Fiserv Inc Q2 FY2023 Earnings Call

Welcome to the Fiserv 2023 Second Quarter Earnings 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 would like to turn the call over to Julie Chariell, Senior Vice President of Investor Relations at Fiserv.

Thank you, and good morning. With me on the call today are Frank Bisignano, our Chairman, President and Chief Executive Officer; and Bob Hau, our Chief Financial Officer. Our earnings release and supplemental materials for the quarter are available on the Investor Relations section of fiserv.com. Please refer to these materials for an explanation of the non-GAAP financial measures discussed 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 our 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 Frank.

Thank you, Julie, and thank you all for joining us today to discuss another very good quarter for Fiserv. Our results continue to demonstrate strong performance in revenue and operating income with second quarter organic revenue growth of 10%, led by performance in Merchant Acceptance, particularly in our international regions, and our Payments and Network segment. Adjusted earnings per share of $1.81 was up 16%, and adjusted operating margin of 36.5% was up 300 basis points. All three measures are tracking ahead of our previous guidance for the full year. As we look to the remainder of 2023, we note that economists' expectations have improved for GDP and consumer spending relative to the start of the year. But those economists also forecast a modest macro slowdown from the first half, in part due to higher anticipated unemployment and the reinstatement of student loan repayment. Among our financial institution customers, spending and spending intentions remain healthy even as net interest margins narrow and lending activity eases. Card and non-card payment services, digital banking, IT modernization and data analytics are high-demand services, and financial institutions are looking to us to deliver. With the outperformance in the second quarter, we are once again raising our outlook for the full year. We now expect 2023 organic revenue growth in the range of 9% to 11%, up from 8% to 9% previously. Adjusted operating margin is now forecast to improve at least 150 basis points this year, up from our prior expectation of greater than 125 basis points. With the year-to-date adjusted EPS growth of 14% and the improved revenue and operating margin performance, we are raising our full year adjusted EPS guidance by $0.10 to a new range of $7.40 to $7.50, representing growth of 14% to 16% over 2022. These second quarter results marked our ninth consecutive quarter of double-digit organic revenue growth. We have also repurchased nearly 6% of our shares outstanding over the last 12 months. I am incredibly proud of the strong performance and the hard work, foresight and collaboration that it took to get here. Now I'm focused on sustaining this momentum. There are multiple parts of our business that I consider future growth accelerants. I will touch on five of these today, and then we'll add and elaborate on them at our Investor Day later this year. Bob will provide more details on this later in the call. The first success story with a continuing growth outlook is Clover, our market-leading cloud-based SaaS operating system for small and medium-sized businesses. Revenue is growing more than 20% on $267 billion in annualized payment volume. This is a testament not only to the appeal of the product offering, but to the power of our vast distribution network. Clover has only begun to scratch the surface on the opportunity in vertical-specific solutions, horizontal value-added services and software and international markets. In the restaurant vertical, we expect to offer the full suite of value-added services and point-of-sale solutions for restaurants and QSRs of all sizes next year. And we've begun to build out vertical specialized software solutions for retail and professional services, including partnerships to manage inventory, improve SKU level analytics and manage appointment scheduling. We're also continuing to enhance our ISV partner program, giving our ISVs access to Clover hardware and processing alongside our value-added services. This will support our growth among additional verticals, including businesses in our back book. An example of this is our integration with SalonUltimate, a vertical software platform provider focused on the salon and spa industry, that will provide a broader combined offering to its large merchant base. Clover now accounts for approximately 25% of our Merchant revenue and remains on track to reach 35% by 2025, in line with our targets for $10 billion in total Merchant revenue and $3.5 billion in Clover revenue by 2025, implying an expected growth acceleration. Following in the footsteps of Clover is Carat, our unified commerce offering for omni-channel merchants. Like Clover, Carat is an operating system that delivers both payments and experiences, but instead of small businesses, Carat is for the world's leading brands and large enterprises. Carat has been posting revenue growth in the mid-teens on the strength of Fiserv's scale, flexibility and customization capability, plus key integrated services and broad payment options. We recently released our two biggest differentiators for Carat: Commerce Hub, which is the orchestration layer that enables easy client access to our products and