Welcome to the Fiserv Second Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, today's call is being recorded. At this time, I would like to turn the call over to Walter Pritchard, Senior Vice President and Head of Investor Relations at Fiserv.
Thank you, and good morning. With me on the call today are Takis Georgakopoulos, our Chief Executive Officer; and Paul Todd, 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 on this call, along with the reconciliation of those measures to the nearest applicable GAAP measures. Unless otherwise noted, performance references are on a year-over-year basis. Our remarks today will include forward-looking statements about, among other matters, expected operating and financial results and strategic initiatives.
Forward-looking statements may differ materially from actual results and are subject to a number of risks and uncertainties. You should refer to our earnings release for a discussion of these risk factors. And now I will turn the call over to Takis.
Thank you, Walter, and good morning, everyone. In stepping into the CEO role, I'm honored by the trust the Board has put in me, deeply committed to our customers and motivated by what this company can deliver to its clients and shareholders. For those who don't know me, I joined Fiserv in late 2024 and shortly after took on the Chief Operating Officer role before assuming leadership of the merchant business last fall.
Prior to Fiserv, I held a variety of roles at JPMorgan, including running its global payments and merchant businesses, which grew to become one of the largest in the industry during my tenure. And as an engineer by trade and training, I'm energized by solving complex problems and technology has always been central to my career. I have firsthand experience with the complexities of building, modernizing and running bank cores and payment systems.
I also understand the responsibility that comes with operating as a critical infrastructure provider from stability and reliability to cybersecurity and customer experience. With that context, I want to make a few comments. Our second quarter results are in line with our guidance.
Our free cash flow generation was above $1 billion. And importantly, our Clover GPV grew at 9%, while Clover revenues grew at 13% adjusted for anticipation and nonrecurring revenue. Second, while maintaining the growth rates in our medium-term outlook, we are updating our guidance for the second half of the year, which results in full year guidance for organic revenue to a range of minus 1% to flat and adjusted operating margins to a range of 31% to 31.5%.
This is driven by 3 factors: First, weaker macro conditions in Argentina and a slower ramp of client-driven implementation time lines, which were both factors outside of our control. Paul will be providing additional information on Argentina given the volatility of that business. Second, a slower pace of execution of some of our growth initiatives, highlighting the need to further focus our efforts and improve operational excellence.
And third, our decision to make incremental investments in technology, infrastructure and cybersecurity that primarily supports our FS business. We expect these investments will accelerate our pace of progress in platform stability, resiliency and cybersecurity, which we know is critical for our customers and for our franchise. With that, let me tell you why I'm excited about our prospects to drive sustainable shareholder value.
Two months into my tenure as CEO, I'm more confident than ever that Fiserv is one of the most consequential businesses in our space. We process 1/3 of U.S. merchant GPV. We have the #1 share in U.S. issuer processing, and we serve 80% of U.S. banks and credit unions with at least one of our products.
And as a result, across our company, we interact with virtually all U.S. big consumers and small businesses. We also have a fundamentally simple business. We are a critical infrastructure provider to our clients.
We have incredible staying power. Because our products are deeply embedded in complex, highly regulated and secure workflows, this is really hard to replicate. This business has a consistent history of strong profitable recurring revenue, and that remains intact.
Recurring revenue makes up approximately 85% of our total adjusted revenue. The processing side of our business grows at around GPV, but the differentiated components with Clover first among them grow at multiples of that. And on top of that, we continue to see a number of significant opportunities that can accelerate our performance beyond the baseline level of recurring revenue we see today.
These include our state-of-the-art modern stack, including Commerce Hub, Vision Next and Finxact, the power of our data and creating solutions that bring our merchant, issuing and network platforms together. These are the types of opportunities that brought me to Fiserv to begin with, and AI is the great unlock to getting those to market in compressed time frames. We are energized about pursuing those opportunities to solve problems for our customers, but realized we must deliver the basics first.
This leads me to outlining where I'm focused and driving our teams to operate with increased urgency and accountability, namely capital allocation, focus and product simplification. To the first point, capital allocation, we are significantly expanding the process to review our mix of businesses and associated capital commitments. To date, the process has resulted in a near-term focus on lower growth noncore businesses and led to our decision to divest our student loan servicing and managed ATM businesses as well as exiting the unprofitable SMB and fuel segments within our merchant business in India.
These were the right decisions, but these alone do not move the needle. Fiserv provides a large number of products to our clients, and we know that they want best-in-class solutions. As part of our expanded review process, together with the Board, we will dispassionately assess how our products compare to best-in-class and whether we have the right to win in each.
If we do, we will double down and make sure we execute. And if we don't, we'll evaluate the full range of actions to maximize shareholder value while making it imperative to ensure that we don't do anything that causes disruption for our clients. While the Board and I fully endorse the One Fiserv strategy and the differentiated value we can deliver to clients through our independent integrated model, that does not mean we should be building everything that our clients are buying from us.
