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spk01: Welcome to the FISERV 2021 Second 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 Shubh Mukherjee, Senior Vice President of Investor Relations at FISERV.
spk05: Thank you, and good morning. With me on the call today are Frank Bedignano, our President and Chief Executive Officer, and Bob Howe. our Chief Financial Officer. Our earnings release and supplemental materials 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, the impact of the COVID-19 pandemic on our business, expected operating and financial results, strategic initiatives, and expected benefits and synergies from the first data acquisition. Forward-looking statements may differ materially from actual results and are subject to a number of risks and uncertainties. You should refer to our earnings release for a discussion of these risk factors. Please refer to our earnings release and supplemental 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 gap measure. Unless otherwise stated, performance references are year-over-year comparisons, and all references to internal revenue growth are on a constant currency basis. And now, I'll turn the call over to Frank.
spk04: Thank you, Shu. Second quarter was a very strong quarter for us across the company. Total company adjusted revenue grew 20%. Adjusted operating margin grew 510 basis points, resulting in adjusted operating income growth of 41 percent. Adjusted EPS grew 47 percent to $1.37. Free cash flow in the quarter was in line with last year, just under $900 million, including the impact of a diminished NOL. Second quarter sales were up 31% with growth across the business. Our strong second quarter was driven by a combination of continued economic recovery and strong execution of our business strategy. On the macroeconomic side, we saw continued recovery in the U.S. with uneven recovery in other parts of the world. The shift to digital commerce drove consumer demand for seamless experiences across challenge. Amidst these trends, we executed on our strategies to continue to win business and grow share. We serve as the operating system for commerce across our client base, ranging from micro merchants to the world's largest corporations, financial institutions, banks and credit unions, fintechs, and governments. This enables us to focus not only on growth at our core, but also on new services, business models, and adjacencies. Given the strong results to date and our solid pipeline, we are raising our outlook range for internal revenue growth and now expect 10 to 12 percent growth for 2021 from 9 to 12 percent previously. Additionally, we are raising our adjusted EPS full-year outlook and now expect a range of $5.50 to $5.60, up from $5.35 to $5.50 previously. The increased adjusted EPS guidance outlook represents a 24% to 27% growth versus last year. Drawing down to the business segments, the quarter was led by a merchant's acceptance segment, which posted internal revenue growth of 41% year over year. Normalizing for the year-ago comps, The segment posted a 13% growth in the quarter on a two-year basis above our pre-pandemic run rate. Both North America and international largely grew in line with the segment average. North America purchase volume was up 33% in the quarter, led by strength in retail, petro, and restaurants. One of the trends that the pandemic has accelerated is the shift to omni-commerce. Consumers are increasingly looking to engage with merchants in whatever way is most convenient. BuyServe's ability to support clients with leading solutions in both brick and mortar and e-commerce environments is a differentiator. We saw the manifestation of this trend during the second quarter. As offline commerce recovered with volumes growing 46% versus 2020 and 11% versus 2019, online commerce volume also grew unabated at 21% year over year, highlighting the criticality of equipping merchants with omni-channel commerce capabilities. Our lead in Omnicommerce is the reason we were honored with the Omnichannel Provider of the Year Award from the Straw Hecker Group, a leading payments industry analyst firm. As you know, Clover, Carrot, and Clover Connect are Fiserv's three leading platforms for small and medium-sized merchants, enterprises, and ISVs, respectively. Starting with Clover... GPV in the quarter grew 96% year-over-year, reflecting a 38% CAGR since 2019 to $184 billion on an annualized basis. In the SMB space, we continue to build out vertical-specific solutions in retail, restaurants, and services. Our vertical sector strategy aims at expanding beyond the buy button, offering an integrated suite of products that help merchants generate revenue and run their business. Value-added services on the Clover platform include Clover Capital, Clover Dining, Clover Order Ahead, and Clover Inventory, as well as our unique app marketplace. which provides access to services such as payroll management, loyalty, and marketing that enable us to increase our share of the merchant's wallet and become the platform of choice. On the enterprise side, Carrot, our enterprise omni-channel ecosystem, continued its strong momentum in the second quarter with new wins and continued innovation in key verticals. In restaurants, Carrot powers digital commerce for 10 of the top 15 QSRs. Carrot has helped Burger King expand its mobile payments experience into Latin America. And restaurant brands international expansion in the UK and other parts of America. In grocery, where Carrot now serves nine of the top ten grocers. We have helped new clients such as Wake Fern, Aldi, and the companies of Ajo De La Haze USA expand their digital grocery ordering capabilities with new payment types. Evidence of Carrot's commitment to the grocery industry and transformed digital experience is exemplified by Carrot's leading online EBT program that has processed $2.5 billion in GPV year-to-date. In retail, where Carrot serves seven of the top ten retailers, we're expanding our merchant services by working with clients such as Adidas on innovative solutions, including our new consumer recommendation engine. This