Fiserv Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 26, 2023

There are 11 speakers on the call.

Operator

As a reminder, today's call is being recorded. At this time, I would like to turn the call over to Julie Sherriell, Senior Vice President of Investor Relations at Fiserv.

Speaker 1

Thank you, and good morning. With me on the call today are Frank Visagiano, our Chairman, President and Chief Executive Officer and Bob Howe, our 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 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.

Speaker 1

You should refer to our earnings release for a discussion of these risk factors. And now, I'll turn the call over to Frank.

Speaker 2

Thank you, Julie, strong performance in revenue and operating income with 2nd quarter organic revenue growth of 10% 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 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.

Speaker 2

With the outperformance in the second quarter, Adjusted operating margin is now forecast to improve at least 150 basis points this year, With year to date adjusted EPS growth of 14% and the improved revenue and operating margin performance, We are raising our full year adjusted EPS guidance by $0.10 to a new range growth of 14% to 16% over 2022. These 2nd quarter results 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.

Speaker 2

I will touch on 5 of these today and then we'll add and elaborate on them at our Investor Day later this year. Bob will provide more details 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% on $267,000,000,000 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. Clover has only begun to scratch the surface on the opportunity in vertical specific solutions, Horizontal value added services and software in international markets.

Speaker 2

In the restaurant vertical, We expect to offer the full suite of value added services and point of sale 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 We are currently in a listen only mode until the question and answer session begins following the presentation. We are currently in a position to reach 35% by 2025, in line with our targets for $10,000,000,000 And total merchant revenue and $3,500,000,000 in Clover revenue by 2025, Implying expected growth acceleration. Following in the footsteps of Clover is Carrot, Our unified commerce offering for omni channel merchants.

Speaker 2

Like Clover, Herrick is an operating system That delivers both payments and experiences, but instead of small businesses, Karat is We recently released our 2 biggest differentiators for Karat, 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 Over time, as with Clover, We'll add more first and third party value added services and payment flows and increase accessibility The 3rd 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 for adoption on Cardhub in the 1st year, which means greater card usage, reduced call center activity and better security, Debit Network and Risk Services. The full integration of Cardhub and Mobility is an investment unique to Vizor because it spans 2 operating segments payments and FinTech, Where others don't participate, our card solution was strengthened by 2 acquisitions, And that's just one example of the many cross selling opportunities specific to Fiserv given our integration work and breadth of capability.

Speaker 2

4th growth area is Land America. Although we haven't spoken in-depth about our international operations, Land 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. The region It's about 6% of total company adjusted revenue and in merchant acceptance it's 10% 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.

Speaker 2

This is where we help merchants navigate At a discounted rate, businesses get better liquidity and we receive a spread that carries low risk. Other parts of our McCann business show strong momentum as well. We will be expanding our relationship With our partner, Kasha Economica Federal, enabling card payment There are more than 13,000 bill payment agencies throughout Brazil. Firestore's solution will allow agencies to extend bill payment options from only cash 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.

Speaker 2

Utilizing our 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 are excited for the opportunities presented by PIX and it has already exceeded total cord sales volume in Brazil in a 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 3 pronged strategy is to Wynne Digital First Banks provide next generation core banking to our existing FI clients And they had larger banks as clients often starting as they launch new products in the cloud.

Speaker 2

Another opportunity in FinTech that's coming together now actually started many years ago. We were an initial investor in FinZac 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 Embedded Finance will add to the many payment and banking solutions that merchants want to offer And we already provide. Here are some examples.

Speaker 2

We deliver stored value and gift card solutions FinTech is the single ledger and issuing platform for products like debit cards and DBAs. And from here, we are investing in the connectivity between platforms to create a more seamless experience for our clients and their end customers. Now, let me turn the discussion over to Bob

Speaker 3

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 4. As Frank said, our 2nd quarter was a very good one and marked our 9th 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%.

Speaker 3

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. In the near future, inflation in Argentina may ease, but it's likely to stay persistently high relative Our broad franchise, new lines of business and strong growth in the rest of the region should balance out any single country's 2nd quarter total company adjusted revenue grew 6% to $4,500,000,000 And adjusted operating income grew 16 percent to $1,600,000,000 resulting in an adjusted operating margin of 30 point 5 percent, an increase of 300 basis points versus the prior year. For the first half of the year, Adjusted revenue grew 8% to $8,800,000,000 and adjusted operating income increased 16% to $3,100,000,000 resulting in 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.