This is a meaningful shift with defined time lines and goals that I expect will create additional opportunities to drive shareholder value. This is a top priority for me. We are acting with urgency, and we will report back on our progress as we advance this work.
Moving on to operational and technology excellence. We need to increase our pace of change and simplify in a number of respects. I started driving this as the leader of merchant, and now I'm driving it across the company as CEO.
In Merchant, we completed the move to organize like most leading tech companies with a single integrated product and technology organization at the center. That helped us eliminate duplication and distractions while making swift progress modernizing our infrastructure around a single modern solution anchored on Commerce Hub, which is our gateway. We are following the same approach in our FS business, recognizing, of course, the differences and complexities of our banks, credit unions and issuing clients.
Just as important, we need to improve coordination across merchants and financial solutions. Going forward, we will look to more consistently leverage foundational capabilities like ledgers, pay-ins and payouts across both businesses. By adopting a common structure, we can consistently improve the client experience, speed up delivery and lower costs.
And as we drive simplification, we can move faster on the capabilities that are unique to Fiserv, including embedded finance, stablecoins, networks and settlement. These operational improvements will put us in a position to drive significant cost savings over the medium term, in line with Project Elevate targets, and we will be very focused in speedy execution. Finally, on technology, I'm confident that we are moving in the right direction.
We have made significant progress with a stable and highly scalable platform in Merchant services and a 70% reduction in FS client-facing incidents. To continue to advance these priorities, we have chosen to invest over $100 million incrementally into our technology infrastructure in the second half of the year, especially in the financial solutions business. We believe this is the right move to position our clients and the company for 2027 and beyond, especially as frontier AI models reduce margins for error.
Now moving to some business highlights. First, in Merchant Solutions, we continue to see progress on a number of fronts, especially with Commerce Hub and Clover. The progress that we have made in modernizing our merchant tech stack in record time under the Commerce Hub Gateway is further reflected in the dramatic increase in our enterprise pipeline with both traditional and e-commerce businesses.
We believe this positions us well in the global enterprise wallet against the best competitors in the space, and we look forward to announcing exciting new large deals in the coming quarters. Just this week, Fiserv and Mastercard entered into a strategic partnership that integrates Mastercard's merchant cloud into Fiserv's Commerce Hub. This partnership adds value-added services together with global reach to our capabilities.
Moving to Clover. I want to highlight Western Alliance Bank going live on Clover, bringing nearly 40 of the top 100 banks in the country working with Clover and highlighting one of the key synergies between our FS and MS businesses. Internationally, our partnership with TD in Canada is continuing to scale, bringing Clover to TD clients across their more than 1,000 branches nationwide.
Our efforts will now shift to converting the existing TD client portfolio to Fiserv in 2027, extending our capabilities to over 80,000 existing TD merchant clients. We also rolled out digital activation to Restaurant Depot, our significant industry partner, reaching thousands of use and touch points with restaurants every month and continue to grow our business with this partner. Lastly, after launching Clover PracticePay, we continue to see success signing up new merchants and have about 20% higher average volumes than our average SMB merchant, and we are expanding this offering into new channels in the second half of the year.
In Financial Solutions, digital payments and issuing businesses fueled our recurring revenue growth. In banking, we are seeing progress with new core wins and related deal value from these wins versus the same period last year, while attrition remained stable. One notable example was the expansion of our relationship with the UW Credit Union, where they selected DNA as its future core platform, replacing their previous solution and incorporating additional Fiserv offerings.
This significant win reflects the growing confidence customers have in our technology strategy and the progress we have made delivering key product milestones. We expanded our relationship with Flagstar Bank through the addition of Finxact. Finxact will serve as the foundation of the bank's core modernization strategy, replacing both our legacy core and a competitor's core platform at least $88 billion in assets institution.
We are excited about the accelerated time line of this conversion and the potential for this deal to drive further Finxact momentum with more banks. Staying on with Finxact for a minute. We grew positions and accounts over 75% and were selected by a firm as their ledger provider.
We also renewed and grew our business with our significant customer OnePay, one of the fastest-growing consumer fintechs in the country. Overall, these proof points are helping maintain our momentum in embedded finance, where we continue to see a strong pipeline. Our issuing business had a significant win with a U.S.-based provider of investment and retirement services for their debit processing portfolio.
We also onboarded new debit and credit portfolios for Huntington National Bank, and we further strengthened our strategic issuing partnership with Bread Financial through Advanced Defense, our AI-enhanced fraud prevention solution. In FS, we also continue to focus on delivering innovation. Among other initiatives, we expect agentOS to lead the way in showing our FS customers the incremental value we can bring to the investments they made in our core banking platforms.
