Welcome to the Fiserv Second Quarter 2025 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 Mike Lyons, our 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 I'll turn the call over to Mike.

Thank you, Julie, and thank you all for joining us today. As you've seen, we had a strong second quarter, fueled by our continued focus on Fiserv's mission of delivering superior value for our stakeholders through leading technology, innovation and excellence in everything we do. During the second quarter, we grew sales, clients and our new business pipeline. We announced several exciting new partnerships and acquisitions, introduced innovative capabilities, like FIUSD stablecoin and made solid progress on our key product initiatives, including Clover, Commerce Hub, CashFlow Central and Experience Digital, also known as XD. We did this all despite an uncertain macro environment during the quarter. For the second quarter, we delivered 8% adjusted and organic revenue growth and strong 16% adjusted EPS growth. We expanded our adjusted operating margin and generated good free cash flow. Importantly, we returned $2.2 billion to shareholders in the quarter by repurchasing 12.2 million shares or 26% more than we repurchased in Q1. And as Bob will cover later, we have increased our 2025 share repurchase guidance to approximately 130% of free cash flow. This means we expect to continue actively buying shares in the second half of the year, all while staying within our targeted leverage range. Before Bob walks you through our financial performance in more detail, I'd like to provide some color around the refinements we made to our guidance and share some important business highlights from the quarter. The 2025 guidance, which called for 10% to 12% organic revenue growth on top of the 16% growth we achieved in 2024, had always assumed a significant growth ramp on the back half of the year. This trajectory was based on the successful launch of a long and granular list of new products and strategic initiatives as well as a relatively strong…

Thank you, Mike, and good morning, everyone. If you're following along on our slides, I'll cover additional details on total company and segment performance, starting with our financial metrics and trends on Slide 4. We delivered another strong quarter, highlighting our consistent ability to grow revenue and expand margin. Second quarter total company adjusted revenue grew 8% to $5.2 billion and adjusted operating income grew 12% to $2.1 billion, resulting in an adjusted operating margin of 39.6%, an increase of 120 basis points versus the prior year. For the first half of the year, adjusted revenue grew 7% to $10 billion, and adjusted operating income grew 11% to $3.9 billion, resulting in an adjusted operating margin of 38.7%, an increase of 150 basis points versus the prior year. Organic revenue grew 8% in the quarter, driven by solid performance in both segments. Through the first 6 months, organic revenue also grew 8%. Second quarter adjusted earnings per share was $2.47, compared to $2.13 in the prior year, up 16% and in line with our full year growth guidance of 15% to 17%. Year-to-date, our adjusted earnings per share increased 15% to $4.61 compared to $4 in the prior year. Free cash flow for the quarter was $1.2 billion and $1.5 billion for the first half of the year. As we said in previous earnings calls, we expect an increase in free cash flow in the back half of the year, which reflects typical seasonality for us, including the timing of inflows related to the green tax credit initiative. We continue to expect approximately $5.5 billion of free cash flow. Turning to performance by segment. Starting on Slide 5. Organic revenue growth in the Merchant Solutions segment was 9% in both the quarter and year-to-date. This compares to 28% growth in…

[Operator Instructions] Our first question comes from Timothy Chiodo from UBS.

I want to start by digging into Clover Capital a little bit more. So you've talked about being meaningfully underpenetrated versus some of the peers when we look at Toast and Square, we would agree that you are well below their penetration levels in capital. Could you talk a little bit about some of the activities that you're doing to unlock that TAM? In other words, we gather that with some of the wholesale ISOs or potentially bank partners, you're not able to access the full set of merchants to sell them Clover Capital, and we gather there are things that are happening to help unlock some of that. Maybe you could put some context around that level of penetration today and where you could see it getting to over the medium term.

