Fiserv, Inc.

Welcome to the FISERV third quarter 2022 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 Julie Sheriel, Senior Vice President of Investor Relations at FISERV.

Thank you, and good morning. With me on the call today are Frank Bisignano, our Chairman, 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. Please refer to these materials for an explanation of the non-GAAP financial measures discussed on this call, along with a reconciliation of those measures to the nearest applicable GAAP measures. Unless otherwise stated, performance references are year-over-year comparisons. Our remarks today will include forward-looking statements about, among other matters, expected operating and financial results, and strategic initiatives. 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. And now, over to Frank.

Thank you, Julie. Before I begin, let me again welcome Julie to the team. As we announced last quarter, she would move to a new role as the head of strategy. Julie joins us from Bloomberg, where she was a senior equity analyst covering the fintech and payment space and has extensive experience as a sell-side analyst and investment product manager. Welcome to your first buy-serve earnings call, Julie. Turning to the results. Overall, I am very pleased with yet another quarter of double-digit growth in both organic revenue and adjusted EPS. We continue to demonstrate the strength of our client base, depth of our partnerships, and resilience of our businesses. Consumers activated more cards, continued to spend, and were issued new credit. Merchants opened up new businesses offered better experiences, and took advantage of more value-added services. Financial institutions upgraded their systems and invested in new products to better compete and capture efficiencies. In the early days of the fourth quarter, we are seeing the same trends continue. We grew adjusted revenue 8%, with organic revenue up 11%. at the top end of our full year 2022 guidance range. Adjusted operating margin of 35.2% was up 100 basis points year over year, expanded 170 basis points sequentially, and was consistent with our internal modeling. Adjusted EPS of $1.63 included an 8-cent foreign exchange headwind versus last year, which is 3 cents more than we anticipated 90 days ago. As we look forward, risks remain from inflation, a still tight market and geopolitical uncertainty. But as a global and diverse business, we are well prepared to capitalize in any market environment. Based on continued momentum, strong execution, and near-term visibility, we are raising our revenue guidance at a high end of the range for this year to 11% organic and raising our adjusted EPS to $6.48 to $6.55. we're executing well beyond our legacy as a mid-single-digit top-line grower. Based on the actions we've taken and the investments we've made, I remain confident that we can achieve faster growth in the high single-digit range or better over the coming years while maintaining our track record of double-digit adjusted EPS growth. When we brought together Fiserv and First Data in July 2019, we envisioned an industry-leading combination with a complete set of strong payments and fintech capabilities that were highly complementary. As we've combined these great companies, we're sometimes asked how being a diversified company that serves merchants and financial institutions, large and small, across all payment types is the winning strategy. We believe we're already demonstrating this through market share gains, faster growth, and expanding margins, and the third quarter is another proof point of the power of this team and our set of assets and capabilities. Third quarter highlights the continuing momentum in our payments and network segment. with organic revenue growth of 11% and adjusted operating margin expanding 190 basis points to 45.9%. Our issuer solutions business, which includes credit processing for large issuers and card and statement services, was particularly strong. Issuer solution contracts with three of the top 25 North American credit card issuers within the last two years, a testament to a single platform that delivers a full suite of digital capabilities. We can trace our success here directly to the investment we've made in the business over the last few years. These include a robust set of APIs, AI-based fraud management, cardholder experience technology via the OnDot acquisition, integrated end-to-end output solutions, plus ongoing cloud enablement of our technology stack. Since we began combining Fiserv and First Data, we made a decision to pursue the opportunity in the government vertical. with its large TAM and multiple use cases that span merchant, issuer, and output services. We began investing in the solutions, people, and infrastructure, and the strategy is now playing out. This month, we began issuing roughly 10 million prepaid cards for the state of California under its middle class tax credit program. Since announcing this win last quarter, we were awarded another contract with the California State Comptroller for cards supporting various disbursement needs. We work with five other states to disperse and process their unemployment benefit cards. The pipeline remains large, and this vertical is traditionally quite resilient through the economic cycle. Investing in innovation is a constant across our business. And nowhere are the benefits more evident than in a merchant's acceptance business. We had another strong quarter for merchant, growing organic revenue 14%, once again outpacing our medium-term guidance of 9% to 12%. At Clover, we rolled out several new products to enhance the merchant experience and customer authorization. This quarter, we'll be piling an expanded retail vertical offering. with additional horizontal value-added services, including an integration with accounting and business software. Our vertical solutions are resonating. In September, Clover Sports signed an agreement with Caesars Superdome and the Smoothie King Center in New Orleans, adding to its base of over 250 professional and college-level sports venues. Clover will streamline purchasing at concession stands, premium bars, and clubs with digital, contactless, and self-service purchasing. We will also provide third-party integration to related services and real-time data insights. Parrot, our enterprise omnichannel operating system, launched new money flows and continued to lead the market in payout choice and flexibility. We launched more instances of our multi-purse wallet, a white-label solution that holds multiple sources of value, including loyalty and prepaid. And we're proud to share that in July, BuyServe was named Merchant Acquire of the Year. by the Merchant Payments Ecosystem Awards in recognition of the highly successful debut of Carrot as an omnichannel commerce operating system. As I mentioned earlier this year, data is an emerging business for us, and it spans both merchant and financial institution clients. We're excited to