We have seen interest from financial institutions grow significantly to over 100 since the initial announcement, and we look forward to providing further updates at Forum. We continue to make progress signing new bank partners for CashFlow Central and the pipeline of opportunities is large. We have cut implementation time lines by about 50% for our financial institutions compared with a year ago and see room for further improvement.
We are now focusing on helping our banking partners drive adoption and use all of the CFC power and its complementarity with Clover to address all the needs of small businesses. Lastly, I want to thank our employees for their hard work and dedication and our clients for their continued trust. I look forward to spending time with the investment community.
With that, I will turn it over to Paul to cover the details of Q2 and our guidance. Thank you.
Thank you, Takis, and good morning, everyone. I will cover details on total company and segment performance in the second quarter and our guidance for 2026. Beginning on Slide 5.
Total company Q2 adjusted and organic revenue was $4.96 billion, a decrease of 4% and 5%, respectively, compared to the prior year period. As we have said previously, Q2 marks the trough in growth rate for the year and resulted in first half adjusted revenue decline of 3% within the range of our expectations for first half adjusted revenue guidance we discussed at our Investor Day. As Takis mentioned, we saw stable underlying transaction, volume and account trends across the business, driving recurring revenue growth of 2% in the quarter with recurring revenue representing 84% of our total adjusted revenue.
While our Q2 results were in line with our expectations, we had 2 incremental headwinds to revenue growth that negatively impact our back half revenue expectations. First, macro conditions in Argentina have continued to impact inflation and interest rates in the country that has weakened our anticipation revenue during the quarter. This impact was a 90 basis point year-over-year headwind to adjusted revenue in Q2 and a 60 basis point negative impact to adjusted operating margin.
At the total company level, our first half adjusted revenue was down 2.8%, excluding the impact from Argentina anticipation. The impact to pretax income and adjusted EPS is minimized as we carry the cost of the anticipation business and the interest expense line. Second, we are experiencing incremental headwinds in our hardware revenue in merchant.
This is partly due to the market impacts of higher level of hardware sales over the last 2 years. Q2 total company adjusted operating income was nearly $1.6 billion, resulting in adjusted operating margin of 31.8% and first half adjusted operating margin of 30.8%. As I mentioned earlier, these results absorbed a 60 basis point headwind to adjusted operating margin from anticipation.
Second quarter adjusted earnings per share was $1.84. It is worth pointing out that FX rates in Lat Am were unfavorable on a year-over-year basis with an impact to adjusted EPS of $0.07 in Q2. Our Q2 results reflect an adjusted effective tax rate of nearly 20%.
For the year, we expect our adjusted effective tax rate to be approximately 19% with the tax rate higher in the second half of the year than what we saw in Q2. Free cash flow for the quarter was strong at $1.1 billion with a free cash flow conversion of 112% driven by efficient management of our working capital and some favorable timing effects. Now I will turn to the performance by segment for Q2, starting on Slide 6 for Merchant Solutions.
Merchant Solutions, both organic and adjusted revenue declined 1% for the quarter. Small business revenue was flat on an organic basis in Q2 and declined 1% on an adjusted basis. Small business volume grew 2% in the quarter, which is lower than Q1, largely due to the anniversary of the CCV acquisition.
Clover revenue grew 2% in the quarter. Excluding higher nonrecurring revenue from the second quarter of 2025, Clover revenue growth would have been 11%. And if we exclude anticipation, Clover revenue would have grown by 13%.
Clover GPV grew 9% on a reported basis and 11% excluding the previously discussed gateway conversion. We continue to expect Clover GPV growth of 10% to 15% ex the gateway conversion. Given the headwinds related to anticipation and hardware, we now expect reported Clover revenue growth in the mid-single digits for 2026.
We continue to expect medium-term Clover revenue growth in the range of 15% to 20% growth as trends underlying this view are stable. Value-added services revenue contributed 25% of Clover revenue in Q2, up from 24% and grew 10% from a year ago, driven by software attach and including Clover Capital and offset by anticipation. Our non-Clover SMB revenue was down 5% in Q2.
Moving on to Enterprise. Adjusted revenue declined 1%, while organic revenue was flat in the quarter. Enterprise transactions grew 8%.
And finally, in Processing, organic revenue declined 8%, while adjusted revenue declined 6% in the quarter. Second quarter adjusted operating income for Merchant Solutions was $781 million, down 14% with adjusted operating margin of 30%. Now I will cover Financial Solutions starting on Slide 7.
For the quarter, both organic and adjusted revenue declined by 8% in Financial Solutions, driven by higher nonrecurring revenue a year ago. In Digital Payments, both organic and adjusted revenue declined by 6% in the quarter. Our underlying account and volume growth in Financial Solutions was in line with what we expected in our recent history.