engine connects digital experiences to local stores enabled by the integration of Radius 8, an acquisition we completed in the first quarter of this year. Tarot has also established new at-scale leadership with crypto wallets, where we power card funds in and funds out solutions. Through this capability, we helped consumers move more than $4 billion in payments volume in and out of wallets for the past 12 months. In the second quarter alone, we moved $2 billion in volume, demonstrating the sharp ramp in digital currency movement. Moving to Clover Connect, LISV-focused offering, momentum continued in the second quarter, with ISV volume up 122% year-over-year. We signed 53 new ISV partners in the quarter, bringing the new ISV partnerships to 95 year-to-date. We're signing up for ISVs that are new to payments and those that are converting from competitors. Year-to-date, almost half of our wins are competitive takeaways. Our ISV partners derive great value in getting access to our partner management tool, Copilot, and integrating with Clover. On our investor day, we talked to you about our merchant acceptance growth strategy for international. We remain focused on growing our global market presence with world-class bank partners and through our direct channels. all while leveraging the strength of common platforms and connections. In the quarter, we announced the JV with Deutsche Bank in Germany that offers us access to over 800,000 merchants, many of whom will power with our Clover platform. In Asia Pacific region, we won a multi-country acquiring processing mandate from Citibank, for its new integrated digital commerce offering, Spring by City. Early in July, we began onboarding and processing payment transactions as part of the Merchant Acquiring Services Agreement signed with Brazil's Caixa Bank in April of this year. The onboarding began 70 days after contract signing, once again demonstrating our speed to market. In addition to the successes I mentioned above, in our merchant acceptance segment yesterday, we announced a strategic relationship with Goldman Sachs to integrate cross-border payment functionality into our B2B accounts receivable and accounts payable solution, SnapPay. As you know, B2B payments is a vast and growing market, ripe with opportunity. We believe that in partnership with Goldman Sachs, we can deliver best-in-class B2B payment capabilities, enhancing visibility, operational efficiencies, and cost savings for our large and mid-market business clients. Moving to the payment and network segment, we posted internal revenue growth of 7% over the second quarter of last year. Positives in the quarter included the continued growth of sales, continued strength in debit transaction volume, initial recovery in credit account volumes, and international growth, with some weakness in bill pay, although results improved sequentially. The differentiated and industry-leading businesses within our payments and network portfolio and our agile execution include are the key reasons why we continue to win with clients. We are proceeding well with onboarding 120 million of credit issuing wins we told you about on our investor day. We completed boarding Atlanticus in Q2 and have completed several stages of migrating both Alliance data and Genesis Financial to the Optus environment. In less than 12 months, After announcing these three banner wins, we are poised to recognize revenue on all three clients in the third quarter of this year. We continue to grow our relationship with innovative growth stage fintechs, digital banks, and consumer lenders. In June, we signed an agreement with Prosper, a fintech pioneer who and a premier AI-driven consumer lending marketplace for credit card processing services. This space is a growth focus for us. Our revenue with FinTech issuers grew over 300% during the first half of this year versus the same period in 2019. On Investor Day, you will recall that driving best-in-class integrated digital consumer journeys is a key differentiator and imperative for our clients. Experiences are the new currency of loyalty. Customers gravitate towards institutions that can give them a unified, seamless experience across both channels and products. To that end, yesterday we announced enhanced Fiserv digital capabilities for integrated digital banking and card management. This enriched mobile first suite will enable financial institutions to offer their consumer and business customers a best-in-class digital banking experience that's designed for the way customers expect to engage. To introduce these enhanced capabilities, we rapidly integrated two recent acquisitions, OnDot and SpendLabs. The result is a single unified platform for consumer and small and mid-sized business cardholders that enables expense and business card management. This offering allows us to deliver a single point of access for all banking products. Our enhanced buy-serve digital capabilities will span all three business segments. In payments, through a leading digital cardholder experience. In financial technology, by driving the penetration of our core account processing and digital surrounds. In merchant acceptance, by increasing the uptake of value-added services from integrating spend labs with our Clover platform. We expect to see incremental usage, engagement, and services revenue on the Fiserv platform as a result. Before I close out the payment segment, I would like to mention the strong growth we're seeing in our debit networks, Star and Excel, as we are winning new issuers through our ability to support all transaction types, including best-in-class fraud management and chargeback products. Moving to the financial technology segment, the quarter was in line with our expectations, posting internal revenue growth of 5%, including an 80 basis points headwind from periodic revenue. I want to highlight some key achievements in the quarter that reflect a strong market position. We added 10 new core account processing clients in the quarter, including eight on the DNA platform, and four in the over $1 billion asset size market. As the smaller end of the banking