Speaker 3

Year to date through June 30, 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 $608,000,000 for the quarter $1,500,000,000 for the 1st 6 months of the year, up 16% year Our free cash flow remains on track to reach $3,800,000,000 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 5. Organic revenue growth in the Merchant Acceptance segment was Strong 14% in the quarter and 16% year to date. Adjusted revenue growth in the quarter was 9% 10% For the first half, merchant volume and transactions grew 1% compared to prior year.

Speaker 3

This slower volume performance reflects 2 temporary factors. First is the decline in retail fuel prices of 27% on average in the quarter, which creates a tough comparison for petro 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 Petro and processing only clients have very little impact on the revenue Since Petro clients typically pay per transaction and processing carries very low fees.

Speaker 3

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.

Speaker 3

Clover posted a strong 23% revenue growth for the quarter and 22% year to date. Quarterly Clover GPV was $67,000,000,000 $267,000,000,000 on an annualized basis, up 15%. Value added services penetration was 16%, 1 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 PayFac as well With the signing of Waystar and Paytheory during the Q2.

Speaker 3

Clover Sport added a relationship with a large service provider for Brown Stadium, other venues. Carrot, our omni commerce operating system for enterprise clients grew revenue 6% Excluding the loss of a Latin America processing client that began taking its business in house, Caret 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, with their Dunkin', Baskin Robbins and Sonic Brands.

Speaker 3

The agreement will add several 1,000 Additional restaurant locations to our processing portfolio. Adjusted operating income in the Acceptance segment increased 21% to $718,000,000,000 in the quarter and adjusted operating margin was up 3 50 basis points to 34.7%. Year to date, adjusted operating income improved 20 percent to $1,300,000,000 and adjusted operating margin grew 280 basis points to 32.7%. Turning to slide 6, the Payments and Networks 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 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.

Speaker 3

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-twenty 22. Still, we anticipate the full year organic revenue growth rate to be toward the high end of our 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. 1st, July 1 was the effective date of the Fed's final rule clarifying parts of Regulation II To make explicit that at least 2 debit network routing options are required for card non present transactions. For our Star and Excel debit networks, which have been supporting CNP for years, this led to more than 80 of our card issuing clients enabling Adding active cards for e commerce transactions.

Speaker 3

This is a growth opportunity that we did not previously have. We also won several large e commerce merchants as clients including in the Q2 Lyft, ADT and T Mobile. Last week, the Fed launched its real time payment system FedNow. So we are now live with 6 banks in the pilot phase 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.

Speaker 3

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. Was up 360 basis points to 47.4% in the quarter, driven by our strong revenue growth and productivity. Financial Technologies segment declined 1% in the 2nd quarter, resulting in 1% growth for the first half. High periodic revenue in the Q2 of 2022 drove a difficult comparison this quarter, creating a 3 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.

Speaker 3

Adjusted operating income was up 1% in the quarter to $285,000,000 And up 2% to $565,000,000 year to date. Adjusted operating margin in the segment increased 130 basis points 36.3% in the quarter. For the first half, the segment's adjusted operating margin grew 60 basis points to 35 We added 10 new core account processing clients in the quarter, including 4 wins for DNA, our market recognized Leading modern core banking platform for banks and credit unions. FinTech showcased its extensibility as an enabler of Embedded Finance with a When and Pay Theory. This payment facilitator serves the education and the healthcare sectors and plans to enable a suite of Banking as a Service and Money Movement capabilities for its vertical SaaS partners.

Speaker 3

We are integrating FinTech 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 $142,000,000 in the quarter $264,000,000 year to date. 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 with 19.8% for the first half.

Speaker 3

We continue to expect the adjusted effective tax rate would be approximately 20% for the full year. Total outstanding debt was $23,200,000,000 on June 30th And the debt to adjusted EBITDA ratio was 2.9 times. During the Q2, we issued €800,000,000 of 8 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 8,600,000 shares for $1,000,000,000 and 21,800,000 shares for $2,500,000,000 over the last 6 months.

Speaker 3

We had 70,100,000 shares remaining authorized for repurchase at the end of the quarter. Products to Trintech for roughly $230,000,000 We are fully committed to our long standing disciplined 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 8, 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% to 9% to 11%, which considers Economist 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.

