Fiserv, Inc.

Welcome to the FISERV 2023 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 would like to turn the call over to Julie Cheriel, Senior Vice President of Investor Relations at FISERV.

Thank you, and good morning. With me on the call today are Frank Busigliano, 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 in 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 our 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 I'll turn the call over to Frank.

Thank you, Julie. And thank you all for joining us today to discuss another very good quarter for FISERN. Our results continue to demonstrate strong performance in revenue and operating income, with second quarter organic revenue growth of 10% led by performance in merchant acceptance, particularly in our international regions and our payments and network segments. Adjusted earnings per share of $1.81 was up 16%, and adjusted operating margin of 36.5% was up 300 basis points. All three measures are tracking ahead of our previous guidance for the full year. As we look to the remainder of 2023, we note that economists' expectations have improved for GDP and consumer spending relative to the start of the year. But those economists also forecast a modest macro slowdown from the first half in part due to higher anticipated unemployment and the reinstatement of student loan repayment. Among our financial institution customers, spending and spending intentions remain healthy, even as net interest margins narrow and lending activity eases. Card and non-card payment services, digital banking, IT modernization, and data analytics are high-demand services, and financial institutions are looking to us to deliver. With the outperformance in the second quarter, we are once again raising our outlook for the full year. We now expect 2023 organic revenue growth in the range of 9% to 11%, up from 8% to 9% previously. Adjusted operating margin is now forecast to improve at least 150 basis points this year, up from our prior expectation of greater than 125 basis points. With year-to-date adjusted EPS growth of 14 percent and the improved revenue and operating margin performance, we are raising our full-year adjusted EPS guidance by 10 cents to a new range of $7.40 to $7.50, representing growth of 14 to 16 percent over 2022. These second quarter results mark out ninth consecutive quarter of double digit organic revenue growth. We have also repurchased nearly 6% of our shares outstanding over the last 12 months. I am incredibly proud of the strong performance and the hard work, foresight, and collaboration that it took to get here. Now, I'm focused on sustaining this momentum There are multiple parts of our business that I consider future growth accelerants. I will touch on five of these today, and then we'll add and elaborate on them at our investor day later this year. Bob will provide more details on this later in the call. The first success story with a continuing growth outlook is Clover, our market-leading cloud-based SaaS operating system for small and medium-sized businesses. Revenue is growing more than 20 percent on $267 billion in annualized payment volume. This is a testament not only to the appeal of the product offering, but to the power of our vast distribution network. Bover has only begun to scratch the surface on the opportunity in vertical specific solutions, horizontal value-added services and software, and international markets. In the restaurant vertical, we expect to offer the full suite of value-added services and point-of-sale solutions for restaurants and QSRs of all sizes next year. and we've begun to build out vertical specialized software solutions for retail and professional services, including partnerships to manage inventory, improve SKU-level analytics, and manage appointment scheduling. We're also continuing to enhance our ISV partner program, giving our ISVs access to Clover hardware and processing alongside our value-added services. This will support our growth among additional verticals, including businesses in our back book. An example of this is our integration with Salon Ultimate, a vertical software platform provider focused on the salon and spa industry that will provide a broader combined offering to its large merchant base. Clover now accounts for approximately 25% of our merchant revenue and remains on track to reach 35% by 2025, in line with our targets for $10 billion in total merchant revenue and $3.5 billion in Clover revenue by 2025, implying expected growth acceleration. Following in the footsteps of Clover is Carrot, a unified commerce offering for omnichannel merchants. Like Clover, Carrot is an operating system that delivers both payments and experiences, but instead of small businesses, Carrot is for the world's leading brands and large enterprises. Carrot has been posting revenue growth in the mid-teens on the strength of Fiserv's scale, flexibility, and customization capability, plus key integrated services and broad payment options. We recently released our two biggest differentiators for Carrot, Commerce Hub, which is the orchestration layer that enables easy client access to our products and services and a data and insights command center that lets clients manage their data in real time to better engage end customers and improve operating efficiency. Over time, as with Clover, we'll add more first and third party value added services and payment flows and increase accessibility around the world. A third area of growth is digital payments and the intersection with digital banking. CardHub is our card account product for debit card issuers that offers all of the newest features for cardholders to manage their accounts. It helps how small and mid-sized bank issuer clients offer their customers the same cutting-edge functionality as the largest independent card issuers. We're about halfway through migrating financial institution clients onto CardHub, where they can integrate with our digital mobile banking product, Mobility, and with competing digital banking providers. This migration has shown a doubling of customer adoption on CardHub in the first year. which means greater card usage, reduced call center activity, and better security. It's drawing new clients to our digital banking solutions, who then tend to bundle out debit processing, debit network, and risk services. The full integration of CardHub and mobility is an investment unique to Pfizer because it spans two operating segments. payments, and FinTech, where others don't participate. Elkhart's solution was strengthened by two acquisitions, OnDot and SpendLabs, in 2021. And it's just one example of the many cross-selling opportunities specific to Fiserv, given our integration work and breadth of capability. The fourth growth area is Latin America. Although we haven't spoken in depth about our international operations, Lion America has been a standout grower in recent quarters, and we believe it can remain so for the long term. We've built a leading franchise across multiple countries and leading financial institutions that spans our product set from merchant acceptance to card issuing to fintech. is about 6% of total company adjusted revenue. And in merchant acceptance, it's 10% of adjusted revenue. It's largely driven by Argentina and Brazil, followed by Mexico, Colombia, and several others. Argentina has garnered attention lately for 100% plus inflation. And while this has certainly contributed to some of our merchant segment strength, a bigger and more sustainable part of the growth comes