Within digital payments, payment platform transactions grew 5%, driven by stable debit processing and acceleration in debit network volumes. Our consumer payment platforms transactions were down 1% with accelerating growth in Zelle being offset by deceleration in bill pay. In issuing, both adjusted and organic revenue declined by 10% in the quarter.
The decline in year-over-year revenue growth was in line with our expectations and reflects lower nonrecurring revenue this year versus a year ago. On an underlying basis, global accounts on file continue to grow in the range we have seen recently, which is up 4%. Finally, in banking, revenue decreased 10% on an organic basis and decreased 8% on an adjusted basis in the quarter as we continued to be impacted by attrition from actions taken over the last several years as well as higher nonrecurring revenue in the year ago period.
We saw core counts declined 3% year-over-year, while overall accounts and positions, including Finxact grew 6%. Second quarter adjusted operating income for the Financial Solutions segment declined 27% to $912 million and adjusted operating margin was 38.7%. From a leverage standpoint, we finished the quarter with a gross debt to adjusted EBITDA ratio below 3.2x.
We completed a $1.4 billion tender offer and open market repurchase for $1.2 billion total consideration and issued $1 billion in eurobonds to take advantage of an opportunity to lower our cost of capital and strengthen our balance sheet. For the year, we continue to expect to finish the year at approximately 3x. Turning to Slide 8.
We repurchased 1.7 million shares during the quarter for approximately $100 million. As we noted during our Investor Day, we are focused on managing our leverage ratio and remain committed to returning any excess capital to shareholders. Following up on the savings opportunity of at least $500 million we identified from our Project Elevate assessment, we have completed the identification phase and have a full inventory of these opportunities.
We are currently prioritizing these and moving forward with the most significant initiatives at pace. On August 5, we closed one of the 2 divestitures we announced around Investor Day and expect to close the other in the third quarter. We have accounted for these in our guidance for adjusted revenue growth, which I will review in a moment.
There is no impact from these transactions on our organic revenue growth. We intend to use the proceeds for a combination of capital return and delevering. As Takis mentioned, we continue to be focused on divesting and pursuing alternative ownership structures for businesses that are not foundational to our strategy or where we believe we are not well positioned to execute.
Now with Slide 9, I'll move on to our 2026 guidance. First, from a revenue perspective, we expect adjusted revenue to grow approximately 2% year-over-year in the second half of the year with Q3 down low single digits and Q4 up approximately mid-single digits. Compared to our prior 6% to 8% second half adjusted revenue growth outlook, we currently expect 2 points of negative impact from delays in newly contracted revenue and enterprise client ramps, 1 point from lower key product and other revenue, 1 point from Argentina anticipation and 1 point from divestitures.
To be clear, we still expect to recognize the vast majority of this revenue, but it has shifted out in terms of timing. Considering these factors, on an organic basis, we expect 2026 revenue growth in a range of minus 1% to flat. On adjusted revenue, we expect about 1 point of impact from the reduction in revenue from the student loan servicing and ATM services business, offset by lower currency impact.
This translates into a range for 2026 adjusted revenue of down 1.5% to down 0.5%. As it relates to expenses, as Takis previously mentioned, we have chosen to incrementally invest in technology infrastructure, particularly in financial solutions. This higher expense level is consistent with the investments we have made since last fall and with the principles of One Fiserv.
As you have heard throughout the year, we are laser-focused on positioning Fiserv to be able to deliver compelling revenue and adjusted EPS growth rates in 2027 and beyond, and we believe that these investments will best position us to deliver that as we move past this transition year. We expect adjusted operating margin of approximately 31% to 31.5% for the year. There are 3 drivers of our lower adjusted operating margin.
Approximately 50 basis points is related to our increased technology infrastructure investment, approximately 50 basis points relates to the impact of Argentina anticipation and the remaining 150 to 200 basis points is a result of the lower revenue I discussed earlier. We expect the divestitures to have negligible impact on our adjusted operating margin. We expect that our updated view of annual adjusted revenue and operating margin to drive adjusted EPS to a range of $7.20 to $7.40.
We continue to expect capital expenditures to remain in the high single digits as a percentage of adjusted revenue. We continue to expect free cash flow conversion of approximately 90% for the year, in line with historical levels. I want to close with a few key points.
First, we remain confident in the path ahead. The change in our second half growth rate is not structural. From here, we expect our adjusted revenue growth rate to improve in Q3 and a further step-up in Q4 to an exit rate consistent with our medium-term growth outlook.
Second, our increased technology spend reflects a deliberate choice to strengthen the business for the long term, not a change in our underlying cost discipline. Our ability to drive operating leverage is intact, and we remain committed to approximately 50 basis points of annual adjusted operating margin expansion starting in 2027 and greater than 200 basis points of total adjusted operating margin expansion for Project Elevate by 2029. This combination of durable revenue growth and margin expansion underpins our confidence in double-digit annual adjusted EPS growth from 2027 to 2029.
