Merchant Margins and Outlook
Q: Why did Merchant margins outperform, and can you meet full-year targets?
A: Merchant margins expanded by 30 basis points in the quarter, outperforming expectations despite absorbing Takepayments, which operates at approximately half of our margin. This reflects continued strong execution and growth in high-margin areas. We're targeting a 30 basis point margin expansion for the full year, with synergies from the EVO integration contributing in the second half. We expect Merchant margins to expand approximately 50 basis points in the back half, leading to the full-year target.

Free Cash Flow Conversion
Q: Can you discuss free cash flow trends and working capital dynamics?
A: We expect to convert over 100% of adjusted earnings to free cash flow this year, excluding a 5-point impact from the R&D tax credit. Improved operating income, lower interest expense, and working capital changes contributed to strong free cash flow in the quarter. We remain confident in our full-year guidance of 100% conversion.

Growth in ISV Channel
Q: How is the ISV channel performing and what's driving growth?
A: The ISV channel continues to show strong momentum, driven by our positioning at the intersection of software and payments. We're seeing consistent growth due to investments in our integrated strategy, vertical market software, and point-of-sale capabilities. This aligns with SMBs increasingly making payment decisions based on software solutions.

Impact of Macro Environment on Volumes
Q: What drove the deceleration in merchant volume growth?
A: Merchant volume growth was 6%, a sequential decline of about 1 point, largely due to macroeconomic factors and the absence of leap year effects. Revenue growth outpaced volume due to contributions from Takepayments, which delivers more revenue than volume, and growth in high-margin areas like point-of-sale software.

EVO Integration Synergies
Q: How are EVO integration synergies impacting margins and outlook?
A: We continue to realize synergies from the EVO integration, expecting to achieve 50% of the $135 million in run-rate synergies this year. This contributes to our confidence in achieving the 30 basis point margin expansion target for Merchant. Integration expenses are trending lower and are expected to reduce further by March 2025, enhancing quality of earnings.

Strategic Focus on Software and Payments
Q: How does software fit into your Merchant business strategy?
A: The future of our Merchant business lies at the intersection of software and payments. We're investing in ISV partnerships, our own software solutions, and point-of-sale capabilities to meet the growing trend of SMBs choosing payment solutions based on their software platforms. This positions us to benefit from long-term market trends and drives growth in technology-led, high-margin businesses.

Capital Allocation and Debt Reduction
Q: Will you maintain current levels of share repurchases given debt reduction plans?
A: We're focused on reducing leverage to our targeted 3x level in the back half of the year. We expect to pay down close to $1 billion in debt from free cash flow, prioritizing deleveraging over share repurchases in the near term.

Revenue Share Agreements in ISV Channel
Q: How are revenue share agreements evolving with new ISV partners?
A: While revenue shares have drifted up over time due to competition, the environment has become more constructive in the last 12 to 18 months. Competitors are more rational due to higher cost of capital. By offering a breadth of capabilities, including embedded commerce solutions, we're able to form more constructive partnerships without reaching the highest revenue share levels.

Simplification and Streamlining Efforts
Q: Can you provide a preview of upcoming efficiency initiatives?
A: We see meaningful opportunities to streamline and simplify our business, which will unlock value to invest in growth initiatives and improve returns. While these are not reflected in our 2024 outlook, they are expected to benefit 2025 and beyond. Details will be shared at our September investor conference.

Success in Embedded Commerce Solutions
Q: What's driving the success in embedded commerce and high attach rates?
A: We've enhanced our selling strategy to attach value-added services to the payment experience, leading to over 70% attach rates of embedded commerce solutions with new customers. This resonates with ISV partners and SMB clients, making their software more competitive and increasing revenue opportunities through cross-selling of loyalty solutions, human capital management, and payroll.

Quality of Earnings Improvement
Q: Will merger and integration costs continue to decline?
A: Integration expenses have trended lower, reaching their lowest level in five years this quarter. We expect them to continue decreasing as we complete the EVO integration by March 2025, enhancing our quality of earnings. Our gap between GAAP and adjusted earnings has improved, and we anticipate further accretion.

Direct Sales Channel Strategy
Q: How are you evolving your direct sales efforts?
A: We're reorienting our direct sales channel towards selling more technology-enabled solutions, including integrated payments and point-of-sale software. This aligns with market trends and allows us to better serve SMBs by offering comprehensive software and payment solutions.

Merchant Volume and Revenue Decoupling
Q: Is there anything unusual in the positive spread between Merchant revenue and volume?
A: The positive spread is due to strong momentum in point-of-sale solutions and embedded commerce, which drive revenue streams beyond pure payment volume. While we aim to keep revenue and volume growth correlated, investments in these areas may cause revenue to outpace volume growth over time.

Issuing Business Pipeline and Modernization
Q: What's the status of your issuing business pipeline and demand?
A: We feel good about our position, with 65 million accounts in the conversion pipeline and 7 letters of intent being converted to contracts. We're expanding our cloud-based solutions and seeing momentum in commercial and sales activities. Long-term growth will be driven by modernization efforts, with new capabilities expected to be in market by 2025.

ProFac's Impact on ISV TAM
Q: How does ProFac increase your ISV addressable market?
A: ProFac fills a niche for smaller ISVs needing some payment facilitation capabilities like streamlined onboarding and funding flexibility, but who aren't scaled to take on full payment facilitator responsibilities. This opens up new areas where we hadn't been as successful in signing ISV partners before, contributing to growth in our integrated channel.

Discretionary vs. Nondiscretionary Volume Exposure
Q: What's your exposure to discretionary vs. nondiscretionary volumes?
A: The distinction between discretionary and nondiscretionary spending is increasingly arbitrary. Our portfolio is well-diversified across both categories, and with the inclusion of EVO, we remain geographically and vertically diversified. This diversification underpins the resilience and durability of our model, positioning us well for any macro environment.

Outlook for Merchant Segment Beyond FX Impact
Q: Are there any other factors affecting Merchant outlook besides FX?
A: Aside from FX, which we expect to largely offset the contribution from Takepayments in the back half of the year, there are no significant additional factors affecting the Merchant outlook. We still expect Merchant revenue growth in the 9% plus range for the full year and margin growth in the 7% to 8% range in the second half.