from anticipation revenue, also known as merchant prepayments. This is where we help merchants navigate the long settlement periods in Argentina, Brazil, and Uruguay by funding their payment receivables early at a discounted rate. Businesses get better liquidity and we receive a spread that carries low risk. Other parts of our TAM business show strong momentum as well. We will be expanding our relationship with our partner, Caixa Econômica Federal, enabling card payment for their more than 13,000 bill payment agencies throughout Brazil. Biosphere Solutions will allow agencies to extend bill payment options from only cash and CASHA debit cards today to all credit, debit, and prepaid cards. The opportunity is meaningful when considering that in 2022, this agent network enabled bill payments equal to about 11% of all credit and debit payments in Brazil. We are also enabling PIX transactions in Brazil in the P2B space, utilizing a software express platform and expanding our presence in PIX beyond P2B. We have also made PIX payments capability available in our large acquiring network in Argentina, supporting Brazilians visiting this neighboring country. We're excited for the opportunities presented by PIX and it has already exceeded total card sales volume in Brazil in a short period of time. The fifth opportunity is Finzec. You know Finzec as the acquisition we made in April of last year to offer a next generation core banking system that's cloud native. It gives us the opportunity to compete and win with financial institutions of all sizes and across geographies, expanding our total addressable market. Our three-pronged strategy is to win digital first banks, provide next-generation core banking to our existing FI clients, and add larger banks as clients, often starting as they launch new products in the cloud. Another opportunity in Finzec that's coming together now actually started many years ago. We were an initial investor in Finzec when it began raising money in 2017 because we saw a value in marrying a merchant processing platform with a back office banking platform. Today, that's called embedded finance, and we are beginning to tap into the opportunity as merchants look to offer banking services to their customers. Their goal is typically to provide more purchasing power and payment flexibility to their customers while creating deeper relationships. Embedded Binance will add to the many payment and banking solutions that merchants want to offer, and we already provide. Here are some examples. We deliver stored value and gift card solutions to many of the world's leading brands. We're the largest private label credit card provider, and we are the processor behind most HSA and FSA accounts. FinTech is the single ledger and issuing platform for products like debit cards and DBAs. And from here, we're investing in the connectivity between platforms to create a more seamless experience for our clients and their end customers. Now, let me turn this discussion over 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'll cover details on total company and segment performance starting with our financial metrics and trends on slide four. As Frank said, our second quarter was a very good one and marked our ninth quarter in a row of double-digit organic revenue growth. Total company organic revenue growth was 10% in the quarter, with strong growth across merchant acceptance and payments and network. Year to date, total company organic revenue grew 11%, led by the merchant acceptance segment, which grew 16%. Our three international regions also continue to perform well, growing 31% organically in the second quarter. We saw strong growth in issuer solutions revenue across all three regions and robust gains in Latin America for our merchant segment. As Frank explained, while Argentina inflation grabs the headlines, the bigger driver of our growth here is anticipation revenue, reflecting a newer business for us in merchant prepayments. In the near future, inflation in Argentina may ease, but it's likely to stay persistently high relative to the rest of the world. Our broad franchise, new lines of business, and strong growth in the rest of the region should balance out any single country's macroeconomic issues. Second quarter total company adjusted revenue grew 6% to $4.5 billion in and adjusted operating income grew 16% to $1.6 billion, resulting in an adjusted operating margin of 36.5%, an increase of 300 basis points versus the prior year. For the first half of the year, adjusted revenue grew 8% to $8.8 billion, and adjusted operating income increased 16% to $3.1 billion, resulting in an adjusted operating margin of 35.1%, an increase of 240 basis points versus last year, and tracking ahead of our 2023 guidance. Adjusted earnings per share for the quarter increased 16% to $1.81 compared to $1.56 in the prior year. Year-to-date through June 30th, adjusted earnings per share increased 14%, to $3.38 at the high end of our 12% to 14% annual guidance range. Free cash flow came in at $608 million for the quarter and $1.5 billion for the first six months of the year, up 16% year-to-date. Our free cash flow remains on track to reach $3.8 billion this year, and we retain line of sight to accelerating cash flow generation in the second half as is typical for our business. Now looking to our segment results starting on slide five, organic revenue growth in the merchant acceptance segment was a strong 14% in the quarter and 16% year to date. Adjusted revenue growth in the quarter was 9% and 10% for the first half. Merchant volume and transactions grew 1% compared to prior year. This slower volume performance reflects two temporary factors. First is the decline in retail fuel prices of 27% on average in the quarter, which creates a tough comparison for petrol merchant volume growth. The second is related to some strategic realignment among large processing clients that's impacting their volumes and represents a large portion of our processing-only volume. Excluding these two isolated factors, volume growth would have been 4%. It's important to note that volume changes for both petrol and processing only clients have very little impact on our revenue since petrol clients typically pay per transaction and processing carries very low fees. Nevertheless, they are big contributors to volume and thus the spread between our volume growth and revenue growth is particularly wide now. This should moderate over time. Other factors contributing to the wider spread are rising penetration of software and services and pricing benefits from both higher inflation and added value. We expect these to be positive contributors to revenue on an ongoing basis. Clover, our operating system for small and medium-sized businesses, continues to build on the strength of its growing product offering to attract and retain more merchants and expand our revenue opportunity with them. Clover posted a strong 23% revenue growth for the quarter and 22% year-to-date. Quarterly Clover GPV was $67 billion and $267 billion on an annualized basis of 15%. Value-added services penetration was 16%, one point above year-ago levels, and on track to achieve our 25% target by 2025. We signed 40 ISVs this quarter, bringing our total sign to 77 year-to-date. Our momentum is starting to build with Payfax as well, with the signing of Waystar and Paytheory during the second quarter. Clover Sport added a relationship with a large service provider for the Cleveland Brown Stadium and other venues. Carrot, our omni-commerce operating