Fidelity National Information Services, Inc.

Q1 2022 Earnings Conference Call

5/3/2022

spk00: Ladies and gentlemen, thank you for standing by, and welcome to the FIS first quarter 2022 earnings call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If we require any further assistance, please press star 0. I would now like to hand the conference over to your speaker, Mr. Nate Rozoff, Head of Investor Relations. Please go ahead, sir.
spk11: Thanks, Cherie. Good morning, and thank you all for joining us today for the FIS first quarter 2022 earnings conference call. The call is being webcasted. Today's news release, corresponding presentation, and webcast are all available on our website at fisglobal.com. Gary Norcross, our Chairman and CEO, will provide a business and strategy update. Stephanie Ferris, our president, will discuss our operating performance. Woody Woodall, our chief financial officer, will then review our financial results and provide forward guidance. And finally, Eric Hogue, our deputy CFO, will also be joining the call for the Q&A portion. Turning to slide three, today's remarks will contain forward-looking statements. These statements are subject to risks and uncertainties as described in the press release and other filings with the SEC. The company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law. Please refer to the safe harbor language. Also, throughout this conference call, we will be presenting non-GAAP information, including adjusted EBITDA, adjusted net earnings, and adjusted net earnings per share and free cash flow. These are important financial performance measures for the company, but are not financial measures as defined by GAAP. Reconciliation of our non-GAAP information to the GAAP financial information are presented in our earnings release. With that, I'll turn the call over to Gary.
spk10: Thanks, Nate, and thank you for joining us today. Starting on slide five, we had a strong start to the year, significantly exceeding our revenue expectations and achieving the high end of our EPS guidance. Revenue increased 9% organically to $3.5 billion, and adjusted EPS increased 13% to $1.47 per share. All of our segments beat our organic growth expectations in the quarter. Banking grew 7%, exceeding our 6% expectation. Merchant grew 15% versus our low double-digit expectation. And capital markets grew 6% with 8% growth in reoccurring revenue. New sales increased our backlog 8% organically to $22.5 billion. This consistent strength and backlog aligns with our midterm outlook for 7% and 9% organic growth, and our sales pipelines remain strong. I'd like to thank the team for their sharp focus on serving our clients and for their continued execution. Turning to slide six, the pace of change in our industry is very exciting. We've invested ahead of this change and throughout the pandemic to position FIS for success. We moved our technology infrastructure and application architecture to the cloud, and we continue to bring new or significantly upgraded solution suites to market. In banking, our multi-year investment strategy has positioned us with the best-in-class capabilities across core and digital banking, issuer processing, and wealth management. We further expanded the modern banking platform's geographic reach this quarter by enabling public cloud deployments with Microsoft Azure. This will expand our reach into key markets like the UK, Thailand, and New Zealand. Our team has also successfully launched our new banking as a service hub. This platform offers an all-in-one finance experience for our clients and enables them to rapidly create and deploy new embedded finance offerings for their customers. We recently formed a partnership with Circle to enable our merchants to receive settlement in USD coin, and Crypto.com will be our first pilot customer. In addition to our ability to quickly deploy advanced technologies, international reach is also a true differentiator for us. Our merchant business added seven new countries in 2021 and plans to add 15 more by the end of 2023. In keeping with the crypto theme, capital markets recently announced a new partnership with Fireblocks to enable our clients to store and issue digital assets, as well as to gain access to decentralized finance. Across multiple verticals, industries, and client types, we continue to develop mission-critical systems at global scale that empower our clients to innovate and grow. The power of FIS doesn't stop with our ability to deliver unique solutions. The true value unlock is leapfrogging from leading solutions for individual client types to offering expansive embedded finance experiences that can bring all of our capabilities to bear for every client. We have technology platform initiatives underway to simplify the consumption of our cloud-native capabilities, either as end-to-end solutions or as individual components. More and more, our clients are asking for access to solutions from all three of our operating segments, to enable robust transformations across their enterprise. These initiatives will speed access for them and open up rich new revenue streams for us. We are also evolving our go-to-market strategy by aligning our sales organizations to directly target these new opportunities. Despite market fears about disruption, at FIS, we think we are the disruptor, and we will help our clients win now and into the future. With that, I'll turn the call over to Stephanie to describe how this vision is translating to our operating segments and to review their first quarter performance.