services; and a data and insights command center that lets clients manage their data in real-time to better engage end customers and improve operating efficiencies. Over time, as with Clover, we'll add more first and third-party value-added services and payment flows and increase accessibility around the world. A third area of growth is digital payments and the intersection with digital banking. CardHub is our card account product for debit card issuers that offers all of the newest features for cardholders to manage their accounts. It helps our small and midsized bank issuer clients offer their customers the same cutting-edge functionality as the largest independent card issuers. We're about halfway through migrating financial institution clients onto CardHub where they can integrate with our digital mobile banking product, Mobiliti, and with competing digital banking providers. This migration has shown a doubling of customer adoption on CardHub in the first year, which means greater card usage, reduced call center activity and better security. Ensuring new clients to our digital banking solutions, we then tend to bundle our debit processing, debit network and risk services. The full integration of CardHub and Mobiliti is an investment unique at Fiserv because it spans two operating segments, Payments and Fintech, where others don't participate. Our card solution was strengthened by two acquisitions, Ondot and SpendLabs, in 2021. And it's just one example of the many cross-selling opportunities specific to Fiserv given our integration work and breadth of capability. A fourth growth area is Latin America. Although we haven't spoken in depth about our international operations, Latin America has been a standout grower in recent quarters, and we believe it can remain so for the long term. We've built a leading franchise across multiple countries and leading financial institutions that spans our product set from merchant acceptance to card issuing to fintech. The region is about 6% of total company adjusted revenue. And in Merchant Acceptance, it's 10% of adjusted revenue. It's largely driven by Argentina and Brazil followed by Mexico, Colombia and several others. Argentina has garnered attention lately for 100% plus inflation. And while this has certainly contributed to some of our Merchant segment's strength, a bigger and more sustainable part of the growth comes from anticipation revenue, also known as merchant prepayments. This is where we help merchants navigate the long settlement variance in Argentina, Brazil and Uruguay by funding their payment receivables early at a discounted rate. Businesses get better liquidity, and we receive a spread that carries low risk. Other parts of our LatAm business show strong momentum as well. We will be expanding our relationship with our partner, Caixa Econômica Federal, enabling card payment for their more than 13,000 bill payment agencies throughout Brazil. Fiserv solution will allow agencies to extend bill payment options from only cash and Caixa debit cards today to all credit, debit and prepaid cards. The opportunity is meaningful when considering that in 2022, this agent network enabled bill payments equal to about 11% of all credit and debit payments in Brazil. We are also enabling PIX transactions in Brazil in the P2B space, utilizing our Software Express platform and expanding our presence in PIX beyond P2B. We have also made PIX payments capability available in our large acquiring network in Argentina, supporting Brazilians visiting this neighboring country. We're excited for the opportunities presented by PIX, and it has already exceeded total card sales volume in Brazil in a short period of time. A fifth opportunity is Finxact. Finxact is the acquisition we made in April of last year to offer a next-generation core banking system that's cloud-native. It gives us the opportunity to compete and win with financial institutions of all sizes and across geographies, expanding our total addressable market. Our three-prong strategy is to win digital-first banks, provide next-generation core banking through our existing FI clients and add larger banks as clients often starting as they launch new products in the cloud. Another opportunity in Finxact that's coming together now actually started many years ago. We were an initial investor in Finxact when it began raising money in 2017 because we saw value in marrying a merchant processing platform with a back-office banking platform. Today, that's called embedded finance, and we are beginning to tap into the opportunity as merchants look to offer banking services to their customers. Their goal is typically to provide more purchasing power and payment flexibility to their customers while creating deeper relationships. Embedded finance will add to the many payment and banking solutions that merchants want to offer and we already provide. Here are some examples. We deliver stored value and gift card solutions to many of the world's leading brands. We're the largest private label credit card provider, and we are the processor behind most HSA and FSA accounts. Finxact is the single ledger and issuing platform for products like debit cards and DDAs. And from here, we're investing in the connectivity between platforms to create a more seamless experience for our clients and their end customers. Now let me turn the discussion over to Bob for more detail on our financial results.