system for enterprise clients, grew revenue 6% in the second quarter. Excluding the loss of a Latin America processing client that began taking its business in-house, Carrot grew 14%. While our relationship with the client remains good, we're focused on growing our higher-value direct business. The underlying carrot business remains strong. We've expanded our merchant processing relationship with Inspire Brands, the second-largest restaurant company in the United States, to include several more of their restaurant concepts while continuing our relationship with their Dunkin', Baskin-Robbins, and Sonic brands. The agreement will add several thousand additional restaurant locations to our processing portfolio. Adjusted operating income in the acceptance segment increased 21% to $718 billion in the quarter, and adjusted operating margin was up 350 basis points to 34.7%. Year to date, adjusted operating income improved 20% to $1.3 billion, and adjusted operating margin grew 280 basis points to 32.7%. Turning to slide six, the payments and network segment posted organic revenue growth of 9% in the quarter, once again, above the high end of the 5% to 8% medium-term guidance range. Notable growth drivers in the segment included active accounts on file in North American credit processing business, the output solutions business, our debit networks, Star and Excel, and Zelle, led by continued growth in both the number of clients and transaction growth. As we've said, we expect tough comparisons through the rest of the year as we anniversary a large new client onboarding completed in mid-2022. Still, we anticipate the full-year organic revenue growth rate to be toward the high-end or medium-term outlook of 5% to 8%. Also notable for this segment, two new payments initiatives took effect this month, offering incremental revenue opportunities for Fiserv over time. First, July 1 was the effective date of the Fed's final rule clarifying parts of Regulation I.I. to make explicit that at least two debit network routing options are required for card-not-present transactions. For our STAR and Excel debit networks, which have been supporting C&P for years, this led to more than 80 of our card-issuing clients enabling card-not-present adding active cards for e-commerce transactions. This is a growth opportunity that we did not previously have. We also won several large e-commerce merchants as clients, including in the second quarter, Lyft, ADT, and T-Mobile. Last week, the Fed launched its real-time payment system, FedNow. So we are now live with six banks in the pilot phase and more than 70 committed to go live so far this year. We are encouraged by the opportunity to add more financial institutions, since more than 1,000 of them are already connected to our Now network for Zelle, providing a single point of integration that could be leveraged by FIs to easily add new rails. That's a major differentiator for Fiserv. But the key to FedNow adoption is compelling use cases, which we think will grow over time, most likely in commercial payments and bill pay spaces. Adjusted operating income for this segment was up 17% to $782 million, and adjusted operating margin was up 360 basis points to 47.4% in the quarter, driven by our strong revenue growth and productivity. Year-to-date, adjusted operating income was up 16% to $1.5 billion, and adjusted operating margin was up 240 basis points to 45.6%. Moving to slide seven, organic revenue in the financial technology segment declined 1% in the second quarter, resulting in 1% growth for the first half. High periodic revenue in the second quarter of 2022 drove a difficult comparison this quarter, creating a three-point headwind. We continue to expect organic growth within the guidance range of 4% to 6% this year as in-year revenue is booked and implementation work on prior wins is completed. Adjusted operating income was up 1% in the quarter to $285 million and up 2% to $565 million year-to-date. Adjusted operating margin in the segment increased 130 basis points to 36.3% in the quarter. For the first half, the segment's adjusted operating margin grew 60 basis points to 35.8%. We had 10 new core account processing clients in the quarter, including four wins for DNA, our market-recognized leading modern core banking platform for banks and credit unions. Finzex showcased its extensibility as an enabler of embedded finance with a win at pay theory. This payment facilitator serves the education and healthcare sectors and plans to enable a suite of banking as a service and money movement capabilities for its vertical SaaS partners. We are integrating Finzac with our merchant PFAC platform to enable P-Theory to extend its vertical SaaS capability to banking and payments. Our goal is to provide a single integration for vertical SaaS providers who want to leverage assets across our banking, payments, and merchant businesses. The adjusted corporate operating loss was $142 million in the quarter, and $264 million a year today. The slight increase over the first half last year is largely impacted by expenses tied to our client conference, which we held in person for the first time since the pandemic. The adjusted effective tax rate in the quarter was 20.6% and was 19.8% for the first half. We continue to expect the adjusted effective tax rate to be approximately 20% for the full year. Total outstanding debt was $23.2 billion on June 30th, and the debt to adjusted EBITDA ratio was 2.9 times. During the second quarter, we issued 800 million euros of eight-year senior notes to replace notes that matured in early July and reduce our commercial paper program balances. Variable rate debt sits at 13% of total. During the quarter, we continued our disciplined capital allocation strategy repurchasing 8.6 million shares for $1 billion and 21.8 million shares for $2.5 billion over the last six months. We had 70.1 million shares remaining authorized for repurchase at the end of the quarter. As we continue to optimize our vast product portfolio for value and strategic fit, yesterday we completed the sale of two financial reconciliation products to Trintec, for roughly $230 million. We are fully committed to our long-standing discipline approach to capital allocation, which includes investing in our businesses organically, maintaining a strong balance sheet, returning cash to shareholders through share repurchase, and pursuing high-value and innovative acquisitions. Wrapping up on slide eight, first half organic revenue growth was well ahead of our prior guidance for the full year. so we are again raising the range from 8 to 9 percent to 9 to 11 percent, which considers economists' range of second-half outcomes. Based on the strong second quarter results and higher anticipated organic revenue growth, we are raising our full-year adjusted EPS guidance range once again from the previous $7.30 to $7.40 to a new range of $7.40 to $7.50. representing growth of 14 to 16% over 2022. This includes a higher adjusted operating margin, now expected to improve at least 150 basis points this year, up from our prior guidance of greater than 125 basis points. Lastly, we're excited to announce our upcoming Investor Day in New York City, Wednesday, November 15th, so please save the day. We'll spend time going deeper on our growth strategies and you'll see how they factor into our outlook when we update our medium-term guidance. It will be a great opportunity to get to know our management team and see some of our products in action. With that, let me turn the call back to Frank.