industry consolidates, we're moving up the asset chains, winning share in the $1 to $50 billion market. One such win is Sunstream Business Services, a service entity which spans 12 financial institutions and provides business and technology services to farm credit associations, totaling more than $115 billion in assets. Sunstream will be converting to DNA in a number of surround solutions. Continuing our strong momentum in the de novo bank market, we signed LCA Financial Services, a newly created, a newly chartered bank focused on small business. While we continue to win with our digital surround solutions, Ability is the new paradigm in digital banking, a single retail and business online and mobile platform. We had our first client go live on the Ability platform in the second quarter with more than 100 clients signed up. We are also fully embracing openness as a strategy. The BuyServe Developer Studio is aimed at attracting the developer community to build innovative products using the range of APIs we expose across cards, payments, banking, small, medium, and large businesses. Additionally, we are building a pre-integrated FinTech app marketplace where our financial institutions clients can acquire, test, and deploy third-party apps seamlessly, easily, and quickly. This openness strategy creates a net new revenue opportunity within our existing client base while widening the value-added services opportunity. With that, let me update you on our integration efforts. Through the second quarter, We've already actioned over $1.1 billion of cost savings and are well on our way to completing our $1.2 billion cost synergy objective by the end of this year. With the majority of the integration work behind us, we are focused on driving further growth and sustainable value in the years ahead. On the revenue side, we're pleased with the level of synergy sales, which accelerated in the second quarter. As of the end of the second quarter, we've already actioned $325 million in annual revenue synergies, and our synergy sales pipeline is growing robustly, and we expect to meet or exceed our $600 million target over the five years post-merger. Revenue synergies in the quarter were driven by payments, debit network, and card sales across our three major client segments, FIs, corporates, and government. Additionally, as the partner of choice, we continue to see momentum in our bank merchant program. Now, let me pass the discussion to Bob for more detail on our financial results.
spk02: Thank you, Frank, and good morning, everyone. If you're following along on our slides, I will cover some of the detail on each of our segments starting with slide four. We had a very strong second quarter, thanks to our broad portfolio of products and services, as well as the positioning of our assets and strong execution across the business. Total company internal revenue growth was 18% in the quarter, with growth across all segments and led by the merchant acceptance segment, which grew 41%. Year to date, total company internal revenue grew 11%, also led by the merchant acceptance segment, which grew 23%. Second quarter adjusted operating income was up a strong 41% to $1.3 billion, and adjusted operating margin increased by a very strong 510 basis points to 33.9%. This margin improvement was driven by our outstanding revenue results and our continued and disciplined cost synergy execution, which produced $90 million of incremental cost synergies during the quarter, as well as strong operating performance. First half adjusted operating income increased 28% to $2.4 billion. Adjusted operating margin through the end of June expanded 440 basis points to 32.7%. Second quarter adjusted earnings per share increased 47% to $1.37 compared to 93 cents in the prior year. Through June 30th, adjusted earnings per share increased 32% to $2.54, putting us on a pace to achieve our 36th consecutive year of double-digit adjusted earnings per share growth, a testament to the incredible resiliency of this company. Free cash flow in the quarter of $897 million was in line with last year, with free cash flow for the first six months of the year up 4% to $1.72 billion. Free cash flow conversion was 97% to adjusted net income, including a $172 million impact from reduced net operating loss carry-forwards. Year-to-date free cash flow conversion came in at 100%, and we continue to expect at least 108% free cash flow conversion for 2021. Now looking at our segment results, internal revenue growth in the merchant acceptance segment was a stellar 41% in the quarter and 23% year-to-date. Our results were driven by a strong performance of our SMB platform, Clover, our enterprise platform, Carrot, and our ISV platform, Clover Connect. These results were driven by a strong global performance despite uneven economic recovery outside North America. The second quarter was a record quarter for Clover. In addition to a very strong 96% annualized GPV growth, This quarter was also the highest shipment volume for Clover hardware, having recently shipped our two millionth Clover device. Moving to Carrot, we won 52 new global enterprise e-commerce clients on a platform in the quarter. Including existing clients, Carrot won or expanded business with brands such as Sportrade, Aldi, and Yapstone. In India, Carrot won the business of a leading digital food delivery platform. Our ISV volume in the quarter through Clover Connect grew 122% year-over-year, and we're winning both ISVs that are new to the payments as well as competitive takeaways. Adjusted operating income in the acceptance segment increased 135% to $524 million in the quarter, and adjusted operating margin was up more than 12 full percentage points to 31.4%, driven by the strength in the top line. Through June 30th, adjusted operating income improved 80% to $911 million, and adjusted operating margin grew 950 basis points to 29.7%. The payments and network segment posted internal revenue growth of 7% in this quarter, resulting in year-to-date growth of 4%. Debit transactions grew a strong 31% in the quarter, and this was a low double-digit sequential grower versus last