Thank you, Frank, and good morning, everyone. If you're following along on our slides, I'll cover details on total company and segment performance, starting with our financial metrics and trends on Slide 4. As Frank said, our second quarter was a very good one and marked our ninth quarter in a row of double-digit organic revenue growth. Total company organic revenue growth was 10% in the quarter with strong growth across Merchant Acceptance and Payments and Network. Year-to-date, total company organic revenue grew 11%, led by the Merchant Acceptance segment which grew 16%. Our three international regions also continued to perform well, growing 31% organically in the second quarter. We saw strong growth in the issuer solutions revenue across all three regions and robust gains in Latin America for our Merchant segment. As Frank explained, while Argentina inflation grabs the headlines, the bigger driver of our growth here is anticipation revenue, reflecting a newer business for us in Merchant prepayments. In the near future, inflation in Argentina may ease, but it's likely to stay persistently high relative to the rest of the world. Our broad franchise, new lines of business and strong growth in the rest of the region should balance out any single country's macroeconomic issues. Second quarter total company adjusted revenue grew 6% to $4.5 billion and adjusted operating income grew 16% to $1.6 billion, resulting in an adjusted operating margin of 36.5%, an increase of 300 basis points versus the prior year. For the first half of the year, adjusted revenue grew 8% to $8.8 billion and adjusted operating income increased 16% to $3.1 billion, resulting in adjusted operating margin of 35.1%, an increase of 240 basis points versus last year and tracking ahead of our 2023 guidance. Adjusted earnings per share for the quarter increased 16% to $1.81 compared to $1.56 in the prior year. Year-to-date through June 30, adjusted earnings per share increased 14% to $3.38 at the high end of our 12% to 14% annual guidance range. Free cash flow came in at $608 million for the quarter and $1.5 billion for the first six months of the year, up 16% year-to-date. Our free cash flow remains on track to reach $3.8 billion this year, and we've retained line of sight to accelerating cash flow generation in the second half as is typical for our business. Now looking to our segment results starting on Slide 5. Organic revenue growth in the Merchant Acceptance segment was a strong 14% in the quarter and 16% year-to-date. Adjusted revenue growth in the quarter was 9% and 10% for the first half. Merchant volume and transactions grew 1% compared to prior year. This lower volume performance reflects two temporary factors. First is the decline in retail fuel prices of 27% on average in the quarter, which creates a tough comparison for petrol merchant volume growth. The second is related to some strategic realignment among large processing clients that's impacting their volumes and represents a large portion of our processing-only volume. Excluding these two isolated factors, volume growth would have been 4%. It's important to note that volume changes for both petrol and processing-only clients had very little impact on our revenue since petrol clients typically pay per transaction and processing carries very low fees. Nevertheless, they are big contributors to volume and thus the spread between our volume growth and revenue growth is particularly wide now. This should moderate over time. Other factors contributing to the wider spread are rising penetration of software and services and pricing benefits from both higher inflation and added value. We expect these to be positive contributors to revenue on an ongoing basis. Clover, our operating system for small- and medium-sized businesses, continues to build on the strength of its growing product offering to attract and retain more merchants and expand our revenue opportunity with them. Clover posted a strong 23% revenue growth for the quarter and 22% year-to-date. Quarterly Clover GPV was $67 billion and $267 billion on an annualized basis, up 15%. Value-added services penetration was 16%, 1 point above year-ago levels and on track to achieve our 25% target by 2025. We signed 40 ISVs this quarter, bringing our total signed to 77 year-to-date. Our momentum is starting to build with PayFac as well with the signing of Waystar and Pay Theory during the second quarter. Clover Sport added a relationship with a large service provider for the Cleveland Browns Stadium and other venues. Carat, our omni-commerce operating system for enterprise clients, grew revenue 6% in the second quarter. Excluding the loss of a Latin America processing client that began taking its business in-house, Carat grew 14%. While our relationship with the client remains good, we're focused on growing our higher-value direct business. The underlying Carat business remains strong. We've expanded our merchant processing relationship with Inspire Brands, the second-largest restaurant company in the United States, to include several more of their restaurant concepts while continuing our relationship with their Dunkin', Baskin-Robbins and Sonic brands. The agreement will add several thousand additional restaurant locations to our processing portfolio. Adjusted operating income in the Acceptance segment increased 21% to $718 million in the quarter, and adjusted operating margin was up 350 basis points to 34.7%. Year-to-date, adjusted operating income improved 20% to $1.3 billion, and adjusted operating margin grew 280 basis points to 32.7%. Turning to Slide 6. The Payments and Network segment posted organic revenue growth of 9% in the quarter, once again above the high end of the 5% to 8% medium-term guidance range. Notable growth drivers in the segment included active accounts on file in North American credit processing business; the Output Solutions business; our debit networks, STAR and Accel; and Zelle, led by continued growth in both the number of clients and transaction growth. As we've said, we expect