announce our new data-as-a-service offering in September, partnering with Snowflake. BuyServe will enable customers to access their payments data in near real-time to better inform business decisions. By leveraging Snowflake secure data sharing, customers can now seamlessly and securely access and integrate their data, driving deeper, timely insights. A large energy company is just one type of client already in pilot. Financial institutions are excited by our data as a service offering as well. Carter Bank, a $4 billion mid-Atlantic community bank, is in an open data pilot with us to consolidate and connect all data across the enterprise. Many banks tell us they spend too much time trying to source data provision, and integrate data. Fiserv and Snowflake will make it easier for Carter to use the data across their Fiserv and non-Fiserv systems to fully understand their customers down to the branch level. FinTech performance was lower than normal this quarter at 1% organic revenue growth, but generated 4% growth year-to-date, and is on track to meet our organic growth guidance of 4% to 6%. This is a consistent business, but timing of product additions, new business implementations, and professional services revenue can vary from quarter to quarter. Some of this revenue anticipated for September slipped into the fourth quarter, and we have good line of sight to full-year revenue in the medium-term guidance range. We remain encouraged by our visibility here after signing 14 core wins in the quarter, with nine being competitive takeaways spread across large banks, new banks, fintechs, community banks, and credit unions. Earlier this year, Webster Bank acquired Fiserv client Sterling Bank to create a $65 billion Northeast regional. In the quarter, Webster chose Fiserv as its core account processing platform with multiple surrounds spanning out FinTech and payments offering. We've talked about the strategic importance of FinSec, a leading cloud banking core today, with 11 clients already in production. After just six months under our umbrella, FinSec is attracting strong interest from both new and existing Fiserv clients. With two large new client wins in the quarter, Finzec will become the cloud-based core platform for two more emerging online banks. And just yesterday, we entered into a new agreement with Zenus to power this global digital bank's first-to-market solution running Finzec on the Microsoft Azure cloud. Looking forward, There's plenty of uncertainty around what 2023 will bring. We're currently in the planning phase, but have already taken steps to ensure we are prepared for a softer macroeconomic environment. We are fortunate to have a well-diversified business with high recurring revenue and a strong balance sheet. Bob will talk more about these factors shortly. but I want to share with you what I am seeing and hearing from clients and where I see opportunity for Fiserv in the coming quarters. The payment segment has successfully capitalized on industry trends that are enabling strong growth. I call out four major trends that are responsible not only for the strong growth we are seeing now, but a robust pipeline for the coming year. First, Cardholders continue to expect better payment experiences, and more issuers look to our platforms to meet this demand. Issuers are also investing in more modern technology solutions, such as better digital, broad, and loyalty capabilities, all of which offer us attractive cross-sell opportunities. Second, the addressable market is growing. Segments such as healthcare, education, and government are increasingly looking for new credit processing and disbursement solutions. Non-traditional startups and fintechs have also been actively entering the card issuing and lending space. Third, demand for plastic solution remains high as issuers compete heavily for new volume. Finally, the card payments environment has remained active, even as we see continued growth in non-card payments, including Zelle and real-time payments. Two regulation-led opportunities. First, the Fed announced that its real-time network, FedNow, would go live in mid-2023. Fiserv announced has been part of the FedNow pilot, and we believe that we are well positioned to participate in the rising adoption of real-time payments. We enable financial institutions and eventually billers and merchants to integrate with a variety of real-time services and networks through our single connection. Second, earlier this month, the Federal Reserve finalized a clarification to Reg II that the dual network requirement for debit applies for all transaction types, including card not present. Fiserv believes this will promote market competition, which will ultimately benefit consumers, merchants, issuers, and the industry at large. Our debit networks, Star and Excel, support card-not-present transactions, but many factors will influence our ultimate opportunity. So we will wait to see how issuers implement this rule once it takes effect in July. In merchant acceptance, the uncertain macro environment has merchants large and small looking to optimize the value in their operations. In some cases, this has increased their desire for a single full-service provider over fragmented specialists, and that suits us well given our breadth and scale. Their focus on areas like payment optimization, lower-cost payment methods, and fraud is presenting more value-added service opportunities as well. In fact, we've won a few deals to enable pay-by-bank which lowers the cost of acceptance for merchants, is an easy way for consumers to earn rewards. One of our large petro merchants, Sunoco, with 5,500 locations, was just one such win in the third quarter. With e-commerce penetration returning to a more normal growth trend, card-present solutions are in focus as the more complex problem to solve for integrated omnichannel solutions. Our marquee base of large merchant customers is looking to us here. This includes leading petro and grocery merchants who are more insulated from economic slowdowns due to the non-discretionary nature of their businesses. In our fintech business, Banks are managing through the macro uncertainty with a focus on serving existing customers and improving operational efficiency. Two areas where we provide a number of important products and services that offer a way to grow accounts and enter new markets in a cost-effective manner. FINS Act. Our new cloud-native modern banking platform is being recognized as the best way to conceptualize, create, and launch new banking products. And our pipeline is particularly active with pioneering digital banks and big issuers entering the banking market via embedded finance. A leading example is our partnership with One Finance, supporting their growth initiatives in retail. We can offer them faster time to market with greater flexibility and scalability, plus the largest product portfolio available. Now let me pass the discussion to Bob for more detail on our financial results.