quarter. We continue to build upon the strong momentum of transaction growth in account-to-account transfers and P2P solutions. Versus prior year, Zelle transactions in the quarter were up 94%, and the number of clients live on Zelle was up 88% in the quarter. Our bill pay business saw sequential improvement in growth from Q1 and is expected to continue to improve through the second half of this year. We continue to expect to see the full year internal revenue growth for the payments and network segment to be toward the upper end of the medium-term growth rate of 5% to 8%. Adjusted operating income for the segment was up 14% to $636 million, and adjusted operating margin was up 260 basis points to 44.6% in the quarter. Year-to-date, adjusted operating income was up 8% to $1.2 billion, and adjusted operating margin was up 140 basis points to 43%. The results were driven by positive momentum in our issuer business and the impact of revenue and cost synergies. The financial technology segment internal revenue grew in line with expectations at 5% in the second quarter as continued growth in high-quality recurring revenue was partially offset by lower periodic revenue, which created an 80 basis points of headwind to internal revenue growth. For the first half of the year, internal revenue growth for the financial technology segment is now 4%. reaching the lower end of our medium-term outlook for this segment of 4% to 6%. Demand for our digital banking capabilities and for our deep offering of digital solutions continues to build momentum. As Frank mentioned, we had 10 new core account processing clients in the quarter. Total mobile subscribers across our leading digital platforms, Mobility and Architect, grew 9% in the quarter. Mobile deposits in Q2 grew 12% over the prior year, while self-service ATM deposits grew 70% over last year. Adjusted operating income was up a strong 8% in the quarter to $273 million and up 14% year-to-date to $519 million. Adjusted operating margin in this segment increased a robust 80 basis points in the quarter to 36.2% and 300 basis points to 34.9% through the end of June, due to a combination of revenue growth, operational effectiveness benefits, and cost synergies. The adjusted corporate operating loss was $124 million in the quarter, in line with our expectations up from last year, largely on higher variable compensation expenses. The adjusted effective tax rate in the quarter was 21.3%, increasing 80 basis points versus prior year. We also expect our full year adjusted effective tax rate will be fairly consistent with 2020 rate and at the lower end of our previously forecasted range of 21 to 22%. During the quarter, we continued our disciplined capital allocation strategy by repurchasing 5 million shares for $588 million. And we have more than 55 million shares remaining authorized for repurchase. We completed two acquisitions in the quarter, SpendLabs, a mobile native cloud-based commercial card payments and software company, and Pineapple Payments, a leading independent sales organization focused on integrated payments. Additionally, we divested our remaining interest in the investment services business and received pre-tax proceeds of $466 million from the transaction. Total debt outstanding was $20.8 billion on June 30th, and the debt-to-adjusted EBITDA ratio decreased to 3.3 times, putting us well on track to achieve our target leverage of less than three times by the end of this year. We are fully committed to our longstanding capital allocation strategy, which includes maintaining a strong balance sheet, making organic investments in innovative solutions, and pursuing high-value acquisitions. Importantly, share repurchase remains our benchmark for capital deployment. With that, let me turn the call back to Frank.
spk04: Thanks, Bob. I'm very proud of the results we've delivered. The quality of our assets, our relentless focus on innovation, our agility, speed of new client implementation with examples like Kasha, ADS, Atlanticus, and Genesys put us in a great spot to serve our clients. Our speed to market with the enhanced buy-serve digital capabilities for banking and card management announced yesterday, along with the integration of business expense management into the Clover platform, all of which leverage the full capabilities of recent acquisitions, OnDot and SpendLabs, add to our continued success. In addition to delivering on our financial results, we continue to focus on our people and on our communities. Earlier this month, Fiserv was named by Forbes as the best employer for diversity, recognizing our commitment to putting diversity at the forefront of our values and having implemented long-term initiatives to create a more inclusive environment. During the quarter, we published our first annual corporate social responsibility report, which is available on the corporate social responsibility section of our website. We also expanded a back-to-business grant program beyond the original locations that were selected in 2020. In May, we partnered with the New York Mets to recognize small businesses as part of our Asian American and Pacific Islander Heritage Month. And in June, we awarded grants to businesses in Tulsa as part of the centennial observation of the Tulsa Race Massacre. None of these achievements would have been possible without our world-class talent. I thank out more than 40,000 associates around the world for their commitment and courage as we stand together to deliver value for clients, our colleagues, and you, our shareholders. And finally, before I close, I want to congratulate the Milwaukee Bucs for winning the NBA championship at Fiserv Forum last week. The Bucs, our terrific partners, and our partnership goes way beyond putting our name on their arena. Clover has been deployed throughout Fiserv Forum for food and beverage concessions, providing attendees with seamless, quick, and easy transactions. They also partnered with us for several back-to-business events earlier this year. Congratulations to the entire Milwaukee Bucks organization. With that, operator, let's open up the line for questions.
