Welcome to the Fiserv 2021 Second 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 Shub Mukherjee, Senior Vice President of Investor Relations at Fiserv.

Thank you, and good morning. With me on the call today are Frank Bisignano, our 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. Our remarks today will include forward-looking statements about, among other matters, the impact of the COVID-19 pandemic on our business, expected operating and financial results, strategic initiatives and expected benefits and synergies from the First Data acquisition. Forward-looking statements may differ materially from actual results and are subject to a number of risks and uncertainties. You should refer to our earnings release for a discussion of these risk factors. Please refer to our earnings release and supplemental materials for today's call for an explanation of the non-GAAP financial measures discussed in this call, along with the reconciliation of those measures to the nearest applicable GAAP measures. Unless otherwise stated, performance references are year-over-year comparisons, and all references to internal revenue growth are on a constant currency basis. And now I'll turn the call over to Frank.

Thank you, Shub. Second quarter was a very strong quarter for us across the company. Total company adjusted revenue grew 20%. Adjusted operating margin grew 510 basis points, resulting in adjusted operating income growth of 41%. Adjusted EPS grew 47% to $1.37. Free cash flow in the quarter was in line with last year, just under $900 million, including the impact of a diminished NOL. Second quarter sales were up 31% with growth across the business. Our strong second quarter was driven by a combination of continued economic recovery and strong execution of our business strategy. On the macroeconomic side, we saw continued recovery in the US with uneven recovery in other parts of the world. The shift to digital commerce drove consumer demand for seamless experiences across channels. Amidst these trends, we executed on our strategies to continue to win business and grow share. We serve as the operating system for commerce across our client base, ranging from micro merchants to the world's largest corporations, financial institutions, banks and credit unions, fintechs and governments. This enables us to focus not only on growth at our core but also on new services, business models and adjacencies. Given the strong results to date and our solid pipeline, we are raising our outlook range for internal revenue growth and now expect 10% to 12% growth for 2021 from 9% to 12% previously. Additionally, we are raising our adjusted EPS full year outlook and now expect a range of $5.50 to $5.60, up from $5.35 to $5.50 previously. The increased adjusted EPS guidance outlook represents a 24% to 27% growth versus last year. Drilling down to the business segments, the quarter was led by our Merchant Acceptance segment, which posted internal revenue growth of 41% year-over-year. Normalizing for the year-ago comps, the segment…

Thank you, Frank, and good morning, everyone. If you're following along on our slides, I will cover some of the detail on each of our segments, starting with Slide 4. We had a very strong second quarter, thanks to our broad portfolio of products and services as well as the positioning of our assets and strong execution across the business. Total company internal revenue growth was 18% in the quarter, with growth across all segments and led by the Merchant Acceptance segment, which grew 41%. Year-to-date, total company internal revenue grew 11%, also led by the Merchant Acceptance segment, which grew 23%. Second quarter adjusted operating income was up a strong 41% to $1.3 billion, and adjusted operating margin increased by a very strong 510 basis points to 33.9%. This margin improvement was driven by our outstanding revenue results and our continued and disciplined cost synergy execution, which produced $90 million of incremental cost synergies during the quarter as well as strong operating performance. First half adjusted operating income increased 28% to $2.4 billion. Adjusted operating margin through the end of June expanded 440 basis points to 32.7%. Second quarter adjusted earnings per share increased 47% to $1.37 compared to $0.93 in the prior year. Through June 30, adjusted earnings per share increased 32% to $2.54, putting us on a pace to achieve our 36th consecutive year of double-digit adjusted earnings-per-share growth, a testament to the incredible resiliency of this company. Free cash flow in the quarter of $897 million was in line with last year, with free cash flow for the first 6 months of the year up 4% to $1.72 billion. Free cash flow conversion was 97% to adjusted net income, including a $172 million impact from reduced net operating loss carryforwards. Year-to-date, free cash flow conversion came…

