Q3 2022 Fiserv Inc Earnings Call
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Welcome to the <unk> third quarter 2022 quarter, earning conference call all participants will be in a listen only mode until the question and answer session begins following the presentation. As a reminder, today's call is being recorded at this time I will turn the call over to Julie <unk> Senior Vice President of Investor Relations at Fiserv.
Thank you and good morning with me on the call today are frankly isn't yano, 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 Dot 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 our 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.
And now over to Frank.
Thank you Julie before I begin let me again welcome Julie to the team.
As we announced last quarter should move to a new role as the head of strategy.
Joey 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 adviser of earnings call Julie.
Turning to the results overall I'm very pleased with yet another quarter of double digit growth in both organic revenue and adjusted EPS.
We continued to demonstrate the strength of our client base.
<unk> 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.
<unk> invested in new products to better compete and capture a vision fees.
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, and included in <unk> via an exchange headwind versus last year, which is <unk> more than we anticipated 90 days ago.
As we look forward ratio remained from inflation.
Still tight 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 at a high end of the range for this year to 11% organic and raising our adjusted EPS to $6.48 to <unk>.
$6 55.
Clearly, we are executing well beyond our legacy as a mid single digit top line grower.
On the actions, we've taken and the investments we've made I remain confident that we can achieve faster growth in the high single digit range or better over the coming years, while maintaining our track record of double digit adjusted EPS growth.
When we brought together visor of adverse data in July 2019, we envisioned in industry, leading combination with a complete set of strong payments and fintech capabilities that we're a highly complementary.
As we combine these great companies, whereas sometimes asked how being a diversified company that serves merchants and financial institutions large and small across all payment types is the winning strategy.
We believe we're already demonstrating this through market share gains faster growth and expanding margins in the third quarter is another proof point of the power of this team and our set of assets and capabilities.
Third quarter highlights the continuing momentum in our payments and network segment with them.
Organic revenue growth of 11% and adjusted operating margin expanding 190 basis points to 45, 9%.
Our issuer solutions business, which includes credit processing for a large issuers.
In card and statements services was particularly strong.
Issuers.
Contracts with three of the top 25, North American credit card issuers within the last two years, a testament to a single platform that delivers a full suite of digital capabilities.
We can trace a success here are directly to the investment we've made in the business over the last few years. These include a robust set of AP is AI based fraud management cardholder experienced technology via the on that acquisition integrate.
<unk> end to end output solutions, plus ongoing cloud enablement of our technology stack.
Since we began combining advisor of inverse data, we made a decision to pursue the opportunity in the government vertical whether it's a large tam in multiple use cases that span merchant issuer and output services, we began investing in our solutions people Andy.
Infrastructure and the strategy is now playing out.
This month, we began issuing roughly 10 million prepaid cards for the state of California under its middle class tax credit program.
Since announcing this win last quarter, we were awarded another contract with the California State Comptroller for cards supporting various disbursement needs.
We work with five other states to disperse and process their unemployment benefit cards.
The pipeline remains large and there's vertical is traditionally quite resilient through the economic cycle.
Investing in innovation is a constant across our business and nowhere on the benefits more evident than in our merchant acceptance business. We had another strong quarter for merchant growing organic revenue, 14% once again outpacing our medium term guidance of nine to 12.
Per cent.
At Clover, we rolled out several new products to enhance the merchant experience and customer authorization. This quarter, we'll be piloting expanded retail vertical offering with additional horizontal value added services, including integration with accounting and business software.
Our vertical solutions are resonating in September Colver sports Ida agreement with Caesars Superdome, and the Smoothie King Center in New Orleans, adding to its base of over 250 professional and college level sports venues Cobra was streamlined purchasing a concern.
<unk> sans premium bars, and clubs with digital contactless and self service purchasing.
We will also provide third party integrations to related services and real time data insights pairing our enterprise Omni channel operating system launch new money flows and continued to lead the market in payout choice and flexibility.
We launched more instances of our multi purse wallet.
White label solution that holds multiple sources of value, including loyalty and prepaid.
Proud to share that in July by serve was a merchant acquirer of the year by the merchant payment ecosystem awards in recognition of the highly successful debut of care as an omni channel Commerce operating system as I mentioned earlier this year.
