Welcome to the Fiserv 2021 Third 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. Please refer to these materials 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. 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. Before I turn the call over to Frank, please note that going forward, we will be using the term organic constant currency revenue to replace internal revenue. There is no change in how we calculate this measure, just a change in terminology. And now over to Frank.

Thank you, Shub. And thank you all for listening in as we share our results for the quarter and highlight the progress against our growth agenda. As you know, we serve as the operating system for commerce and money movement across our client base of banks, fintechs and businesses, ranging from SMBs, to mid market, to large enterprises. We help our clients grow by extending our platform to capture new services and new money flows. We are also seeing real benefits from the ongoing economic recovery, especially here in the U.S. We remain optimistic and continue to invest in growth. Turning to our performance. We had a strong third quarter, with total company adjusted revenue up 10%. Adjusted operating margin expanded 130 basis points to 34.2%. Adjusted EPS grew 23% to $1.47. We attained our highest quarter of actioned revenue synergies of $95 million. To date, we have achieved $420 million of actioned revenue synergies, 70% of the increased commitment of $600 million for the 5-year period following the merger. As we invested to accelerate growth, free cash flow came in at $572 million for the quarter and $2.3 billion year-to-date. Free cash flow was driven by a combination of the following: first, increased capital expenditure in the areas of technology, innovation hubs and the integration of newly acquired capabilities; second, the working capital increase driven by revenue growth; and finally, reduced benefit of unmet operating loss carryforwards. On the back of our results and the strength of our investments, we are tightening our outlook for organic revenue growth and raising the lower end of our outlook for adjusted EPS. We now expect organic constant currency growth of 11% for the full year and adjusted earnings per share between $5.55 and $5.60. This raises the lower end of our prior…

Thank you, Frank, and good morning, everyone. Before I begin reviewing the detailed business results, as Shub mentioned, we are aligning with the broader community and simplifying our message by clarifying our internal revenue growth metric as organic constant currency revenue. This does not change how we calculate this measure, just clarifies the terminology. It will be the same definition in calculations we've used in prior quarters. On Slide 11, we've included a new schedule to clearly provide an understanding of the walk from GAAP revenue to internal or organic revenue for the third quarter. This summary can be seen in more detail in the appendix of our presentation. Now I will cover some detail on each of our segments. If you're following along on our slides, I'm starting with Slide 4. We feel great about our performance for both the quarter and the first 9 months of the year. And we are well positioned to achieve strong full year financial results. Total company organic revenue was up 10% in the quarter, with growth across all segments, led by Merchant Acceptance segment, which grew 18%. Year-to-date, total company organic revenue grew 11%, also led by the Merchant Acceptance segment, which grew 21%. Total company adjusted revenue also grew 10% to nearly $4 billion in the quarter. Year-to-date, total company adjusted revenue has grown 11% to $11.4 billion. Third quarter adjusted operating income was up a strong 15% to $1.4 billion and adjusted operating margin increased by 130 basis points to 34.2%. This margin improvement was driven by our strong revenue results and our continued disciplined cost synergy execution, which produced $64 million of incremental cost synergies during the quarter. And we have now actioned $1.16 billion programmed today. Year-to-date, adjusted operating income increased 23% to $3.8 billion. Adjusted operating margin…

Thanks, Bob. I'm very proud of the results we've accomplished, with another quarter of double-digit adjusted revenue growth and double-digit adjusted EPS growth. In addition to delivering on our financial results, we continue to focus on our associates and our communities. In July, Fiserv was named to the Disability:IN's Disability Equality Index 2021 Best Places To Work, and in September, received the Silver Torch Award from the National Black MBA Association as Partner of the Year, recognizing our commitment to putting diversity at the forefront of our values and talent and client engagement strategies. During the quarter, we also entered into a multiyear relation with -- into multiyear relationships with Girl Scouts USA and the Russell Innovation Center for entrepreneurship. These partnerships focus on increasing access and opportunity for aspiring women and minorities within the entrepreneurial ecosystem. We also expanded our Back2Business program to Detroit and the Washington, D.C.; Maryland, Virginia area as well as internationally with our entry into the U.K. Additionally, during the quarter, we also completed our CDP submission, and for the first time, published our EE0-1 filing on our Internet site. 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. With that, operator, please open the line for questions.