spk01: Thank you. We would now like to open the phone lines for questions. If you would like to ask a question, you may press star one on your phone. If you would like to withdraw your question, press star two. Our first question comes from Lisa Ellis from Moffitt Nathanson. Please go ahead.
spk06: Hi, good morning. Thanks, guys. Good to hear from you. I wanted to follow up on the two-year CAGR call-out for the merchant acceptance segment. I believe you said it's running now at a 13% internal revenue growth on a two-year CAGR basis. One, wanted to just confirm that number. And then two, I wanted to kind of just drill into it a little bit, given that that's above your medium-term outlook for that segment, which as per Investor Day was 9% to 12%. Can you just highlight what you're seeing, say, in North America versus ex-U.S. and Are there any unusual dynamics in this quarter or do you see that sustainable going forward and kind of what's different about the business now than prior to the pandemic when I believe it was running closer to about 10%? Thank you.
spk04: Well, I think it starts with the U.S. has been a strong spot in the recovery right now. You heard us talk about unevenness outside the U.S., But I do think you saw a robust even last July when it all began coming back. I do think you've got to focus on the three legs in the U.S. and internationally. The three legs are Clover, Carrot, and Clover Connect. And all of those were continued investments, continued build-out, and we're seeing it show up in the client's office. So I would say really driven by U.S. When you see that we say U.S. and international for the quarter perform fundamentally evenly, that was a spotty evenness, meaning not every country performed was the same, and you could kind of map to where recoveries happen or not. So I think it's all about our platform strategy and our client strategy that's driving the outcomes, and I think our team's galvanized very well around it.
spk02: And, Lisa, just to hit the first part of that question, 13% is an average growth rate if you – Look at Q2 of last year. It was actually down 15% over the prior year. We're now up 41% over 2020, so the average 13% there.
spk06: Terrific. Thank you. Good stuff.
spk01: Next, we'll go to the line of Dave Koning from Bayard. Please go ahead.
spk07: Yeah. Hey, guys. Congrats, and go Bucs.
spk04: Bucs in six.
spk07: There we go. That was fun. Well, yeah, and maybe my first question, just on the merchant segment momentum, I guess a little bit like what Lisa was asking about. I went back several years, and the second half usually has quarters that look a lot like Q2. So usually Q3 and Q4 look a lot like Q2. But the question, I guess, is, is the momentum building? I mean, you mentioned international still has room to improve. U.S. momentum seems kind of off the charts. BAMS actually grew significantly. faster year over year than your core merchant business for the first time probably in many, many years. So are we in a momentum situation that Q3 and Q4 could actually be better than Q2 this year compared to when normally it's the same?
spk04: I think the answer to that is yes. I mean, you know, there is concern in the world, right? I mean, so that's a little bit in how we think about it. when we talk to you about what we're doing. So there is a degree of us saying the world's not out of the woods yet. Although I think they've learned how to grow with this. So it's highly possible what you're saying could happen. I mean, we're driving the business to get the results we're getting. you see all the partnerships we're aligning to, too, to bring more. So, yeah, I'd say it's possible. But, you know, the world's head's spotting this right now, too.
spk07: Yeah, no, that's great. And I guess, secondly, just as a follow-up, the past, I guess, handful of quarters at different times KKR has sold, they're down to a much smaller position than they were a year or two ago. But on the heels of now a really good quarter, what do you think their thoughts are about selling now?
spk04: I'd start off with, first and foremost, I do not anticipate them conducting additional secondary offerings. Their holdings are just under 10% now, and they have told us they intend to sell shares on the open market over time in a routine and pragmatic way going forward. So, you know, I don't think we're going to see another secondary.
spk07: Sounds great. Thanks, guys. Thank you.
spk01: Thank you. Next, we'll go to Timothy Chiodo from Credit Suisse. Please go ahead.
spk11: Thanks a lot. Thank you for taking the question. So, over the last year or so, we've seen a few merchant acquirers become public. They have pretty fast growth in some more niche verticals, so online gambling, regulated financial services. Clearly, the first data, if I serve merchant acquiring businesses, extremely well diversified and has a much, much larger scale, meaning that any one vertical couldn't be overly meaningful. But maybe you could just touch on your approach to participation in those types of verticals, the extent to which you either are or will, how much it could help your business, what are the pros, cons, et cetera. Thanks a lot.
spk04: Well, I think we're in every vertical. I think we have, you know, I mean, we talk about grocer, QSR, retail, but, you know, we're in gaming. We're across the board. You know, you don't have a business of this size and scale that isn't serving all markets. And, you know, when you look at our capability, we do a good job of bringing base capability in. And then, you know, segmenting to what verticals specifically need. So I think, you know, we are completely deployed against growth. I mean, we're deployed against growth. You know, where we invest is where we believe the growthier segments are.