Thank you, Frank, and good morning, everyone. If you're following along on our slides I will cover additional detail on total company and segment performance, starting with our financial metrics and trends on slide for. Third quarter results showed continued strength and the benefit of our broad portfolio total company organic revenue growth was 11% in the quarter with continued momentum and merchant acceptance. A nice step up in growth in our payments and network segment and stable performance in the fintech segment considering the impact of some timing of revenue quarter to quarter. year today total company organic revenue grew 11% led by the merchant acceptance segment which grew 17%. Third quarter total company adjusted revenue grew 8% to $4.3 billion, and adjusted operating income grew 11% to $1.5 billion, resulting in an adjusted operating margin of 35.2%, an increase of 100 basis points versus the prior year. As Frank mentioned, Margins improved sequentially 170 basis points from the second quarter on 1% higher revenue and 2% lower expenses. For the first nine months of the year, adjusted revenue grew 9% to $12.4 billion, and adjusted operating income increased 10% to $4.2 billion, resulting in an adjusted operating margin of 33.6%, 40 basis points ahead of the prior year period. The adjusted operating margin for the quarter was impacted by several factors, including, first, investments related to new acquisitions, including BentoBox and Finzac. Second, the significant strengthening of the U.S. dollar, particularly in September. And third, the net impact of inflation on our revenue, offset by costs for both labor and material. As we've previously said, we expect significant adjusted operating margin expansion in the fourth quarter. We have four factors driving this improvement. First, the benefits of the final ramp down of prior integration expenses and resulting productivity benefits. Second, in the latter part of the third quarter, we began taking some cost actions to tighten spending in light of the continued uncertain macroeconomic conditions across the globe. Third, as part of our ongoing strategic review, we divested our career business and two small low margin non-strategic units. Finally, we anticipate healthy operating leverage and easier inflation comparisons in the fourth quarter. These factors should deliver our full year guidance for at least 100 basis point improvement and sets us up well for 2023. Third quarter adjusted earnings per share increased 11 percent to $1.63 compared to $1.47 in the prior year. Unfavorable foreign exchange impacted adjusted EPS by 8 cents per share year-over-year or five points of growth headwind relative to the exchange rates a year ago. Year-to-date through September 30th, adjusted earnings per share increased 14 percent to $4.59. Free cash flow came in at $849 million for the quarter and $2.1 billion for the first nine months of the year. Free cash flow conversion was 81% of adjusted net income this quarter, well ahead of prior year and first half levels. Like the fourth quarter of 2021, we expect a significant ramp in free cash flow and free cash flow conversion in the last quarter of the year. Free cash flow conversion of 71% year-to-date reflects a combination of, first, continued organic investment in software and application development to drive higher growth across the business. Second, greater working capital investment in both accounts receivable and inventory driven by accelerated revenue growth And third, higher capital expenditures associated with the newly acquired capabilities to drive innovation and integration. As we close out the year, the sustained strength in our business gives us confidence to raise our full-year organic revenue growth outlook to 11 percent, the top end of our previous guidance range of 9 to 11 percent. With this higher organic revenue growth outlook and execution on cost actions that support continued adjusted operating margin expansion, We are raising our full year adjusted EPS guidance range to a new range of $6.48 to $6.55, representing growth of 16% to 17% over 2021 at the high end of our original 15% to 17% guide. This includes significant strengthening of the U.S. dollar, which leads to an additional $0.06 of unfavorable foreign exchange impact in the third and fourth quarters relative to our expectations just 90 days ago. While we anticipate greater than 100 percent conversion of free cash flow in the fourth quarter, we continue to anticipate strong revenue growth as indicated by another increase in our organic revenue outlook. We have real investment opportunities to sustainably grow our top line faster than market and faster than our history of mid-single-digit growth. Therefore, we now expect full-year free cash flow conversion to be approximately 85%. Now looking to our segment results starting on slide 5. Organic revenue growth in the merchant acceptance segment was a healthy 14% in the quarter and 17% year-to-date. Adjusted revenue growth in the quarter was 9% and 14% for the first nine months, well ahead of the medium-term segment guidance of 9% to 12%. Merchant volume and transactions grew 10% and 5% respectively, excluding the loss of a processing client mid last year. Activity was consistent in North America, with some deceleration in Europe. We see new opportunity with the launch of our Deutsche Bank joint venture in the quarter. Turning to our merchant operating systems, Clover and Carrot, we continue to see gains across key metrics, including net new merchant ads, Value-Added Services Penetration and Partner Relationships. Clover revenue grew 19% coming off our toughest comparison against last year when the post-COVID return to normal was in full swing. Payment volume growth was 21%. Software and services penetration reached 15% of total revenue, an increase of over 260 basis points from last year and up 30 basis points sequentially with strength in assets like Clover Capital. CloverConnect for ISVs built on its momentum with very strong revenue growth in the quarter as we continue to execute on our vertical strategies, adding 37 ISV partners. We won key clients away from competition, such as Salon Ultimate Software, a comprehensive solution for salons and spas. Another PayFac win in the quarter was Tempus, which expands our presence in the healthcare vertical. We focused on our integration of BentoBox and rounded out our restaurant offering with the acquisition of NextTable for reservations, providing an opportunity to expand ARPU beyond the average increase of two to three times, which we see for merchants using BentoBox and Clover. Carrot also had a strong quarter, with revenue growing at 18%. We continued to drive accelerated growth in new money flows with third quarter digital transactions up 67% year over year and online EVT transactions up 27%. We delivered on our new innovations and signed agreements with Sunoco to launch Pay by Bank and with Subway's digital acquiring business in Puerto Rico via our connected commerce ecosystem, among others. We also continued to show we're a provider of choice for fintechs, this time with peer lender Zerto for digital disbursements and card not present acquiring. Adjusted operating income in acceptance segment increased 11% to $610 million in the quarter, and adjusted operating margin was up 20 basis points to 32.4%. The improvement was led by operating leverage and cost management more than offsetting the impact of acquisitions and divestitures, as well as FX. Year-to-date, adjusted operating income improved 14% to $1.7 billion, and adjusted operating margin grew 20 basis points to 30.8%. Turning to slide 6, on the payments and network segment, organic revenue grew 11% in the quarter above the high end of the 5% to 8% medium-term guidance range. This growth was enabled by a variety of drivers across our business lines. Our North American credit active accounts on file grew 19% versus third quarter of last year. This growth was driven by both new business onboarding and a favorable credit environment. Our international issue in business through strong double digits, driven by macroeconomic improvement, as well as the onboarding of new clients. And our debit business continues to post solid growth, driven by new client wins on our debit networks, Star and Excel. We are pleased with several wins among fintechs in the quarter as well, including one with Papaya for e-bill distribution. Papaya is an app provider that brings billers and consumers together for a better bill pay experience. Year-to-date organic revenue grew 8%, and we expect the momentum in this segment to continue through the rest of the year, resulting in full-year organic revenue growth at or above the top end of our medium-term outlook range of 5% to 8%. Adjusted operating income for the segment was up 14% to $744 million, and adjusted operating margin was up 190 basis points to 45.9%. driven by strong operating leverage. Year-to-date, adjusted operating income was up 9 percent to $2 billion, and adjusted operating margin was up 70 basis points versus last year at 44.1 percent. Moving to slide seven. In the financial technology segment, we posted 1% organic revenue growth for the quarter and 4% year-to-date within our 4% to 6% medium-term guidance range. The non-recurring portions of this business, including new product implementation work and professional services, was impacted by the timing of contracts in September, but we retained good line of sight to this revenue being booked in the fourth quarter. Meanwhile, customer momentum continues, and we had 14 core wins in the quarter, including nine competitive takeaways. Adjusted operating income was down 5 percent in the quarter to $261 million and up 3 percent to $817 million year-to-date. Adjusted operating margin in the segment decreased 190 basis points to 34.1 percent in the quarter, driven by investment in FinZAC and timing of periodic revenue. Year-to-date, the segment's adjusted operating margin declined 50 basis points to 34.8%. The adjusted corporate operating loss was $109 million in the quarter, a slight improvement from the first half run rate, and $356 million year-to-date. The adjusted effective tax rate in the quarter was 20.9% and was 19.8% year-to-date. We expect the full year 2022 adjusted effective tax rate to be approximately 20%. Total debt outstanding was $21.4 billion on September 30th. The debt to adjusted EBITDA ratio dropped another tenth of a turn to 2.9 times, reaching our target leverage of being below three times, which we set when we announced our merger. During the quarter, we stepped up our share repurchases, buying back $750 million worth of our stock. We had 24.5 million shares remaining authorized for repurchase at the end of the quarter. Additionally, we've repurchased a little more than $250 million so far in October. We are fully committed to our longstanding capital allocation strategy, which includes investing in our business organically, maintaining a strong balance sheet, repurchasing shares, and pursuing high value and innovative acquisitions. We've included slide eight in the presentation to reflect this greater investment while strengthening our balance sheet and returning cash to our shareholders. With that, let me turn the call back to Frank.