[Operator Instructions] Our first question comes from Tien-Tsin Huang from JPMorgan.

I want to ask on Acceptance. I'll ask on Acceptance. Looks like you outperformed the global Visa volume, if I'm looking at this correctly. But the yields turned negative in the third quarter. I know it was positive last quarter. So just a question here on pricing and mix in general for Acceptance. And what the outlook on yields might be here going into the fourth quarter?

Thanks, Tien-Tsin. This is Bob. I would attribute largely that variation to the difference between volume and trends of our mix relative to what you might see in Visa as well as the yield. Ever so slightly, that ebbs and flows within the quarter depending on the mix of SMB versus enterprises. Overall, we feel quite good about the overall performance, how we're performing against the overall market and against our peers.

Got you. So more mix than pricing.

Yes.

Our next question comes from Lisa Ellis from MoffettNathanson.

Terrific. I think I'll follow up on Tien-Tsin's question, and actually specifically ask about the large processing client roll off that you highlighted. That looks like it's about a 5-point drag on overall volumes in Merchant Acceptance and a larger drag on e-com. Can you just elaborate a little bit on that situation? And specifically, how should we think about how it's affecting revenues. Like if it's a low-yielding client? And then also, is that something now that will take another 3 quarters before it lapsed? Or just any additional detail there would be helpful.

Yes, Lisa. The way to think about this, this is a large client that we processed through a joint venture. We pointed it out in terms of adjusting our volume and transactions for transparency, it has very little impact overall on the actual revenue. And the revenue numbers you see there are as reported, so including that decline. That client is largely off our platform at this point, and so you'll see it from a year-over-year standpoint. But there's no more decline going forward because they're essentially off our platform at the end of third quarter.

Our next question comes from Dave Koning from Baird.

Nice job. I guess, first of all, just in Acceptance, I think last quarter, you even mentioned Q4 being up sequentially from Q3. I guess, is that still the case? And maybe as I look back on some of the more normal years, it seemed like you'd grow a few percent sequentially in Q4. Just wondering anything in Q3 or Q4 that would disrupt that kind of normal few percent up sequentially pattern?

So you're talking about growth quarter-to-quarter sequentially?

Yes. Just sequential revenue growth in Acceptance. It looks like a few percent up is kind of normal in Q4.

Yes, David, I think it's tough to call anything normal these days. I would expect our fourth quarter to be roughly in line with third quarter sequentially for this year.

Okay. Okay. Cool. And then I guess, secondly, just Payments, I know you kind of called out how it's going to be within the range. You'd said for maybe at the upper end of the range. Is some of that anything that's falling into 2022 now? Were there any maybe delays in implementations? Or anything there that just kind of makes '22 now a little better than it previously would have been?

Yes. I wouldn't call it any delays per se, but we highlighted a few growth drivers that we'll see into 2022: a couple of the new wins, PayPal going live. We signed a new large U.S. telecom that will go live soon. And of course, the announcement of Credit Choice will help us as we launch that program. As Frank pointed out, we're now in pilot. We're seeing very strong demand for that program, for something that we had not formally announced yet. So we're just now announcing that. So we have some good early read on that. And of course, we'll have CardHub, the offering that we acquired through OnDot, for a full year next year. And that is now fully integrated into our Mobiliti platform, and we continue to build out that capability.

We also have those -- 3 of the top 25 issuers that are beginning onboarding. So that will be within the numbers next year. And you heard us talk about us converting BBVA onto our platform also for our client, PNC. So -- and you're going to continue to get the Zelle ramp in there also as that continues to grow and we onboard more. So I think those all will factor into next year's numbers.

Next, we have James Faucette from Morgan Stanley.