spk02: Tim, I think one of the keys for our growth and, quite frankly, how we – work through the pandemic and continue to grow the business meaningfully is we're very well diversified in terms of the way we go to market, whether that's our direct channel to our bank partners, to our non-financial institution partners, joint ventures, et cetera, but also extremely well diversified across verticals and participate essentially in all of them and have offerings that get us revenue growth across a very wide spectrum.
spk11: All right. Excellent. Thank you so much. Really appreciate that. As a minor follow-up, was there any comment you could give on the assessment's timing on the contra revenue, any impact in Q2 given the difference in quarter-over-quarter growth, Q1 to Q2, some of those impacts that we saw last year? Yeah.
spk02: You recall we had a pretty significant impact in Q2 of last year, negative impact in Q2 that rebounded in the second half of uh last year we're seeing the opposite now as we saw a big rebound in uh second quarter of this year we do have a tailwind that will be muted a bit in the second half of the year we don't have the quite the same um snapback in the second half as we did in snack second half of last year so call it roughly of the 12 full points of margin improvement we saw this year over Q2 of last year, about four points of that was the brand assessment fees. And then that will be a bit of a headwind for us in the second half of the year. But we certainly see a margin expansion continuing into the second half.
spk11: Perfect. That's really helpful. Thank you so much, both of you.
spk01: Thank you. Next, we'll go to the line of James Fawcett from Morgan Stanley. Please go ahead.
spk09: Hey, thanks a lot. And I really appreciate your comments this morning. I know Bob talked a little bit about capital allocation, but I'm wondering if you can just let us help us think about how priorities or at least the way that you allocate may be changing, if at all, especially given kind of what's happening from a perspective is your stock's a little cheaper now. And so maybe that speaks to wanting to do buybacks. On the other hand, We're continuing to see massive flows of capital into competitors, both through the private and public markets and the like. So just wondering if there's any evolution there on your thinking of how to prioritize use of capital going forward.
spk04: Well, you know, I'd start with at 3.3 on, you know, leverage. That will be wealth. world behind us. And you know, we did talk about investor day, you know, 30 billion of free cash. And so I think you also see us continuing the strategy of taking Silicon Valley, digital expertise and capability integrated into our company, and fundamentally creating experiences that nobody in our peer group can do. You saw it with Clover back in the day, and when I talked about OnDot, I did say that the acquisition of OnDot and then subsequently SpendLabs, but OnDot specifically, would bring a Clover-like effect to our company. And the fact that, you know, so you'll see us deploy capital to those type of acquisitions, but I want to bring clarity to what I mean in a Clover type We've created a single instance for consumers to be able to get every banking product they have and have card functionality that surpasses the industry by a lot. So we have tremendous everything from digital issuance, to the ability to put it in the wallet. I think you've got to really think about what we're doing there. And then we will invest in these products quite heavily, right? So, you know, I think you'll see us, you know, continue to do those type of acquisitions that drive the digital presence. But, you know, we've done things unparalleled through those acquisitions. So, you know, we talked about $30 billion. You see the properties we've bought. You see us integrating those properties, integrating for growth. And I think you'll see us always, though, using, you know, buyback as a benchmark.
spk02: Jay, I think this quarter is perhaps a prototypical example. This digital enhancement, digital innovation that Frank talked about in his prepared remarks and just referenced is a combination of investing in our business organically, internal investment, advancing our digital banking capability with mobility, bringing more feature function capability to our mobile capability, adding to that inorganic investment, the acquisitions of SpenLab and OnDot in a quarter that we also repurchased 5 million shares. So the $30 billion of capital available we have this year and for the next four or five years allows us to buy back shares, make inorganic investment in M&A, and develop internal products and internal innovation and generate a very high return.
spk09: That's great, Culler. Thank you very much to both of you.
spk02: Thank you.
spk01: Thank you. Next, we'll go to Dan Doliff from Mizuho. Please go ahead.
spk12: Hey, guys. Good morning. Great results. So, yeah, no problem. So, you know, did I hear that correctly? You said that this quarter was a record shipment quarter for Clover?
spk02: That's correct.
spk12: And so it sounds like, you know, it sounds like it's more idiosyncratic share gains than anything market or reopening related. Maybe can you comment a little bit on that? you know, who you're gaining share from, maybe specific verticals, and then maybe kind of the trajectory. You went from 36% in Q1 to 96% in Q2. How should we think about the remainder of the year? Thank you.