Thanks, Bob. Let me wrap up with an update about progress on ESG and our people platform. Since the release of our most recent CSR report in the second quarter, we have seen positive momentum in our ESG ratings at MSCI, Refinitiv, and SMP CSA, and significant increases in our ISS quality scores. We have submitted our CDP survey for the second year. These improvements are attributable to our improved ESG programming, framework alignment, and our 2021 CSR report. As we look out to what is best described as an uncertain year ahead, Fiserv is well positioned for the long haul. We've made the investments in product, people, and infrastructure that will allow us to continue as an industry leader, driving better top line growth and productivity. We've talked about some of the product innovation and TAM expansion that we've achieved. So let me take a minute to discuss our people. We're grateful for our dedicated workforce, especially our essential workers who are present throughout the pandemic. We recognize their commitment both through compensation and career advancement while supporting them by upgrading and expanding our infrastructure. This made it particularly gratifying when we were ranked number six of the top 250 largest U.S. public companies on the American Opportunity Index earlier this month. The index measures how well these companies foster economic mobility based on real-world outcomes for employees, particularly those without a college degree. This index is one indicator that shows we are well positioned to compete for talent. Our hybrid workforce strategy is greatly enhanced by world-class facilities and co-located workforces. We began consolidating around large modern hubs and closed over 70 facilities in the past two years. This morning, we announced our new location for our global headquarters in downtown Milwaukee. Last month, we opened the largest fintech hub on the East Coast, our Innovation Center in Berkeley Heights, New Jersey, where we anticipate LEED Platinum certification. This followed a major upgrade of both our production and office facilities in Omaha, Nebraska. We are opening new and expanded facilities in Dublin Island and Sao Paulo, Brazil, and are working towards LEED certification in these facilities after achieving LEED Gold status in New York. While this spending will ease in 2023, We are already reaping the rewards through lower operating expenses and increased productivity. I will close by thanking our more than 40,000 hardworking Fiserv associates around the world for working relentlessly to serve our clients and you, our shareholders. With that, operator, please open the line for questions.