I wanted to ask a little bit more of a strategic question. I appreciate all the color on near-term trends and benefits that you're getting from new customer wins. But Frank, it seems like you have picked up a little bit the pace of acquisitions, at least the announced ones recently. Can you talk about how you're feeling about potential and importance of doing acquisitions as part of your FIS or as part of your overall strategy, and if that's evolving at all? And I guess tied to that, Bob highlighted the balanced capital allocation. But I'm wondering if it makes sense to accelerate debt paydown a little bit to improve optionality in case bigger deals come along.

Well, maybe I'll talk about what we've been doing on M&A, and how we're looking at M&A. And I think the first thing is, whether it's M&A or building out businesses, we're investing organically and inorganically. And I think the thing that, hopefully, you see is our agility and speed and innovation. We talked about OnDot, and it's fully integrated beyond its initial capability and now in our mobile product and winning in the market. You see us go and look at BentoBox. And we're extending our total addressable market with the capability that will start with restaurants, but actually could be a storefront and much larger. But all of these are nurturing good, strong startups that then we'll allow to thrive in our environment. And we put the capital behind them to integrate them and grow. And you hear how we bring SpendLabs along with it. So I think you should expect us to continue that and realize that -- I think we believe we have a deep skill set in integrating properties, transforming our property itself. In some cases, we're even disrupting ourselves in the process as we move from CardValet to CardHub to an integration. So you should expect us to continue to do that and be very, very thoughtful about acquisitions. But we will invest inorganically and we'll invest organically. And we will invest organically in the acquisitions to allow them to thrive within our ecosystem and not to be stand-alone entities.

And then, James, as far as paying down debt, we've seen a significant reduction or improvement in our leverage, now at 3.2x. Back when we completed the merger, we were just over 4x. But we continue to generate good free cash flow. And as you may recall, back at our Investor Day last December, we talked about the capital to deploy over the next 5 years of more than $30 billion. As we enter 2022, not only will we have very strong cash flow, but we will also have capacity on the balance sheet. As EBITDA grows, the company will naturally delever. And so we'll have the capability to borrow just to maintain that historic leverage ratio. So we feel like we're very good -- positioned to be able to complete acquisitions that we feel we want to complete. It's not prohibited or constrained by capital.

Next, we have Jason Kupferberg from Bank of America.

Just wanted to start with a follow-up on the -- that large processing client that is coming out of the numbers here. I guess it looks like it's an e-com client just based on how much it impacted the e-com volume numbers specifically. And was this just a competitive situation that was becoming too price intense from your guys' perspective? Just wanted to get a little bit more color because it's fairly sizable, it appears.

Yes. I mean let's go first to -- that volume coming off our system is in our revenue number. So hold that thought, right? I mean -- so when you look at a large processing client off a JV, that's exactly what it sounds like. Which is, first of all, they -- this was long telegraphed by the client. But when we always talked about our business, we knew the RPT on this and never saw it as an real economic impact. Really just a volume impact to our business. And they went in-house. It wasn't a competitive takeaway, and it was part of their strategy. We're happy to support them with our processing capability through our JV for the period of time that we did it.

Okay. And just on the free cash flow conversion. I just wanted to hone in on what, I guess, were the most significant changes in your expectations versus last quarter. Because I mean, at the end of the day, I know, on a quarterly basis, obviously, working capital can move around. But the full year revenue is coming in right in line with your plan. Presumably, the diminished benefit of the NOL would have been known previously. So is this really just a function of kind of higher CapEx than you anticipated at the end of the day versus what you were thinking last quarter?

Yes. Jason, the way to think about it is, our 11% revenue outlook, certainly at the high end of our original outlook, was 7% to 12%. So we're growing quite a bit faster than we originally expected overall. We are also seeing meaningful opportunities to invest for growth. So to your point, CapEx is higher in terms of spending on creating new capabilities, new products and services as well as integrating the acquisitions that we announced earlier in the year. Things like OnDot, the software development that we're investing there to not only integrate into our existing capabilities, our other products and services, but to create new capability with some of those acquisitions, led us to make the decision to continue to invest in growth and still have very good free cash flow and good cash conversion overall.

