up by about 30 basis points. For our Payments segment alone, it's about 60 points. Paul Condra - Credit Suisse Securities (USA) LLC Okay. Okay, great. And should we think of that 50 bps as kind of continuing into 2018 the way to think about continued margin expansion?

[Jeffery W. Yabuki:]

Yes. And what we have said, Paul, is that we believe as part our long-term guidance, that we have the ability to increase our adjusted operating margin by generally at least 50 basis points per year on average. Paul Condra - Credit Suisse Securities (USA) LLC Perfect. Okay, great. And then one just kind of broader question, I mean a lot of focus on H-1B visas and I'm curious if you have any kind of – like your mix of employees that work with those visas and how you're thinking about changes to that program and any impact you might have?

[Jeffery W. Yabuki:]

I think at this stage, we're paying attention to what's going on and we'll likely see how it all settles out. Paul Condra - Credit Suisse Securities (USA) LLC Okay. Thank you.

[Jeffery W. Yabuki:]

Thank you.

[Operator:]

Thank you. Our last question is from Brett Huff of Stephens Incorporated. Your line is now open.

[Brett Huff:]

Good afternoon, guys. Thanks for taking the question. I'll be quick.

[Jeffery W. Yabuki:]

Sure.

[Brett Huff:]

Can you talk a little bit about the commercial cash management or Treasury Management, however, we wanted to talk about it. All of a sudden, it seems like there's a lot of focus on that. Jack Henry is starting to build their own. You guys bought a nice asset. What's the driver for that? Is it just sort of time or is it that banks are refocusing on that or have we just under invested in it, kind of what's changing in the market that's driving that do you think?

[Jeffery W. Yabuki:]

Yeah. So, Brett I would say that, it's a combination of factors. If you look at surveys, right now, of bank executives, who are making technology decisions or maybe business technologies that are enabled by technology, near the top of the list, you're going to see commercial cash management and commercial lending. And so those capabilities, because they are serving the most important clients in the bank, have always been important, but they're becoming more important. And they're becoming more important because the retail profitability of the banks is getting compressed. And, therefore, banks are going to the places that they know, and that's serving their commercial clients. And the further up you want to move in the size of the institutions, so as you as you break through $1 billion or $3 billion or $5 billion or $10 billion, the commercial capability is the most important part of the – often the most important part of the analysis, the buyer analysis. And so, that's why I believe you're hearing people talk about it. For us, we made a decision that said, we have been looking at building and we have built out our product meaningfully over the last three or four years. But our decision was, it was time to leapfrog the market. And we – the solution that we bought is a solution that the guys who did the business had been actually was the original magnet (01

[Brett Huff:]

That's helpful. And then just last one on P2P, I know it's been discussed a little bit. Any updates on your view on the game between bank-driven versus non-bank-driven peer-to-peer with PayPal starting to work more together with banks, I think, the distinction maybe got a little bit murkier. Any additional data or any additional thoughts you have on this peer-to-peer as it evolves, number one. And then number two, monetization of peer-to-peer other than express payments or is this more of a relationship we want to make sure our customers stay within our digital footprint?

[Jeffery W. Yabuki:]

So, Brett, I would say, and Mark may want to add on to this. I would say that, it's been our belief that if you give a consumer a choice, would you rather move your money through a regulated financial institution or a company that is a merchant acquirer that they probably won't know what a merchant acquirer is, and they'll likely go with the regulated financial institution. Now, I'm – it's a little tongue-in-cheek because Venmo has done well and those folks have done a nice job with it. No question about that. We are very aligned with what's going on with Zelle, and we are optimistic that, that through Zelle and Popmoney and any number of others that banks will end up being the primary place in which payments move from one person to another. Our revenue model is based on transactions, and so while there may be no consumer-based transaction, as is the case in many other examples, we are providing a very safe and very secure product that allows that money to move with complete confidence to the consumer. And we've invested lots of money to make sure that we have the leading product in the market and we do. And we're excited about that. So we do see monetization there on top of the real-time instant opportunity that we talked about.

[Mark A. Ernst:]

Yeah. The only thing I'd add is, we do a lot of research and we are tracking the market and consumer attitudes around this whole space pretty regularly. We have not seen any change in the fact that consumers, by a large margin, prefer their financial institution, their existing bank or credit union, to be the provider of this service. And they are looking for a common network or a common brand through which to do that. And so we – that's why we are so excited about the prospect of the Zelle capability coming online.

[Brett Huff:]

Great. That's what I needed. Thanks again, guys.

[Jeffery W. Yabuki:]

Thanks, Brett.

[Jeffery W. Yabuki:]

Thanks everyone for joining us this afternoon. If you have any further questions, don't hesitate to give us a call. We also look forward to seeing you at our Investor Day later on in the year. Have a good night, everyone.

[Operator:]

Thank you. That concludes today's conference. Thank you for participating. You may now disconnect.