Thank you. We would now like to open the phone lines for questions. If you would like to ask a question, you may press star 1 on your phone. If you would like to withdraw your question, please press star 2. Our first question will come from Lisa Ellis from Moffitt Nathanson. Please go ahead. Hi, good morning. Thanks for taking my questions.

First one, just Bob, it's for you. On free cash flow, can you just elaborate a bit on what changed, I guess, relative to 90 days ago that caused you to bring down the free cash flow outlook for the year? And maybe just more broadly, looking forward, how are you thinking about what more of a sustainable level of free cash flow conversion is for Pfizer, realizing that there were some unusual items in this year, in 2022? Thank you.

Yeah, good morning, Lisa. Thank you. So I guess a couple of things. One, in terms of the adjustment in our outlook for the full year, I think I would point to a couple of things. One is we continue to see good opportunities to invest for future growth. Obviously, we're seeing an impact in the current year from an 11% growth rate that puts pressure on working capital. As you grow the top line, you have more receivables, but we're also carrying more inventory. One of the things that has persisted longer than we had anticipated just 90 days ago is the supply chain issues slash problems in China around getting point-of-sale devices, et cetera. And we continue to ensure that we have availability of product and can support our client base with having a point-of-sale product. COVID shutdowns in China are actually going on right now, and so protecting ourselves there. We also have some new geographies and new clients that are bringing on Clover and other point of sale devices, so we continue to invest in that. You see our capital spending around new product development, software cap. We continue to see good opportunities, so we're driving for sustainable, very high single, perhaps even low double-digit growth investments around the acquisitions of Finzac, OnDot, BentoBox. We've made the decision to keep investing and therefore revised our free cash flow.

In terms of...

You know, long-term sustainability, I'm not prepared to give guidance for 2023. But, you know, we've certainly seen in the last two years, 21 and 22, a pretty significant step function change in our growth rate, 11% last year, which granted is against the COVID-adjusted prior year, but 11% this year. bending that curve, so to speak, from companies that were mid-single digits and perhaps generously mid-single digits pre-merger, now double digits, you're going to see something less than 100% free cash flow going forward, I think.

Okay. Okay. All right. And then my follow-up, Frank, for you and your prepared remarks and commenting in regards to carrot, you highlighted that many merchants find that the in-store, the card-present component of acquiring or omnichannel acquiring is often the more complicated part. Can you just elaborate on this? I think this is a question we get often, you know, just sort of related to how to think about omnichannel acquiring and, you know, the tricky aspects of executing that for merchants that might currently use different acquirers in-store and online. Thank you.

Yes, thanks, and good to hear from you, Lisa. I think we always had a very strong in-store presence, and we were always a large processor for e-commerce transactions, and then we veered into the front end of the business and began building out that omni-channel presence what we see is that our ability to, you know, bring, in fact, a single integration point, single reporting structure, connected hardware, connected systems, you know, as companies evolve and want many times an easier instance, we are an excellent provider of it. And when we look at carrot long term, you see us also talking about, you know, other features in there where we allow, you know, a multi-person wallet that puts more product in there. It could be loyalty. It could be prepaid. It could be rebates. So how we bring all that capability in a single connection. ultimately even allowing larger players, and ultimately we think it will drop to mid-market, this capability, the ability for their consumers to build greater loyalty through this single connection and this omni-channel presence. So we're pretty excited. We've built it out. The use cases are there. It's been strategic. We came from a different place than others. We came with a great physical presence and a great processing capability. And then building the omni-channel front end of Carrot is resonating well with our clients. So think about it along with integrated value-added services and embedded front end. all of that ultimately was just a much larger value prop than pure omnichannel. I hope that's helpful.