Yes. Thank you for the questions. It's Mike. First of all, we were pleased with the progress we made in Clover this quarter, continue to be on pace for $3.5 billion of revenue this year. And the growth plan around that, as we said, over the last several months is a combination of horizontal expansion, added Homebase this quarter, vertical expansion. We did Rectangle, which we're thrilled with to take us in to the health care space, launched Clover Hospitality earlier in the quarter, geographic expansion in the markets there and then building out the distribution channels. We talked about US Foods, the agreement with TD and then in and around operational excellence within the products where we think we're the most underpenetrated, as you pointed out, is Clover Capital. And the essence there is if you go into both our non-Clover SMB base and our Clover SMB base, very low penetration. We take -- we're very prudent with our risk management there. And then there are a number of practices that we put in both on the behaviors and on the -- in and around Clover Capital in terms of how we go about making the offers operationally, how do we negotiate with our merchants, how do we present those and how do we price those, made a number of refinements beginning this quarter, but we're just at the beginning stages of a much more holistic thought process around Clover Capital. And ultimately, we think there's a lot of ground to take within our current risk appetite and then over time, whether you can expand that risk appetite some. We obviously, given the penetration rates, we are taking less risk today than our competitors are. So we think it's a value-added product to our merchants. They like it. They depend on it. We think the TAM there is significant, and we're going to make a series of operational pricing and risk management decisions over the next coming months and quarters, and we think the progress will be good there. But what came into this quarter was we're just at the very beginning efforts of that.

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

Look, the overall growth rates on the business continue to be sound, but I think there's an expectations change occurring that investors are digesting right now. So maybe just help us understand a little bit more specifically what changed from the beginning of the year until now on the merchant growth rate? And again, just reiterate, Bob, if you can, the merchant margins. And just help us understand the building blocks for Clover growth and overall merchant growth, both, if you look at the Clover volume side, why is the adjusted versus reported volume still different in the second half? And then more importantly, just looking at Clover revenue, if you could break down hardware, VAS, payments for the rest of the year growth rate-wise and the conviction you have around the guide for the rest of the year?

Yes. It's Mike. I'll start. Just on the overall organic growth rate for the company, we obviously refined to approximately 10% from 10% to 12%. Just a couple of comments there. I've been in the seat for about 10 weeks now. I've had the opportunity to better understand the key drivers of our business, the status on the strategic initiatives and then what was embedded in the full year guidance. And that full year guidance always anticipated a big ramp in growth in the back half of the year based on the rollout of a whole bunch of projects and initiatives. It was a granular list. It's a very strong list that we had the ability to re-underwrite, study all of our initiatives, and they are great initiatives. It's just a matter of the timing of getting them to market. So as I said a minute ago, we're still confident we'll get the full financial and strategic benefits of all those initiatives. And it's just a matter of timing. And again, we feel very good about them. The pipelines around the products that we're coming to market with are very strong. The clients want them. The technology is good. So we feel very good about it. So the refinement from 10% to 12% to 10% is just having the benefit of 6.5 months into the year, understanding where we are in those product rollouts and then importantly, understanding how we want to roll them out with the quality which we want to roll them out. So forecast from here indicates back half of the year growth of 12%, which led us to -- at the original range at the lower end of that original range. And that's the type of transparency we want to give you as we go through the year and see stuff and are able to narrow the range and the variability around it. So going into a couple of products.

Yes. Darrin, you got a multilayer question there. I think first, I'll attack the question around the Clover growth rate. And we reported a 30% growth rate in terms of revenue, an 8% reported volume adjusting for the gateway at 11%. So continue to see good overall revenue growth, and that's certainly supported by an acceleration of volume. As you know, Clover is a hardware and software solution. It's a business operating system. Volume certainly is an important part of it, but there's lots of revenue in addition to that, and that's where we get into that spread, so to speak, between volume and revenue. Volume continued to grow this year -- or excuse me, this quarter. We also see increasing benefit of value-added services, a 24% VAS penetration. That's actually a greater than a 50% growth rate just on the VAS line. And that VAS, as you know, is software plus our working capital. We continue to see good growth in our working capital solutions, and that's rapid deposits, Clover Capital and anticipation. And so we're seeing good opportunity there. We expect that to continue. We are certainly focused on growing volume, signing up more merchants, but we're also focused on selling the full operating system. That's hardware and the value-added services, and we're seeing the benefit of that. In terms of merchant margin, in the second quarter, we did see margins come down about 200 basis points. First and foremost, that's against a pretty tough comp last quarter -- excuse me, Q2 of last year was up quite meaningfully. And if you look at Q2 2025 margin of 34.6%, that's up 90 basis points from where we were 2 years ago. We continue to see opportunities to grow margin, to grow the merchant business, and we continue to…

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

Just wanted to get a little more detail on what initiatives are being extended exactly. And I think, Mike, you mentioned that some of it was on Fiserv. Can you elaborate on that and what you're doing to address it? Is it a budgeting issue? Or is there something more specific to that? Just trying to like Darrin ask, give a little bit more understanding on your conviction on the new outlook.

