Giant chair.
All right. Welcome, everyone. I'm Tim Chiodo. I'm the lead payments processors and fintech analyst here at UBS. Getting started a little bit earlier this year, a Monday session. Kicking us off here for the conference is the management team from Fiserv. We have the CEO, Mike Lyons, and the new CFO, Paul Todd. We're going to go through a series of questions. We're going to start off with a little bit of recapping some of the things that Mike found at the company this year and some of the things he's changing. We'll talk about some of the revenue decisions made. We'll talk about the new targets. We'll talk a little bit specifically on each of the two segments, Financial Solutions and Merchant Solutions.
We'll get into a little bit more on the financial side in terms of CapEx with the One Fiserv Initiative, investors in CapEx, and a little bit on capital allocation. With that, I'm going to turn it over to Mike and Todd. I want to thank you and the full team for making the trip here to Arizona. Thank you, Mike and Paul.
No, thank you for having us. Also, welcome Walter Pritchard, who's our, as of this morning, as our new Head of Investor Relations, formerly with Palo Alto Networks. I'm sure he'll look forward to meeting all of you. Thank you for having us.
All right. Excellent. Yes, Walter, welcome. Glad to be working with you. All right. Let's start off with recapping some of the items that you described as things that you found, whether it was a culture of short-termism, some of the things you found around underinvestment. Let's keep it more to the behaviors and some of the things that you discovered and what you're changing at the company.
Sure. I think, as I described, most people noticed it. On our Q3 earnings call, we talked about a review of the company that had started in the third quarter, went into the fourth quarter, looked at all aspects of the company: tech, operations, competitive position of our businesses, financials, major trends in the industry. As part of that, we used both internal, obviously our internal staff, but used a series of external advisors to make sure we got subject matter experts and an objective view of where our strengths, opportunities, gaps sit. Obviously, we did that as it started out initially as part of our annual strategic planning and budgeting process, but went much deeper, more broad, and more expansive than that normal process would.
Ultimately, while we do not like the outcome of what we had to say, we thought the process provided a very clear understanding of the company and what our structural growth rates and our margins are. As part of that, which we said on the Q3 call, we adjusted our guidance to reflect really four things. First was Argentina, where we have a very strong business that provides a very needed service to our merchant clients. There is no change in what we are doing there. Very favorable cyclical patterns and developments in that country from 2022, 2023, and 2024 gave us a significant impact on our overall reported organic growth. You peel that away, and the company was sort of growing in the mid-single-digits like it always was, not in the double-digit range that had been reported for those three or four years.
Second big thing was just the performance of our businesses relative to expectations in the third quarter and then when we looked out for the rest of the year. Third major area was there were, based on client feedback, in most of our business, we have about $20 billion in revenue. $7 billion is small business-driven, and the remainder is enterprise-driven. Based on feedback from those enterprise clients, there were more things that they wanted around the client experience. The speed to market was certain of our products. They liked the quality of products, just wanted to get the speed to market faster and the quality of implementation and resiliency. We introduced a series of both capital expenditures and operating expenditures to address that.
The final thing that we observed was that while any company has the ability to pursue short-term initiatives or long-term initiatives, we think striking a balance between those two is the right way to run a company. We had gotten overweight on short-term initiatives as part of that. As you put those factors through, we announced what we think our long-term structural growth rate is and long-term structural margins. Obviously, that was different from the last couple of years, but it was a very clear understanding of what we're dealt with. It is the direct impact and direct driver of where we're putting our incremental investments and directing our strategic plan.
Excellent. Thank you, Mike. All right. We're going to get into the next topic, which is around revenue. One of the things I've noticed from discussions with investors is maybe lack of appreciation on what exactly happened in the second half of the year. Some look at it and say, "Man, it's really hard for a company to have trends fall off like that." In reality, at least we can pinpoint three pretty specific revenue decisions that the company made. Maybe there are more, but I'll outline them as some of the price reductions within digital payments, specifically around STAR and Accel. The second one was maybe not selling as many licenses on purpose to shift more towards recurring revenue. The third was some of the pricing rollbacks within Clover. Maybe there are others, but those are three that stood out to us.
Maybe you could talk a little bit about those revenue decisions and what specifically changed within each of those three items.