Terrific. Thank you.

Next, we'll go to the line of David Toget from Evercore ISI. Please go ahead.

Thank you. Good morning. Bob, could you dig into your commentary around the bridge to 2022 margins, particularly your actions to tighten spending in the third quarter. Can you bracket for us what the annualized cost savings from these actions might be?

Sure, David. Good morning. So a couple of things from a margin standpoint. If you recall, actually going back to our first quarter earnings call, which we reiterated in the second quarter earnings call, And we've expected since the beginning of the year that our margin would accelerate into the second half of the year. That acceleration was largely driven by carryover integration spending that we used to back in 2021 adjust out as merger and integration spending. Our company policy says you do that through the end of last year and any projects that are continuing no longer get adjusted out of our earnings. And so we had some costs flow into the P&L at the beginning of the year that we knew those projects were going to finish up in the first half, first nine months of the year. And so that investment, that integration spending would taper off through the year and in particular be mostly out by the end of the third quarter. So you see improvement in investment or lower spending on those projects. plus you get the benefit of the projects being done, i.e., those generate a return, generate productivity, and so you get a double bang in the second half of the year, and in particular, as those projects, again, have largely been completed, the end of the third quarter, we'll see that come down in Q4 and get the productivity. The second piece of growth in margin is basic productivity, i.e., non-merger-related, non-integration, what we used to refer to as operational excellence, rolling through the business. Some of that is very basic productivity, Six Sigma, leaning out, you know, your spending sort of a thing. Some of it is the fact that we've now reopened our offices and our associate base is returning to the office, increasing our collaboration. Frank talked about the location work that we've done in creating large hubs in north central New Jersey that is now open, driving some collaboration and productivity. And then I guess the final two things that will drive margin in fourth quarter, one is scale. As you know, an incremental dollar of revenue in this company comes through at higher than company average growth given the fixed cost nature of the company, and so we feel good about seeing good operating leverage on revenue growth and scale. And then finally, some of the divestitures we did, those three small units that we sold at the end of third quarter, you'll see the benefit of fourth. Q3 over Q2, we expanded margins 170 basis points. Obviously, if you do the math, we've got a big expansion expected in the fourth quarter. But quite frankly, if you look over the last five or six quarters right in line with what we've done in the past, 300, 400, even 500 basis point margin improvement in a number of quarters in the last six, eight quarters. So I feel good about our ability to generate at least 100 basis points for the full year.

Thanks for that. Just a quick follow-up on the Clover revenue growth, which stepped down a little bit to 19%, but still well above market growth. What's the path to get back on the five-year growth plan of 27% that you laid out at the March merchant acceptance deep dive?

Sure, David. I guess the fastest thing to think about or the largest thing to think about is the 19% number that we showed in our prepared remarks and in the slides. That's a reported number. Obviously, FX had a pretty significant impact in the entire company, actually in all companies in third quarter. If you were to currency adjust that number, you'd probably pick up three points, maybe even four points of growth. Plus, as you recall, in the first quarter of this year, we divested a small joint venture that we had. It was a minority equity interest, actually, technically. generated about $175 million of cash. So on an organic basis, that clover growth is actually more in line with the 25% that we've talked about as part of our long-range expectation of growing clover to at least $3.5 billion.

Yeah, I would add there, you know, we talked about $3.5 billion in 2025. We talked about a 9% to 12%. For the segment, you know, we're in normal comparison. We're at 14% right now for the segment. I also think, you know, the work we're doing on value-added services, and it'll keep inching up and moving up, as you saw, you know, is a key driver here. You know, we continue to grow the merchant base, grow the LTV, grow the ARPU, and, you know, we feel highly confident in exactly what we said in March, and I think it's playing out right now exactly as planned. You know, our sequential growth has been very high, and I think so if you look at it, what Bob talked about and just looked at the business case and the driving of it, our confidence level has will continue to grow quarter by quarter.

Understood. Thank you.

Next, we'll go to the line of Darren Peller from Wolf Research. Please go ahead.

Thanks, guys. If we break down the merchant growth rate again, 14% is obviously somewhat industry-leading growth, and yet the volume growth, I think, was 10%. If you could just remind us, are the components all the same as to what's really driving that outperformance on overall growth and the spread between revenue and volume? If that's something that you see sustainable, what's driving that? Obviously, Clover and Cara continue to do well, but how's international? How's the SMB versus enterprise? Frank, just any patterns you're seeing change, if any, in the consumer behavior would be great.

