All right. Good afternoon, everybody. Thanks for joining us this afternoon for this session of the Morgan Stanley Fintech Conference. Very pleased to have Bob Hau, CFO of Fiserv with us today. Before we get started with Bob, I do have a quick disclosure to read. Please see the Morgan Stanley Research Disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales rep. Bob, I have to say, it's not really a question, I just have to say is that it was a little bit discombobulating probably to see the ticker change, right? Still getting used to that. Yeah. Yeah. You know, it's great that you're able to be with us today. Look, I think probably first and foremost among people and top of mind is just kind of the macro environment, right? Kind of how things fit or are developing from your perspective. We've generally seen in other data that consumer spending overall was stable by March and April through May. Maybe we continue to see some non-discretionary spend and ongoing shift to services. Investors themselves continue to be concerned about potential weakening. How are you reading the tea leaves of the consumer today and, you know, based on what you would expect or wanna see? Yeah, as you know, we have a pretty broad view into what's going on around the economy. Mm-hmm. Our data is very consistent with what you just described. We saw a bit of a lower growth in March. I would attribute that more to year-over-year comps, i.e., January and February of the prior year. Okay -was weak. as you may remember, January of 2022, COVID had kind of come rearing back. Right, right. People had shut back down a little bit. By the end of February, that had subsided, and people were back out and about. Right -restaurants and retail activities. You saw that in the year-over-year comparisons. As we went through our Q1 earnings call at the end of April, we iterated that, A, we saw that a little bit in March. April was consistent, we've seen May fall in that same line. In line with our expectations, we had a very strong first quarter. We modified our guidance a bit, took the bottom end of our guidance. We had previously been forecasting 7%-9% organic growth for the year. Yep. Yep. We took that up at the end of Q1 to 8%-9%. It still does assume a bit of a mild recession in the second half of the year. Right. Here we are, June 12th, it hasn't hit yet. We continue to see a good, robust consumer. Remains to be seen what happens, though. When you put together that initial outlook, had you anticipated mild recession through most of the year, or had you always anticipated that it would be more of a back-end weighted? Yeah, we definitely assumed it would be back half. Obviously, going into the year when we gave original guidance, for the year in February, we had a pretty good view of what was going on for first quarter. We weren't anticipating a cliff in second quarter. Right now, I think the conventional wisdom is still for a mild recession. I think the conventional wisdom is still, brief and mild. Right. Hasn't happened yet. Right. Got it. Let's talk about specifically then, you know, the pricing and that kind of thing. Last year, you were able to roll out some pricing changes late last year that have helped support better revenue growth. What drove that decision? You know, have you seen any attrition or impacts from it, and, you know, what is the opportunity on an ongoing basis, especially as you continue to add value to your services on the payment side? Yeah. We saw a price increase opportunity last year, I think largely in line with the rest of the world. Okay. I'd be hard-pressed to find, many industries or companies that didn't have price increases given the rate of inflation, i.e., costs were going up. Right. It was an environment where those conversations with the clients had shifted a bit. You didn't get immediately tossed out. You may get ruffled up a little bit. Right. ... but you didn't get immediately tossed out. We actually described last year that we probably saw a couple of points of growth from higher than normal pricing. We look at prices regularly. Yeah, yeah. We're a big proponent of value -based pricing. If we think we're providing value for our clients, we'll talk to them about that value and how they're seeing the benefit of using our solutions, and we try to get paid for that. How should we think about then, you know, that as it starts to roll through and we start to annualize that? I mean, we saw a big, at least differential in revenue versus volume growth this last quarter. Mm-hmm. like how should we be taking that into account? Yes, you're talking about our merchant segment in particular. Yeah. I would not attribute that gap, between volume and revenue growth, organic revenue growth, as price. Yep. Yes, that's part of it, but there's a lot of different variables that drive that variation, and that ebbs and flows from quarter to quarter to quarter. Okay. The last several quarters, many quarters, it's a positive gap. For sure. It got quite a bit larger in first quarter. Some of that's price, some of that is the mix of small