Thanks, Bob. I'd like to acknowledge our corporate social responsibility programming because it continues to support better outcomes for our clients, shareholders, and associates. You'll find many examples in our annual CSR report published in May. Highlights this quarter include growth in employee resource groups and internal mobility, additional grants for small business under our Back to Business program, and awards and recognition as a top employer for veterans and National Guard members. We're also in the process of submitting data to the Carbon Disclosure Project, or CDP, for the third straight year. Finally, I'd like to leave you with some important perspective from our annual client conference forum, which we host in June. For the first time since the pandemic, we were able to meet with thousands of clients and prospects in person. Together, they represented over 50% of our revenue from financial institution clients. We hosted education sessions on real-time payments, embedded finance, and cloud modernization, and an experience center that showcased key products like CardHub, digital banking, FinZac, and the new Clover kitchen display system. As gratifying as this was, the more meaningful takeaways for me can be summed up in three themes I heard from clients again and again. One, they love our products and they're ready to spend. Our core banking systems, especially Premier for Community Banks and DNA, our most modern cloud-enabled core, are coveted by bank and credit union CIOs. Our smaller clients remain largely untouched by the March banking turmoil, and our larger clients have one eye on the regulatory environment and the other on how we can help them accelerate their growth. Two, they are rooting for our innovations. Small and mid-sized financial institutions see Fiserv as their champion for the latest technology solutions. They're relying on us for their digital and mobile banking, top tier features and card services, and data and analytics. Three, they have noted our improved service. We've already made strong progress in client service with our relationship management model over the past year. Most recently, as an example of our operational excellence initiative this year, we launched a commitment tracker where clients can view the deliverables we've promised and track their progress. It's the first of its kind in the industry for transparency and accountability and financial institutions now have one more reason to choose Fiserv. So to conclude, as we approach the anniversary of our merger exactly four years ago this week, we are gratified that our vision and execution have proven out what results that exceeded expectations. From here, The combination of our investment, innovation, and talented workforce mean the next four years stand to be even better. And now, 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 at any time, you may press star 2. For our first question, we'll go to the line of Dave Toggett from Evercore ISI. Please go ahead.