Data is emerging business for us and it spans both merchant and financial institution clients.
We're excited to announce our new data as a service offering in September partnering with Snowflake.
Pfizer will enable customers to access their payments data in near real time do better informed business decisions.
By leveraging snowflake secure data sharing customers can now seamlessly and securely access and integrate their data driving deeper timely insights.
A large energy company is just one type of client already in pilot.
Institutions are excited by our data as a service offering as well Carter bank of $4 billion mid Atlantic Community Bank is in an open data pilot with us to consolidate and connect all data across the enterprise.
Many banks tell us they spend too much time trying to source provision and integrate data by serving snowflake, we'll make it easier for Carter to use the data across their advisor or an advisor systems to fully understand their customers down to the brands.
Level.
Fintech performance was lower than normal this quarter at 1% organic revenue growth, but generated 4% growth year to date and is on track to meet our organic growth guidance of 4% to 6%.
This is a consistent business, but timing of product additions new business implementations and professional services revenue can vary from quarter to quarter.
Some of this revenue anticipated for September slipped into the fourth quarter and we have good line of sight to full year revenue in the medium term guidance range.
We remain encouraged by our visibility here after signing 14 core wins in the quarter with nine being competitive takeaways spread across large banks, new banks fin techs community banks and credit unions.
Earlier this year Webster Bank acquired Pfizer of clients Sterling bank to create a $65 billion in northeast regional in.
In the quarter web as their chose fiserv as its core account processing platform with multiple surrounds spanning our fintech and payments offering we've talked about the strategic importance of Fintech, leading cloud banking core today with 11 clients already in production.
After just six months under our umbrella Zach is attracting strong interest from both new and existing fiserv clients.
With two large new client wins in the quarter transact will become the cloud based core platform for two more emerging online banks.
And just yesterday, we entered into a new agreement with Venus the power of this global digital banks first to market solution running thin Zack on the Microsoft Azure cloud.
Looking forward, there's plenty of uncertainty around what 'twenty 'twenty three will bring we're currently in the planning phase, but have already taken steps to ensure we are prepared for a softer macroeconomic environment.
We're fortunate to have a well diversified business with high recurring revenue and a strong balance sheet, Bob will talk more about these factors shortly but I want to share with you what I am seeing and hearing from clients and where I see opportunity for Pfizer in the coming quarters.
The payments segment has successfully capitalize on industry trends during an enabling strong growth.
I call out four major trends that are responsible not only for the strong growth. We are seeing now, but a robust pipeline for the coming year.
Burst cardholders continue to expect better payment experiences and more issuers with two of our platforms to meet this demand.
Issuers are also investing in more modern technology solutions, such as better digital.
Broad and loyalty capabilities, all of which offer us attractive cross sell opportunities.
Second the addressable market is growing.
<unk>, such as health care education, and government are increasingly looking for new credit processing and disbursement solutions non traditional startups and Vin techs have also been actively entering the card issuing in the lending space third demand verbal.
<unk> solution remains high as issuers compete heavily for new volume.
Finally, the cards payments environment has remained active even as we see continued growth in non card payments, including zelle and real time payments.
Two regulation led opportunities.
First the fed announced that it's real time network Fed now would go live in mid 2023.
Pfizer has been part of the fed now pilot and we believe that we are well positioned to participate in the rising adoption of real time payments.
We enable financial institutions, and eventually Villers and merchants integrate.
With a variety of real time services and networks through a single connection.
Second earlier this month, the federal reserve finalize a clarification to Ray Guy I that the dual network requirement for debit applies for all transaction types, including card not present.
<unk> believes this will promote market competition.
Which will ultimately benefit consumers merchants issuers and the industry at large our debit networks star and Accel support card not present transactions, but many factors will influence our ultimate opportunity.
So we will wait to see how issuers implement Israel once it takes effect in July .
In merchant acceptance, the uncertain macro environment as merchants large and small looking to optimize the value in their operations. In some cases. This is increase their desire for a single full service provider over fragmented specialists and that suits us well given our breath.
And scale their focus on areas like payment optimization well.
Lower cost payment methods and fraud is presenting more value added service opportunities as well.