Speaker 3

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 15. 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.

Speaker 3

With that, let me turn the call back to Frank.

Speaker 2

Thanks, Bob. 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 Finally, I'd like to leave you with some important perspective from our annual client conference forum, which we hosted in June. For the first time since the pandemic, we were able to meet with thousands of clients and prospects in person. Together, they represent over 50% of our revenue from financial institution clients.

Speaker 2

We hosted education sessions on real time payments, embedded finance and cloud modernization And the new Clover Kitchen display system, as gratifying as this was, the more meaningful takeaways They love our products and are ready to spend. Our core banking systems, especially Premier for Community Banks and DNA, our most modern cloud enabled core are 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. 2, they are rooting for our innovations. Small and midsize financial institutions see Pfizer as their champion for the latest technology solutions.

Speaker 2

They're relying on us for their digital and mobile banking, top tier features and card services and data and analytics. 3, 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 So to conclude, as we approach the anniversary of our merger exactly 4 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 4 years stand to be even better.

Speaker 2

And now operator, please open the line

Operator

For our first question, we'll go to the line of Dave Togut from Evercore ISI. Please go ahead.

Speaker 4

Thank you. Good morning. Good to See the acceleration in Clover revenue growth. Noting the long term plan to continue to accelerate Clover revenue growth, If we zoom in a little closer on to the next, let's say, 6 to 12 months, would you expect this trend to continue?

Speaker 2

Yes. 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. CS bringing more software into the product set, vertical solutions. We believe We have a long, long opportunity set in front of us.

Speaker 2

Remember, we haven't gone to the back book 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. So in our vision And in our visibility, we see a continued acceleration in global growth.

Speaker 4

Thanks for that. 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?

Speaker 2

Well, I've been super guarded And on this item, as I like to say, we're in early innings. We couldn't get volume without enablement. So step 1 is enablement. Step 2 is also as you heard us talking about merchants wanting it and you hear us talk to a 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.

Speaker 2

It's 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, none of this is in today's set of numbers or the guide that we're

Speaker 4

Understood. Thanks so much.

Speaker 2

Thank you.

Operator

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

Speaker 2

Guys, thanks. Frank, I know you touched on the forum, but I'd love to

Speaker 5

just hear your thoughts on demand from the banks right now and just The context and the environment we're in going to 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?

Speaker 2

Let me talk about Forum because It was really first post merger physical forum. We had done virtual ones, but 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 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 We watch the response to the commitment tracker.

Speaker 2

The fact that we want to lead the industry And we have commitments. You could hear somebody who is 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 So we're part of our clients' growth strategy. We love driving it.

Speaker 2

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 On Dot 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 Hi, super high. FinZac, the amount of time FinZac got attention at was off the charts and it is the industry leader in current instances In a space it plays.

Speaker 2

I think relative to the consumer, they have a lot weighing They have the student debt issue. They have rising interest rates. And you've We'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.

Speaker 2

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.

Speaker 3

Hey, Darrin. Just a As the guidance went to 3 or 4 of them pre mergers, so the last time we had in person, The tone of the conversation and the depth of the conversations was quite different this time. Innovation, partnership conversations, 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,

Speaker 2

Yes, there's 5. I'll just add one other item, maybe it's 2. One is, our clients' willingness to want to engage and talk to us about their innovation needs. It can only have said for a long time, innovation happens in the client's office, Not in our Sunnyvale office. And 2, needless to say, when you're in that environment, Your pipeline build opportunity in the current and the future is very, very strong and the amount of follow-up meetings that are off the charts.

Speaker 5

That's great. That's great. Guys, when we just my quick follow-up is just back to the spread between volume and revenue and merchant. If we Just took out the things out of your control like gas prices and process and the like inflation for example and we just focused on pricing and software As a penetration, maybe even just focusing on the customers that are you're just processing for that have low revenue. How do we think about

Speaker 6

sustainability of those factors driving better

Speaker 5

revenue for and for how long? Driving better revenue for and for how long?

Speaker 3

Look, obviously, we believe the opportunity to continue to add Value added services and deepen that penetration. In our merchant investor call, jeez, a little more than a year ago now, we talked about Clover VAS penetration reaching 25% by 2025. We're off to a good start. We continue to focus on that. We can continue to develop new capabilities there.

Speaker 3

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 we're quite frankly, we're much more focused on creating that value for our clients and then being paid for it.