Yeah, I think it goes, if you go back to the four areas observed, the fourth, which was balancing, the right balance between short-term initiatives and long-term initiatives. We did not forego any revenues. We are not pursuing short-term revenues. We made a series of decisions that we think best optimize the experience for the client and long-term value for our shareholders. When we got out of balance, there were a series of decisions made to drive earnings in certain prior periods that we reversed in this period or took a different approach to STAR and Accel. We had gone above market in pricing on our debit. Those are two. We own two debit networks, STAR and Accel. We had gone above market pricing on those, which obviously helped earnings in a period but impacted our long-term ability to attract new clients to the networks if your pricing is high.
We made that adjustment. The second one you talked about was license sales, sort of falls into this camp of you can pursue short-term initiatives, but they're not perpetual, so you can't sell an infinite number of licenses. We made a decision there. On the Clover fees, very specifically, we believe we have a great product in Clover. It's a long-term part of our growth story. Our clients love the product, and we price for value in it. We have a premium-priced product, and we price for value. When there is an opportunity where we're either adding software capabilities or vertical expertise or horizontal expertise, you can price for it. These fees that were put in a year ago, there were a couple of fees put in a year ago that we decided weren't priced for value. That was largely based on our conversations.
We have a great distribution channel with the ISOs and a great distribution with the bank partners, plus our own directory distribution channel. Based on feedback really from our partners, we thought it was the right decision not to carry on with those fees. I think it just all falls into that initiative of what's right for the long term, what's right for the short term, and striking the right balance between those.
All right. Thank you. On that Clover point, you kind of hit it there, Mike, but maybe a brief follow-up. It sounded like maybe it was more of the end-of-life fees. It was not as much the buy rates. It was a little bit more on the end-of-life side. Can you just talk a little bit more about that? I think part of the goal was to improve relationships with the broader ISO community. If you could just talk about what you are seeing early days on that.
Yeah, just broadly on Fiserv's been specifically around merchant and small business has been always distributed largely through partnerships. We have 1,000 banks and growing signed up as distribution partners. We work through their small business sales teams. The other major distribution channel, as you mentioned, is independent sales organizations or ISOs, which are a major part of the merchant community. We have hundreds and hundreds of long-standing relationships there, unmatched distribution network through the ISO. When they give us feedback, either positive or negative, we obviously incorporate that into our thinking and our strategic planning. As you said, these were very specific fees around storage and end-of-life that we did not think, based on conversations with them and obviously them with their clients, that we did not think it struck the right balance of pricing for value.
Over time, as we continue, we're investing in lots of different vectors in Clover, especially vertical expertise and horizontal expertise, that if we introduce a value proposition that we'll be able to push through, the ISO partners have always been there right with us to do that. That's a partnership and a collaborative relationship to do it.
Great. Thank you. All right. I think this next one we can probably go to Paul. I'm going to attempt to combine two of the questions that we had here in the interest of time. You had mentioned certain deferred investments, right? That we should expect a little bit higher CapEx going forward as part of the One Fiserv program. Maybe you could talk a little bit around those investments. Also, what is the quarterly CapEx number directionally that you could help us and investors should be thinking about in the models for 2026?
Yeah. We talked on the last call about ramping up our CapEx from roughly the $1.5 billion range to roughly the $1.8 billion range. That is primarily due to the efforts around resiliency and some of the technology spin that we felt like we needed to do to kind of serve the customers in the way the One Fiserv and customer-first mindset that we have. We did absorb that step up in CapEx to that high single-digit of kind of revenue level. We expect that as we move into 2026 to kind of continue at that high single-digit kind of revenue of CapEx stepping up from the $1.8 billion. We do not expect any kind of meaningful step up beyond that.
That high single-digit of revenue we feel is the right level of CapEx and is consistent with kind of prior practice of the business and is the level of investment that we need to support the growth on the business going forward.
All right. Excellent. Thank you, Paul. All right. We're going to move into the—sorry, Mike, did you want to comment or?
No, unless you want me to.