In fact, we've won a few deals to enable pay by bank, which lowers the cost of acceptance for merchants is an easy way for consumers to earn rewards one of our large petro merchants Sunoco with 5500 locations with just one such win in the third quarter.
With the e-commerce penetration returning to a more normal growth trend card present solutions are in focus as the more complex problem to solve for integrated Omnichannel solutions, our marquee base of large merchant customers is looking to us.
Here.
This includes leading Petro and grocery merchants, who are more insulated from economic slowdowns due to the non discretionary nature of their businesses in our Fintech business.
Thanks are managing through the macro uncertainty with a focus on serving existing customers and improving operational efficiency to areas, where we provide a number of important products and services that offer a way to grow accounts and enter new markets in a cost effective manner.
Pin Zack our new cloud native modern banking platform is being recognized as the best way to conceptualize create and launch new banking products and our pipeline is particularly active with pioneering digital banks and big issuers and.
During the banking market via embedded finance, a leading example is our partnership with one finance supporting their growth initiatives in retail we can offer them faster time to market with greater flexibility and scalability plus the largest product portfolio.
Oil available.
Now, let me pass the discussion to Bob for more detail on our financial results.
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 four.
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.
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 in 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 nine months of the year adjusted revenue grew 9% to $12 4 billion and adjusted operating income increased 10% to <unk>.
$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 Bento box and Fintech.
The significant strengthening of the U S dollar, particularly in September and.
And third the net impact of inflation on a revenue offset by costs for both labor and materials.
As we've previously said, we expect significant adjusted operating margin expansion in the fourth quarter.
We have four factors driving this improvement.
First the benefits of the final ramp down of prior integration expenses, and resulting productivity benefits.
Second in the latter part of the third quarter, we began taking some cost actions to tighten spending in light of the continued uncertain macroeconomic conditions across the globe.
Third as part of our ongoing strategic review, we divested our Korea business and two small low margin non strategic units. Finally, we anticipate healthy operating leverage and easier inflation comparisons in the fourth quarter. These factors should deliver our full year guidance for at least 100 basis point improvement.
And sets us up well for 2023.
Third quarter adjusted earnings per share increased 11% to $1 63.
Compared to $1 47 in the prior year.
Unfavorable foreign exchange impacted adjusted EPS by <unk> <unk> per share year over year or five points of growth headwind relative to the exchange rates a year ago.
Year to date through September 30th adjusted earnings per share increased 14% to $4 59.
Free cash flow came in at $849 million for the quarter and.
And $2 1 billion for the first nine months of the year.
Free cash flow conversion was 81% of adjusted net income this quarter well ahead of prior year and first half levels.
Like the fourth quarter of 2021, we expect a significant ramp in free cash flow and free cash flow conversion in the last quarter of the year pre.
Free cash flow conversion of 71% year to date reflects a combination of first continued organic investment in software and application development to drive higher growth across the business.
Second greater working capital investment in both accounts receivable and inventory driven by accelerated revenue growth.
And third higher capital expenditures associated with the newly acquired capabilities to drive innovation and integration as we close out the year the sustained strength in our business gives us confidence to raise our full year organic revenue growth outlook to 11% the top end of our previous guidance range of 9% to <unk>.
11%.
With this higher organic revenue growth outlook and execution on our cost actions that support continued adjusted operating margin expansion.
We are raising our full year adjusted EPS guidance range to a new range of $6 48.
To $6 55.
Representing growth of 16% to 17% over 2021 at the high end of our original 15% to 17% guide.
This includes significant strengthening of the U S dollar, which leads to an additional six cents of unfavorable foreign exchange impact in the third and fourth quarters relative to our expectations just 90 days ago.
While we anticipate greater than 100% conversion of free cash flow in the fourth quarter. We continue to anticipate strong revenue growth as indicated by another increase in organic revenue outlook.
We have real investment opportunities to sustainably grow our topline faster than market and faster than our history of mid single digit growth.
Therefore, we now expect full year free cash flow conversion to be approximately 85%.
Now looking to our segment results starting on slide five.
Organic revenue growth in the merchant acceptance segment was a healthy 14% in the quarter and 17% year to date.
Adjusted revenue growth in the quarter was 9% and 14% for the first nine months well ahead of our medium term segment guidance of 9% to 12% merchant volume and transactions grew 10% and 5% respectively. Excluding the loss of a processing client mid last year.
