FISV 1.22.26

I think there's just a lack of clarity on what the normalized or correct earnings, revenue growth profile, and margin profile of the business are. It's quite clear that when the company reported organic growth of 11% or 12% in 2021 to 2023, there's no debate that those numbers are obviously wrong. I don't know exactly where the fulcrum exists today, but there's a huge difference in the multiple if these businesses are a 1% per year grower or a 4-5% per year grower. I don't know where the midpoint of expectations is now. I think there's just plainly a lack of clarity, period.

The debate would be whether it’s a low single digit or mid single digits on the revenue growth front. Maybe there's even someone out there who thinks this is a flat business, or that there are enough customer losses that you're actually in the negative. The revenue is probably a bigger point of contention, but the company is clearly telling you there will be a margin reset. Where that shakes out is not quite clear at this point. More generally, almost everything is in abeyance for this company right now because we have little clarity about what it will look like post-reset. There are basically no sacred cows or priors you can rely on.

I think what you brought up is, in some ways, the most important, and it certainly relates to the other two points. Just how good a business is this? Certainly, considering the recent stock price performance of the payment sector, there are merchant processing and payments-type businesses here, but there are other things like Financial Solutions, which is stickier and higher quality and doesn't have quite the same factors at play. There's a real debate about the quality of some of the business lines. Clearly, the quality will be tested by how much they've been shortchanging customers. I think that's a real, more general point of contention. Where that manifests is in the debate over how that translates to the multiple. Really, what you ultimately see play out is how sticky this business is in terms of whether it can maintain certain customers. That's what will determine, in large part, just how sticky this business is, and how far you can push customers. Those would be my impression of the main points.

Of the three that I brought up? Granted, I realize I'm being a little reductive about it because I literally said "what is revenue growth," "what is margins," and "what is multiple," which is 80-90% of stocks. Margins are clearly the least important, and probably the most visibility in relation to how important it is. In other words, with revenue, I raised the question, is this a 1-2% grower or a 4-5% grower? There might not seem to be much difference between those two, but from a multiple perspective and even just the algorithm, when you think about a levered equity like this, there's actually quite a big difference. Granted, it's a big black box, and you could do all the diligence in the world and probably not figure out whether it's a 2% grower or a 5% grower. So, yeah, there's not much visibility there. There's a conceptual question about how good this business is, but if you're talking about what’s most likely to cause the stock to work or not, it's probably going to be what happens to revenue growth in the near to medium term. I'd probably point to that.

I haven't done any deep work. I know he came from Maverick, and he was also at PNC. I didn't do a case study of what happened with PNC during his tenure there. I know it has a good reputation for being well-run among midsize regional banks and financial services companies. Not particularly great or outstanding, but definitely not bad. I'm sure, having come from Maverick, he's a thoughtful capital allocator and will probably know how to communicate with the Street. Obviously, there's a good chance PNC is a customer of Fiserv, FIS, or one of those guys, so he knows something about these products.

From what little work I’ve done, I wouldn't say I have a particularly favorable or unfavorable view. I'd probably be slightly favorable. But again, this is a big, hairy, complicated business, and he's inheriting some tough problems. There are many really great CEOs who, depending on how deep these problems really are, might not be able to solve them even with the most capable hands. The bigger question to me is just how significant these problems are, rather than how capable the guy is of solving them. There's a range of outcomes to that first question where it almost doesn't matter how good the CEO is.

I’d think more of the first and third points. I don't know if people are thinking much about the sales force. I think what's going to happen is that the prior company clearly underinvested in the business and the product, and that had a knock-on effect on how well they were serving customers. Did you shortchange those customers enough that, even though it's really difficult to rip out and replace these products, and it's the last thing customers want to do, did they push it so far that customers might contemplate that?

Additionally, as I mentioned, they're going from apparently 16 cores to 5. I have to imagine that’s a non-trivial undertaking, and a lot could go wrong with that. Maybe you further alienate customers if you don't handle that carefully. It's one of those black-box sort of businesses, in some ways. I don't mean black box in the way that insurance is. I guess just more so that there's a lot going on. This business is a roll-up. There are so many different products, product lines, and different ways to segment them that it's hard to say, "I think 20% of business is at risk." It's hard to dimension a very specific impact other than to say there has already been a notable deceleration in the growth they're guiding to.

Organic growth in this most recent quarter was 1%, but in USD terms. I don't know if you need to look at it that way now. Obviously, the Argentine currency is moving less, but the point is they went from growing 11% in organic terms and maybe high single digits or mid-single digits ex-Argentina and on a dollar basis to being flat this past quarter. Some of that is that they were deemphasizing short-term revenue initiatives. I guess that tells you a bit about how significant those short-term revenue initiatives are that they’ll no longer be able to rely on them. There were a couple of other things going on with the quarter. It wasn't just that, but I think the bigger question, and it's hard to get a specific answer, is what's the risk that some material customers actually walk away? I wish I could give you a more specific answer on the worst-case versus the best-case outcomes, but I just don't know if I can, which is part of the reason we don't have a position.

That's another thing I struggle with, too. In theory, you could do expert calls or talk with some customers to get a sense of where their head is at.

Yeah, surveys or something like that. But again, this is such a big company with a diversified client list and so many different lines of business that I don't know if you'll really get a decisive answer out of that. Maybe you could magically talk to the one person who’ll confirm, "Oh yeah, I'm a bank CTO. I've just had it with these guys, and I'm going to cancel my contract." But even in the worst-case scenario, they won't lose 20% of their business. Even just talking to their customers might be a bit of a needle-in-a-haystack, finding the ones who are actually so dissatisfied that they're going to leave. So, it's tough. I struggle with the same thing.

I think the best you can do is get a mosaic. You talk with some customers who can speak concretely to their relationship with Fiserv and what's happened, and what’s the likelihood they actually reduce the amount of business they're doing with them? Then maybe you could also speak with some former people in the sales force. They're not the issue, but they’ll have their finger on the pulse of what's happening. You’d have to talk to the former sales force for compliance reasons. Obviously, a lot of these things, granted, I'm sure these problems existed for a while, but they're really becoming apparent, and there's action being taken in relation to them now. So I don't know if you could speak to someone who was formerly at Fiserv but was there recently enough to speak intelligently to everything that's going on.

It probably needs to be a mosaic of those things, and even then, I don't know if you'll get a decisive answer. Other than that, the only thing you can really do is, presumably, at a certain point, just try to underwrite the most draconian scenario that you could tell realistically, and you try to buy it close enough to that point. None of these guys, including the payments guys, which again is slightly different, like Global Payments or something like that, seems to have really found a bottom. I think Global Payments is trading at 5.5x earnings.

So maybe that's the super draconian scenario you think of, where they trade at 5.5 or 6x earnings. We know earnings are going to reset over the next several quarters, in that 2026 is going to be lower, I'm going to say modestly lower, than 2025, and who knows if that's the end of earnings declines. So maybe you say it's $7 of earnings at a 5.5x multiple, so that's a $37 stock price, which is quite a bit lower than here. That's the only other thing for me. It’s having so much comfort on a valuation basis that you're willing to buy this thing anyway.

I don't think we're quite there right now. If nothing happened and the stock just drifted down to $55 or something, would we just be like, "Okay, we still don't know exactly what's going on here, but now it's cheap enough to buy it"? Maybe at that point. Now, I don't know if it's just going to go from $67 to $55 for absolutely nothing. Something will probably have to happen for that to happen. But never say never.