businesses versus enterprise clients. It's a mix of the penetration of value-added services and what those value-added services are. We continue to see opportunity there. We're not forecasting, predicting that that spread continues for the balance of the year. Again, there'll be ebbs and flows in that. We have a broad distribution channel. We have a broad geographic reach. We have a mix of enterprise clients and small businesses. We have different mix of verticals, that, all of those elements can drive the difference in that gap between volume and revenue, and we'll see how that plays out. How much are you able to do through software and services, and continuing to roll that out, to make that like, I get that it ebbs and flows? Yeah can move around, but to make it more predictable, slash, or sustainable, maybe? Yeah. Maybe never be greatly predictive based on the mix of consumer spending, but are there things that you can do to make it, that gap or that spread wider for, you know, a more reliable time frame? Yeah, one of the priorities of the company, and we laid this out, geez, a little more than a year ago now, where we did a bit of a deep dive on our merchant business, and we talked about a couple of key things on the growth algorithm for our merchant business. Number one, we have two significant, meaningful operating systems. Clover Right our operating system for small businesses, and Carat, the operating system for our enterprise clients. Yep. Building out additional capability into those operating systems, number one, increases our opportunity to sell value-added services. Number two, the attainment or retention rate goes up because you become a more important part of the ecosystem of how a merchant, how a retailer, how a small business is running their business. Right, right. How an enterprise is running their enterprise. We continue to build that out. One of the things we talked about, particularly in Clover, is we were at very, low teens, high double digit, call it 12%, 13%, 14% penetration on value-added services. We expect that to grow to 25% penetration. Mm-hmm -by 2025, as we build out our vertical focus as well as build out horizontal capability. Vertical, building out additional capabilities right now focuses around restaurants, retail, and services. Horizontal capability that can go across a wide swath of different verticals, gives us more value-added services we can sell. Got it. Got it. You know, we get a lot of questions on how sustainable the higher level of revenue growth is going to be moving forward. You know, I think, like, what I'm trying to get at here with this line of questioning is, how should we think about what the medium-term growth algorithm is. Yeah for merchant generally? We gave a medium-term outlook for the company in late 2020. Right. That medium-term outlook officially was for 2022 and 2023. Yep. For the merchant business, we guided 9%-12%. For the overall company, we guided, again, medium -term, 7% and 9%. Last year for the company, we did 11%. The year before that, we did 11%. This year, our original outlook, was 7%-9% for the year. We've now updated that to 8%-9%. Right. given the strength of Q1. In our merchant business, we originally guided for the year at 9%-12%. We actually said, back in February, we anticipate 9%-12%, but actually probably at the top end of that. Mm-hmm. Maybe even a little above. I finally got pushed by a few of you, and I said: Look, I think 10%-13% is very reasonable. A lot of that will depend on the macro environment. Fast-forward to Q1 results with an 18% top line. again, I'm not suggesting that we're gonna stay at 18%. Our full year outlook is 10%-13%. Mm-hmm. That gives us, what? 8%-12% for the next nine months. Right. for the last three quarters of the year. We have an updated medium -term beyond 2023. We're looking at that right now. I feel very good about the growth trajectory of the business. We think we've, quote, "bent the curve." You know, pre-merger, the two legacy companies, one would have talked about mid-single digit growth and struggled to get to that mid-single digit. Right, right. You'd have to squint a little bit to see mid-single. Right, right. The other was mid to maybe high single digit growth, depending on the year. On a combined basis, two years in a row, we did 11%. Granted, one of those 11% is off of a COVID-impacted 2020. Right. last year is a solid 11%. This year, we're looking at 8%-9%. We think we're a high single-digit or maybe better growth rate. Right, right. On that, you know, if you go back to, and appreciating that you haven't updated your medium-term outlook since late 2020, Like, how important is that? Is that something that we should expect that you'll revisit and provide new, benchmarks and targets for us? Or, you know, Like, just wondering how you would expect to communicate that. Yeah, we're absolutely evaluating that as we speak, updating our medium -term and actually our long-term models that we do pretty regularly. Right. I suspect before we turn the calendar to 2024, we'll be providing some new medium-term/long-term