Finally, our cash generation remains a real strength. We generated over $1 billion in free cash flow this quarter, and we continue to target 90% free cash flow conversion for 2026 and beyond. Moving forward, we will continue to evaluate increased capital return to shareholders over time.
And with that, we will now start the Q&A session.
[Operator Instructions] Our first question comes from Tien-Tsin Huang from JPMorgan.
I know you went through a lot of the outlook there. Just maybe could you mind decomposing again what changed in the second half outlook after reaffirming on June 15 and why it's not structural. It sounds like a lot of it is the slower client ramps, for example.
Was that driven by change in leadership and clients wanting to better understand the go forward? I'm just trying to understand why it's not structural.
Yes. Tien-Tsin, this is Paul, and I'll start, and then I'll turn it over to Takis for any additional comments. As I said in my prepared remarks, there are several things that changed.
And after Takis became CEO, Takis and I went through our operating plan. We went through all the initiatives, all the client impacts and 4 things emerged from that, and that's what I called out in the prepared remarks that we've got about 2 points of incremental headwind from the contracted revenue and Enterprise ramps that I called out at Investor Day. We have about 1 point of headwind from product and other things, specifically hardware.
And then we have 1 point from Argentina anticipation, 1 point from divestitures. So if you think of a point from divestitures, that's just mechanical. The point roughly from Argentina anticipation is macro related to just Argentina.
And then the first 2 buckets, those aren't structural changes. They are timing-related changes. So we expect to see the vast majority of that revenue.
It is just moved out from a time standpoint, and that's reflected in the guidance that we provided this morning.
Yes. And thank you, Paul, and just to add on, Tien-Tsin, just a couple of thoughts from my side. This unfortunately is a transition year with noise, hopefully, will be behind us soon.
As Paul said, he and I reviewed every initiative, every budget. And in the case of some of these large deals, actually spoke to the clients to understand what changed in terms of the time line. And this is our most accurate assessment of what's going to happen.
To give you an example, one of the clients, one of our largest deals, the clients going through an M&A. We were supposed to go live in September, October. They need more time because of that M&A. So there's nothing fundamentally changing in terms of the deal, in terms of the size of the deal, just the timing moves out by quarter. So we believe that these numbers that we have is an accurate assessment, derisked and does not impact the momentum that we see in 4Q and beyond.
Next, we'll go to the line of Timothy Chiodo from UBS.
I want to see if we could talk a little bit about some of the core banking efforts and outreach to some of the clients. I know that, that was something that we talked about a little bit at the Investor Day. I wanted to see how that's going, the approach, maybe how it might have changed with some of the leadership changes?
And then a related topic, if you could just talk a little bit about some of the advantages that Fiserv has, whether it's product or relationships that would help Fiserv to compete with the potential greater entrance of Pismo into the core banking market and issuer processing in the U.S. I appreciate that this isn't really something very, very near term, but as we think about over maybe a [ 5 ] or maybe even longer-term time period than that.
Thank you. Maybe I can start. And I thought there was 2 questions.
So on the first one, obviously, one of the things that I've done and spend most of my time over the past few weeks is talking to the clients, and this is not new. I've been doing that since I came here. And at the end of the day, what they say is, in my mind, both pretty simple, pretty straightforward and pretty reasonable.
They want platforms that work. They want us to deliver what we promised. They want good customer service, and they want us to help them prepare for the future, but not force our priorities on that.
These are not new things. These are the things that this company has been working on and we've been making progress on. And by the way, these are customers that have been with us not for months or years, they've been with us for decades.
So we are working on those things. I think we mentioned the 70% reduction in incidents. We mentioned the $100 million extra in infrastructure technology.
These are all things that are indirect response to the things that they are looking for. We are also maintaining continuity. We announced that Srini Krish and Andrew Gelb are going to be running the FX business.
Both of them have been with those clients for more than a decade each. And then our Vice Chairman has been with those clients for multiple decades. So that will continue.
It's BAU. It's no change in terms of what we are trying to do. But hopefully, it will be an acceleration of how quickly we deliver it.
And coming from a bank, I know what those expectations look like. On your question of Pismo, I think we have a very broad set of solutions in the market. Some solutions are geared towards credit unions, some are geared towards community banks, some are geared towards large banks and some are geared more towards fintechs, neobanks, et cetera.
When we look side-by-side at Pismo versus our own capabilities, not just with Finxact, but how Finxact is complemented by everything else that we have, think of digital banking, think of payment, think of embedded finance, think of issuing, we believe that we have a very complete set and the size and growth of Finxact has been quite spectacular, especially over the past couple of quarters. So I feel very good about our competitive position, both in the traditional space and in kind of the newer, more modern cloud-native space. And we've seen the momentum.
