Welcome to the Fiserv Third Quarter 2022 Quarter Earnings Conference Call. [Operator Instructions] As a reminder, today's call is being recorded. At this time, I will turn the call over to Julie Chariell, Senior Vice President of Investor Relations at Fiserv.

Thank you, and good morning. With me on the call today are Frank Bisignano, our Chairman, President and Chief Executive Officer; and Bob Hau, our Chief Financial Officer. Our earnings release and supplemental materials for the quarter are available on the Investor Relations section of fiserv.com. Please refer to these materials for an explanation of the non-GAAP financial measures discussed on this call, along with a reconciliation of those measures to the nearest applicable GAAP measures. Unless otherwise stated, performance references are year-over-year comparisons. Our remarks today will include forward-looking statements about, among other matters, expected operating and financial results and strategic initiatives. Forward-looking statements may differ materially from actual results and are subject to a number of risks and uncertainties. You should refer to our earnings release for a discussion of these risk factors. And now over to Frank.

Thank you, Julie. Before I begin, let me again welcome Julie to the team. As we announced last quarter, she moved to a new role as the Head of Strategy. Julie joins us from Bloomberg, where she was a senior equity analyst covering the fintech and payment space and has extensive experience as a sell-side analyst and investment product manager. Welcome to your first Fiserv earnings call, Julie. Turning to the results. Overall, I am very pleased with yet another quarter of double-digit growth in both organic revenue and adjusted EPS. We continue to demonstrate the strength of our client base, depth of our partnerships and resilience of our businesses. Consumers activated more cards, continue to spend and were issued new credit. Merchants opened up new businesses, offered better experiences and took advantage of more value-added services. Financial institutions upgraded their systems and invested in new products to better compete and capture efficiencies. In the early days of the fourth quarter, we are seeing the same trends continue. We grew adjusted revenue 8% with organic revenue up 11%, at the top end of our full year 2022 guidance range. Adjusted operating margin of 35.2% was up 100 basis points year-over-year, expanded 170 basis points sequentially and was consistent with our internal modeling. Adjusted EPS of $1.63 included an $0.08 foreign exchange headwind versus last year, which is $0.03 more than we anticipated 90 days ago. As we look forward, pressure remained from inflation, a still tight [ global ] market and geopolitical uncertainty. But as a global and diverse business, we are well prepared to capitalize in any market environment. Based on continued momentum, strong execution and near-term visibility, we are raising our revenue guidance to the high end of the range for this year to 11% organic and raising…

Thank you, Frank, and good morning, everyone. If you're following along on our slides, I will cover additional detail on total company and segment performance, starting with our financial metrics and trends on Slide 4. Third quarter results showed continued strength and the benefit of our broad portfolio. Total company organic revenue growth was 11% in the quarter with continued momentum in Merchant Acceptance, a nice step-up in growth in our Payments and Network segment and stable performance in the Fintech segment, considering the impact of some timing of revenue quarter-to-quarter. Year-to-date, total company organic revenue grew 11%, led by the Merchant Acceptance segment, which grew 17%. Third quarter total company adjusted revenue grew 8% to $4.3 billion, and adjusted operating income grew 11% to $1.5 billion, resulting in an adjusted operating margin of 35.2%, an increase of 100 basis points versus the prior year. As Frank mentioned, margins improved sequentially 170 basis points from the second quarter on 1% higher revenue and 2% lower expenses. For the first 9 months of the year, adjusted revenue grew 9% to $12.4 billion, and adjusted operating income increased 10% to $4.2 billion, resulting in an adjusted operating margin of 33.6%, 40 basis points ahead of the prior year period. The adjusted operating margin for the quarter was impacted by several factors, including, first, investments related to new acquisitions, including BentoBox and Finxact; second, the significant strengthening of the U.S. dollar, particularly in September; and third, the net impact of inflation on our revenue, offset by costs for both labor and material. As we've previously said, we expect significant adjusted operating margin expansion in the fourth quarter. We have 4 factors driving this improvement. First, the benefits of the final ramp-down of prior integration expenses and resulting productivity benefits. Second, in the latter…

Thanks, Bob. Let me wrap up with an update about progress on ESG and our people platform. Since the release of our most recent CSR report in the second quarter, we have seen positive momentum in our ESG ratings at MSCI, Refinitiv and S&P CSA and significant increases in our ISS quality scores. We have submitted our CDP survey for the second year. These improvements are attributable to our improved ESG programming, framework alignment and our 2021 CSR report. As we look out to what is best described as an uncertain year ahead, Fiserv is well positioned for the long haul. We've made the investments in product, people and infrastructure that will allow us to continue as an industry leader, driving better top line growth and productivity. We've talked about some of the product innovation and TAM expansion that we've achieved. So let me take a minute to discuss our people. We're grateful for our dedicated workforce, especially our essential workers who are present throughout the pandemic. We recognize their commitment both through compensation and career advancement while supporting them by upgrading and expanding our infrastructure. This made it particularly gratifying when we were ranked #6 of the top 250 largest U.S. public companies on the American Opportunity Index earlier this month. The index measures how well these companies foster economic mobility based on real-world outcomes for employees, particularly those without a college degree. This index is one indicator that shows we are well positioned to compete for talent. Our hybrid workforce strategy is greatly enhanced by world-class facilities and colocated workforces. We began consolidating around large modern hubs and closed over 70 facilities in the past 2 years. This morning, we announced our new location for our global headquarters in Downtown Milwaukee. Last month, we opened the largest fintech hub on the East Coast, our innovation center in Berkeley Heights, New Jersey, where we anticipate LEED Platinum certification. This followed a major upgrade of both our production and office facilities in Omaha, Nebraska. We are opening new and expanded facilities in Dublin, Ireland and Sao Paulo, Brazil and are working towards LEED certification in these facilities after achieving LEED Gold status in New York. While this spending will ease in 2023, we are already reaping the rewards through lower operating expenses and increased productivity. I will close by thanking our more than 40,000 hardworking Fiserv associates around the world for working relentlessly to serve our clients and you, our shareholders. With that, operator, please open the line for questions.