Yeah. You know, we like to say, hey, we don't really talk about yield. We talk about revenue. I know you've heard us be consistently beating that drumbeat. We decided to beat that drumbeat when we were on the right side of that curve, so you didn't think we used it as a walk away from commitment on anything. I think the investment you see us putting into this business, And that investment from sales to infrastructure to product development is really driving the number. I think, you know, you heard us announce partnerships across the board and even more today even as we talk more about Doitia. But then the ISV is, I think, a business mix, which we said at the start of the pandemic, that we had this tremendously balanced mix, we had the best distribution in the industry, and we had fabulous geographic reach is still playing out. And that really is what's driving our growth number and our volume number. You know, we did not have a great quarter in the European theater. but the mix of our business and the strength of our business from the largest retailers to the pizza store in Brooklyn, as you know, I like to talk about my own town, really shows through in the model. I think the work in Clover is, and the building of the value-added services is definitely also playing into our growth in a way that may not always be just in that, but also in our total product set and the ability to deliver it. So I think we do have the industry and franchise. I think Clover, and you've always been supportive of it from the start, has proved out its merit And you're seeing it come through. I'd say the only other thing I'd add is, you know, our franchises in Brazil, in Argentina, continue to win and grow as does our U.S. franchise. So, you know, value-added services, omnichannel growth in verticals like restaurants, international. That was our story in the beginning of the pandemic, and that's our story coming out of it. And, you know, we're having a margin discussion, and we're fully confident where we're going to be there. You know, I would note that Merchant had the largest margin it's ever had this school

Okay. Thanks, Frank. Just a quick follow-up on the payment segment. Just the strong, strong growth. Obviously, the accounts and the issuer side was strong on the credit card and the new wins, but if you could just comment on what's happening in some of the other aspects of the business, whether it's bill payments or it's the network, and what kind of aspects of that growth is sustainable versus maybe once we anniversary the new wins, is there more to go? Thanks, guys.

Yeah, I mean, you know, we had talked about this, the wins, the onboarding of the wins, the growing. You know, I like to frequently go back to investor day where we talked about this incredible pipeline, which at the time felt like, you know, it was a once-in-a-lifetime event, meaning you win three of the top 25 issuers. And that part was a... one-time event. But that pipeline is the same size and shape as it was back in 2020. And the building out of healthcare and government verticals, investment in education, all bode very well for, you know, performing at the higher end of that guidance range as we go forward here. But, you know, the pipeline is very strong. And you hear us talking about the California win, but the reality is we've had multiple government wins with our ability to distribute payments in a card-based fashion and having probably the best capability in the industry around that.

Thanks, Bert.

Next, we'll go to the line of Dave Koenig from Bayard. Please go ahead.

Yeah. Hey, guys. Thank you. And a couple of things. I guess my first question, kind of a follow-up on David Toggett's question. It looks like your sequential EBIT dollars of growth, the way you're guiding, is $150 million plus. Your revenue is about $50 million, give or take. So let's say that all goes to EBIT. That's $100 million of extra, right, of extra kind of that cost control revenue. Is that a fair way to think about it? And you kind of said that's sustainable. I mean, is that $400 million of run rate cost savings? Because, I mean, that would be a huge benefit into next year as well. Are we looking at that right?

Yeah, David, I'd be a little careful. I'd have to run through all of your math. You've got some broad assumptions on the sequential growth or the growth year over year in fourth quarter. Ultimately, the simple or straight answer is, look, we see some good cost improvement third quarter to fourth quarter, as I talked about earlier, the ramp down of these integration projects as well as the benefit of the projects driving productivity into the organization now that we've got integration largely behind us, maintaining the productivity mojo that you've seen from this company for a lot of years. and certainly incremental revenue drops to the bottom line. The growth in payments certainly helps. Obviously, that's our highest margin business, and continuing to see good growth in SMB also helps. We feel good about the quote, to use a four-letter word, mix, in the fourth quarter. we see good opportunity or good line of sight towards cost reduction slash productivity divesting a couple of these small non-strategic units that are low margin and getting that scale really helps in the fourth quarter.

Gotcha. Thank you. And just a quick follow-up. In the fintech segment, I know Q3 was clearly weak. Is there a way to give kind of a more normalized growth number, actually implementations, and then Also, Q4 has been higher than Q2 every year going back since I think 08 was maybe the last time Q4 was below Q2. Is it fair just to think that if everything's kind of normalized that that pattern would continue?

We put up a 7% Q2 number. I would not anticipate us being north of 7% in fourth quarter. We do feel good about the growth of the fintech segment. If you look over the last several years, There's variation quarter to quarter. Some of that is the periodic revenue or license and term fees. We have the additional impact in third quarter of this year for these non-recurring, you know, one-timer type. I hate to use the term one-timer because they're regular. As contracts renew, we get short-term or immediate-term revenue, and some of started to see some of that rebound so we feel good about number one we're already in the four to six percent range and we'll close the year out that way yeah i just thought that uh you would ask about our new milwaukee headquarters yes nice yes great well thanks guys thank you next we'll go to the line of tenjin wong from jp morgan please go ahead

Thank you. Good revenue here. I just wanted to ask on the buybacks here. You're at your target leverage, as you called out, and you stepped up your buybacks. It looks like, what, 80% of free cash flow is getting allocated to buybacks year-to-date. So I just want to check your appetite on buying back stock here. It sounds like October was in line with the third quarter run rate. Appetite to buy back stock versus acquisitions?