Yes. As I was just saying, we went into the year, the year was built on a back half of the year plan with a lot of granular, very attractive, very compelling initiatives, no major 1 or 2 items, but a very long list of initiatives. And as you go through the planning and have the benefit of half the year and you look at where the rollout of those initiatives are in terms of timing and how we want to do it in terms of quality for the client, scalability and a client-first mindset. And then you roll forward the rest of the year, it puts us at the bottom end of the original 10% to 12% range just in getting those products to market and realizing the revenues. There isn't a quality issue with them. It's not products that have gone to market and not generated the revenues we thought it's just getting the products to market. And as I said, some of that we control. We can execute faster, better, greater sense of urgency and some of it we don't because we're integrating with partners, contract signings, how do people respond to an uncertain macro in the second quarter, obviously, more clear now. So lots of factors that go in there. what we did with this is we said when you look at our most current plan in the rest of the year, we're confident that we've captured what we will roll out and realize in revenues this year. And then importantly, as you go forward, all of those initiatives, as I said, we've had a great chance to re-underwrite them, restudy them, and they're good. They're really great products, whether we're redefining how small businesses manage cash with CashFlow Central. We're resetting the parts of how small businesses run their businesses off the Clover platform and the attributes we're going to there. We're introducing a digital payment trail, FIUSD. These are all great products resetting our digital platform in banking. So we like all the products. It's just we're giving you the most updated look on timing. And obviously, when we started the year, you give a wider range. And as you go through the year and get a better sense of where things are, we're able to narrow the range a little. I think to a lesser extent, we started the year with some macro assumptions around certain activity levels in parts, more so in the FI business where card accounts on file would rebound off a cyclical low. You'd see greater activity in certain of the digital payment sites and maybe a faster and more robust upgrade cycle in certain parts of core and surround bank technology. And obviously, while it's strong today, the economy has taken an uneven path to get here, and we just factored that into the future outlook. Hopefully, that helps.

Tien-Tsin, I think the way I think about it is our original guidance at 10% to 12%, our baseline plan was midpoint, 11%. To get to 12%, we factored in the opportunity for a slightly better macro environment, a little bit faster business, some of the credit and course surrounds that Mike just talked about that would have gotten us a little bit faster, stronger would have gotten us to the top end. And now that we've seen a bit choppier recovery in the macro economy, a little bit slower on the initiatives, again, both on things inside and outside of things in our control and outside our control, a little bit slower, puts us at the bottom end of the range, which is what we're guiding to at this point.

Really quick. It sounds like it's not just 1 or 2 initiatives, it's several initiatives and you're just lowering the curve of growth expectations across all of that, if I got that right.

Yes, that's right.

Next, we'll go to the line of Harshita Rawat from Bernstein.

Bob, Mike, I want to follow up on merchant operating margins. I know you talked about some of the drivers there on the mix with respect to sales and marketing investments, CCV and product investments. The margin miss was a bit of a surprise. So it would be very helpful if you can quantify some of the drivers and maybe also talk about cadence from here? And also, was this kind of merchant margins in line with your expectations for the quarter as you were kind of thinking about it from, say, 3 months ago?

Yes, Harshita. So from a total company margin outlook, as you heard, we've revised our guidance for the full year previously, at least 125 basis points to now approximately 100 basis points. Certainly, an impact. Again, this impacted merchant margin in the quarter, but also impacted full year outlook as we get 9, 10 months of revenue from those acquisitions. I specifically talked in an earlier question about CCV, but we have 3 other acquisitions that just recently closed, call it, the last 90 days. And as you add that business, call it, order of magnitude, $200-plus million of revenue at below company average, that certainly weighs on the overall margin. And add to that, that we're now at a 10% organic growth, so we don't have quite as much volume to help override or offset some of that external -- some of that M&A activity caused us to take the full year down from that 125 to 100 basis points for the full year. In terms of merchant margin in particular, I'd say generally in line with what we expected. Again, when you layer in the acquisitions, look at some of the investments we're making, obviously, those were intentional decisions, both in terms of marketing, distribution and investments in new products and services. So overall, in line with as we expected, other than obviously taking the full year in terms of fully factoring in the acquisitions.