Activity was consistent in North America with some deceleration in Europe , we see new opportunity with the launch of our Deutsche Bank joint venture in the quarter.
Turning to our merchant operating systems, Clover, and carrot, we continue to see gains across key metrics, including net new merchant adds value added services penetration and partner relationships Clover revenue grew 19% coming off our toughest comparison against last year when the post COVID-19 returned to normal.
<unk> was in full swing.
Payment volume growth was 21% software and services penetration reached 15% of total revenue an increase of over 260 basis points from last year and up 30 basis points sequentially with strength in assets like Clover capital.
Silver connect for Isps built on its momentum with very strong revenue growth in the quarter as we continued to execute on our vertical strategies, adding 37 ISP partners.
We won key clients away from competition, such as Salon Ultimate software, a comprehensive solution for salons and spas.
Another paycheck win in the quarter was tempus, which expands our presence in the health care vertical we focused on our integration of Bento box and rounded out our restaurant offering with the acquisition of nex table for reservations, providing an opportunity to expand <unk> beyond the average increase of two to three times, which we see for.
Merchant using bento box and Clover.
Here. It also had a strong quarter with revenue growing at 18%. We continued to drive accelerated growth in new money flows with third quarter digital transactions up 67% year over year and online EBT transactions up 27%.
We delivered on our new innovations and signed agreements with Sunoco to launch pay by bank and with subway digital acquiring business in Puerto Rico via our connected commerce ecosystem. Among others. We also continued to show we're a provider of choice for Fintech. This time with peer lenders are too for digital disbursed.
And card not present acquiring.
Adjusted operating income in acceptance segment increased 11% to $610 million in the quarter and adjusted operating margin was up 20 basis points to 32, 4%.
The improvement was led by operating leverage and cost management more than offsetting the impact of acquisitions and divestitures as well as FX.
Year to date, adjusted operating income improved 14% to $1 7 billion.
And adjusted operating margin grew 20 basis points to 38%.
Turning to slide six on the payments and network segment organic revenue grew 11% in the quarter above the high end of the 5% to 8% medium term guidance range.
This growth was enabled by a variety of drivers across our business lines, our North American credit active accounts on file grew 19% versus third quarter of last year.
This growth was driven by both new business, Onboarding and a favorable credit environment.
Our international issuing business grew strong double digits, driven by macroeconomic improvement as well as the onboarding of new clients.
And our debit business continues to post solid growth driven by new client wins on our debit networks star in excel.
We are pleased with several wins among fintech in the quarter as well, including one with PAPAYA for E build distribution.
<unk> is an app provider that brings pillars and consumers together for a better bill pay experience.
Year to date organic revenue grew 8% and we expect the momentum in this segment to continue through the rest of the year.
Resulting in full year organic revenue growth at or above the top end of our medium term outlook range of 5% to 8%.
Adjusted operating income for the segment was up 14% to $744 million and adjusted operating margin was up 190 basis points to 45, 9% driven by strong operating leverage.
Year to date adjusted operating income was up 9% to $2 billion in adjusted operating margin was up 70 basis points versus last year at 44, 1%.
Moving to slide seven in the financial Technology segment, we posted 1% organic revenue growth for the quarter and 4% year to date within our 4% to 6% medium term guidance range. The nonrecurring portions of this business, including new product implementation work and professional services was impacted by the <unk>.
We have contracts in September , but we retained good line of sight to this revenue being booked in the fourth quarter.
Meanwhile, customer momentum continues and we had 14 core wins in the quarter.
<unk> nine competitive takeaways.
Adjusted operating income was down 5% in the quarter, the $261 million and up 3% to $817 million year to date.
Adjusted operating margin in the segment decreased 190 basis points to 34, 1% in the quarter driven by investment in Fintech and timing of periodic revenue.
Year to date, the segment's adjusted operating margin declined 50 basis points to 34, 8%.
The adjusted corporate operating loss was $109 million in the quarter, a slight improvement from the first half run rate and $356 million year to date.
Adjusted effective tax rate in the quarter was 29% and was 19, 8% year to date.
We expect the full year 2022, adjusted effective tax rate to be approximately 20%.