Next, we have Ramsey El-Assal from Barclays.

Frank, I wanted to ask you a kind of a broader question. There seems to be some debate or discussion among investors about potential fintech kind of disruptive forces in the marketplace. At the same time, it seems like you guys function as somewhat of an infrastructure or enablement layer for fintechs. I mean even from the call today, you talked about Chime and Baakt and PayPal, and I know there's a slew of others. So can you talk about this tension between fintech as a competitor and a potential disruptor versus fintech as just sort of a high-growth distribution channel for the business?

Yes. I mean I take this as a long-term issue really back in time, right? I mean we're a platform, as we like to say, for everything from fintechs to SMB to large enterprises. And if you think about what we did with Clover, that was opened up a community to the development community, so we can be a platform for them and then a platform for our end users. So my view and our view is we're happy to do things to disrupt ourselves, like you see us doing with the SpendLabs, the OnDots. And even Clover was a disruptor of ourselves. And we'll continue to use our platform to enable. And ultimately, we want to serve all communities. So if you think about things we've talked about here, Chime previously, NYDIG, Baakt being an enabler and one of our clients' coin base. You think about us bringing PayPal into the bill payment ecosystem. We are going to use our platform to enable. And then we're going to compete heavily with our full capabilities. So our traditional clients who will get all the capabilities and continue innovation. And we will also enable those that have the capabilities that we believe our clients would use. When you think about all of that -- you hear us talk about being a token provider for Microsoft. That's about bringing their authorization rates higher. So I don't really find any conflict here. We have waterfront property. We open up the waterfront property. And our job is to enable commerce, and we get paid for enabling commerce.

Next, we have Darrin Peller from Wolfe Research.

I want to hone in on Clover because I know there's been a lot of discussion on what that asset could mean for you. So help us understand. Any more metrics you think makes sense on the success of that asset? Obviously, it continues to grow well. But any other metrics in terms of how big the revenue is from that now? What kind of growth do you anticipate? Maybe any kind of profitability, volume? And then also, is there an opportunity given some disruption we're hearing about in the market around a Chinese competitor having some challenges on their terminals in the market now? I think they have 1 million -- 3 million or so terminals that might be challenged now. Could there be a replacement opportunity for Clover on that?

Yes, Darrin. It's Bob. Overall, obviously, we are quite pleased with the progress and the continued growth prospects of Clover. GPV up 46%, just under $200 billion for third quarter on an annualized basis. We continue to invest in new capabilities and expand our reach there. As you know, a large proportion -- about 90% of that volume is new to Fiserv, and so that is certainly a growth driver for the company overall and continue to expect that going forward. We're adding capabilities. BentoBox, as a great example, is building out some of the verticals. Across that capability, we have significant, strong distribution channels. And with the dissolution of the BAMS joint venture, we have a good and very quickly growing direct channel that we didn't see us have a few years back. And so we continue to see good opportunity there. And in terms of the terminal dynamic, we have -- obviously, we have our own Clover devices. We also use other terminals for the other parts of our company. And we have a variety of different providers of those terminals, and no disruption to us at this point.

Yes. And I would just add, Clover is a platform of choice. You heard about the international expansion of that. And I would think that as people are making choices going forward with disruption, for others, that will just further accelerate our growth.

Yes. Yes. I would think that could be an opportunity for you to take a lot of share in the U.S., at least with what's going on there. A quick follow-up is just on the cash flow and the capital deployment. Just given what normalized earnings could be, how strongly -- or would you consider a more material accelerated share buyback by any chance just given you're now -- you probably will be at about that 2.8 turns leverage target, let's call it, at the end of the year?

Yes, Darrin. I think the way we think about capital deployment has been and remains quite consistent and quite balanced. We continue to focus on growing the business organically, doing value-accretive inorganic growth, i.e., acquisitions. And then, obviously, always looking to return cash to shareholders where appropriate. I don't think you ought to anticipate us doing a large buyback. As you know, we're essentially in the market every quarter and have been for years, short of the short period of time between announcing and closing our merger back in 2019. And we'll continue to be a disciplined capital allocator.