Flagstar is a great example of that. So I'm actually very excited about what's coming ahead.
Our next question comes from Darrin Peller from Wolfe Research.
Just given the management changes, how you're ensuring that everyone is aligned properly. And then, Takis, when you think through this portfolio review and the potential for incremental changes or divestitures, maybe give a little bit more color into what you're looking at, what types of size businesses you might want to think about or if there are businesses of meaningful size that could potentially be carved out to keep the business more streamlined and what we should expect time line-wise around this?
Yes. So again, 2 questions. So let me start with the second one.
So we did a very kind of detailed portfolio review of our business. And the lens that we took is are we in places that are not growing, that don't have the kind of profitability profile that we like, et cetera. And that's why we ended up with the 3 that we ended up.
My approach is a little bit different, which is in addition to all of that, I want to look at what our clients need and what we make and take each one of those things that we make and say, do we have a best-in-class product. We know our clients want best-in-class. Can we deliver best-in-class.
And by the way, can we deliver them in an integrated and simple-to-use way. If the answer is yes, we have a best-in-class product, then we just keep on doing what we are doing, just try to do it better and fine. If we are not best-in-class, then we will look at what are the alternatives.
And you can obviously understand what the alternatives may look like. And we're going to look at each and every one of them, focusing on areas where we have not been able to meet our expectations over time, where there are other solutions in the market that are actually really good because we know our clients want the best, they don't necessarily care who manufactures that best. So that's what we are going to do.
I don't want to get into details of the size because I've only been here for like -- I mean, I've been here longer, but I've only been doing the job for 5 weeks. So I want to give myself a little bit more time to work with the team and get to the bottom of those questions, but we are going to do that with a very high sense of urgency, and we will report back as we make progress. And there is no kind of preconceived notion as to whether these are going to be small or large.
They are going to be in every place where we can't effectively compete. And obviously, we're going to prioritize areas where we can't compete and where we are expanding a lot of technology resources to deliver those products. So I need to come back to you with more specifics.
I think we are not ready yet. In terms of the continuity and the management team, we have continuity. The merchant business remains the merchant business.
The priorities are the same. We have a new team that we hired over the past year or a largely new team that we've hired over the last year. It's a very simple org structure.
It's people that have decades of experience in doing what we need them to do, and they just continue to execute. And then on the FS side, Srini and Gelb have been here again more than a decade each. They know the business, they know the clients, they know the priorities, they will keep executing.
There are a couple of areas where I'm going to be focusing on. One is obviously that portfolio review that I just talked about. The second one is the speed and focus of execution.
And the third one is technology excellence. Again, these are not different things from before. I just want to bring more urgency into execution and more focus to make sure that we do those things as quickly as possible.
Next, we'll go to the line of Harshita Rawat from Bernstein.
So your implied OpEx guidance for second half has gone up. What changed versus the Investor Day and also the June reiteration of the guide? I know, Paul, you talked about $100 million in technology infrastructure.
Can you give more color on what are the incremental areas you're investing in? It's a pretty steep ramp in second half expenses. And then also maybe talk about SMB volume growth, that's the weakest we have seen in a while in a strong U.S. spending environment.
I know you talked about CCV lapping, but is the SMB ex Clover deteriorating.
Yes, Harshita, 2 things. As it relates to the total expense, if we just look at it on a quantum basis, the total expense now versus what we were expecting before is approximately $100 million, which we called out. And that is our technology infrastructure area, particularly in the areas of cyber and just overall infrastructure, which we believe are in the right interest of both our clients, particularly on the solutions side.
We also believe are best to position us for the longer-term success certainly as we go into '27 and beyond. Obviously, our expense base is largely fixed here. So when we have revenue that doesn't show up at a high incremental margin, that flow-through is what's impacting the margin most significantly.
But that would be the biggest thing from an expense standpoint that I would call out. As it relates to the SMB side, yes, you're right, and I mentioned it in the prepared remarks, that the biggest thing on a sequential basis between the SMB volume in 1Q and 2Q is the anniversary of CCV. So the level that we're at right now is roughly what we would expect to be for the remaining part of the year.
And I would just highlight that as it relates to SMB, the thing that we're obviously most focused on is the Clover SMB volume and the growth that we have seen in Clover consistent with our expectations, certainly for the second quarter in that double-digit range and also consistent with the outlook that we have for the remaining part of the year as well as our longer-term outlook on GPV volume. All right. We'll take the next question, but let's stick with one question, please.
Our next question comes from Dan Dolev from Mizuho Securities.
Lots of good things actually with Clover. So congrats here. Question, Takis, on some of the divestitures that you talked about.
I think your debit network is a good example of something that some of the large banks could value a lot more, and it's probably not priced into your stock multiple. I mean there has been some news, I think, in the journal about this. Could one of these assets be something that you would consider making changes to?