Total debt outstanding was 21 4 billion on September 30th.
The debt to adjusted EBITDA ratio dropped another 10th of a turn to two nine times, reaching our target leverage of being below three times, which we set when we announced our merger during the quarter, we stepped up our share repurchases buying back $750 million worth of our stock.
We had $24 5 million shares remaining authorized for repurchase at the end of the quarter.
Additionally, we repurchased a little more than $250 million so far in October .
We are fully committed to our long standing capital allocation strategy, which includes investing in our business organically, maintaining a strong balance sheet repurchasing shares and pursuing high value and innovative acquisitions.
We've included slide eight in the presentation to reflect this greater investment while strengthening our balance sheet and returning cash to our shareholders with that let me turn the call back to Frank.
Thanks, Bob.
Let me wrap up with an update of our progress on ESG NLP 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.
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And S M P C S a.
And significant increases in <unk>.
I S S 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, Pfizer have us well positioned for the long haul.
We've made the investments in product people and the infrastructure that will allow us to continue as an industry leader.
Diving 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 how people.
We're grateful for our dedicated workforce, especially our essential workers, who are present throughout the pandemic.
We recognize their commitment through compensation and career advancement.
While supporting them by upgrading and expanding our infrastructure.
This made it particularly gratifying when we were ranked number six 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 base.
Based on real world outcomes for employees, particularly those without a college degree.
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 co located Workforces, we began consolidating around large modern hubs and closed over 70 facilities in the past two years.
This morning, we announced our new location for our global headquarters in downtown Milwaukee.
Last month, we opened the largest fin tech 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 San Paulo, Brazil, and are working towards LEED certification. 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 increase productivity.
I will close by thanking our more than 40000 hard working Pfizer of associates around the world for working relentlessly to serve our clients and you our shareholders.
Operator, please open the line for questions.
Thank you we would now like to open the phone lines for a question. If you would like to ask a question you May Press Star one on your phone if you would like to withdraw your question. Please press star two our first question will come from Lisa Ellis from Moffett Nathanson. Please go ahead.
Hi, good morning, Thanks for taking my questions.
The 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 Pfizer.
Realizing that there were some unusual items in this year in 2022. Thank you.
Yes. Good morning, Thank you.
I guess, a couple of things one in terms of the.
Adjustments in our outlook for the full year.
<unk>.
Point to a couple of things one.
Continue to see.
Good opportunities to invest for future growth.
We're seeing an impact in the current year from an 11% growth rate.
Puts pressure on working capital as you grow the top line you have.
Receivables, but we're also carrying more inventory one of the things that has persisted longer than we had anticipated just 90 days ago as the supply chain issues slash problems.
China around getting point of sale devices et cetera.
And we continue to ensure that we have availability of product.
And <unk>.
<unk> can support our.
Client base with having a product point of sale product.
Colby shutdowns in China.
We are actually going on right now.
So protecting ourselves there.
Call for another point of sale device. So we continued 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 Fintech.
Bento box, we've made the decision to keep investing.
And therefore revised our free cash flow.
Okay.
Long term sustainability.
I'm not prepared to give guidance for 2023, but we've certainly seen in the last two years 'twenty, one and 'twenty two a pretty significant step function change in our growth rate of 11% last year, which granted is against a corporate 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 youre going to see something less than 100% free cash flow going forward I think.
Okay, Alright, and then my follow up Frank for you in your prepared remarks, commenting in regards to carry you highlighted that.
Merchants find that the in store the card present component of acquiring our omnichannel acquiring is often the more complicated part can you just elaborate on this I think this is a question we get often.
Sort of how to think about omnichannel acquiring in.
The trickier aspects of executing that.
<unk> that Mike currently use different acquirers in store and online. Thank you.
Yes.
Okay.
So.
Yes.
Thank you.
We have always had.
Strong in store presence.
And we were always a large processor.
Four.
E Commerce transactions.
Yes.
Yes.
It is.
Yes.
That channel presence.
What we see is that our ability to.
Great.
Is that a single integration point.
All reporting structure.
Connected hardware.
As a company.
Many times easier instance, we are excellent provider.
And when we look at current and long term Ccs also talking about.
Other features in there.
Oh Wow.
Okay.
That puts more product in there.
