Fiserv, Inc. (FI) Q3 2025 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

The earnings call reveals several negative factors: a decline in adjusted operating income and margin, a decrease in EPS, and unexpected revenue weakness in the Financial Solutions segment. Although Clover shows strong growth and share repurchases are positive, the financial performance issues and unclear management responses in the Q&A section raise concerns. The guidance adjustment to the low end of revenue growth expectations and the decline in margins further contribute to a negative sentiment. The lack of clear visibility into revenue issues and potential risks in execution suggest a negative stock price reaction.

Key Financial Performance

Total company third quarter adjusted revenue $4.9 billion, grew 1% year-over-year. Reasons for change include slowing cyclical growth in Argentina, recalibration of optimistic growth assumptions, deferred investments, and deprioritization of short-term initiatives.

Adjusted operating income $1.8 billion, decreased 7% year-over-year. Reasons for decline include higher sales and marketing expenses, higher data processing costs, depreciation and amortization expenses, and foreign currency impacts.

Adjusted operating margin 37%, decreased by 320 basis points year-over-year. Reasons include the same factors affecting adjusted operating income.

Adjusted earnings per share (EPS) $2.04, decreased 11% year-over-year. Reasons include a $53 million foreign currency expense, $31 million increase in interest expense due to Argentina, and a tax-free gain of $89 million from a merchant alliance joint venture termination.

Free cash flow $1.3 billion for the quarter and $2.9 billion year-to-date. Full-year free cash flow is expected to be approximately $4.25 billion, impacted by higher capital expenditures tied to the One Fiserv initiative.

Merchant Solutions organic revenue growth 5% for the quarter and 7% year-to-date. Growth driven by Clover, North America ISV business, and anticipation revenue in Latin America.

Clover revenue Grew 26% in the third quarter. Growth driven by value-added solutions, solid GPV growth, and SaaS penetration reaching 26%.

Financial Solutions organic revenue Declined 3% in the quarter but grew 3% year-to-date. Decline attributed to lower periodic license revenue and industry dynamics.

Debt-to-adjusted EBITDA ratio 3x, slightly increased. Reasons include ongoing investments and acquisitions.

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Operating Highlights

Clover GPV Growth: Clover GPV grew 8% on a reported basis and 11% excluding the 2023-2024 gateway conversion. U.S. Clover GPV grew approximately 7.5%, marking a slight acceleration from the first half of the year.

Clover Revenue: Clover revenue grew 26% in the third quarter, driven by value-added solutions and solid GPV growth. SaaS penetration reached 26% due to strength in vertical software sales, Clover Capital, and anticipation.

New Product Launches: Investments in modern innovative platforms, including streamlining banking cores from 16 to 5, embedding real-time capabilities in AI, and launching Vision Next, a modern card core.

International Expansion: Clover solution to be introduced in Japan through a partnership with a leading local financial institution to drive digital payments transformation for the Japanese SMB market.

Partnerships: Exclusive long-term partnership with Nubank, one of the world's largest digital banks. Signed the largest healthcare deal ever in Q3 and a significant program with the U.S. Treasury Department for the Direct Express program.

Operational Excellence: Launched Project Elevate, a multiyear transformation agenda powered by AI, focusing on sales, client onboarding, Clover client service, HR, and finance. Early proof points demonstrate strong potential.

Cost Management: Higher level of capital expenditures expected at $1.8 billion for 2025, tied to the start of the One Fiserv initiative.

Strategic Shift: Reset revenue and earnings baseline to focus on high-quality, largely recurring revenues. Deprioritized short-term revenue and expense initiatives to prioritize sustainable growth.

Leadership Changes: Announced new Co-Presidents and CFO, along with three new Directors to the Board, bringing significant expertise and fresh perspectives.

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Risk or Challenges

Competitive and Client Service Gaps: Identified gaps in competitive positioning and client service, requiring focused investment to address.

Revenue and Earnings Baseline Reset: Resetting growth and margin targets due to slowing growth in Argentina, recalibration of optimistic growth assumptions, deferred investments, and deprioritization of short-term initiatives.

Argentina's Economic Impact: Slowing cyclical growth in Argentina, with high inflation and interest rates previously driving significant revenue growth, now contributing less to overall growth.

Deferred Investments: Past decisions to defer investments and cut costs have limited the ability to serve clients effectively, execute product launches, and achieve full revenue potential.

Short-Term Revenue Initiatives: Over-reliance on short-term revenue initiatives has negatively impacted long-term client relationships and recurring revenue.