Yes. So when I said we are going to do a holistic review of everything, obviously, the debit networks will be part of that review as well. We have 2 debit networks.
They're critical to our clients. They're important to our business, but that will be part of the review. Again, I don't want to comment on anything specifically until I have a few more weeks in the job.
Next, we'll go to the line of Will Nance from Goldman Sachs.
Takis, I know a big part of your vision for the merchant business revolves around Commerce Hub and scaling an omnichannel offering to enterprise clients. I wondered if you could talk about the partnership with Mastercard and just how you see that unfolding and how you think about time lines there?
Sure. Thank you. I would say one thing first to clarify.
When I'm thinking of Commerce Hub, I'm thinking of an end-to-end modern stack for all of the merchant business. It's a gateway, it's a back end, it's a set of value-added services, which, by the way, will include Clover, meaning it will all be one integrated technology stack. We've made record -- progress in record time on Commerce Hub.
I've been very impressed with the team, which is a testament a little bit to what this company can do when all of the resources are focused without any distractions on a single and simple strategy that we are trying to execute. That said, it's a big leap and it's a big effort to try to compete with the best-in-class on the enterprise side, and we still have gaps that we're working on. And conversely, Mastercard has a great merchant business, and they have a number of capabilities that we thought are very complementary to ours.
When we look at, for example, the geographic coverage they have, when we look at the clients they have, et cetera and we compare that to ours, we also saw a lot of capabilities that are complementary, and we saw an opportunity to go to market together and win business together. So the teams are working now. There is an integration component, which is going to take a couple of quarters to bring those capabilities together, but I think that will incrementally improve our collective capability to win new business.
So we are very excited. Mastercard has been a great partner of ours.
Next, we'll go to the line of Bryan Keane from Citi.
Paul, I was hoping you could help us bridge the gap from kind of where we are this quarter and the third quarter to getting back to more normalized growth in the fourth and then into 2027. I guess my question is the delays in client implementations, slower pace of growth initiatives, you got some hardware Argentina issues. It just doesn't seem like we're going to turn that quickly as we get into the fourth quarter.
But obviously, you have some visibility there. Maybe you could highlight.
Yes, Bryan, a couple of things. So I would route you just to what we called out about our recurring revenue growing at 2% and that represents obviously the vast majority of the revenue of the company. So foundationally, that's kind of the right way to think about the growth rate there.
And then as we had talked about at Investor Day, even the ramping of the bucket that I provided are the key drivers of the fourth quarter growth rate between where we sit today and where that fourth quarter is. And we have -- as we move forward, that exit growth rate is exactly in line with the medium-term guidance that we provided as well. So the components are there, the structural growth rate of organic revenue, which will improve in the third quarter and continuing to improve in the fourth quarter with that vast majority of revenue kind of starts there and then the things that we've talked about are additive on top of that.
And then obviously, as we move into next year, the noise around Argentina and the noise around the headwind of hardware begin to wean down.
Next, we'll go to Andrew Schmidt from KeyBanc Capital Markets.
Takis, I wanted to ask, I think one of the priorities you outlined was moving faster. Maybe you could just drill down on this, just given kind of the technology stack as it sits today in the culture, how do you enact change at scale? Obviously, we've seen product velocity picking up in the space, particularly in merchant, but across the board.
Maybe just a little bit in terms of how you drive that change at Fiserv.
Yes. Thank you. I think, first of all, this is not new.
I've seen real progress in that space over the past couple of quarters. I think it started with hiring a strong product organization, which I think we've done on both BMS and DFS side. And then it comes from a clear and consistent view of where we are trying to go, from an agglomeration of products and capabilities to a coherent end-to-end strategy.
This was relatively easy. It's not easy, but it is comparatively easy to do on the MS side. And that's why we've anchored on one platform, end-to-end, one set of capabilities globally, and we've diverted all of the resources that we're working on anything else onto that.
And when you do that, you can make a lot of progress. And I think it's the same approach on the FS side, and that's why I'm talking about that portfolio review to make sure that there is nothing that we are spending time, resources, energy and tech dollars on that we don't have a very clear path to deliver in the near term. So I think that's one.
The second one is around the collaboration across the 2 sides of the business. We have products that sit on one side or on the other side that actually have value to both. Our network is a prime example of that.
Embedded finance is a prime example of that. StoneCastle is a prime example of that. Digital currency is a prime example of that.
So I want to make sure in all of those, we work as one company, leveraging the impact to financial institutions as a benefit to financial institutions as well as the benefit to the merchant side. And I think there, we have -- we can do better, we can move faster and we can be more efficient. And then the last component is technology, a big driver of our expense base comes from technology infrastructure, maintaining multiple platforms, maintaining multiple versions, maintaining multiple data centers.