Thank you. Good morning. Good to see the acceleration in clover revenue growth. You know, noting the long-term plan to continue to accelerate clover revenue growth, if we zoom in a little closer onto the next, let's say, six to 12 months, would you expect this trend to continue?

Yeah, thanks, Dave. I mean, as you've heard us talk over time, we continue to have tons of opportunity, both in the ISV and our day-to-day operating business itself, we expect it to have an acceleration. See us bringing more software into the product set. vertical solutions. We believe we have a long, long opportunity set in front of us. Remember, we haven't gone to the back book at all. That's an opportunity. It's not anywhere in our guide, that back book opportunity. You should expect us also to continue to add services, and that's really driving that penetration. In our vision, and in our visibility, we see a continuing acceleration in clover growth.

Thanks for that. Just as a quick follow-up, the 80 issuers that you enabled for card not present on STAR and Excel, is there any way you can quantify potential volume from those issuers over the next year or so?

Well, you know, I've been super guarded on this item. As I like to say, we're in early innings. You know, we can't get volume without enablement. So step one is enablement. Step two is also, as you heard us talking about, merchants wanting it. And you hear us talk to a few today of large players there. I think as we come closer and we talk at Investor Day, you'll get better visibility of this. It is. It's not even early innings. It's, you know, the first at bat, really. But we have demand. We have issuer compliance with us on it, and we have opportunity in front of us. And fundamentally, I like to say, you know, none of this is in today's set of numbers or the guide that we're talking to you about.

Understood. Thanks so much.

Thank you.

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

Guys, thanks. Frank, I know you touched on the forum, but I'd love to just hear your thoughts on demand from the banks right now in the context of the environment we're going into this quarter, as well as volume trends and just merchant, more importantly, consumer trends into July, what you're seeing across the ecosystem domestically and maybe internationally also.

Let me talk about Forum because, you know, it was our really first post-merger physical forum. We had done virtual ones, but, you know, demand gen at a virtual conference is not very high. The ability for our leadership team to touch thousands of clients, and we made a point of that. Lots of listening sessions. lots of meetings, and that's why I go through those three bullets that, you know, their desire to engage and spend is very high. Their desire to have us be part of their embedded strategy to help them grow their bank is very high. We watch the response to the commitment tracker, the fact that we want to lead the industry and, you know, meeting our commitments. You could hear somebody who was at the conference, like Bank of California, yesterday talk on their merger call about the strategic partnership they have with us. Their CIO is there. I heard from their CEO yesterday and their CIO. So we're part of our client's growth strategy. We love driving it. It's not a core only play. It's everything we bring around it. And you look at the acquisitions we've done, the receptivity to Cardhub through OnDot, and I think you'd find a core competency in this company no longer for tuck-ins, but for acquisitions that we could do at a size and then turn it into a completely different capability. So demand high, super high. Finzac. You know, the amount of time Finzac got attention at Forum was off the charts, and it is the industry leader in current instances in the space it plays. I think relative to the consumer, you know, they have a lot weighing on them now. You know, they have the student debt issue. They have rising interest rates. And you've seen a moderation in volumes. You've heard it, and I think you'll hear it across the industry. Our business mix, July is similar to what we saw in the quarter, but our business mix has allowed us to deliver so many other services, leading with Clover, following with the other value-added services that allows us to be able to – be in the position we are, and we think we're fortunate and blessed.

Hey, Darren, just on forum, as a guy who went to three or four of them pre-mergers of the last time we had in person, the tone of the conversation and the depth of the conversations was quite different this time. Deep innovation, partnership conversations, A change in customer service that is being experienced by our clients and echo that Frank talked about the commitment tracker. Our willingness to be very transparent on what we're doing and why we're doing it and the openness of our solution enabling much wider breadth of capability not only stuff that we bring, and that's increased over time with our payments and FinTech segment, both serving financial institutions, but having those open APIs and the developer studio that we announced a couple of quarters ago. Yeah, they're fine.

I'll just add one other item. Maybe it's two. One is our clients' willingness to want to engage and talk to us about their innovation needs. it can only, I've said for a long time, innovation happens in the client's office, not in a Sunnyvale office. And two, needless to say, when you're in that environment, your pipeline build opportunity in the current, in the future, is very, very strong in the amount of follow-up meetings that are off the charts.

That's great. That's great. Guys, when we just, my quick follow-up is just back to the spread between volume and revenue at Merchant. If we'd just took out the things out of your control, like gas prices and inflation, for example, and we just focused on pricing and software as a penetration, maybe even just focusing on the customers that you're just processing for that have low revenue. How do we think about sustainability of those factors driving better revenue and for how long?