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

Just looking at Merchant again, just the pure math of revenue growth of 9% in the first half and 12% guidance for the full year puts the second half at mid-teens. And I'm just wondering, I guess, a, if there was anything unnaturally low in the 9% for the first half? And b, if there's anything unnaturally high in the second half, really, what's driving that 6% acceleration? And is that the starting point really into next year? I mean that would be phenomenally good if that's kind of the beginning point into next year.

Yes, David, I think a couple of things. I wouldn't necessarily point to anything "unnatural." One of the biggest drivers, of course, is last year, we had the impact of the transitory benefit of inflation and interest in Argentina, and that transitory benefit eased quite meaningfully throughout the 4 quarters last year and is actually now gone in 2025. And so on a comparison basis, each of the 4 quarters becomes an easier compare. And in fact, at this point, if you look at current inflation and interest rates in Argentina, they're actually below the 5-year average. Things have improved quite meaningfully. Ultimately, that's a good thing for us. A good macro environment in Argentina is good and things look generally positive there. Obviously, they're still in a difficult economic condition in terms of recession and whatnot, but that is a positive for us on a transitory benefit going away, but overall economy going away. Secondly, if you look at first half to second half, Clover becomes a bigger piece of the Merchant business as well as continues to grow. The second quarter was at a 30% revenue growth. We need approximately 30% on a full year to get to the $3.5 billion. That's a nice growth rate because it was growing last year. And so that gives an extra lift overall to the Merchant segment on a first half, second half basis just by continuing to grow at that 30-plus percent given good VAS and other benefits. The second half, we'll get more international expansion. Brazil is going well. That continues to grow nicely. That one of our 5 new countries that we expanded Clover to. You heard some of the partnerships, some of the ADP benefits, et cetera, all give accelerated growth. And then -- that's on the Clover side. In the enterprise space in Merchant, Commerce Hub continues to do well. We've got a number of very large enterprise clients that are expanding their use of -- i.e., they've sold up for Commerce Hub. They're now ramping that. And as they add more capabilities, more stores in Commerce Hub, that expands. We talked a little bit in our prepared remarks around the international expansion or the globalization of Commerce Hub, adding Latin America. We've got the first large enterprise client going live shortly on that expanded Commerce Hub capability and on and on. So we feel good about the opportunity to accelerate both in merchant as well as in financial solutions to get us from 8% in the first half of the year to 10% for the full year.

Next, we'll go to the line of Will Nance from Goldman Sachs.

Bob, I just wanted to ask another question here on the Clover side. You've expressed a lot of confidence in the ability to hit the $3.5 billion revenue target in 2025. I know that you guys had some targets out for 2026 as well. I don't think you've addressed those. And if I look at where the Street is, Street, I think, is still comfortably below those targets, roughly 24% revenue growth next year. So just wondering if you can maybe address that and talk to the confidence in hitting that? And if not, the Street numbers are already kind of below it. Like what do you think is a reasonable revenue growth rate for a kind of low double-digit volume growth dynamic in Clover, given some of the initiatives you've got on the VAS and the capital side, but also maybe considering what seems to be a pretty strong year for hardware sales, which may be less reoccurring as we look forward?

Yes. Thanks, Will. So certainly not updating 2026 guidance at this point, but I would certainly point to a couple of key things. First and foremost, we laid out the $3.5 billion goal for 2025 about 3 years ago, and we are exactly on track to deliver just that. We need to continue to do what we did in the first half to deliver the second half to get to $3.5 billion. Obviously, there's continued growth to get to the $4.5 billion. That's a number we put out about 1.5 years ago or so. But the things that we are doing now that help us deliver the $3.5 billion put us in a good position to deliver the $4.5 billion next year, things like the horizontal expansion with Homebase, adding ADP and CashFlow Central capabilities into Clover, the vertical expansion, adding Clover Hospitality, Rectangle Health for what we're calling PracticePay and a new health care vertical. The international expansions, we talked about the benefit of Brazil. We continue to see growth across all 5 of the new international regions. It's very early stages. So you're getting a little bit of benefit this year. That continues to accelerate into 2026 and beyond. And then we're also expanding our distribution channels with the announcement of the US Foods, for example, a new sharing partner, TD Bank, building out our direct channel. So absolutely online to deliver $3.5 billion, a number we set out 3 years ago and things that we're doing this year help us grow the balance of this year, second half as well as into 2026.