Speaker 2

Yes. I mean just 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.

Speaker 5

Makes sense. Thanks guys.

Operator

Next, we'll go to the line of Tien Tsin Huang from JPMorgan. Please go ahead.

Speaker 7

Hey, thanks. Nice results here, Frank. I I know you called out LatAm as a standout. You guys have had good results there. I'm just love to hear your thoughts on some of the recent M and A in the region with Visa buying Bismo.

Speaker 7

I think EVERTEC also bought The FinTech platform, is there anything going on there that might change things competitively?

Speaker 2

Well, I'd go back to our Brazil business, which really It's the largest business in Latin America and the rest of the region keys off of, in In many ways, was created from scratch organically. And we built that business organically and then done some Some strategic things, I mean, you hear us talking about Software Express. That was a very, very small acquisition that we believe could Transcend our business throughout Latin America. We added tremendous Banking franchises, I mean, you look at what we talked about on Kache here, right? 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.

Speaker 2

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 Our call it their lottery agencies that Bill Pay has taken it and came up with a Strategy that would take us to 11% of the payments made. So we have great organic We brought Clover to Argentina and we spent a lot of time and the platform change that 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 the only U.

Speaker 2

S. Player because everybody had retreated. And we had a deep belief with good leadership on the ground would affect remember, we don't run an international business, we run 3 regional businesses and Then we drop down to a model where country hedge drives the P and L there, but we run global business solutions. So I think our model is strong. I think this the action in these countries has always been going on, Darren.

Speaker 2

And I think we like outhand and we believe that these are strategic and will be Opportunities for more, Tien Tsin. So thank you. Thank you

Speaker 7

very much. No, I appreciate that answer. And I know you guys have really upsold 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 and CapEx software investments in some of these growth areas?

Speaker 7

And can we expect free cash conversion to improve beyond fiscal 2023.

Speaker 3

Yes, Tien Tsin, 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 9 quarters of Executive double digit growth, there's investment opportunity out there. So we continue to feel quite good at delivering the approximately $3,800,000,000 and I see the benefit of that as working capital comes in and gets collected.

Speaker 7

Yes, well done. Thank you, guys.

Operator

Next, we'll go to the line of Lisa Ellis from Nathan Moffenson. Please go ahead.

Speaker 6

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 Carat within the 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.

Speaker 6

And then also just elaborate a little bit on competitively how you see this platform is differentiated and whether or not Cara, 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.

Speaker 2

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 And those first migrations will begin probably in the Q4 through And those will be new client migrations, right? This is a customized solution For the client, that gives them total flexibility.

Speaker 2

I mean, look, we think it's a double digit clear double digit growth engine We think it will scale over time. You should think about it as we We've 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 To be powerful, call it several 100,000,000 of dollars growing double digits. And so hopefully that frames the size of the opportunity.

Speaker 2

We have a large pipeline on it. We're in execution mode and we think much like we believe Clover has become an industry leader, we believe Carrot will be the industry

Speaker 6

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, the sort of roll off of 1 of or at least The 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.

Speaker 2

Yes. I think Nothing has 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 now see that Stripe's leaving as a processing client within a JV. And I think people really thought, wow, but it ended up fine.

Speaker 2

If you think back, We continue to add processing clients. In many cases, sometimes We help processing clients grow and they leave other services with us. So I treat processing like it's that $1,000,000,000 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.

Speaker 2

Does that make sense?

Speaker 6

Yes. Thank you. Thanks a lot.

Speaker 2

Thank you.

Operator

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

Speaker 8

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?

Speaker 3

Yes, 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 are 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.

Speaker 3

So we now think the full year will be in the call it The 14% to 17% organic growth rate for our merchant business, continue to see good performance across The gamut with Clover continues to perform quite well in terms of continuing the Value added service capability and the penetration of VaaS into the COBRA portfolio and some of the things you've heard us talk about both in the prepared remarks and In the Q and A around the carats and international growth providing a nice lift there.

Speaker 8

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?

Speaker 3

In terms of volume versus revenue spread?

Speaker 8

Yes, exactly. Just because some of the discrete pricing actions you took Last year, I believe in Q4.

Speaker 3

Yes. 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 our 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.

Speaker 8

And just as a follow-up on FinTech, just the visibility on the second half acceleration, I guess, implied in the reiteration 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.