Moving on. All right. Let's go into the Financial Solutions segment. This has been a big topic. We were even just joking about it before we hopped on stage here. The core migration. A lot of investor questions around what's been happening with the credit unions. Has that already been in progress for some time? We go to the banking side. Is it 1,400? Is it 1,600? How many of those are an easy software update? How many of those are migration? What are some of the processes and kind of pricing tools that you're putting in place to retain those clients? If we could clear up some of the core migration topic, I think that would be appreciated.
Sure. As a company we provide, we are the core—this is on the financial service side of business. About half of our revenues fall into this broadly. One of the services we provide in there, we're the core banking platform for about 3,500 institutions in the U.S. We have the long tail of banks. Some of our competitors, the very biggest banks tend to be on legacy systems with a lot of customization. There is a tier. The next tier of banks are the super regional banks that are on a couple of competitive platforms. We pick up sort of $100 billion-$150 billion down. Obviously, between credit unions and banks is 8,000 or so. We have a significant share of the market there. It's been a great business for us for a long time. Historically, Fiserv bought cores and kept them independent.
That's how you get 16 different core platforms. A couple of things that have happened in there. We started this initiative to create and invest in five truly modern cores, really started in 2022. It was the first time we were talking about the market. There's nothing new here. Obviously, it's gotten some attention. Split up between credit unions and banks to try to help you through this, help you through the process. There were 11 credit union cores. The goal is eventually to get that to two modern cores. We will be at six credit union cores next year, early next year. Five of the 11 cores, for some reason or another, were not going to be supported going further, either compliance levels or the number of credit unions on the cores. Various reasons contributing to each one.
We will be at six to two going forward next year. That process has been more of a strongly encouraged process to get down to the six cores. From here, from six to two and then from the banking side from five to three, there is no forced conversion. We will continue to support all 11 of those cores as long as customers want to be on them. We are obviously investing to create five great ones. Finxact, which is the modern core, there are no conversions on or off that, just new customers coming in. Signature, which is our large bank core, no conversions on or off that coming in. Portico and DNA. Portico for small credit unions, DNA for larger credit unions. It is the only core in the market that really serves credit unions and banks. The final one is CoreAdvance.
CoreAdvance, as you mentioned, will incorporate three existing cores: Premiere, Precision, and Cleartouch. Again, nobody's forced to go in there. Premiere, which is 70% of the customers in that group. CoreAdvance is just an upgrade of Premiere. There is no conversion. The clear messages from here are five great cores going forward, very competitive, leave us very competitive in the market. No forced conversions. We'll support. There's no forced timelines. We went to—we had 4,500 clients out at our client forum in September. We said no forced conversion timelines. If you give us a timeline that you'd like to upgrade to one of the five, we'll hit it. If we don't hit it, then they financially benefit from us. The job is on us, and we're taking it very seriously.
In some parts of our practice in getting here, we did not do as good a job as we could have done, but it is to handhold the customers so that there is no forced conversion. Two, deliver them a great experience so there is no desire to leave outside of the core. Three, show them the value of how the new cores can enhance resiliency, enhance performance, drive new customers, allow for customized pricing, incorporate new apps and all that. Obviously, work closely with the consultant community to show them the values of it. It is a good thing for the customers. It is a good thing for us. From the 2022 period up until now, we did not manage—in my opinion, we did not manage the message and that conversion of the five as well as we could have.
For a number of months now, we're on the other side of that and aggressively working with our customers to get them to the right thing. I think one of the things I pointed out on the Q3 call and I've talked about since then is we are not in the market where the customers are saying someone's just really beating you on your cores. Your cores aren't the right technology. Your cores aren't that. They're saying, "We want a great experience. We want the products that you've developed to get to market faster. We want value-added solutions from you all. And we want to work closely with you in terms of how we compete in a modern, rapidly changing technology environment for banks." It's been an experience thing, not a product thing. That's on us. It's just execution.
Excellent. Thank you for clearing that up. We really appreciate it. I know that investors appreciate those numbers. Another topic that comes up a lot. Let's move on to the Merchant Solutions segment. When we break down the revenue buckets within Merchant Solutions, within SMB, of course, there's Clover. We get to just the SMB portion of Clover, backing out some of the enterprise and some of the processing. Then we get to the core non-Clover SMB. On our estimates, at least, last year, that was kind of looking flattish to slightly up. This year, Q1, Q2, Q3, it's been negative and increasingly so, especially in Q3. There are some reasons that can kind of explain this around some of the Argentina dynamics, maybe a little bit of back-book conversion coming out of this. It's roughly a $4 billion revenue stream within Merchant.