tough comparisons through the rest of the year as we anniversary a large new client onboarding completed in mid-2022. Still, we anticipate the full year organic revenue growth rate to be towards the high end of our medium-term outlook of 5% to 8%. Also notable for this segment, two new payments initiatives took effect this month, offering incremental revenue opportunities for Fiserv over time. First, July 1 was the effective date of the Fed's final rule clarifying parts of Regulation II to make explicit that at least two debit network routing options are required for card-not-present transactions. For our STAR and Accel debit networks, which have been supporting CNP for years, this led to more than 80 of our current issuing clients enabling card-not-present, adding active cards for e-commerce transactions. This is a growth opportunity that we did not previously have. We also won several large e-commerce merchants as clients, including, in the second quarter, Lyft, ADT and T-Mobile. Last week, the Fed launched its real-time payment system, FedNow. So we are now live with six banks in the pilot phase and more than 70 committed to go live so far this year. We are encouraged by the opportunity to add more financial institutions since more than 1,000 of them are already connected to our NOW Network for Zelle, providing a single point of integration that could be leveraged by FIs to easily add new rails. That's a major differentiator for Fiserv. But the key to FedNow adoption is compelling use cases, which we think will grow over time, most likely in commercial payments and bill pay spaces. Adjusted operating income for the segment was up 17% to $782 million and adjusted operating margin was up 360 basis points to 47.4% in the quarter, driven by our strong revenue growth and productivity. Year-to-date, adjusted operating income was up 16% to $1.5 billion and adjusted operating margin was up 240 basis points to 45.6%. Moving to Slide 7. Organic revenue in the Financial Technology segment declined 1% in the second quarter, resulting in 1% growth for the first half. High periodic revenue in the second quarter of 2022 drove a difficult comparison this quarter, creating a 3-point headwind. We continue to expect organic growth within the guidance range of 4% to 6% this year as in-year revenue is booked and implementation work on prior wins is completed. Adjusted operating income was up 1% in the quarter to $285 million and up 2% to $565 million year-to-date. Adjusted operating margin in the segment increased 130 basis points to 36.3% in the quarter. For the first half, the segment's adjusted operating margin grew 60 basis points to 35.8%. We added 10 new core account processing clients in the quarter, including four wins for DNA, our market-recognized leading modern core banking platform for banks and credit unions. Fintech showcased its extensibility as an enabler of embedded finance with the win at Pay Theory. This payment facilitator serves the education and the health care sectors and plans to enable a suite of banking-as-a-service and money movement capabilities for its vertical SaaS partners. We are integrating Fintech with our merchant PFAC platform to enable Pay Theory to extend its vertical SaaS capability to banking and payments. Our goal is to provide a single integration for vertical SaaS providers who want to leverage assets across our banking, payments and merchant businesses. The adjusted corporate operating loss was $142 million in the quarter and $264 million year-to-date. The slight increase over the first half last year is largely impacted by expenses tied to our client conference, which we held in-person for the first time since the pandemic. The adjusted effective tax rate in the quarter was 20.6% and was 19.8% for the first half. We continue to expect the adjusted effective tax rate to be approximately 20% for the full year. Total outstanding debt was $23.2 billion on June 30, and the debt-to-adjusted-EBITDA ratio was 2.9 times. During the second quarter, we issued €800 million of eight-year senior notes to replace notes that matured in early July and reduced our commercial paper program balances. Variable rate debt sits at 13% of total. During the quarter, we continued our disciplined capital allocation strategy, repurchasing 8.6 million shares for $1 billion and 21.8 million shares for $2.5 billion over the last six months. We had 70.1 million shares remaining authorized for repurchase at the end of the quarter. As we continue to optimize our vast product portfolio for value and strategic fit, yesterday, we completed the sale of two financial reconciliation products to Trintech for roughly $230 million. We are fully committed to our longstanding disciplined approach to capital allocation, which includes investing in our businesses organically, maintaining a strong balance sheet, returning cash to shareholders through share repurchase and pursuing high-value and innovative acquisitions. And wrapping up on Slide 8. First half organic revenue growth was well ahead of our prior guidance for the full year, so we are again raising the range from 8% to 9%, to 9% to 11%, which considers economists' range of second half outcomes. Based on the strong second quarter results and higher anticipated organic revenue growth, we are raising our full year adjusted EPS guidance range once again from the previous $7.30 to $7.40 to a new range of $7.40 to $7.50, representing growth of 14% to 16% over 2022. This includes a higher adjusted operating margin now expected to improve at least 150 basis points this year, up from our prior guidance of greater than 125 basis points. Lastly, we're excited to announce our upcoming Investor Day in New York City on Wednesday, November 15, so please save the date. We'll spend time going deeper on our growth strategies, and you'll see how they factor into our outlook when we update our medium-term guidance. It will be a great opportunity to get to know our management team and see some of our products in action. With that, let me turn the call back to Frank.