Thanks, Bob. I'm very proud of the results we've delivered. The quality of our assets, our relentless focus on innovation, our agility, speed of new client implementation with examples like CAXIA, ADS, Atlanticus and Genesis put us in a great spot to serve our clients. Our speed to market with the enhanced Fiserv digital capabilities for banking and card management announced yesterday along with the integration of business expense management into the Clover platform, all of which leverage the full capabilities of recent acquisitions, Ondot and SpendLabs, add to our continued success. In addition to delivering on our financial results, we continue to focus on our people and on our communities. Earlier this month, Fiserv was named by Forbes as the Best Employer for Diversity, recognizing our commitment to putting diversity at the forefront of our values and having implemented long-term initiatives to create a more inclusive environment. During the quarter, we published our first annual corporate social responsibility report, which is available on the Corporate Social Responsibility section of our website. We also expanded our back-to-business grant program beyond the original locations that were selected in 2020. In May, we partnered with the New York Mets to recognize small businesses as part of our Asian, American and Pacific Islander Heritage month. And in June, we awarded grants to businesses in Tulsa as part of the centennial observation of the Tulsa Race Massacre. None of these achievements would have been possible without our world-class talent. I thank our more than 40,000 associates around the world for their commitment and courage as we stand together to deliver value for clients, our colleagues and you, our shareholders. And finally before I close, I want to congratulate the Milwaukee Bucks for winning the NBA championship at Fiserv Forum last week. The Bucks are terrific partners, and our partnership goes way beyond putting our name on their arena. Clover has been deployed throughout Fiserv Forum for food and beverage concessions, providing attendees with seamless, quick and easy transactions. They also partnered with us for several back-to-business events earlier this year. Congratulations to the entire Milwaukee Bucks organization. With that, operator, let's open up the line for questions.

[Operator Instructions] Our first question comes from Lisa Ellis from MoffettNathanson. Please go ahead.

Hi, good morning. Thanks, guys. Good to hear from you. I wanted to follow up on the two-year CAGR call out for the Merchant Acceptance segment. I believe you said it's running now at a 13% internal revenue growth on a two-year CAGR basis. One, wanted to just confirm that number. And then two, I wanted to kind of just drill into it a little bit, given that that's above your medium-term outlook for that segment, which as per Investor Day was 9% to 12%. Can you just highlight like what you're seeing, say, in North America versus ex-US? And are there any unusual dynamics in this quarter or do you see that sustainable going forward? And kind of what's different about the business now than prior to the pandemic when I believe it was running close to about 10%? Thank you.

Well, I think it starts with the US has been the strong spot in the recovery right now. You heard us talk about unevenness outside the US. But I do think you saw a robust even last July when it all began coming back. I do think you've got to focus on the three legs in the US and internationally. The three legs are Clover, Carat and Clover Connect, right? And all of those were continued investments, continued build out and we're seeing it show up in the clients' office. So I would say, it's really driven by US. When you see that we say US and international for the quarter performed fundamentally evenly, that was a spotty evenness, meaning not every country was the same and you could kind of map to where recoveries happened or not. So I think it's all about our platform strategy and our client strategy that's driving the outcomes. And I think our teams galvanized very well around it.

And Lisa, just to hit the first part of that question, the 13% is an average growth rate. If you look at Q2 of last year, it was actually down 15% over the prior year. We're now up 41% over 2020. So the average 13% there.

Terrific. Thank you.

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

Maybe my first question, just on the Merchant segment momentum, I guess a little bit like what Lisa was asking about, I went back several years and the second half usually has quarters that look a lot like Q2. So usually Q3 and Q4 look a lot like Q2. But the question, I guess is, is the momentum building? You mentioned international still has room to improve. US momentum seems kind of off the charts, BAMS actually grew faster year-over-year than your core merchant business for the first time probably in many, many years. So are we in a momentum situation that Q3 and Q4 could actually be better than Q2 this year compared to when normally it's the same?

I think the answer to that is yes. There is concern in the world. Right? So that's a little bit in how we think about it when we talk to about what we're doing. So there is a degree of us saying, the world's not out of the woods yet, although I think they've learned how to grow with this. So it's highly possible what you're saying could happen. We're driving the business to get the results we're getting. You see all the partnerships we're aligning to, to bring more. So, yeah, I'd say it's possible. But the world has spottiness right now too.

Yeah, that's great. And I guess, secondly, just as a follow-up, the past, I guess, handful of quarters at different times KKR has sold -- they're down to a much smaller position they were a year or two ago. But on the heels of now a really good quarter, what do you think their thoughts are about selling now?

I'd start off with, first and foremost, I do not anticipate them conducting additional secondary offerings. Their holdings are just under 10% now. And they have told us they intend to sell shares on the open market over time in a routine and pragmatic way going forward. So I don't think we're going to see another secondary.

Sounds great. Thanks, guys.

Thank you. Next we'll go to Timothy Chiodo from Credit Suisse. Please go ahead.

Thanks a lot. Thank you for taking the question. So over the last year or so, we've seen a few merchant acquirers become public. They have pretty fast growth in some more niche verticals. So online gambling, regulated financial services. Clearly, the First Data Fiserv merchant acquiring business is extremely well diversified and has a much, much larger scale, meaning that any one vertical can be overly meaningful, but maybe you could just touch on your approach to participation in those types of verticals, the extent to which you either are or will, how much it could help your business, what are the pros, cons, etc.? Thanks a lot.