[Operator Instructions] Our first question will come from Lisa Ellis from MoffettNathanson.

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

Yes. Lisa, thank you. So I guess a couple of things. One, in terms of the adjustment in our outlook for the full year, I think I would point to a couple of things. One is we continue to see good opportunities to invest for future growth. Obviously, we're seeing an impact in the current year from an 11% growth rate that puts pressure on working capital. As you grow the top line, you have more receivables, but we're also carrying more inventory. One of the things that has persisted longer than we had anticipated just 90 days ago is the supply chain issues/problems in China around getting point-of-sale devices, et cetera. And we continue to ensure that we have availability of product and can support our client base with having a product, point-of-sale product. COVID shutdowns in China are actually going on right now, and so protecting ourselves there. We also have some new geographies and new clients that are bringing on Clover and other point-of-sale devices. So we continue to invest in that. You see our capital spending around new product development, software cap. We continue to see good opportunities, so we're driving for sustainable, very high single, perhaps even low double-digit growth investments around the acquisitions of Finxact, Ondot, BentoBox. We've made the decision to keep investing and therefore revised our free cash flow. In terms of long-term sustainability, I'm not prepared to give guidance for 2023. But we've certainly seen in the last 2 years, '21 and '22, a pretty significant step function change in our growth rate, 11% last year, which granted is against the COVID adjusted prior year. But 11% this year, bending that curve, so to speak, from companies that were mid-single digits and perhaps generously mid-single digits pre merger, now double digits. You're going to see something less than 100% free cash flow going forward, I think.

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

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

Next, we'll go to the line of David Togut from Evercore ISI.

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

Sure, David. So a couple of things from a margin standpoint. If you recall, actually going back to our first quarter earnings call, which we reiterated in the second earning -- second quarter earnings. And we've expected since the beginning of the year that our margin would accelerate into the second half of the year. That acceleration was largely driven by carryover integration spending that we used to back in 2021, just out as merger and integration spending. Our company policy says you do that through the end of last year. And any projects that are continuing no longer get adjusted out of our earnings, and so we had some cost flow into the P&L at the beginning of the year that we knew those projects were going to finish up in the first half, first 9 months of the year. And so that investment, that integration spending would taper off through the year and, in particular, be mostly out by the end of the third quarter. So you see improvement in investment or lower spending on those projects. Plus you get the benefit of the projects being done, i.e., those generate a return, generate productivity. And so you get a double bang in the second half of the year. And in particular, as those projects again have largely been completed at the end of the third quarter, we'll see that come down in Q4 and get the productivity. The second piece of growth in margin is basic productivity, i.e., nonmerger-related nonintegration, what we used to refer to as operational excellence rolling through the business. Some of that is very basic productivity Six Sigma leaning out your spending sort of a thing. Some of it is the fact that we've now reopened our offices, and our associate base is returning…

Just a quick follow-up on the Clover revenue growth, which stepped down a little bit to 19% but still well above market growth. What's the path to get back on the 5-year growth plan of 27% that you laid out at the March Merchant Acceptance deep dive?

Sure, David. I guess the fastest thing to think about or the largest thing to think about is the 19% number that we showed in our prepared remarks and in the slides. That's a reported number. Obviously, FX had a pretty significant impact in the entire company, actually in all companies in the third quarter. If you were to currency adjust that number, you'll probably pick up 3 points, maybe even 4 points of growth. Plus, as you recall, in the first quarter of this year, we divested a small joint venture that we had. It was a minority equity interest actually technically, generated about $175 million of cash. So on an organic basis, that Clover growth is actually more in line with the 25% that we've talked about as part of our long-range expectation of growing Clover to at least $3.5 billion.

Yes, I would add there. We talked about $3.5 billion in 2025. We talked about a 9% to 12% for the segment. We're in normal compares, we're at 14% right now for the segment. I also think what we're doing on value-added services and they don't keep inching up and moving up and just saw it's a key driver here. We continue to grow the merchant base, grow the LTV , growth the ARPU, and we feel highly confident in exactly what we said in March. And I think it's playing out right now exactly as planned. Our sequential growth has been very high and I think so. If you look at it ex what Bob talked about and just look at the business case and the driving of it, our confidence level is as high as it was in March, and we're seeing it play out, and the value-added services will continue to grow quarter-by-quarter.