Look, obviously, we believe the opportunity to continue to add value-added services and deepen that penetration. In our merchant investor call, geez, a little more than a year ago now, we talked about clover bass penetration reaching 25% by 2025. We're off to a good start. We continue to focus on that. We continue to develop new capabilities there. And so we see that as an ongoing growth engine. And in terms of pricing, it's about value-add pricing. It's delivering the value to the client and then getting paid for that. So value-add pricing is sustainable. There's certainly an element of a benefit of inflation in a different environment today, but quite frankly, we're much more focused on creating that value for our clients and then being paid for it.

Yeah, and I mean, just in a very simple way of thinking here, we like to add merchants. And we like to add them with multiple products and continue to sell products into our back book also.

Makes sense. Thanks, guys.

Next, we'll go to the line of Tianjin Wang from J.P. Morgan. Please go ahead.

Hey, thanks. Nice results here. Frank, I know you called out LATAM as a standout. You guys have had good results there. I just loved your thoughts on some of the recent M&A in the region with Visa buying Pismo. I think Evertech also bought a a fintech platform? Is there anything going on there that might change things competitively?

Well, you know, I'd go back to our Brazil business, which really is the largest business in Latin America, and the rest of the region keys off of in many ways, was created from scratch, organically. And we built that business organically and then done some strategic things. I mean, you hear us talking about Software Express. That was a very, very small acquisition that we believed could transcend our business throughout Latin America. We added tremendous banking franchises. I mean, you look at what we talked about on Kasha here. We talked about the first leg of that, which was a very large deal that put us in fundamentally every city in Brazil with the leading bank in terms of size and scale. And then we came back because of such a good job that we did, right? They came back and we went to work on what fundamentally are, you know, call it their lottery agencies that BillPay has taken in and came up with a strategy that would take us to 11% of the payments made. So we have great organic capability in Latin America. You know, we brought clover to Argentina. And, you know, we spent a lot of time and the Argentinian platform changed and allowed it to be a dual acquirer as opposed to a single acquirer. And so those are all strategic things that happen there. So I guess what I'm really saying at the core is when we came into Brazil, we were actually, you know, the only U.S. player because everybody had retreated. and we had a deep belief with good leadership on the ground. Remember, we don't run an international business. We run three regional businesses, and then we drop down to a model where country heads drive the P&L there, but we run global business solutions. So I think our model is strong. I think the action in these countries has always been going on, Darren, And I think we like out hand and we believe that these are strategic and will be, you know, opportunities for more attention. So thank you.

Thank you very much. I appreciate that answer. And I know you guys have really upsold Lacatia. So that's a great case study. My quick follow-up then for Bob, just thinking about the raised revenue and the margins, but no raise in the free cash flow. Is this a timing issue given the higher working capital? capitalized software investments in some of these growth areas, and can we expect free cash conversion to improve beyond fiscal 23?

Yeah, Tingen, you hit it right on the head. Obviously, we've raised the revenue guidance, and so that will bring additional working capital. And, of course, as we continue to see opportunities to grow the top line with now nine quarters of consecutive double-digit growth, there's investment opportunity out there. So we continue to feel quite good at delivering the approximately $3.8 billion and see the benefit of that as working capital comes in and gets collected.

Yep, well done. Thank you, guys.

Next, we'll go to the line of Lisa Ellis from Nathan Moffinson. Please go ahead. Hi, good morning. Thanks, guys.

I wanted to ask about carrot. You highlighted carrot was up 6% as reported, 14% excluding the one client roll-off there. Can you give us a little additional color, one, on just how we should be thinking about the scale of carrot within the merchant business, either on sort of a revenue or volume basis? I know it's like a subset of the enterprise segment, which you've disclosed. And then also just elaborate a little bit on competitively how you see this platform's differentiated and whether or not Carrot is, is this mostly like new client sales or is a lot of this migrating existing enterprise clients onto an Omni platform? Just a little bit of elaboration there would be great. Thank you.

Hey, thanks, Lisa. Thank you very much. I think, first of all, think of Carrot as a go-to-market product for both our current book coming over, but that has not been where we've focused the growth effort. Sitting under it is an orchestration layer, which is created as commerce hub. And those first migrations will begin probably in the fourth quarter through the rest of time. And those will be new client migrations, right? This is a customized solution for the client that gives them total flexibility. We think it's a clear double-digit growth engine for us. We think it will scale over time. You should think about it as we talked about over time, what type of e-comm business we have total. Obviously, the enterprise piece is smaller than our total piece that we've talked about to you all. And I think you should think about it as a business that will continue, you know, to be powerful, you know, call it several hundred millions of dollars growing double digits. And so, you know, hopefully that frames the size of the opportunity. We have a large pipeline on it. We're in execution mode, and we think, you know, much like we believe Clover has become an industry leader, we believe Carrot will be an industry leader.