outlooks. Got it. Let's talk about Clover. That, you know, it's really hard not to talk about the business without Clover, especially given the growth rates that we've seen, up 22% in the first quarter. You've set a target for this to be about a $3.5 billion Right -revenue business by 2025. I guess the question that I have is, as Clover becomes a greater piece of the pie, how does margin and unit economics compare to the rest of the business? let's start there. Yeah, I would say if you look at our overall merchant segment, the strongest margin business within that is small business. Mm-hmm. Followed by enterprise, and then the third one being our processing business, where we're doing pure processing for others. We see opportunity to continue to expand margins across all three of our segments. Okay. Across each element of our three segments. Some of it is scale benefit. Okay. As we sell more solutions, an incremental dollar of revenue falls through to the bottom line at greater than company average. I refer to it as the virtuous cycle of growth in the company. Mm-hmm. We're a software company, and so an incremental dollar of revenue means nice margin lift. We reinvest that. Right to provide more growth, that then gets you more scale on that business. I expect each one of our businesses to contribute to our margin expansion. Our outlook for 2023 is at least 125 basis points. When we achieve that, we'll have more than 500 basis points over the last three years. Right. Right. I think the company's got some good margin expansion ahead of it. Clover is absolutely part of that, and one piece of that is the value-added services. Mm-hmm are better than average margin, so we'll see some growth there. On those value-added services, if they're better margin, how should we think about, like, what the attach rates are of those versus, you know, the potential for attach rates? If that seems like that has the potential to be an important margin lever, how do we think about that as a, you know, what needs to be done to drive that and what, versus what we're seeing today? At its simplest level, you know, that attach rate right now is that penetration rate that we talk about, kind of the mid-teens, growing to 25% of Clover revenue. Clover being, by the time we get to 2025, about 35% of the overall enterprise. Right. Excuse me, of the overall merchant business. Merchant business, right. It becomes a more meaningful piece, and some of that $3.5 billion of revenue that we expect for Clover in 2025 is that deeper penetration, a higher attach rate on. To drive that, is that just simply putting more, you know, solutions and alternatives into the market for people to choose, or is there something that you need to do from a sales perspective? Just wondering, like, how you move the needle so much on attach rate. Yeah, I think there's multiple elements of that. Okay. One is more solutions. Two is more integrated solution, making it easier for the merchant to consume that capability. Okay. Three is selling it, sales. We now have a direct channel that's actually relatively new to us over the last several years. As we build out that direct channel, you tend to find better value-added service penetration. Reaching more merchants with Clover and truly becoming that operating system, where we're supporting the merchant. If you think about a small business, many of these small businesses, they're very good at pizza or- Right. retail of some sort. They don't want to be a payments company. Right. They want to be able to consume those services, so they can make pizza. Enabling that to simplify the way they run their retail store or their pizzeria or bodega, what have you, is an opportunity for us to deepen that value-added service and expand margins. Ultimately, at our core, and I think most companies will say this, but this really is at our core. Uh-huh . we wake up every day trying to figure out how to help our clients grow. Right. That is, maybe sounds altruistic, but at the end of the day, obviously, that helps our revenue. Right. Right, right. It really is a focus. We're trying to figure out how best to make our clients, our customers, successful, and obviously, that makes us successful. When you think about Clover and those incremental services, et cetera, does that do anything at all to change or modify the merchant type that opts for Clover? Does it tend to create an opportunity to move more upmarket or downmarket, or does it just reinforce where you're already at? Just wondering how it impacts, you know, the customer merchant that may be choosing to use Clover. Yeah. Different merchants will use different capability. Mm-hmm. Different verticals will have different requirements. Yep. Obviously, a Clover client tends to be a bigger small business. Yep. We do have solutions, you know, for micro merchants, but you don't get a lot of value-added service with those. Right. That's right. You know, that can be as simple as a dongle that they're selling for a local, a bakery store. Right. Right, right. Again, one of the reasons why we're looking