Well, I think we're in every vertical. When we talk about grocer, QSR, retail but we're in gaming, we're across the board. You don't have a business of this size and scale that isn't serving all markets. And when you look at our capability, we do a good job of bringing base capability, and then segmenting to what verticals specifically need. So I think we are completely deployed against -- and we're deployed against growth, I mean, we're deployed against growth. Where we invest is where we believe the growthier segments are.

Tim, I think one of the keys for our growth and, quite frankly, how we work through the pandemic and continue to grow the business meaningfully is we're very well diversified in terms of the way we go to market, whether that's our direct channel, through our bank partners, through our non-financial institution partners, joint ventures, etc., but also extremely well diversified across verticals and participate essentially in all of them, and have offerings that get us revenue growth across a very wide spectrum.

All right. Excellent. Thank you so much. Really appreciate that. As a minor follow-up, was there any comment you could give on the assessments' timing on the contra revenue, any impact in Q2 given the difference in quarter-over-quarter growth, Q1 to Q2, some of those impacts that we saw last year?

Yeah. You recall, we had a pretty significant impact in Q2 of last year, a negative impact in Q2 that rebounded in the second half of last year. We're seeing the opposite now as we saw a big rebound in second quarter of this year. We do have a tailwind that will be muted a bit in the second half of the year. We don't have quite the same snapback in the second half as we did in the second half of last year. So, call it, roughly, of the 12 full points of margin improvement we saw this year over Q2 of last year, about 4 points of that was the brand assessment fees. And then that will be a bit of a headwind for us in the second half of the year. But we certainly see margin expansion continuing into the second half.

Perfect. That's really helpful. Thank you so much both of you.

Thank you. Next we'll go to the line of James Faucette from Morgan Stanley. Please go ahead.

Thanks a lot. And really appreciate your comments this morning. I know Bob talked a little bit about capital allocation. But I'm wondering if you can just help us think about how priorities or at least the way that you allocate may be changing, if at all, especially given kind of what's happening from the perspective of your stock is a little cheaper now, and so maybe that speaks to wanting to do buybacks. On the other hand, we're kind of continuing to see massive flows of capital into competitors, both through the private and public markets and the like. So just wondering if there's any evolution there on your thinking of how to prioritize use of capital going forward?

I'd start with three[Phonetic] on leverage, that will be well behind us. And we did talk about Investor Day, $30 billion of free cash. And so I think you also see us continuing the strategy of taking Silicon Valley digital expertise and capability, integrate it into our company and fundamentally creating experiences that nobody in peer group can do. You saw it with Clover back in the day. And when I talked about Ondot, I did say that the acquisition of Ondot and then subsequently SpendLabs, but Ondot specifically, would bring a Clover-like effect to our company. And the fact that -- so you'll see us deploy capital to those type of acquisitions. But I want to bring clarity to what I mean in a Clover type. We've created a single instance for consumers to be able to get every banking product they have and have card functionality that surpasses the industry by a lot. So we have tremendous -- everything from digital issuance to the ability to put it in the wallet. I think you've got to really think about what we're doing there. And then we will invest in these products quite heavily. Right? So I think you'll see us continue to do those type of acquisitions that drive the digital presence, but we've done things unparalleled through those acquisitions. So we talked about $30 billion. You see the properties we bought. You see us integrating those properties, integrating for growth. And I think you'll see us unique, always though using buyback as a benchmark.

James, I think this quarter is perhaps a prototypical example, this digital enhancement, this digital innovation that Frank talked about in his prepared remarks and just referenced is a combination of investing in our business organically, internal investment, advancing our digital banking capability with Mobiliti, bringing more feature function capability to our mobile capability, adding to that inorganic investment the acquisitions of SpendLabs and Ondot in a quarter that we also repurchased 5 million shares. So the $30 billion of capital available we have this year and for the next four or five years allows us to buy back shares, making organic investment in M&A and develop internal products and internal innovation and generate very high return.

That's great color. Thank you very much to both of you.

Thank you. Next we'll go to Dan Dolev from Mizuho. Please go ahead.

Hey, guys, good morning. Great results. So did I hear that correctly you said that this quarter was a record shipment quarter for Clover?

That's correct.

And so it sounds like it's more idiosyncratic share gains than anything market or reopening related. Maybe can you comment a little bit on who you're gaining share from, maybe specific verticals? And then maybe kind of the trajectory, you went from 36% in Q1 to 96% in Q2. How should we think about the remainder of the year? Thank you.