Thanks, Bob. I'd like to acknowledge our corporate social responsibility programming because it continues to support better outcomes for our clients, shareholders and associates. You'll find many examples in our annual CSR report published in May. Highlights this quarter include growth in our employee resource groups and internal mobility; additional grants for small business under our back-to-business program; and awards and recognition as a top employer for veterans and National Guard members. We're also in the process of submitting data to the Carbon Disclosure Project, or CDP, for the third straight year. Finally, I'd like to leave you with some important perspective from our annual client conference, Forum, which we hosted in June. For the first time since the pandemic, we were able to meet with thousands of clients and prospects in person. Together, they represented over 50% of our revenue from financial institution clients. We hosted education sessions on real-time payments, embedded finance and cloud modernization, and an experience center that showcased key products like CardHub, Digital Banking, Finxact and the new Clover Kitchen Display System. As gratifying as this was, the more meaningful takeaways for me can be summed up in three themes I heard from clients again and again. One, they love our products and they're ready to spend. Our core banking systems, especially Premier for community banks and DNA, our most modern cloud-enabled core, are coveted by bank and credit union CIOs. Our smaller clients remain largely untouched by the March banking turmoil. And our larger clients have one eye on the regulatory environment and the other on how we can help them accelerate their growth. Two, they are rooting for our innovations. Small and midsized financial institutions see Fiserv as their champion for the latest technology solutions. They're relying on us for their digital and mobile banking, top-tier features in card services, and data and analytics. Three, they have noted our improved service. We've already made strong progress in client service with our relationship management model over the past year. Most recently, as an example of our operational excellence initiative this year, we launched a commitment tracker where clients can view the deliverables we promised and track their progress. It's the first-of-its-kind in the industry for transparency and accountability, and financial institutions now have one more reason to choose Fiserv. So to conclude, as we approach the anniversary of our merger exactly four years ago this week, we are gratified that our vision and execution have proven out with results that exceeded expectations. From here, the combination of our investment, innovation and talented workforce mean the next four years tend to be even better. And now, operator, please open the line for questions.