Foreign Currency and Interest Rate Risks: Significant foreign currency expense and interest rate increases in Argentina have impacted financial results.

Operational Challenges: Operational inefficiencies and the need for a cultural shift to improve execution, accountability, and client service.

Forecasting and Communication Issues: Need for improved forecasting rigor and clearer communication with investors to set realistic expectations.

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Guidance & Outlook

Revenue Growth: Fiserv has revised its 2025 organic revenue growth guidance to 3.5% to 4%, down from the original 10% to 12%. Preliminary 2026 guidance indicates low single-digit organic revenue growth, with a return to mid-single-digit growth expected beyond 2026.

Earnings Per Share (EPS): Adjusted EPS for 2025 is expected to be $8.50 to $8.60, representing a modest decline year-over-year. Preliminary 2026 guidance suggests adjusted EPS will be down modestly compared to 2025, with double-digit adjusted EPS growth anticipated starting in 2027.

Capital Expenditures: CapEx for 2025 is projected to be approximately $1.8 billion, or roughly 9% of revenue, with free cash flow expected to be around $4.25 billion.

Clover Revenue: Clover revenue for 2025 is expected to be $3.3 billion, down from the original guidance of $3.5 billion. Q4 Clover revenue growth is projected at approximately 10%, with adjustments for certain fees potentially raising growth to the high teens.

Argentina Business Impact: Argentina's organic growth rate is slowing, contributing 2 percentage points to the overall organic growth rate of just over 5% year-to-date. This is a significant reduction from prior years, where Argentina contributed 5 to 10 percentage points to organic growth.

Strategic Investments: Fiserv is making significant investments in emerging technologies, including AI and embedded finance, under the One Fiserv action plan. This includes Project Elevate, a multiyear transformation agenda powered by AI, expected to last approximately 2 years.

Leadership Changes: New leadership appointments include Co-Presidents and a new CFO, with a focus on driving execution and synergies between merchant and financial institution businesses.

Investor Communication: Fiserv plans to host an Investor Day in the first half of next year to provide more details on its action plan and medium-term outlook.

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Shareholder Return Plan

Share Repurchase: During the quarter, Fiserv repurchased 7 million shares for approximately $1 billion and had 49 million shares remaining authorized for repurchase at the end of the quarter.

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Key Q&A

Q:How long was Fiserv over-earning with deferred investments and short-term revenue and expense initiatives? What is the timeline and cost to reverse this and achieve double-digit EPS growth?

A:Michael Lyons explained that in his six months at Fiserv, they conducted a rigorous analysis of the company, identifying deferred investments and short-term initiatives as areas to address. He stated that the company is currently at the low end of mid-single-digit growth but has a clear path to accelerate growth through investments. He expressed confidence in achieving double-digit EPS growth by focusing on long-term execution, client satisfaction, and capital management.

Q:What changed in the Financial Solutions segment's growth trajectory, and what is the outlook for this segment?

A:Michael Lyons and Paul Todd explained that the Financial Solutions segment experienced a decline due to factors like consolidating cores and execution issues. They expect the core banking business to grow in the low single digits, with additional growth from surrounds like XD CashFlow Central. The segment is projected to achieve mid-single-digit growth over time, with improvements in execution and investments.

Q:What is the outlook for Clover's revenue growth and competitive positioning?

A:Michael Lyons stated that Clover is a strong asset with significant opportunities for expansion in verticals, international markets, and client experience improvements. For Q4, Clover's revenue growth is expected to be 10%, with a low teens growth rate in 2026 and higher teens in 2027. The company is focused on operational excellence and leveraging AI to enhance the platform.

Q:What is the margin outlook for the first half of next year, and what are the key investment areas?

A:Paul Todd explained that margins will trough in Q1 2026 and gradually improve throughout the year, returning to current levels by year-end. Key investment areas include modernizing cores, enhancing surrounds, improving operational excellence, and leveraging AI for cost efficiency and client satisfaction.

Q:Why did the Financial Solutions segment experience a significant revenue weakness in Q3 despite prior guidance?

A:Michael Lyons acknowledged that the Q3 revenue weakness was unexpected and resulted from a more rigorous review uncovering assumptions that were difficult to achieve. He cited macro factors, embedded assumptions, and short-term initiatives as contributors. Leadership changes and a new baseline have been established to address these issues.

Q:Review of Unclear Management Responses

A:Management avoided directly addressing why there was a lack of visibility into the Q3 revenue weakness in the Financial Solutions segment despite prior guidance. Their response included general explanations about macro factors and embedded assumptions but lacked specific details or clarity on the root causes of the issue.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

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