for ways to our clients to grow is, the bigger the small business, the more value-added solutions they'll want to consume. Got it. What about from a pricing perspective? You know, how does this impact your ability to pull pricing lever and take advantage of that as a revenue and margin driver? Yeah, it really is all about value-added- Okay pricing. Where we are providing additional capability to those merchants, where they see value for having that capability, you're able to get price for that. Got it. What about from a competitive environment right now, in merchant generally and for Clover specifically? I mean, I guess I ask the question because. From our perspective, we've seen a massive reduction in the amount of capital going into some of the fintech startups and over the last, you know, compared at least over the last nine months, compared to what it had been the previous few years. You know, we've seen IPOs. I just wonder how that fall in VC investment may be impacting the competitive landscape, if at all, for you. Yeah, you know, it certainly ebbs and flows. There are fewer garages in Silicon Valley. Right, right. -all looking to compete with us on a day-to-day basis, but there's still lots of competition and lots of innovation in the market. I like having lots of competitors. I think that's good for innovation, it's good for the industry. We continue to innovate, and we think we're part of that disruption, so to speak. Right. Right. You may have heard us refer to ourselves, you know, we believe we're the original fintech. Lots have come and gone. We continue to perform, we continue to invest for our clients. Right. Again, our focus is allowing them to grow and bringing new innovative solutions, to their marketplace is an important aspect. There's lots of competitors coming on a regular basis. That drives innovation, including by us. Got it. Got it. I've been dominating the line of questioning here. If anybody has any follow-up questions, please raise your hand and we'll get you a microphone. I don't see anybody for the time being, so I'll just continue on. I want to turn now to the fintech and payment system- Mm-hmm. segments. Excuse me. Can you provide an update on what you're seeing within your financial institution customers? You know, what's the spending appetite, and what does that look like across your base, especially given the stress on regional and smaller banks? Yeah. Obviously there has been a lot going on in the banking world. Yeah The last few months. Broadly, we continue to see, robust conversations. We still see a very robust sales pipeline. Okay. In fact, we are, actually, as we speak, launching our client conference that we've held annually for the last, you know, many years, back in person Right. Right for the first time since the pandemic. We'll have, you know, 3,000 clients, sitting down with us, talking about the future of the banking industry. Right. Right, right. That pipeline, that level of activity continues to be quite robust. Our focus, our kind of the sweet spot of our company, in the fintech space has typically been community size up to regional size banks over the last several years. That's actually grown quite a bit. You know, not unusual to have us talking to a financial institution of $100+ billion in assets. Right. If you're talking about switching out cores, that's typically not where we're playing, although we do. Number one, there aren't a lot of regional banks up in that space, and they're not changing out their cores regularly. In the community financial institution, call it the $5 billion or $10 billion to $50 billion market, there's still a lot of activity there. Got it. The world is continuing to evolve. They've got competition. They're looking for new solutions. They're looking for digital capability, mobile banking capability. Our Ondot, our card solution, combined with our mobile banking solution, continues to be quite high on the list of priorities. Finxact, our new cloud-based core solution, is driving lots of conversations. You know, there's been lots of cycles over the years. Right. Right, Right, right. We typically don't see IT spending in our space cut back. Got it. I want to ask you something, and ask you to play a little bit of psychologist here, is that, like you just laid out a bunch of technology-driven reasons and product reasons for what Fiserv's delivering for customers to continue, you know, and have a robust pipeline. I think when we saw the events of March and April, I mean, universally, the assumption was that there would be at least some period of reassessment and evaluation on the part of your customers as to what they wanted to prioritize, what the landscape was going to look like. Even now, we have, you know, at least some commentary from a regulatory perspective. Mm-hmm ... that there may be changing. Yet, none of that seems to have changed the sales cycle, if you will. Like, why do you think that is from a, like, a psychological perspective? Is it just as simple as a bank management's collectively saying: "Hey, if we're going to be in