Thank you. We would now like to open the phone lines for questions. Operator provided instructions for asking questions. For our first question, we'll go to the line of Dave Togut from Evercore ISI.

Thank you. Good morning. Good to see the acceleration in Clover revenue growth. Noting the long-term plan to continue to accelerate Clover revenue growth, if we zoom in a little closer on to the next, let's say, 6 to 12 months, would you expect this trend to continue? Just as a quick follow-up, the 80 issuers that you enabled for card-not-present on STAR and Accel, is there any way you can quantify potential volume from those issuers over the next year or so?

Yes. Thanks, Dave. As you've heard us talk over time, we continue to have a large opportunity, both in the ISV and our day-to-day operating business itself, and we expect to see acceleration. You'll see us bringing more software into the product set and more vertical solutions. We believe we have a long opportunity set in front of us. Remember, we haven't gone to the back book at all. That's an opportunity. It's not anywhere in our guide, that back book opportunity. You should expect us also to continue to add services, and that's really driving that penetration. So in our vision and visibility, we see continuing acceleration of Clover growth and then international growth as well. On the card-not-present enablement, we've been guarded on this item. We're in the very early stages. Step one is enablement. Step two is merchants adopting it. I think as we come closer to Investor Day, you'll get better visibility. It's really the first at bat, but we have demand, we have issuer compliance with us on it and we have opportunity in front of us. And fundamentally, none of this is in today's set of numbers or the guide that we're talking about.

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

Guys, thanks. Frank, I know you touched on the Forum, but I'd love to just hear your thoughts on demand from the banks right now and just in the context of the environment we're in going into this quarter as well as volume trends in just merchant, more importantly, consumer trends into July, what you're seeing across the ecosystem domestically and maybe internationally also.

Let me talk about Forum because it was our really first post-pandemic physical Forum. The ability for our leadership team to meet thousands of clients and prospects in person was powerful. We intentionally held many listening sessions and meetings. Their desire to engage and spend is very high. They also want us to be part of their embedded strategy to help them grow. We watched the response to the commitment tracker closely. We saw examples where clients talked about strategic partnerships with us. We're part of clients' growth strategies across a broad set of capabilities. When you look at recent acquisitions and integrations, clients have been receptive to CardHub through Ondot and the broader set of capabilities we offer. Demand is strong. Finxact, in particular, received a lot of attention at Forum and is viewed as a leader in its space. On consumer trends, there are headwinds — the student debt issue and higher interest rates — and you've seen a moderation in volume. July was similar to what we saw in the quarter. But our business mix, with Clover and other value-added services, allows us to perform well despite these pressures.

Darrin, just to add on Forum, as someone who attended several pre-merger Forums, the tone and depth of conversations this time were quite different. There were deeper innovation and partnership discussions and consistent feedback on improved customer service. The commitment tracker and our increased openness have been well received. Our Developer Studio and open APIs are enabling broader capability, giving clients easier ways to integrate and innovate with our platforms.

Yes. Two additional thoughts: clients' willingness to engage and discuss their innovation needs was clear — innovation happens with clients, not in isolation — and that creates a strong pipeline of opportunities and follow-up meetings.

That's great. Just a quick follow-up on the spread between volume and revenue at Merchant. If we exclude things outside your control like gas prices and processing-only volume dynamics, and focus on pricing and software penetration, how should we think about the sustainability of those factors driving better revenue and for how long?