Great. Thank you. And then my follow-up, also just staying within Merchant for a second, if I think back to the deep dive you did on Merchant a year and a half ago, I think you were expecting the processing piece of Merchant to be sort of flattish through 2025. In light of what you called out today, you know, the sort of roll-off of one of, or at least a portion of one of your big processing clients. Does that sort of change that outlook or maybe taking a step back sort of strategically, how are you thinking about the role of your processing business within Merchant going forward as you're seeing such strong growth from Clover? Thank you.

Yeah, I think nothing's changed in our point of view, and maybe we could step back a hair to the day that Stripe left us. Maybe I remember it more. I announced to you that Stripe's leaving as a processing client within a GV, and I think people really thought, wow, but it ended up, you know, fine. If you think back, we continue to add processing clients. You know, in many cases, you know, sometimes we help processing clients grow, and they leave other services with us. So I treat processing like it's that billion-dollar business and it's fundamentally flat and there's been ads and you have large-scale deletes, but it has very little processing revenue impact because of how you all, why I always try to talk us off this volume versus revenue issue because we have a lot of processing volume but it's not the largest part of our business. So I would think about exactly how we present it. We will have volume leave on a quarter, and we add volume back at other points in time. Does that make sense?

Yes.

Thank you. Thanks a lot.

Thank you.

Next, we'll go to the line of Jason Kupferberg from Bank of America. Please go ahead.

Thanks, guys. I just wanted to stay on merchant to start. Can you put a finer point on where you expect merchant revenue growth to land for the full year? And just as we start tuning back half of the year models, how much will this spread between revenue growth and volume growth potentially shrink in Q4 as you lap some of the discrete pricing actions you had taken? Yeah.

Yeah, Jason, from an overall standpoint outlook for the balance or for the full year, we previously guided 10 to 13% for 2023 on an organic basis. Given the strength that we've seen in the first half and an improved outlook for the second half of the year, people still talking about recession, but more people are talking about a recession in 2024. The term soft landing is starting to come into lexicon periodically. I'm not sure we're quite there yet, but we'll see what the Fed does today. But things have certainly modestly improved in terms of the expectation for the second half of the year. So we now think the full year will be in the, call it the 14% to 17% organic growth rate for a merchant business. Continue to see good performance across the gamut with Clover continuing to perform quite well in terms of continuing the value-added service capability and the penetration of VAS into the Clover market. portfolio and some of the things you've heard us talk about both in prepared remarks and earlier in a Q&A around the carrot and international growth providing a nice lift there.

And just on that spread narrowing potentially in Q4, just any modeling help you want to give us on that so we don't get caught off sides there?

In terms of... volume versus revenue spread?

Yeah, exactly, just because some of the discrete pricing actions you took last year, I believe, in Q4.

Yeah, and obviously there's lots of puts and takes, and we continue to try to drive folks into focusing on revenue. There's more and more revenue that is not tied directly to volume. and we've now been showing that quarter in and quarter out. So I think I'll stick to the 14% to 17% full-year outlook and feel pretty good about that.

And just as a follow-up on FinTech, just the visibility on the second half acceleration, I guess, implied in the reiteration of the full-year guide and maybe some color on how you see Q3 versus Q4, because I know the comps are pretty lumpy during the back half of the year. Thank you.

Yeah, definitely. And so we do have good visibility into this space. And to your point, there's lumpy quarters, you may recall, and this will play in the third quarter and the fourth quarter on a comparison this year. We had what was felt by many as a difficult third quarter last year. And during the third quarter earnings call, we reiterated our full year outlook. at 4% to 6% then, fully expected the fourth quarter to rebound given the timing of both periodic revenue and some one-time quote-unquote type non-recurring revenue that we see what we refer to as in-year activity, particularly when clients are implementing. And we obviously have good visibility into the backlog of our implementation cycle. So we feel good about being able to deliver that 4% to 6%. We recovered and delivered last year quite well. That will drive different comparisons. First half was actually a more difficult comparison than second half last year. And then within the second half, third quarter will be an easier compare than fourth quarter. And so you'll see some continued lumpiness there. But we feel good about the overall visibility and our ability to deliver that range. Thanks, Bob.

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

Yeah. Hey, guys. Congrats on four years. Great job. Thanks, Dave. Yeah. I guess one of the key highlights to me, in the court of the margins in Merchant, you had one of the best, probably ever, incremental margins, both year over year and sequentially, about 75% of the revenue growth hit the profit line. And I'm just wondering if... Is that sustainable, and what exactly drove that? You know, what drove such? Is it mixed, or, you know, what was that?