this business, then our going assumption has to be that we're going to continue to be who we are, and we got to continue with our modernization programs." Is it as simple as that, or are there other factors, you think? I do think it's probably as simple as that. You know, we used the term a few weeks ago now, that some of the banking clients are, quote, "distracted. Mm-hmm. A lot of people took that word and ran with it. I can't imagine having actually, anybody in the financial services world not be distracted by what's going on. Right. Right, Right, right. I'm talking about it right now. That's a distraction- Distraction We didn't used to have this conversation back in January and February. Right, right. We're now having it. We in Fiserv are paying more attention to what's going on in the banking industry with regulators, et cetera. You're paying attention to that. To your point, I think most banks can expect to continue to be banks. They are continuing to look for ways to grow their business. Right. to manage their operations as effectively as possible, maybe more so now. We have a long track record of bringing solutions to financial institutions, whether it helps them grow their business, whether it helps them gather deposits, whether it helps them run more effectively and efficiently, bring new solutions to their, to their consumers and their clients, we'll continue to do that. We continue to have great conversations. Got it. Let's talk about the things that, you know, you can control directly, and that's expenses and other points. Mm-hmm. -of leverage is that, you know, I think Fiserv has deservedly built a reputation of, over a long period of time, of being able to manage and be very focused on managing expenses and, you know, not let things get bloated, et cetera. You know, what is your willingness to pull back on expenses this year if the macro worsens more than what you've anticipated? Conversely, what do you do from an expense standpoint if this mild or modest recession that you built in doesn't materialize? Yeah. Like, where's the points of investment that make sense? To your point, I think we have a long track record of managing this quite effectively. Mm-hmm. it is fundamentally part of the DNA of the company. Mm-hmm to drive what we sometimes refer to as operational excellence. Right. It's finding new ways to do things for less. We do it day in and day out. You don't typically hear us announce that, you know, we just made an investment, and now we're going to save $100 million starting next quarter. We saved $1 million yesterday, we're going to save $2 million tomorrow, we're going to save a $1.5 million the day after that. It isn't some big bang, so to speak. We're constantly evaluating where we are spending money, whether that's investment- Mm-hmm whether that's just operating our company. Right. If we have a short, mild recession or no recession, I think our investment level is exactly where we want it to be, and we'll continue to invest. i.e., if it's a short, mild recession, we'll manage our expenses, we'll grow the business, and we'll, you know, hit our guidance for 8%-9% top line and $7.30-$7.40 EPS, expand margins under 25 basis points. We think we've got that covered, and that will set us up for the future. If we hit a brick wall and Mm-hmm have a significant recession, we'll evaluate where we're spending money. Right. If the market is not looking for new solutions because the world's hit a really tough spot, then for us to continue to invest and bring those solutions to market when the client's not ready for them, doesn't make sense. Doesn't make sense. Again, we've demonstrated the ability. You don't get to 37 consecutive years of double-digit earnings by chance. Right. Right. There aren't many companies, there are actually no companies, no other public companies that can say that. That's that discipline, management and spending. Let's take the reverse scenario. Let's say the planned or expected recession doesn't materialize. You hit your margin expansion targets. Now it's a lot easier because you don't have that headwind, if you will. Do you let the extra fall to the bottom line, or are there places where you feel like, hey, there's reason to push a little bit of incremental investment here? Just wondering, you know, if things materialize to be better than you've planned, how we should think about that, not only impacting the top line, but more importantly, the bottom line. Yeah. I think you'll see a kind of a mix of those two- Okay ... depending on exactly, how that, how it manifests itself. If, if the, merchant world, if the consumer, continues to spend robustly and people are going out to restaurants regularly and in a big way, would we accelerate some of our restaurant capability? Absolutely. Okay. Building out verticals, that sort of a thing. I'm not constrained in my spending today, there isn't, well, gee, suddenly I would go, you know, to the next item on the list and go... Right. It's more around the timing of when the client expects and needs that solution. If that changed, we would