We believe the opportunity to continue to add value-added services and deepen penetration is ongoing. We previously outlined Clover's path to 25% value-added services penetration by 2025, and we're off to a good start. We're focused on developing new capabilities and creating value for clients, which enables value-add pricing. There is an element of benefit from inflation today, but our main focus is delivering client value and being paid for it.

A simple way to think about it is we want to add merchants and sell them multiple products, and continue to sell products into our back book over time.

Makes sense. Thanks, guys.

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

Hey, thanks. Nice results here. Frank, I know you called out LatAm as a standout. You guys have had good results there. I would love your thoughts on some of the recent M&A in the region with Visa buying Pismo and other activity. Is there anything going on there that might change things competitively?

I'd go back to our Brazil business, which is the largest in Latin America and was built largely organically. We have strong local leadership and have made strategic investments such as Software Express that can scale across Latin America. We've added significant banking franchises, including our relationship with Caixa, which has given us broad reach in Brazil. We've expanded that relationship into bill payment agencies, which is a material opportunity. When we entered Brazil, there were few U.S. players in the market. Our regional operating model and deep local presence put us in a strong position. We like our hand in the region and see continued strategic opportunity.

No, I appreciate that answer, and I know you guys have really upsold Caixa, so it's a great case study. Quick follow-up for Bob: thinking about the raised revenue and margins, but no raise in free cash flow, is this a timing issue given higher working capital and software investments? Can we expect free cash conversion to improve beyond fiscal 2023?

Yes, Tien-Tsin, that's correct. We've raised revenue guidance, which will bring additional working capital. As we continue to grow the top line, there's investment opportunity as well. We feel good about delivering approximately $3.8 billion in free cash flow and expect working capital to normalize and cash flow to accelerate as collections come in.

Well done. Thank you, guys.

Next, we'll go to the line of Lisa Ellis from MoffettNathanson. Please go ahead.

Hi, good morning. Thanks, guys. I wanted to ask about Carat. You highlighted Carat was up 6% as reported, 14% excluding the one client roll-off. Can you give a little additional color on how we should think about the scale of Carat within the Merchant business, either on revenue or a volume basis? And elaborate on how this platform is differentiated and whether Carat growth is mostly new client sales or migrating existing enterprise clients onto an omni-platform?

Think of Carat as a go-to-market product that will capture both new clients and opportunities from our existing book, though we've focused growth efforts on new enterprise clients. Under Carat is an orchestration layer called Commerce Hub. Migrations will begin in the fourth quarter and beyond and will often be customized solutions for the client. We view Carat as a clear double-digit growth engine that will scale over time. You should think about it as a several-hundred-million-dollar business growing double digits with a large pipeline. We believe Carat will become an industry leader.

Great. And my follow-up: if I think back to the deep dive on Merchant, I believe the processing piece was expected to be flattish through 2025. With the roll-off you mentioned, does that change the outlook for processing? Strategically, how do you view processing within Merchant as you see strong growth from Clover?

Nothing has changed in our outlook. Processing has historically been a relatively flat, lower-fee business. We have had clients depart and clients added over time. Processing volume can move quarter to quarter, but it has little impact on overall revenue because much of that volume is low-fee processing-only. Think of processing as a roughly $1 billion business that is important but not the primary revenue driver. We'll continue to add higher-value services and focus on revenue growth beyond processing volumes.

Yes. Thank you. Thanks a lot.

Next, we'll go to the line of Jason Kupferberg from Bank of America. Please go ahead.

Thanks, guys. I wanted to stay on Merchant. Can you put a finer point on where you expect Merchant revenue growth to land for the full year? And as we tune back half models, how much will the spread between revenue growth and volume growth potentially shrink in Q4 as you lap some of the discrete pricing actions you took last year?