The question from the investment community is, should we expect that to continue to decline at this sort of rate? Should there be some improvement? And really, how much of that decline has been driven by any back-book conversion that's been done thus far?
You want to comment on the numbers first?
Yeah. I mean, we wouldn't necessarily expect kind of the similar kind of movement there. I would say a couple of things. One, Argentina obviously is an impact there. Two, we've said as it relates to the non-Clover SMB that we're not going to force kind of people to move away from the non-Clover to the Clover. That would help that dynamic as that kind of plays through. Yeah, we actually see on a non-Argentinian base that actually be positive if you take out Argentina, that there's actually a roughly flat to slightly positive kind of piece there. We would, on a go-forward basis, we've put all of the efforts, particularly around sales and investment, on the Clover side. You wouldn't see the similar kind of growth rates because of that emphasis.
We do not see that as a thriving or a negative growth kind of book as we look at it on a go-forward basis. We are being very strategic about how we look at that back-book and when it makes sense for customers to migrate over to Clover.
I think your numbers, I think, tied to Paul's basically, if you strip out Argentina, low single-digit growth bounces around quarter to quarter. Three, a little over $3 billion in the Clover SMB book, a little over $4 billion in the non-Clover SMB book. Clover is obviously our platform of choice to go forward in for small business. All of those revenues roll up to Fiserv today. Anything to drive any form of movement from the non-Clover SMB to Clover has to be driven by a value proposition attached to it. Whether that's continuing to build out more verticals, continuing to build out the quality of the software, continuing to refine the types of hardware we produce. We're not just going to jam. Again, we're taking a same thing I said earlier, a short-term, long-term initiative and thinking only about the shareholder inclined experience.
In the end, yeah, you could juice all the Clover growth you want by forcing a version, but that's probably not good for Fiserv over time. It is a tremendous option we have over a long period of time to be smart, thoughtful, conversion where there's a value proposition attached to it. The flip side of Paul raises a good point is we probably get too overweight and too focused on driving the great experience of Clover. We think we can do some work on the non-Clover side until there's a value proposition to try to better improve the growth there.
All right. Excellent. Let's keep it going with the Merchant Solutions segment. And we'll talk a little bit about Clover. You talked about the new way that investors should think about the growth for Clover, which is volumes in the 10%-15% range and revenues in, call it, the 15%-20% range. So roughly five-ish point gap. The question we get from investors is, how can we be confident that there will continue to be faster revenue growth, whether it's the SaaS packages or Clover Capital, which on our estimates is way underpenetrated versus some of the competitors, and then also some of the anticipation revenue from Argentina that could be coming into Clover?
I think you did a great job answering it. We said structure, important point. It's structurally, we said volume in the 10%-15% range with the high end of that being driven by some form of back-book conversion of non-Clover SMB. And then basically five percentage points of growth differential. The only differential between volume growth and revenue growth is hardware and VAS. Obviously, pricing's in both hardware and VAS. The investments we're making, vertical expertise, which comes into the software, horizontal expertise, which comes into changing a small business. Instead of just running a payments box, you're running a small business box, whether that's ADP, Homebase for employment management, or other services, Clover Capital over time. Certainly, relative to peers, a very small penetration, both of the non-Clover base and the Clover base on Clover Capital.
We've already started some work around that and continued development on the hardware side. We see that as a sustainable delta between the two, but it comes with and requires investment. Those are all the investments that, one, we factored into the numbers we gave you and that we're working on in the business. I think on the vertical side, I'd add that we're heavy. We've got this big market share as you've outlined in, or big meaning greater than 10%, still a lot of white space in restaurant and retail. We would like to better reflect the U.S. economy to reduce cyclical either ups or downs. That is why Clover Hospitality is coming in. Healthcare, we made the big investment, we're doing the big partnership with Rectangle. Then as talk is, it's talked about building out in professional services.