Well, why don't I start off with a look at -- I think Clover is a platform of choice and Clover is a partner platform of choice. And we did talk about that Clover would get other distribution channels, and that distribution could be our own outside the US. It could be with our ISV partners. And then just in our base core business, our own, I mean, your question of share, when you're as big as we are, we're competing with everybody and we feel that Clover is at the top of the list of what people want as a product. So I think it is about the differentiated product and the capability that gets it the type of numbers you saw in this quarter.

And then, Dan, just to add, the 96% growth year-over-year, remember this is the quarter that's comparing to the second quarter of last year, which was obviously a very difficult year across the board. But I think the pertinent number here is a 38% CAGR over the last two years. So, obviously, Clover growing incredibly well, continue to expect that to be a lift and a share gainer for us as we lead with Clover in the marketplace. We're seeing benefits of continued innovation, continued investments in Clover as new business formation kicks in post-pandemic, as merchants that were not transacting at all or very much come back. Our investments in Clover Dining, etc. pay off when the economy recovers, people think of Clover and allow us to serve them with Clover devices, hitting our record shipment as well as giving us that nice lift in overall GPV.

Yes, great. I agree, it's definitely everywhere, Great stuff. Thank you.

Thank you. Next we have Darrin Peller from Wolfe Research. Please go ahead.

Thanks, guys. Let me just shift to the fintech segment for a minute, which for several quarters was really in the 3% to 4% range and did show the acceleration to that 5%. You guys have talked about it being something that can do 4% to 6% growth. And we're seeing some signs of improvement now. You talked a lot about digital bank in your release also. And so I'm curious from a structural standpoint, given all the new competition out there, if you could touch on the assets you have and your capabilities and, in your view, confidence level around that segment actually being in that 4% to 6% or better versus low single-digit over time, that'd be great. Thanks.

Well, you see a number of things going on our FinTech segment, but let me bring -- I want to bring complete clarity on the digital offering because I think it affects both core and our digital business. And ultimately, what we have a deep belief is that we're here to help our clients serve their clients. So the ability to take 2,100 Mobiliti banks and bring them a fully integrated card experience at the highest level of card via the Ondot and bring that in a way that -- maybe the simple way to think about it is everything you can imagine in one application that allows you to do everything from originate transactions to digital card issuance to digital card view to card free cash, all in the same place that you're doing your bill pay and you're doing your Zelle transactions. So we're going to take 2,100 Mobiliti clients, 1,300 CardValet and bring that to them. And then that will be what we -- and those are financial institutions, we believe that will also help our clients increase their digital adoption quotient with their clients. So we see this as a game changer. So it's early innings. We got banks up and running on it. And we will deploy. And then you hear us talking about, on top of all that for financial institutions, we bring in Abiliti that sits on top of all of it. But the most important thing to think about is our cores are strategic. The front end, though, is where we believe the tip of the spear and where we win to help our clients serve their clients. And you saw what we posted now, but I look forward to continuing to generate more revenue through better function we bring to clients that allow them to do more with their clients. And then, you've got an integration of a SpendLabs into Clover, which allows -- these are our digital platforms. We're talking about digital platforms, one-of-a-kind digital platform. And I think what you should take away, there's an element of this company that's digitally agile and can deliver, and you saw it on those credit conversions. I think those are good track rated speeds for those size and scope. CAIXA is unparalleled. 70 days from signing, we're boarding merchants for them every day. And then you look at us taking SpendLabs and Ondot and I think we're going to have that same effect that Clover had when we look years out from now.

Going back to the -- sorry, go ahead.

No, no, Bob, go ahead, please.

I was just going to bring you it back to the 5% growth. Obviously, we had a good quarter, hitting 5%. We indicated that periodic revenue headwind would abate. I think it was 150 basis points. Last quarter, we said we expected this quarter to be half that. We saw 80 basis points into the second half of the year. We see that no longer being a headwind. And through the first half of the year, we're now at 4%. So we reached the bottom end of that medium-term guidance and continue to be quite comfortable that we will be in that 4% to 6% range this year. And the things that Frank's talked about, the investments we're making in digital banking gives us an opportunity to continue to see that good mid-single digit growth going forward.

Okay. Great. Hey, Frank, just quick follow-up on M&A. What are your thoughts on doing more tuck-ins that keep improving the tech stack and really thinking about maybe even just accretive to revenue growth, maybe even dilutive to EPS just type deals, just really add to the long-term growth strategy? Thanks, guys.