If you go back to Tien-Tsin's point, there's -- we are doing lots of things on the Clover platform across these 5 or 6 major areas to drive a business operating platform, not a point-of-sale payments device. And that's the mindset we're operating around it. So as we continue down the path of maturing Clover and bringing a solution to businesses to help them run their businesses better, every quarter we go, there's new and more interesting things that we can do around it. And we're just scratching the surface of -- there's a whole bunch of work streams as you think about the next level of Clover and the excitement around bringing more AI to Clover, whether it's in inventory optimization, smart menu builders, helping businesses manage -- optimally manage their staffing, how do you deliver better service and support to them. So it's an evolution, but I think the important takeaway is we're building a business operating system. The TAM in the United States, we're less than 10% penetrated there. We're almost 0 internationally. And we're going after an opportunity to help businesses run better, not some type of race on a point-of-sale software -- point-of-sale hardware, software device. So that's the approach we're coming at it with, and it's exciting. Clover is an incredible platform.

And Will, just to add to that, overall, we talk about Clover's operating system. It's a payments, it's a software, it's a hardware solution. Your question about hardware being good growth this year, absolutely. Your comment about that will not likely reoccur, I'll generally disagree with. This is a hardware business with software and payments. First of all, we make good margin on our hardware. It is not something we give away. It's not a loss leader. And our hardware, if you look at the hardware revenue as a percent of overall Clover revenue, it's been relatively consistent in kind of the mid-teens range for a few years. We continue to invest in developing new hardware. We think we've got a best-in-class, world-class hardware, and we continue to build out that capability and provide that best- in-class hardware to our client base. So we think that continues to sell into the future.

And for our final question, we'll go to the line of Andrew Jeffrey from William Blair.

A question on Clover value-added services and maybe just the competitive environment. Bob, as you see more international expansion, some of the growth initiatives gain traction in Clover, is it possible that value-added services attach maybe dips before going back up again and just so sort of adoption of those services? And then just generally in the U.S., any commentary on the software integrated competitive environment? Is it stable? Is it changing a little bit at the margin? Any help there would be great.

Yes, it's Mike. Bob can come back in on it. Obviously, what I just talked about is continuing to serve as a business platform. We have to continue to build value-added services within the VAS book, and there's a tremendous amount of focus around that. Internationally -- in the markets we've gone into so far internationally, it's a less robust VAS portfolio. So it's both expanding internationally and building out the VAS on the international side. So hopefully, we see both of those grow over time, they should as the efficacy of the platform plays out with small businesses. So we're very excited not just in the U.S., but to really bring VAS to the external markets versus where it is today. And that's a hallmark of what Clover is. On the competitive landscape, we've got great competitors. I think our focus is going after businesses and helping businesses run their businesses better versus some type of competitive dynamic. There's great other platforms out there, whether in specific verticals or more broadly. And we think we've got a platform that can go globally, and there's plenty of TAM to go after on that front. So again, less than 10% share in the U.S., 0% share in the external markets. So the ability to penetrate and bring value-added to small businesses is -- we just feel like we're barely scratching the surface of that opportunity.

Yes. It seems like a big...

Andrew, I think in terms of the VAS U.S. versus global, certainly, the U.S. business -- U.S. market is more mature in terms of the value-added services and software operating system capability. And it varies by country, by region across the globe as well as varies in our offering. So we've talked about this a little bit, Australia being one of our new Clover international markets is probably the most furthest along in terms of richness of the software available on Clover and other markets, we continue to develop that capability. And I think it is a market that will continue to expand as we bring more capability. Today, you don't see a lot of that taking place because it's not available. And so we see that as an opportunity going forward. If you think about software, maybe a little less so, but working capital support is much more of a global opportunity for us.

The comparable other market is Canada. And again, we're excited this morning to announce the partnership with TD to really build out and distribute Clover further in that market where we've -- as I said, we've generated really good growth over the last 5 years of being there with the constant increasing availability of that. All right. Thank you. And to all of those on the call today, thank you for your interest, and our IR team is available for any further questions. Have a great day.

Thank you all for participating in the Fiserv Second Quarter 2025 Earnings Conference Call. That concludes today's call. Please disconnect at this time, and have a great rest of your day.