spk04: Well, why don't I start off with, you know, I think Clover is a platform of choice, and Clover is a partner platform of choice. And we did talk about, you know, that Clover would get – other distribution channels, you know, and that distribution could be our own outside the U.S. It could be with our ISV partners. And then just in our base core business, our own, I mean, you know, when we're, you know, your question is share when you're as big as we are. You know, we're competing with everybody, and, you know, we feel that Clover is at the top of the list of what people want. want as a product. So I think it is about the differentiated product and the capability that gets it at the type of numbers you saw in this quarter.
spk02: And then Dan, just to add the 96% growth year over year, remember this is the quarter if comparing to second quarter of last year, which was obviously a very difficult year across the board. I think the pertinent number here is a 38% CAGR over the last two years. So obviously Clover growing incredibly well. Continue to expect that to be a lift and a sure gainer for us as we lead with Clover in the marketplace. We're seeing benefits of continued innovation, continued investment in Clover. as new business formation kicks in post-pandemic, as merchants that were not transacting at all or very much come back, our investments in clover dining, et cetera, pay off when the economy recovers. People think of clover and allow us to serve them with clover devices, hitting our record shipment, as well as giving us that nice lift in overall GPV.
spk12: Yeah, great. I agree. It's definitely everywhere. Great stuff. Thank you. Thank you.
spk01: Thank you. Next, we have Darren Peller from Wolf Research. Please go ahead.
spk08: Thanks, guys. Let me just shift to the FinTech segment for a minute, which for several quarters was really in the 3% to 4% range and did show the acceleration to that 5%. You guys have talked about it being something that can do 4% to 6% growth, and we're seeing some signs of improvement now. you talked a lot about digital banking in your release also. And so I'm curious, you know, from a structural standpoint, given all the new competition out there, you know, just if you could touch on the assets you have and your capabilities and in your view, confidence level around that segment, actually being in that four to six or better versus low single digit over time, that'd be great. Thanks.
spk04: Yeah. Well, you know, you see a number of things going on in authentic segments. But let me bring – I want to bring complete clarity on the digital offering because I think it affects both core and our digital business. And ultimately, what we have a deep belief is that we're here to help our clients serve their clients. So the ability to take 2,100 mobility banks and bring them a fully integrated card experience at the highest level of card via the OnDot and bring that in a way that maybe the simple way to think about it is everything you can imagine in one application that allows you to do everything from originate transactions to digital card issuance, to digital card view, to card-free cash, all in the same place that you're doing your bill pay and you're doing your Zelle transactions. So we're going to take 2,100 mobility clients, 1,300 card valet, and bring that to them. And then that will be what we all, and those are financial institutions, we believe that will also help out clients increase their digital adoption quotient with their clients. So we see this as a game changer. So, you know, it's early innings. We got banks up and running on it, and we will deploy. And then you hear us talking about on top of all of that for – The financial institutions, we bring in ability that sits on top of all of it. But the most important thing to think about is our cores are strategic. The front end, though, is where we believe the tip of the spear and where we win to help our clients serve their clients better. And, you know, I mean, you saw what we posted now, but I look forward to continuing to generate more revenue through better function we bring to clients that allow them to do more with their clients, you know. And then, you know, you got an integration of a spin lab into Clover, which allows – these are our digital platforms. We're talking about digital platforms, one-of-a-kind digital platforms. So, you know – And I think what you should take away, there's an element of this company that's digitally agile and can deliver, and you saw it on those credit conversions. You know, I think those are good track record speeds, you know, for those size and scope. Kasha's unparalleled, you know, 70 days from signing. We're boarding merchants for them every day. and then you look at us taking Spendlabs and OnDot, and I think, you know, we're going to have that same effect that Clover had when we look years out from now. Okay.
spk02: Go ahead.
spk08: No, no, no, Bob, go ahead, please.
spk02: I was just going to bring you back to the 5% growth. Obviously, we had a good quarter hitting 5%. We indicated that periodic revenue, Headwind would abate. I think it was 150 basis points. Last quarter, we said we expected this quarter to be half that. We saw 80 basis points. Into the second half of the year, we see that no longer being a headwind. And through the first half of the year, we're now at 4%. So we reached the bottom end of that medium-term guidance and continue to be quite comfortable that we will be in that 4% to 6% range this year, and the things that Frank's talked about, the investments we're making in digital banking, gives us an opportunity to continue to see that good mid-single-digit growth going forward. Great.
spk08: Hey, Frank, just a quick follow-up on M&A. I mean, what are your thoughts on doing more talk-ins that, you know, keep improving the tax back and Really thinking about maybe even just accretive to revenue growth, maybe even dilutive to EPS, just type deals. Just really add to the long-term growth strategy. Thanks, guys.