And part of that acceleration that we are making now in terms of our investments is to move out of those things with an enhanced base, which does not only mean better customer experience and better stability and cybersecurity, but it also means a fundamentally different cost base going forward as we get rid of all of that legacy.
Next, we'll go to the line of Jamie Friedman from Susquehanna.
Takis, Paul, a question on Financial Solutions. The organic revenue was down 8%. At the same time, looking at the slides, Finxact and core accounts grew pretty nicely, mid-single digits.
Zelle was up 23%. So I'm just trying to understand what's driving the disconnect? And when do the comps get easier for Financial Solutions?
Yes, Jamie, the Financial Solutions volumes really across the board, we're very pleased with. In the digital space, whether it was what we saw on the debit network side of volumes, our debit processing volumes, our issuer accounts on file growth, the transaction growth in issuer was very strong. And then as we called out, the Finxact growth was strong as well.
We do have the preponderance of the nonrecurring revenue headwind is in Financial Solutions in the second quarter. And so if you kind of peel that back and look at the fundamental growth rate of the business in the second quarter and remove out the noise, we grew that segment in the low single digits in the first quarter. So fundamentally, going back to the comment I made earlier about recurring revenue growth, if you take out the noise, Financial Solutions grew, and we were very satisfied to see that the growth rate that we have seen in the underlying volumes of Financial Solutions that we had talked about in the first half of the year continued to strengthen or certainly stabilize in the third quarter.
Our next question comes from James Faucette from Morgan Stanley.
I wanted to ask about pricing. I know that there were some few rollbacks from Fiserv for particularly Clover customers last year. Just want to get a sense of just remind us, a, when do we fully lap those or take the full impact of those?
And more importantly, what are you seeing in the pricing environment now? Do you feel like things are steady and customers are responsive to where you have pricing now? And are you seeing much in the way of price competition?
Yes. So just a couple of things there. I'll start off with and then Takis, you may want to add.
So as it relates to the lapping, the fourth quarter is the lapping of those pricing moves that we talked about last year. So we will have that comparative dynamic outside of the fourth quarter on that front. On the yield front, things are stable.
If we look at both our yield for the quarter as well as what we expect for the rest of the year, the yield environment is very stable, either overall from a merchant standpoint or Clover specifically. So we like what we see from an overall yield standpoint.
Yes. Thanks, Paul. The only thing I would add is, obviously, we are monitoring pricing changes that our competitors are announcing, et cetera.
We are very focused on delivering value to our clients. We are very focused on improving customer satisfaction, customer service. You've also seen at Investor Day all of the new initiatives, the new features, the new capabilities that we are rolling out on Clover, which are coming out kind of now like Clover Agent is now in pilot, Clover PracticePay is out there.
Each one of those things add incremental value to our clients in a differentiated way. So as we deliver those things, we improve customer service and customers are happy, we will have more ability to generate higher yield. But right now, we are focusing on those things.
We'll take our last question here. Go ahead, Ivy.
And for our final question, we'll go to the line of Jason Kupferberg from Wells Fargo.
I know you mentioned that the hardware part of the merchant business was one of the reasons for the second half revenue cut. So I wanted to see if you could size that impact and just clarify, is that because of slower new customer acquisition or other drivers? I know you mentioned comping against some higher hardware sales over the last couple of years, but it seems like that's something that we would have already known about before today.
So any more color there would be great.
Yes. So maybe I'll start and then Takis may want to talk about the environment. The one thing that has changed on our hardware expectations is in the back half, we are seeing a tougher environment of just hitting our hardware sales targets that we had previously.
And a lot of that, I think, has to do with the elevated amount of hardware sales that have been made in the past and just kind of the market dynamics related to that. We certainly, on a go-forward basis, would expect that this comparative kind of headwind or market kind of headwind would change as we get further away from the period of elevated hardware just on a comparative basis if you just look at the numbers. So that's what's changed is the environment of future hardware sales has changed versus what we had expected.
And it is a meaningful headwind to our expected growth. I called out about the Clover headwinds that we have there between both anticipation and hardware. Hardware makes up about half of that headwind and then the anticipation makes up roughly the other half.
Takis, do you want to talk?
Yes. No, I see that as a temporary headwind driven, as Paul said, by previous sales. We have not seen any material change in the number of new merchants and things like that.
Over time, as we shift the focus of Clover more towards software, more towards larger clients like we are doing -- we are seeing with Rectangle and hopefully, we'll see with Target, you will see probably a different shift of SMBs over time. But right now, what we are seeing is really just the headwind from the past.
We want to thank you for joining us on the call today. We look forward to following back up with all the investors on a go-forward basis. And thanks for your time this morning.
Thank you.
Thank you all for participating in the Fiserv Second Quarter 2026 Earnings Conference Call. That concludes today's call. Please disconnect at this time, and have a great rest of your day.
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