Jason, from an overall outlook standpoint, we previously guided Merchant organically to 10% to 13% for 2023. Given the strength in the first half and improved expectations for the second half, we now expect full year organic growth in the Merchant business to be in the 14% to 17% range. Clover, Carat and international growth are providing strong lift. On the volume versus revenue spread, there are many moving parts, but we continue to drive more revenue that is not tied directly to volume, and we remain focused on revenue growth. I'll stick to the 14% to 17% full year outlook for Merchant.

And a follow-up on Fintech: what's the visibility on second half acceleration? Any color on Q3 versus Q4 given lumpy comps?

We have good visibility. There are lumpy quarters in Fintech due to periodic revenue and implementation timing. We expect to deliver within our 4% to 6% full year guidance, driven by in-year activity and backlog we see in implementations. Comparisons are lumpy through the second half; third quarter will be an easier compare than fourth quarter, but we remain confident in delivering the range.

Thanks, Bob.

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

Yes. Hey, guys, congrats on four years. One of the key highlights in the quarter was the incremental margins in Merchant — about 75% of the revenue growth hit the profit line. Is that sustainable and what drove it?

We've had good fall-through and saw similar levels in the fourth quarter last year. This is the benefit of a very scaled business and continued productivity. We've driven productivity and synergies post-merger, and we continue to do so. We feel good about margin expansion overall and delivering at least 150 basis points of adjusted operating margin improvement this year.

Thanks. Quick follow-up: Clover revenue was about 8% above volume growth — is that both product and pricing and is that sustainable?

Yes, that's driven by continued penetration of value-added services, which adds to the spread between revenue and volume. Value-added services were 16% penetration this quarter and are headed to 25% by 2025. As we continue to provide value to business customers and allow them to focus on running their business, that value translates into pricing opportunity and margin for us.

Gotcha. Thanks, guys. Great job.

Next, we'll go to the line of Bryan Keane from Deutsche Bank. Please go ahead.

Hi, guys, and congratulations on the strong results. One of the secrets has been growth through acquisitions and value-added services, especially in Merchant. What's the pipeline look like for M&A? Are there deals you want to make to continue to add and push up revenue growth?

We've had success with acquisitions like BentoBox, Finxact and Ondot, and smaller strategic investments like Software Express. We stay close to startups through minority investments, which gives us insight and a pipeline of acquisition opportunities. We have a strong track record of retaining founders and integrating capabilities. You should expect us to continue to pursue such opportunities as they align with our strategic objectives.

Thanks, Bryan.

And our last question comes from Ashwin Shirvaikar from Citi. Please go ahead.

Thank you. If I can ask, Frank, you mentioned a couple of times over the last few quarters that Clover isn't necessarily being applied to the back book. Could you talk about that opportunity? The yield you get from Clover seems to be improving as capabilities increase. Could you talk through the plan?

Yes. When we discussed Merchant at our previous Investor Day, back-book Clover adoption wasn't included in our guidance. There is an opportunity to strategically lean into the back book, and we expect to go deeper over time. We see the ability to bring more software services into our current Clover client base, which will drive the spread between volume and revenue. We've been on the Clover journey for over a decade and still think we're in the early innings of the addressable opportunity. This is not in last year's guide, and we'll provide more detail at Investor Day.

Great. Quick question on the sale of the financial reconciliation business: what's the revenue and profit impact? I saw proceeds of about $230 million.

You will see us continuously evaluate our portfolio for strategic fit. For that business, we were not the industry leader and it wasn't a future growth engine for the company. We do well for our clients, but we decided this was not the best use of our capital. That framework drives such disposition decisions.

Ashwin, in terms of size, this is a very small business — on the order of less than 0.2% of last year's revenue.

Got it. Okay. Thank you.

Well, thank you, everyone. Thank you for your attention today. Please feel free to reach out to our IR team with any questions. Look forward to talking to you in the future, and have a great day.

Thank you all for participating in today's second quarter earnings conference call. That concludes the call for today. Please disconnect at this time, and have a great rest of your day.