Excellent. Okay. Let's try and squeeze in two final questions here if we can. It's on merchant margins. And really, this starts out with more of a Q3, Q4 question, but it bleeds into a fiscal 2026 question in terms of segment level margins. So when we look at Q3, the merchant margins were down about 50 [bps] year- over- year. But benefiting that margin was the $89 million gain. If you back that out, it would have been more in the kind of down 400-ish basis points year- over- year. With that context, how should investors be thinking about the implied margins across the two segments in Q4? And maybe more importantly, what's implied in the guidance for fiscal 2026 on a segment level?
Yeah. We do not typically give a guide as it relates to kind of the segment margins. I would say a couple of things. One, you are right as it relates to just the math, as it relates to the 3Q. In the full year guide, you can kind of impute what the overall margin looks like for Q4 relative to the roughly down 200 basis points on the full year. We have also kind of said that we are not expecting any kind of meaningful change as it relates to the Financial Solutions side from a 3Q to 4Q standpoint. That kind of gives you some framing as it relates to the overall margin.
As we look to next year, we kind of said on the last call what we expect the overall margin to be in that 33%-35% kind of roughly range for next year as we sit here today. That kind of gives you a high-level indication of where we see the margin picture for next year.
Perfect. Thank you, Paul. All right. If we can get another, so another one. We talked a little bit about this before coming on stage. The question we get from investors is around the buyback plans for next year. I believe the commentary has been that your free cash flow number will be what it will be, and you will use X% of that to buy back stock. If you could talk about how investors should be thinking about that relative to some other years where you've spent more than 100% of free cash flow on buyback.
Yeah. So a couple of things. I mean, one, obviously for next year, the cash flow picture does look different. We still believe roughly the cash flow conversion percentage is roughly where it's been. That is kind of the starting point. Capital allocation principles have not changed. We are very committed to our overall debt leverage and maintaining that debt leverage in the two and a half to three times. Any excess cash beyond the debt leverage ratio, as well as any other cash needs as it relates to CapEx, are deployed into share repurchase. It would not be the same as what it was this year, obviously, where it was more front-end loaded. It would not look the same. We obviously are going to use free cash flow to buy back our shares.
Excellent. Thank you. We have another minute left. Given we have the time, I'm going to circle back to one that we skipped and see if we could talk about the sales hiring. This has been a big topic in the industry, right? Square is hiring a few hundred salespeople over the next few years. Global Payments on their earnings call talked about adding 500 salespeople in North America. You recently mentioned you have roughly 600 in the U.S. that I believe are supporting specifically SMB and Clover. If you could talk a little bit about that number, where it could be going. More specifically, of that 600, how much of those are quota carrying salespeople?
Yeah. It goes back, we talked about a little bit earlier, is our primary distribution methods. We think we're completely differentiated. We know we're completely differentiated both through the bank channel where we have 1,000 banks signed up. There's about 50% of those where we're actively penetrated. We've signed up a lot, and then you're continuing to mature our presence within those institutions. We love the operating leverage that comes with that. We have the ISO partners, which are continuing to grow, long, long-standing relationships deeply embedded into their operations and their sales practices. On top of that, we've always had a combined inside-outside sales force. The 600 we gave you in the second quarter call, I think.
That's right.
Yeah, they're all quota bearing. Those are traditional salespeople. There's obviously support behind those. That number has continued to grow. It'll finish up 20-25% on the year. That's what we're not, I don't read into that, that we've shifted our distribution. We have a partner channel, and then we're filling in, especially around specific verticals and specific products with direct salespeople or specific markets around it. We think it's a nice complement to these two massive channels that we have. If we continue with the investments we have around both Clover and non-Clover merchant SMB and enterprise, distribution is our number one competitive advantage, right? Nobody has what we have, and it would take years and years to create that. We don't want to ever change what we have.
We just want to continue to build all the channels of it and further support it.
Perfect. Very clear in that the bank channel and the ISO channel remain the focus and the bolus of the gross ads while it's.
We love to build a direct channel alongside this.
Perfect.
It is not a change in philosophy. It is just adding to more distribution.
Extremely clear. On behalf of our team and everyone at UBS, I really want to thank both Mike and Paul and the IR team, including Walter and Nico, for joining us here in Arizona. Thank you so much for being a part of our conference.
Thanks for having us.