spk04: Well, I felt, you know, obviously you've watched over time the type of properties we buy. You know, our ISV strategy was born out of acquisition, and now it's a winning strategy. Clover was born out of acquisition. And I think you'd have to argue that's a bigger-than-winning strategy. You'll watch these assets, OnDot and SpendLab. So I think you're just going to continue. I don't think it needs to be dilutive to EPS. I think we know how to make it accretive pretty darn quick. And what I just talked about was kind of the dream of the acquisition when we put the companies together, that we could take an asset like an OnDot and spread it all the way through because of what a great bank partner we were and that we could bring it all the way from merchant to fintech. So I think you should expect us to continue to do more like that, and I think we have a skill at it that we keep the talent, we grow the talent, and we build a bigger digital gene pool in the process. Great. Thanks, guys.
spk01: Thank you. Our next question comes from Jason Kupferberg from Bank of America. Please go ahead.
spk02: Jason, are you there?
spk03: Yes, can you hear me? Yes.
spk02: Good morning.
spk03: Good morning. Yes, can you comment just on any July trends in the acceptance segment, any impacts on the Delta variant? And then also just on the revenue yield dynamics, I know those were positive in the second quarter in acceptance. How should we think about that for Q3? Will volumes and revenues be a little bit more in sync?
spk02: Yeah, so in terms of July trends in our merchant segment, I'd say obviously through, what, 26 days or so of information yesterday, day before. Slightly better than June, so continued improvement, in growth, and I'm talking about versus 2019. When you do a 2020 compare, you get some real odd variations on a comparison point. So we're looking at versus prior year as well as versus 2019. But slight improvement in July versus what we saw in June, consistent with what we've got loaded in our full year outlook with that growth rate and EPS growth. call it mid 20%, 25, 26% merchant growth, volume growth over 2019. And in terms of yield, you saw a recovery, so to speak, in Q2 versus what we saw in Q1 as our SMB portfolio continues to grow nicely. I think that's gonna be consistent in the second half of the year.
spk03: Okay, so we should expect those positive yield dynamics to continue. I just wanted to switch over to the payments segment for a minute. I know you're reiterating the higher end of the 5% to 8% target range, and I think you probably have to do 10%, 11% in the second half to get there. I know you've got some new portfolios ramping up, but just talk about the visibility on that acceleration relative to where you were in the first half.
spk04: Yeah. I mean, I think you see the credit momentum and you see us talking about that we'll have good second-half revenue from that. You see, you know, general, that's on the wins, and then you see general credit momentum beginning in our portfolio. Debit networks, you know, I talked about the strength of them, and we feel very, very strongly about what's going on there in debit transaction growth. So when you put all those in the calculus, you know, your stores go from two to seven, and you should expect us to continue our trajectory north.
spk03: Okay. Good stuff. Thanks, guys. Thanks, Jason.
spk01: Thank you. Our last question comes from Ramsey Ellisall from Barclays. Please go ahead.
spk10: Hi, guys. Thanks for squeezing me in here. I wanted to ask about your payment mix and the acceptance segment, sort of on the you know, sort of in a post-pandemic environment. I know we're maybe not 100% there yet, but when you think about digital versus, you know, offline, debit versus credit, SMB versus enterprise, do you expect kind of a different mix in your business after the pandemic, and how does that feed into your kind of longer-term growth algorithm?
spk02: You know, Ramsey, I think, you know, we certainly have seen – a broad movement to digital everything. It's why you hear us talk about the investments we're making and mobile capability and integrating our digital banking and card management experience, more and more digital transactions, e-commerce, et cetera. Certainly, I believe the pandemic brought forward multiple periods of of transition into that space. And I do think it was not transitory. Those changes are here to stay and we'll see as people return to whatever normal is going to be, what that continued transition growth rate happens. But obviously we're seeing great growth in Zelle. We're seeing more and more transactions on account to account transfers. and good e-comm volume you heard us talk about in our merchant space up 21%. So getting mobile first capability and digital experiences was a focus of ours over the last several quarters, and we're bringing a number of that into a single instance right now and continue to see that integration going forward.
spk10: Great. Let me squeeze one quick last one in here, which is, do you see the Feds revisiting the Durbin routing rules as kind of opening up a market opportunity for Star and Excel?
spk04: Yes.
spk10: Short and sweet.
spk02: Yeah, obviously Ramsey remains to be seen, the timing and when that will happen, but it does look to be a real opportunity for us.
spk04: Yeah, and, you know, I think the thing is – You know, our capabilities around fraud and chargeback management and our capabilities to serve the biggest issuers is very deep. And, you know, I think that many times having a third network is very valuable to everybody, both merchants and issuers. And so in Star and Excel, we've invested heavily in them. And that's why we get the type of transaction growth you're seeing there. So we really, really love our debit networks. Great. Fantastic. Thanks. So thank you for joining us this morning. We appreciate your support. If you have further questions, please don't hesitate to contact our investor relations team. Stay safe and have a great day.
spk01: Thank you all for participating in today's conference. You may disconnect your line and enjoy the rest
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