Well, I feel -- obviously, you've watched over time the type of properties we buy. Our ISV strategy was born out of acquisition. Now it's a winning strategy. Clover was born out of acquisition. And I think you'd have to argue that's a bigger than winning strategy. You'll watch these assets, Ondot and SpendLabs, so I think you're just going to continue. I don't think it needs to be dilutive to EPS. I think we know how to make it accretive pretty darn quick. And what I just talked about was kind of the dream of the acquisition when we put the companies together, that we could take an asset like an Ondot and spread it all the way through because of what a great bank partner we were, and that we could bring it all the way from merchant to our fintech. So I think you should expect us to continue to do more like that. And I think we have a skill at it that we keep the talent, we grow the talent, and we build a bigger digital gene pool in the process.

Great. Thanks, guys.

Thank you. Our next question comes from Jason Kupferberg from Bank of America. Please go ahead.

Can you comment just on any July trends in the Acceptance segment? Any impacts from the Delta variant? And then also just on the revenue yield dynamics, I know those were positive in the second quarter in Acceptance, how should we think about that for Q3? Will volumes and revenues be a little bit more in sync?

Yes. So in terms of July trends in our Merchant segment, I'd say, obviously, through what 26 days or so, we have information yesterday, day before, slightly better than June. So continued improvement in growth. And I'm talking about versus 2019. When you do a 2020 compare, you get some real odd variations on the comparison points. So we're looking at versus prior year as well as versus 2019. But slight improvement in July versus what we saw in June, consistent with what we've got loaded in our full-year outlook with that growth rate and EPS growth. Call it mid-20%, 25%, 26% merchant growth, volume growth over 2019. In terms of yield, you saw a recovery, so to speak, in Q2 versus what we saw in Q1 as our SMB portfolio continues to grow nicely. I think that's going to be consistent in the second half of the year.

Okay. So, we should expect those positive yield dynamics to continue. I just wanted to switch over to the Payments segment for a minute. I know you're reiterating the higher end of the 5% to 8% target range. And I think you probably have to do 10%, 11% in the second half to get there. I know you've got some new portfolios ramping up, but just talk about the visibility on that acceleration relative to where you were in the first half.

I think you see the credit momentum and you see us talking about that we'll have good second half revenue from that. You see, in general -- that's on the wins, and then, you see general credit momentum beginning in our portfolio. Debit networks, I've talked about the strength of them and we feel very, very strongly about what's going on there in debit transaction growth. So when you put all those in the calculation, you saw us go from 2% to 7%, and you should expect us to continue our trajectory north.

Okay. Good stuff. Thanks, guys.

Thank you. Our last question comes from Ramsey El-Assal from Barclays. Please go ahead.

Hi guys. Thanks for squeezing me in here. I wanted to ask about your payment mix in the Acceptance segment sort of in a post-pandemic environment. I know we're maybe not 100% there yet. But when you think about digital versus offline, debit versus credit, SMB versus enterprise, do you expect kind of a different mix in your business after the pandemic and how does that feed into your kind of longer-term growth algorithm?

Ramsey, I think we certainly have seen a broad movement to digital everything. That's why you hear his talk about the investments we're making in mobile capability and integrating our digital banking and card management experience. More and more digital transactions, e-commerce, etc. is certainly -- I believe the pandemic brought forward multiple periods of transition into that space. And I do think it was not transitory. Those changes are here to stay. And we'll see, as people return to whatever normal is going to be, what that continued transition growth rate happens, but, obviously, we're seeing great growth in Zelle. We're seeing more and more transactions on account to account transfers and good e-com volume, you heard us talk about in our merchant space, up 21%. So getting mobile first capability and digital experiences was a focus of ours over the last several quarters, and we're bringing a number of that into a single instance right now and continue to see that integration going forward.

Great. Let me squeeze one quick last one in here, which is, do you see the Feds revisiting the Durbin routing rule as kind of opening up a market opportunity for STAR and Accel?

Yes.

Short and sweet.

Obviously, Ramsey, it remains to be seen the timing and when that will happen, but does look to be a real opportunity for us.

Yeah. I think the thing is, our capabilities around fraud and chargeback management and our capabilities to serve the biggest issuers is very deep. And I think that many times having a third network is very valuable to everybody, both merchants and issuers, and so -- and STAR and Accel, we've invested heavily in them. And that's why we get the type of transaction growth you're seeing there. So, we really, really love our debit networks.

Great. Fantastic. Thanks.

So thank you for joining us this morning. We appreciate your support. If you have further questions, please don't hesitate to contact our Investor Relations team. Stay safe and have a great day.

[Operator Closing Remarks]