The loyalty can be prepaid.
Great Apes.
So, bringing all of that capability in a single connection.
Currently they don't allow a larger players.
We think it will drop the mid market.
The ability there.
Bill.
Alright.
Sure.
Omnichannel presence. So we're pretty excited we built out the use cases are there.
Phil the winning and secure volume.
Systems.
It's been strategic equity came from a different place than others.
Great physical presence at great processing capability and building out Omnichannel Friday.
Interesting.
That's clear.
Shall I think about it along with integrated value added services.
Yes.
All of that.
Let me take much larger value prop.
Hey, Chad.
That's helpful.
Terrific. Thank you.
Next we'll go to the line of David <unk> from Evercore ISI. Please go ahead.
Thank you good morning.
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 Good morning, So a couple of things.
Margin standpoint, if you recall actually going back to our first quarter earnings call, which we reiterated in our second earnings second quarter earnings 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.
By carryover integration spending.
We used to back in 2021 adjust out as merger and integration spending.
<unk> 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.
<unk> finish up in the first half first nine months of the year and so that investment that's that integration spending would taper off through the year and in particular.
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.
These projects again, it largely been completed at the end of the third quarter, we will see that come down in Q4.
Productivity the second piece of growth and margin is basic productivity I E not merger related not integration.
We refer to as operational excellence.
Rolling through.
Business some of that is very basic productivity six sigma leaning out.
Finding sort of a thing some of it is the fact that we've now re.
Opened our offices and our associate base is returning to the office, increasing our collaboration Frank talked about.
<unk> location work that we've done in creating large hubs like Berkeley Heights facility.
Our central New Jersey that is now open.
Giving some collaboration and productivity.
And then I.
Yes.
Final two things that will drive margin in the fourth quarter. One is scale as you know an incremental dollar of revenue in this company comps.
Comes through at higher than company average growth.
Given the fixed cost nature of the company and so we feel good about seeing good operating leverage on revenue growth and scale and then finally some of the divestitures. We did those three small units that we sold at the end of third quarter Youll see the benefit of fourth.
Q3 over Q2, we expanded margins 170 basis points. Obviously, if you do the math, we've got a big expansion expected in the fourth quarter.
Quite frankly, if you look over the last.
Five or six quarters right in line with what we've done in the past 300, 400, even 500 basis point margin improvement in a number of quarters in the last six to eight quarters. So feel good about our ability to generate at least 100 basis points for the full year.
Thanks for that 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 five year growth plan of 27% that you laid out at the March merchant acceptance deep dive.
Sure Devin I guess.
Fastest thing to think about are the largest thing to think about is that 19% number that we showed in our prepared remarks and in the slides.
Our reported number obviously FX had a pretty significant impact in the entire company actually.
And all companies in the third quarter, if you were to.
Currency adjust that number.
You probably pick up.
Three points, maybe even $4 so growth plus as you recall in the first quarter of this year.
We don't vested.
Small joint venture that we had.
The minority equity interest actually technically gen.
Generated about $175 million of cash so on an organic basis.
Clover growth is actually more in line with the 25% that we've talked about as part of our long range expectation of growing cohort. So at least $3 1 billion.
Yes.
At Mary.
About.
Alright, and then ask bill yet in 2020, we talked.
<unk> talked about a nine to 12.
For the sake.
We are in normal compares.
At 14% right now for the statement I also tank.
The work, we're doing on value added services.
Keep inching up and moving up that you saw.
Key drivers here.
We continue to grow with the merchant base.
Grow DLP grow the.
Sure.
And.
We feel highly confident that exactly what we said in March.
I know right now exactly as planned.
Sequential growth has been very high.
So if you look at it ex what Bob talked about and just like that.
And then driving out of that.
Tom.
It was in March.
Play out value added services will continue to grow quarter by quarter.
Understood. Thank you.
Next we'll go to the line of Darrin Peller from Wolfe Research. Please go ahead.
Thanks, guys.
Breakdown the merchant growth rate again, 14% is obviously somewhat industry, leading growth and get 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 in the spread between revenue and volume if that's something that you see.
<unk>, what's driving that.
Obviously over in care continuing to do well, but how is international how is the SMB versus enterprise.
Brian just any patterns, you're seeing change if any.