Yeah, we've definitely had a good fall through on that incremental. You know, we saw similar levels fourth quarter of last year and definitely had continuing good fall through over the last several years as we continue to expand margin pretty meaningfully. And it's the benefit of... of overall volume in a scale business, a very scale business, and it's the benefit of productivity, and we continue to drive productivity. Back in 19 and 20, we used the term synergy, which really is a synonym to productivity in many cases, particularly inside the merchant business that didn't have a lot of direct cost synergy as we merged. We drove real productivity, and we continue to do that. So we feel good about margin expansion overall, delivering 150 basis points margin expansion or better this year up from the 125, and we think there's continued opportunity here going forward.

Great, thanks. And just a quick follow-up, Clover revenue about 8% above volume growth, so that's part of the spread. Is that both product and pricing, and is that sustainable too?

Yeah, absolutely. Again, we have a long path of continued growth. penetration of value-added services that very much adds to that quote spread between revenue and volume at 16% this quarter added to 25% in 2025 and as we continue to provide value to our our business customers and allow them to focus on running their business versus you know, handling the payments and all of the ancillary services that are available on our Clover software operating system, that value translates into a pricing opportunity and margin for us.

Gotcha. Thanks, guys. Great job.

Thank you.

Next, we'll go to the line of Brian King from Deutsche Bank. Please go ahead.

Hi, guys, and let me echo a congratulations on the strong results You know, Frank, one of the secrets has been the growth you guys have gotten through acquisitions and value-added services, and especially looking at the merchant segment. What's the pipeline look like for M&A, and are there deals out there you want to make to continue to add and push up revenue growth above volume growth through acquisitions and value-added services?

Well, I mean, you know, we've been looking at our history, whether it's BentoBox, whether it's Finzac, whether it's OnDot, right, Software Express, right? That's why I made my comment. They're no longer tokens. They're more horizontal leverage. We have lots of minority investments that we hang out with. We get to know. I think that's why our success rate is so high. If you went to the people at OnDot, they're so delighted on how they integrated into a mobile banking platform that would have never been where they were headed. They were card control. If you look at BentoBox, their ability to come across – In total, so, you know, we stay close to a lot of startups. We make minority investments in startups. We get to know them, and then we get a really good shot at turning them into way more value. We have a fabulous track record of keeping founders. I'm darn proud of that. They become part of the fabric of the company. So, yeah, I think you should expect us to do more of those as time goes on here.

Okay, great. I know we're running a little long, so I'll pass the line. Thanks.

Thanks, Brian. Thanks, Brian.

Thank you. And our last question comes from Ashwin Srivikar from Citi. Please go ahead.

Thank you. Let me add my congratulations as well on the good quarter. If I can ask, you know, Frank, you mentioned a couple of times over the last few quarters that, you know, the clover isn't necessarily being applied to the back book. Can you talk about the opportunity there? It seems to me the yield that you're increasingly getting from clover as the capability set increases is better and better. So if you could talk through that plan, that would be great.

Yeah, I mean, you know, First of all, I think what you're asking, you broke up a little bit, but I want to make sure I understood. Are you asking about what we're going to do with Clover into the back book?

Yes, that's what I'm asking.

What's the size of that prize? Well, to start at A, when we did our March Investor Day on the merchant business, there was no Clover back book consideration into that. There was consideration... for going into the backwood and selling more value-added services. But you should expect us at some point to strategically lean in, but that's a opportunity in front of us. I think we see the ability to actually go into our current Clover client base and bring more software services. And we think, obviously, that continues driving the spread between volume and revenue growth in Clover. But, you know, I've been on the Clover journey 10 years, back to, you know, maybe it's really headed to 11 plus years if I really counted right. Sorry about that. And that started with a few engineers and a few patents I still believe we're in the super early innings and the amount of real estate we have that we can utilize with Clover and the amount of real estate we have inside our client base that can allow us to bring Clover. But go back to it's fundamentally not in our guide that we gave in last year. And you should expect us to give you a super-duper deep dive on this investor debt.

Great. And then a quick question with regard to the sale of the financial reconciliation business. I might have missed it, but what's the revenue and profit impact of that? I did see the proceeds, $230 million.

Yeah. Let me make a point on that. You know... you will always look at us looking at our strategic position. You know, we believe we're an industry leader. We have to be a top three player. We want to be prudent about capital allocation and where we deploy our internal capital. And for us and our clients, you know, we were not the industry leader. We did a good job for them. It is not a future growth engine of the company, and so that's fundamentally how that decision gets made. And you will continue to see us do this. You saw us do that with Korea. So I want you to have that framework.

And, Ashton, in terms of size, this is a very small business, order of magnitude. It's less than two-tenths of 1% of last year's revenue.

Got it. Okay. Thank you.

Well, thank you, everyone. Thank you for your attention today. Please feel free to reach out to our IR team with any questions. Look forward to talking to you in the future, and have a great day.

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