change the investment cycle. Now let's talk about capital allocation. We have about five minutes left. you know, just what is your feeling right now in terms of capital allocation, you know, between debt reduction, buying back your own shares, looking at M&A, et cetera? Like, how are you feeling in wanting to allocate capital today? Yeah. We talked a lot about the discipline around operating the company and our margin expansion. The other one I'd point to is the capital allocation methodology. Mm-hmm. Long track record of investing for organic growth, generating good strong free cash flow... Yeah ... that gives us the opportunity to invest in that organic growth, but also look for inorganic opportunities to acquire new capabilities back into the company and then manage a very strong balance sheet and return excess cash back to shareholders. That's exactly where we find ourselves still today. Last year, we hit our deleverage point. Obviously, we had seen an increase in leverage with the merger- Yeah. -with Fiserv and First Data, where we went up to about four times levered. We committed to return to historic levels, which is kind of a sub three times leverage. We did that in the middle of last year. Debt paydown is achieved. As we grow EBITDA, we'll actually have capacity... Right to borrow against that to even maintain the kind of 2.9x levered that we're at today right now. That gives us lots of firepower to reinvest back in the company. I frequently get, you know, "Which are you looking to do, acquisitions or return cash to shareholders through share repurchase?" The absolute answer for a long period of time is both. Right. I'd have to look, but I'll bet you can go a decade, certainly you can go seven years, 'cause I have that history myself. Probably go more than a decade. There's been a total of one quarter where we didn't return cash to shareholders through share repurchase, and it was the quarter that we closed the transaction, between Fiserv and First Data, and that was only one quarter. Right. Right. We continue to do that. We bought back a $1.5 billion worth in the first quarter. We continued to look for value accretive acquisitions. As I have been known to say, I'm absolutely a willing buyer at the right price. The magic of M&A is finding a willing seller at that same price. Right. because I don't wake up, in the morning saying, "Geez, I've gotta have... X. I need this capability," I can be a very disciplined buyer. There isn't a hole in the portfolio, so to speak, that if I could just find somebody to, that I could acquire, that might cause you to maybe spend a little bit more. The, the recipe of the company for a lot of years now has been our businesses source the acquisition opportunities, but the central team manages that purchase. You find a, a business leader that has a great passion for buying something, but the pricing decision is not an emotional decision. It's a value accretive decision. You know, we did five or six deals last year. Yep. We spent about $1 billion last year. We did about the same the year before. We haven't done anything yet this first half. That isn't a sign that we're out of the market by any stretch of the imagination. Right, right. Our M&A team is as busy as it's ever been. We just haven't closed any deals, and until we can find a value accretion opportunity, we'll continue to invest organically. I mean, it seems like the implication of what you're saying is that valuations haven't reset probably to a, Yeah, at least in the private markets, typically, to where it would make sense. Like, does it feel like that's being a slower process than you would've anticipated? Why do you think that is? Yeah, I'm not sure I'd say it's a slower process than I anticipated. It's a lot of human dynamic. Valuations have come down. Mm-hmm. Value expectations have not yet quite caught up. Mm. A lot of times you start the conversation, and the seller is talking about the value that they had a year ago. Right, right. Well, that's not the value today. Right. Finding those opportunities again at the right price, we'll continue to be a disciplined buyer. Well, and that makes a lot of sense. I mean, is there it sounds like it's every single company has the, that you're maybe talking to, has the same kind of dynamics, that human dynamic, and so, you know, how that varies can, you know, be a lot of difference, I guess. Yeah, I think there's an element of that, particular where you've got, you know, a founder with a significant portion, PE firms, you know, looking at the risk of having to do a write down. Right. it isn't always about price. There's lots of other variables. Right, right. that you have to go through before you decide to consummate a deal. again, because, I love the portfolio that we have Mm and the breadth of our capability, again, our team is quite busy, but we'll make sure Yeah. We're creating value. Get to the right point and the right price, et cetera. Right. Well, Bob, that's all the time we have. Thank you to all of you for joining us today. I appreciate it. Great. Thank you very much.