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 drum beat.
Thanks Ravi.
On the right side of that curve.
Just walk away from anything.
<unk>.
The investment you see us putting into this and that investments from sales infrastructure and product development.
Really driving that number.
I think you heard us announce partnerships across the board and then more today than as we talk more about <unk>.
But then the ISP is I think al.
Is mix, which we said at.
At the start of the pandemic that we had this tremendous balance next.
We have the best distribution in the industry and we had fabulous.
Great.
It's still playing out.
And that really is what's driving outgrowth number and volume.
We did not have a great.
Cologuard and the Europe .
But the mix of our business and the strength of our business.
From the largest retailers to the pizza startup Brooklyn.
I'd like to talk about.
It really shows through in the model I think the working Clover and the building of the.
Value added services.
Definitely also playing into our.
Our growth in a way that may not always be just dash, but also add our total product set and the ability to deliver it. So I think we do have industry, leading franchise and clover and.
You've always been supportive of it from the start.
Proved out its merit.
And you're seeing it come through.
I'd say the only other thing I'd add is you know.
Our <unk>.
Franchise is in person.
In Argentina.
Continue to win and grow.
Less franchise so.
Value added services.
<unk> growth in vertical.
Restaurants International that was out story in the beginning of the pandemic and that's our story coming out of it and you know.
We're having a margin discussion.
And we.
We are going to.
Be there.
I'd note that merchant has the largest margin it's ever had.
All right.
That's a testimony to our leadership in that business.
Yes.
Yeah.
Okay.
Thanks for.
Just a quick follow up on the payment segment, just the strong strong growth obviously the accounts on the issuer side was strong from a credit card.
But if you could just comment on what's happening in some of the other aspects of the business, whether it's bill payments sorts the network.
Just what kind of aspects of that growth is sustainable versus maybe once we anniversary the new wins is there more to go.
Thanks, guys.
Yes, I mean, we had.
<unk> talked about this.
The wins, John boarding up the wins to growing.
Frequently go back to Investor Day, where we talked about this incredible pipeline, which at that time felt like.
It was a once in a lifetime event.
Meaning you win.
Sorry.
25, issuers and that was a.
One time event.
Pipeline is the same size and shape as it was back in 2008 planning and the building out of healthcare and government verticals.
Investment in education.
Although at very low or.
For me at the higher end of that guidance range.
We go forward here.
<unk> given guidance for anything other than what we're talking about in 'twenty, two but yeah.
The pipeline very strong in Europe talking about your California win but the reality is we just had multiple government wins with our ability to distribute payments.
And a card based fashion and.
Probably the best capability and industry around that.
Thanks Kurt.
Yes.
Next we'll go to the line of Dave Koning from Baird. Please go ahead, Yeah, Hey, guys. Thank you and a couple of things I guess my first question kind of a follow up on David <unk> 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 a $100 million of extra right of extra kind of that that cost control.
Is that a fair way to think about it and you kind of said that 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 or are we looking at that right.
Yeah, David I'd be a little careful might have to run through all of your math you've got some.
Assumptions on.
The sequential growth or the growth year over year and 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.
Ended the organization now that we've got integration largely behind us.
Maintaining the productivity module 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 continue to see good growth in SMB also help so we feel good about the quote to use a four letter word mix.
Yes.
The fourth quarter we.
We see good opportunity or good line of sight towards.
Cost reductions productivity.
Divesting a couple of these small.
Non strategic units that are low margin and getting that scale really helps you in the fourth quarter.
Got you. Thank 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 actually implementations and then.
Also Q4 has been higher than Q2 every year going back since I think OE. It was maybe the last 10-Q4 was below Q2.
Is it fair just to think that if everything is kind of normalize at that that pattern would continue.
Yes.
Put up a 7% Q.
Q2 number.
I would anticipate us being north of 7% in the fourth quarter, we do feel good about the growth of the Fintech segment.
Look over the last several years there is variation quarter to quarter. Some of that is the periodic revenue or license and term fees, we have the additional impact.
And third quarter of this year for these nonrecurring.
One time are tight.
You used the term onetime or because they are the regular as contracts renew we get.
Short term or immediate term revenue and some of that's already slipped into the fourth quarter I E.