Speaker 3

Yes, 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 Q3 and the Q4 on a comparison this year, we had what was felt by many as a difficult Q3 last And during the Q3 earnings call, we reiterated our full year outlook at 4% to 6% then, fully expected the 4th quarter To rebound given the timing of both periodic revenue and some one time type non recurring revenue that we We refer to as in year activity, particularly when clients are implementing and we obviously have good visibility into the backlog of our implementation 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.

Speaker 3

First half was actually a more difficult comparison than second half But we feel good about the overall visibility and our ability to deliver that range.

Speaker 2

Thanks, Bob.

Operator

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

Speaker 9

Yes. Hey, guys. Congrats on 4 years. Great job.

Speaker 10

Thanks, Dave.

Speaker 2

Yes, I guess one

Speaker 9

of the key highlights to me in the quarter, 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 what drove such is it mix or what was

Speaker 3

Yes. We definitely had a good fall through on that incremental. We saw similar levels Q4 of last year And definitely had, continuing good fall through, over the last several years as we continue to expand margin pretty meaningfully. It's the benefit of overall volume and a scaled business, a very scaled business And it's the benefit of productivity and we continue to drive productivity. Back in 2019 2020, 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.

Speaker 3

So we feel good about margin Expansion overall, delivering 150 basis points margin expansion were better this year, up from the 125, And we think there's continued opportunity here going forward.

Speaker 9

Great. Thanks. And just 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?

Speaker 3

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

Speaker 9

Got you. Thanks guys. Great job.

Speaker 2

Thank you.

Operator

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

Speaker 8

Hi, guys. And let me echo congratulations on the strong results. 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 and 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?

Speaker 2

Well, I mean, we've been looking at our history, whether it's BentoBucks, whether it's FinZac, whether it's On Dot, right, Software Express, Right. That's why I made my comment. They're no longer tuck ins. They're more horizontal leverage. We have lots of minority investments that we hang out with.

Speaker 2

We get to know. I think that's why our success Trade is so high. If you went to the people at On Dot, 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 any. If you look at BentoBox, their ability to come across in total.

Speaker 2

So we stay close to a lot of startups. We make minority investments in start ups. We get to know them and then we get a really good shot Turning them into way more value. We have a fabulous track record of keeping founders. I'm darn Proud of that.

Speaker 2

They become part of the fabric of the company. So yes, I think you should expect us to do more of those

Speaker 8

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

Speaker 2

Thanks, Brian. Thanks, Brian.

Operator

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

Speaker 10

Thank you. Let me add my congratulations as well on the good quarter. If I can ask, Frank, you mentioned a couple of times over the last few quarters, Chlor isn't necessarily being applied to the back book. Can you talk about the opportunity There seems to me the yield that you're increasingly getting from Clover as the capability set increases

Speaker 2

Yes. I mean, first of all, I think what you're asking, but you broke up a little bit, but I want to make sure I understood. You're asking about What we're going to do at Clover into the back book?

Speaker 10

Yes. That's what I'm asking.

Speaker 2

What's the size of that price? What's the size of that, Bryce? Well, start at A, when we did our March Investor Day on the merchant There was no Clover back book consideration into that. There was Consideration from going into the back foot and selling more value added services, but you should expect us At some point to strategically lean in, but that's an 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.

Speaker 2

And we think, obviously, that continues driving the Spread between volume and revenue growth in Clover. I've been on the Clover Journey 10 years, back to maybe it's really headed to 11 plus years, But really, I 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.

Speaker 2

But go back to it's fundamentally not in our guide that we gave And you should expect us to give you a super duper deep dive on this Investor Day.

Speaker 10

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, dollars 230,000,000

Speaker 2

Yes. Let me make a point on that. You will always look at us looking at our strategic position. We believe we're an industry leader. We have to be a top 3 player.

Speaker 2

We want to be prudent about capital allocation and where we deploy our internal capital. And for us and our clients, 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, right?

Speaker 2

And you will continue to see us do this. So I want you to have that framework.

Speaker 3

And Ashwin, in terms of size, and this is A very small business, order of magnitude, it's less than 2 tenths of 1% of last year's revenue.

Speaker 10

Got it. Okay. Thank you.

Speaker 2

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.

Operator

Thank you all for participating in today's

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Earnings Conference Call
Fiserv Q2 2023
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