Our next question comes from Timothy Chiodo from Crédit Suisse.

I wanted to dig in a little bit more with 2 mix-related questions on Clover. And you sort of alluded to in the last question, but hopefully, we can get some of the mix percentages. So first would be around the portions of revenue. So a large portion would be payments related. But also, you highlighted at the Investor Day some increasing software attach; strength in value-added services; and then also, clearly, there's the hardware component. So even if you could just give sort of rough breakdown of those components. And then the second part is around mix and distribution. So you alluded to some of the various channels, whether it be direct, in bank partners, retail ISO, wholesale ISO, even just broad strokes on the mix of distribution would be really helpful.

Yes, Tim. So a couple of things to think about there. One, in terms of channel, we are seeing broad growth across all of our channels, whether it's through partners, through ISV, ISOs, through obviously our joint ventures as well as, as I mentioned in a previous question, building out our direct channel. We have, have had and continue to be focused on having a very wide breadth of distribution capabilities and continue to focus on winning in all of those channels. And that remains -- it has been and will continue to be a broad focus of ours. And then in terms of breakdown of revenue, we haven't given detail around the mix of hardware versus software versus processing. Obviously, the vast majority of our revenue in the Merchant Acceptance business is the merchant acquiring revenue inside of Clover. Obviously, we've got hardware that we sell. But the magic to Clover is you sell the hardware and then you have a processing client, a merchant acquiring client for years and years with high attach and high attainment rate. And we continue to focus on that.

Our next question comes from David Togut for -- from Evercore ISI.

Within Merchant Acceptance, what impact are you seeing on your payment volume when a competitive buy now, pay later solution is added at one of your e-commerce clients? And in particular, I'd appreciate your help with 2 things: Number one, are you retaining the merchant acquiring or merchant processing when a BNPL company is added? Or are they bringing in their own merchant acquirer? And number two, do you have any insights into funding mix when BNPL gets added at one of your clients in terms of debit ACH versus credit?

Yes. I think a couple of things. Number one, we have a number of referral partners. And over the last several quarters, we've announced these or talked about these, whether it's Zip or Bread or Citizens Pay. We continue to be focused on enabling multiple options for our merchants. And obviously, we're the merchant acquirer for those merchants, and so providing that capability maintains that relationship with those merchants. And in terms of credit versus ACH, et cetera, I think broad industry view is, today, a large portion of that -- paying for buy now, pay later activity is actually paid or are finally executed through card payments.

So you're not seeing any specific mix in terms of ACH when you look across kind of BNPL adoption at your customers.

No. I think the key there is, while buy now, pay later has a high volume in terms of news, it's still a relatively small portion of the overall GPV or merchant space and not moving the needle. And in fact, in some instances, instead of one transaction, you're actually seeing 4 transactions.

Our next question comes from Dan Dolev from Mizuho.

Can you give us some color on the -- what's implied in the fourth quarter organic growth guidance for the 2 other segments, for Payments and Fintech? That would be great.

Dan, you were quite muffled. Can you repeat that question?

Can you give us some color on what's implied by the guidance, the organic growth guidance for the other 2 segments, Fintech and Payments and Networks?

Yes. So I think I tried to give some of that color in our prepared remarks. In our FinTech segment, year-to-date, we're now at 4%. And we expect for the full year to be in that medium-term outlook range of 4% to 6%. And then in our Payments segment, again, relative to kind of our medium-term guidance, our medium-term outlook of 5% to 8%, we expect to be in that range. That is adjusted from previously, where we expected to be at the high end of the -- toward the high end of the range. Right now, I'd say just in the range. And year-to-date, we're at 5%.

And that was our last question for today's call.

I'd like to thank everybody for joining us this morning. We appreciate your support. If you have further questions, please contact our Investor Relations team. Have a great day, and thank you for everything.

Thank you all for participating in today's conference. You may disconnect your line, and enjoy the rest of your day.