Going to see some of that rebound. So we felt good about number one we're already in the 4% to 6% range and we will close the year out that way.
Gotcha.
You had asked about new Milwaukee headquarters.
[laughter], yes, nice, yes, great well thanks, guys.
Thank you next we'll go to the line of Tien Tsin Huang from Jpmorgan. Please go ahead.
Thank you good revenue here I just wanted to ask on the <unk>.
Buybacks here you are at your target leverage as you called out the stepped up your buybacks it looks like what 80% of free cash flow is getting allocated to buybacks year to date. So just just wanted to check your appetite on buying back stock here. It sounds like October was.
Was in line with the third quarter run rate.
Appetite to buy back stock versus acquisitions.
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 in defense we were strong in.
The third quarter, and certainly strong so far in fourth quarter 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.
Did that while also.
Paying down some debt or delevering down to our targeted leverage range that gives us lots of flexibility to ultimately to both M&A and share repurchase.
It obviously is a bit of a trade off if I spend a dollar in M&A I don't have that dollar available 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.
<unk> capability.
Given the breadth of our existing portfolio. There are lots of things that we can add whether it's next table that we did recently or it's bento box or or fitting Zach we did all of that will also.
Buying back a lot of shares.
No I think.
I would just say that.
We have an appetite.
Across the segments.
We are highly selective.
In fact, and then we come back and that heavily.
Absolutely.
<unk>.
So.
We felt good about our balanced approach I think you can see.
Obviously, we invest in the business organically invest in the business and organically.
And then talking about buying back out buyback.
Our stock and returning that to shareholders too.
Yes, you can change you should imagine that we're going to have that continued balanced mentality.
And obviously, we like cash grain companies and grow them.
Good good.
Thanks for that my quick follow up if you don't mind just on the you mentioned.
Star and excel.
<unk> card not present transactions I know I've asked about this.
<unk>.
And I hear you that you want to wait for how issuers want to implement the new rule in July but.
Readiness for Star and Excel.
Is there still a lot of investment required.
To attack that and I guess I'll ask how aggressive we'll probably be in that pursuit.
At this time.
I'd say readiness is high.
Thanks.
You made a comment.
Thank you.
You want network capable.
Okay.
Eligibility.
To execute at that we think is there.
Obviously.
We always felt that.
This would create more competition.
And we like that.
We weren't competing for those transactions before.
You should expect us to be.
We do that every other business line.
Trading wrong.
At the best possible rate.
So I think yeah.
We're in the planning stage, obviously it is tough to issuers.
But we think.
This was a very good outcome and we continue we continue to.
I expect ourselves to participate.
We would given our size and scale and the nature of the business we have.
Thanks as always.
Thank you Nick.
Our last question will come from Jason Kupferberg from Bank of America. Please go ahead.
Thanks, guys 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 right. 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, the free cash flow conversion goes back north of a 100% or have some other things changed in the business around capex or other factors that we should just be thinking about thank you.
Yes.
I'll have to go back and check the transcript I don't think I said it was likely I said to see our business growing at this level.
Right not to give guidance or an outlook or just what we've said.
Previously obviously in today's world.
So if you 2023 'twenty four 'twenty five 'twenty six 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 accelerating from that when we gave when we did our earnings can be our investment call Investor Conference back in December of 'twenty.
We hadn't yet close to transact transactions, we've talked about.
That acquisition.
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.
<unk> continues to grow we will see some opportunity there building out clover.
Growing our merchant business, perhaps even at the high end of that 9% to 12.
March of 'twenty, two Investor conference talked about perhaps better growth in that segment.
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 generate good returns for our shareholders.
And just 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.
The growth this year.
Getting some great.
Back from our clients.
Hundred $20 billion worth of wins that we talked about back in December of 'twenty now.
<unk> implemented and growing many of them actually outperforming that $120 million worth of ACB.
We have a continued strong backlog.
<unk> out that government vertical that we've talked about certainly that opportunity again, we're not prepared to give.
Outlook or guidance for 2023, but we feel quite good about.
That segment is performing right now.
Okay. Thank you guys.
Alright, thank you.
Thank you.
Thank you for your attention today.
Please feel free to reach out.
Team with any questions and have a great day and thanks, a lot guys think girls ladies.
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