You know, Tenzin, I guess first, yes, obviously we've been buying back shares. We are always in the market. Every once in a while there's some ebbs and flows, and we were strong in the third quarter and certainly strong so far in fourth quarter. I feel good about our ability to continue to buy back shares. It's a balanced capital deployment approach that we've always had and continue to have. around investing in organic growth. If you look at that new slide, we added a significant increase in CapEx, which is obviously putting pressure on free cash flow. But we did that while also paying down some debt or de-levering down to our targeted leverage rate that gives us lots of flexibility to ultimately do both M&A and share repurchase. I see it obviously as a bit of a trade-off. If I spend a dollar in M&A, I don't have that dollar available on for share repurchase, but we have good capacity to do both. We look at acquisitions through the lens of a share repurchase. We're certainly interested in continuing to add to our portfolio. As I've said in the past, I don't wake up in the morning saying, geez, I really need to go get X capability. given the breadth of our existing portfolio. There are lots of things that we can add, whether it's NextTable that we did recently or it's BentoBox or FinZac. We did all of that while also buying back a lot of shares.

Yeah, no, I think I just say that we have an appetite. You see our appetite across the segments. We are highly selective, Bento, FinZac, And then we'd come back and invest heavily on DOT in those as we had done on Clover.

shareholders to you should continue you should imagine that we're going to have that continued balance mentality and obviously we like to integrate companies and grow them good no good thanks for that my quick follow-up if you don't mind just on the you mentioned star in Excel supporting card not present transactions I know I've asked about this in the past and I hear you that you want to wait for how issuers want to implement the new rule in July, but the readiness for STAR and Excel, is there still a lot of investment required to attack that? And I guess I'll ask how aggressive will Fiserv be in that pursuit? Thanks for the time.

I'd say readiness is high. You know, I think we made a comment that and our ability to execute that we think is very high. Obviously, we always felt that this would create more competition, and we like that, obviously. at the best possible rate. So I think, you know, we're in the planning stage. Obviously, it is up to issuers. But, you know, we think that this was a very good outcome, and we continue to expect ourselves to participate as we would, given our size and scale and the nature of the business we have.

Thanks, as always. Thank you.

Thank you. Our last question will come from Jason Kupferberg from Bank of America. Please go ahead.

Thanks, guys. I just wanted to go back to, Bob, your answer to Lisa's question in the Q&A. The free cash flow conversion, I think you said likely to remain below 100% going forward, but I'm just trying to think about this in the context of the analyst day in 2020. I think the target there was 105% plus, and that was with a 7% to 9% revenue growth rate. Just wanted to kind of calibrate this. I mean, if revenue growth moves back to the high single-digit range from the current low double-digit run rate, does that mean that free cash flow conversion goes back north of 100%? Or have some other things changed in the business around CapEx or other factors that we should just be thinking about? Thank you.

Yeah. One, I'll have to go back and check the transcript. I don't think I said it was likely. I said to see a business growing at this level. I try not to give guidance or an outlook or adjust what we've said previously. Obviously in today's world, the view of 2023, 24, 25, 26 is just a little bit cloudy and we'll continue to evaluate. Some of it is what are our investment opportunities to either be at the top end of that range and or perhaps even accelerate from that. When we did our earnings, our investment call, investor conference back in December of 20, we hadn't yet closed the Finzec transaction. We've talked about how that acquisition may give us an opportunity to bend the curve, so to speak, yet again on the FinTech segment. which today hitting at a 4% to 6% rate is above what we've been able to do traditionally. And as Finzec continues to grow, we'll see some opportunity there building out Clover and growing our merchant business at perhaps even the high end of that 9 to 12. The March of 22 investor conference talked about in that segment. So lots of opportunities for us, and we're going to make sure that we are making good investment decisions to grow the top and bottom line and generate good returns for our shareholders.

And just quick follow-up, just given all the momentum in the payments segment, do you feel more bullish on your ability to be near the higher end of the 5% to 8% target range there, not just for this year, but beyond this year?

Look, I think we've seen some very nice progress in the growth this year. We're getting some great feedback from our clients. The $120 million worth of wins that we talked about back in December of 20 now all implemented and growing, many of them actually outperforming that $120 million worth of ACV. We have a continued strong backlog. Building out that government vertical that we've talked about, certainly an opportunity. Again, we're not prepared to give an outlook or guidance for 2023, but we feel quite good about how that segment's performing right now.

Okay. Thank you, guys.

Joy, thank you.

Thank you. Thank you for your attention today. Please feel free to reach out to our IR team with any questions and have a great day. Thanks a lot, guys, girls, ladies.

Thank you all for participating in the FISER third quarter 2022 earnings conference call. That concludes today's call. Please disconnect at this time and have a great rest of your day.