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

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

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

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

Yes. I mean we had talked about this. The wins, the onboarding of the wins, they're growing. I'd like to frequently go back to Investor Day where we talked about this incredible pipeline, which at the time felt like it was a once in a lifetime event, meaning you win 3 of the top 25 issuers. And that part was a onetime event. But that pipeline is the same size and shape as it was back in 2020. And the building out of health care and government verticals, investment in education, all bode very well for performing at the higher end of that guidance range as we go forward here. I'm not giving guidance for anything other than what we're talking about in '22. But the pipeline is very strong. And you hear us talking about the California win. But the reality is we've had multiple government wins with our ability to distribute payments in a card-based fashion and having probably the best capability in the industry around that.

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

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

Yes. David, I'd be a little careful. I have to run through all of your math. You've got some broad assumptions on the sequential growth or the growth year-over-year in fourth quarter. Ultimately, the simple or straight answer is, look, we see some good cost improvement third quarter to fourth quarter. As I talked about earlier, the ramp-down of these integration projects as well as the benefit of the projects driving productivity into the organization now that we've got integration largely behind us, maintaining the productivity model that you've seen from this company for a lot of years. And certainly, incremental revenue drops to the bottom line. The growth in Payments certainly helps. Obviously, that's our highest-margin business, and continuing to see good growth in SMB also helps. So we feel good about the quote, to use a 4-letter word mix, in the fourth quarter. We see good opportunity or a good line of sight towards cost reduction/productivity, divesting a couple of these small nonstrategic units that are low margin and getting that scale really helps into the fourth quarter.

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

No. Obviously, we put up a 7% Q2 number. I would not anticipate us being north of 7% in fourth quarter. We do feel good about the growth of the Fintech segment. If you look over the last several years, there's variation quarter-to-quarter. Some of that is the periodic revenue or license and term fees. We have the additional impact in third quarter of this year for these nonrecurring one-timer type. I hate to use to as one-timer because they're regular. As contracts renew, we get short-term or immediate-term revenue, and some of that's already slipped into fourth quarter, i.e., we started to see some of that rebounds. We feel good about, number one, we're already in the 4% to 6% range, and we'll close the year out that way.

Yes. I'll just say I thought you had asked about our new Milwaukee headquarters.

Yes, nice. Yes, great.

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

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

Tien-Tsin, I guess, first, yes, obviously, we've been buying back shares. We are always in the market. Every once in a while there's some ebbs and flows, and we've been -- we were strong in the third quarter and certainly strong so far in fourth quarter. I feel good about our ability to continue to buy back shares. It's a balanced capital deployment approach that we've always had and continue to have around investing in organic growth. If you look at that new slide, we added a significant increase in CapEx, which is obviously putting pressure on free cash flow. But we did that while also paying down some debt or delevering down to our targeted leverage rate that gives us lots of flexibility to ultimately do both M&A and share purchase. I see it obviously, as a bit of a trade-off. If I spend $1 in M&A, I don't have that dollar available on -- for share repurchase. But we have good capacity to do both. We look at acquisitions through the lens of a share repurchase. We're certainly interested in continuing to add to our portfolio. As I've said in the past, I don't wake up in the morning saying, "Geez, I really need to go get x capability given the breadth of our existing portfolio." There are lots of things that we can add, whether it's NexTable that we did recently or it's BentoBox or Finxact. We did all of that while also buying back a lot of shares.

Yes. No, I think I'd just say that we have an appetite. You see our appetite across the segments. We are highly selective, Bento, Finxact. And then we come back and invest heavily, Ondot, in those as we had done on Clover. So we feel good about our balanced approach. I think you can see that, obviously, we invest in the business organically or invest in the business inorganically. And then we feel good about buying back of stock and returning that to shareholders too. You should imagine that we're going to have that continued balance mentality. And obviously, we like to integrate companies and grow them.

Good. My quick follow-up, if you don't mind. Just on the -- you mentioned STAR and Accel supporting card-not-present transactions. I know I've asked about this in the past, and I hear you that you want to wait for how issuers want to implement the new rule in July. But the readiness for STAR and Accel, is there still a lot of investment required to attack that? And I guess, I'll ask how aggressive will Fiserv be in that pursuit.

I'd say readiness is high. I think we made a comment that they are designed to be dual network capable. And our ability to execute, we think, is very high. Obviously, we always felt that this would create more competition, and we like that. Obviously, we weren't competing for those transactions before. And you should expect us to behave like we do in every other business line, which is try to grow at the best possible rate. So I think we're in the planning stage. Obviously, it is up to issuers. But we think that this was a very good outcome, and we continue to expect ourselves to participate as we would given our size and scale and the nature of the business we have.

Our last question will come from Jason Kupferberg from Bank of America.

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

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

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

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

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

Thank you all for participating in the Fiserv Third Quarter 2022 Earnings Conference Call. That concludes today's call. Please disconnect at this time, and have a great rest of your day.