spk04: Thanks, Gary, and good morning, everyone. This was an exciting quarter with momentum building for our new solutions as Gary discussed. Starting with banking on slide eight, we continue to see elevated organic growth posting our sixth consecutive 5% plus revenue growth quarter, which is well above the historical trend. Clearly, our multi-year investment strategy is paying dividends. To bring our vision to life, I'd like to highlight a few strategic new wins, which are a direct result of our technology investments. PaymentsOne is the most advanced, scaled issuer processing platform in the market. We've migrated approximately 1,500 of our existing clients to this platform, and we continue to leverage its unique end-to-end capabilities to win new clients. In the quarter, a top 20 U.S. financial institutions selected PaymentsOne for debit processing and card production. We remain differentiated with our issuer processing capabilities and believe we have significant TAM to capture with this innovative platform. In addition, we're making significant investments in our wealth management platform, gaining a second landmark win with Mutual of America, following our T. Rowe Price win last year. And in a third example, our premium payback loyalty network is a truly unique solution that combines our strengths in issuing and acquiring to enable consumers to pay with points in-store at the point of sale. This quarter, AT&T decided to join our loyalty network, and consumers will be able to use points from participating issuers to pay in AT&T stores. As retailers and issuers continue to join, we expect a powerful network effect. Capital markets grew revenue 6% organically, as shown on slide nine. Our team continues to transition the business to SaaS-based revenue models, which drove recurring revenue up 8% in the quarter. Transitioning to SaaS not only increases the predictability and resiliency of growth, but also allows for incremental cross-sell opportunities as clients look to transition to the cloud. We've made significant investments in our transfer agency solution to create an as-a-service offering that drives efficiency and automation. Similar to banking, we had a second landmark win this quarter with a leading financial institution with more than $1 trillion in AUM, continuing the momentum from our Franklin Templeton win last year. This win builds on a longstanding core processing relationship, and we were thrilled to enhance our value proposition by bringing them even more breadth of capabilities. We also saw strength with privately held investment firms. Our investment operations suite drove capital markets largest ever private markets deal with a premier high net worth multi-family office that will leverage our technology suite to transform their operations. Finally, we expanded our relationship with Robinhood in the quarter to empower their new stock loan income program. This expanded relationship helps cement our long-term vendor of choice partnership with Robinhood, where we continue to expand our value proposition across traditional and digital assets for this client. Overall, our end-to-end SaaS solutions are differentiated in the market and will continue to drive strong growth for capital markets. On slide 10, our merchant segment generated 15% organic growth this quarter. And our PayRix acquisition is already paying off by signing several SaaS-based platforms in the quarter. PayRix more than doubled their client count as compared to last year, and we highlight a few recent wins with platforms spanning the education, commercial, and marketplace verticals on the slide. We also continued our success as the leading acquirer for crypto. Currency.com signed with us this quarter after witnessing our capabilities and client service for another crypto exchange. They were further attracted to our expansive global reach, which will help them expand their own business. Lastly, the Nielsen Report recently published their 2021 U.S. Merchant Acquirer Ranking, which highlighted the strength of our e-commerce and software-led strategy. Our share of total U.S. volume increased by approximately 200 basis points to 20% in 2021 from 18% the year before. I couldn't be prouder of our team. The pandemic put them to the test, and they continue to put our clients first and execute at the highest levels. I'll wrap up by sharing the performance of our subsegments on slide 11. Global e-commerce continues to be our fastest-growing business with 23% growth on a constant currency basis. As anticipated, travel rebounded strongly in the quarter, exceeding 2019 levels. Our large enterprise business grew 14% organically and continues to be a differentiated source of scale. Lastly, software-led SMB grew 13% organically, with restaurant and retail both growing double digits. With that, I'll now turn the call over to Woody to discuss our financial results. Woody?
spk09: Thanks, Stephanie. Thank you all for joining us today. I will begin with our financial results on slide 13. Then I'll touch on our balance sheet and cash flow before taking you through our guidance. We're very pleased with our 9% organic revenue performance and the strong results achieved across all of our operating segments. We maintain consistent margins year over year as we were able to successfully offset wage inflation and difficult comparisons including last year's stimulus-related revenue. This translated to 13% adjusted EPS growth, which is consistent with the high end of our full-year guidance range. Turning to our segments. Banking revenue grew 7% on an organic basis, primarily due to continued client demand. Adjusted EBITDA margins contracted 90 basis points to 42%. The banking segment is where we experienced the majority of our margin headwind, as it directly benefited from the Paycheck Protection Program, or PPP, revenue in the prior year and was impacted by higher labor costs. Merchant revenue grew 15% on an organic basis, reflecting strong results across all three subsegments, as Stephanie mentioned. Merchant adjusted EBITDA margin expanded 30 basis points to 47%, primarily due to high contribution margins on new revenue growth. Capital markets revenue grew 6% on an organic basis, primarily due to continued strong new sales and the transition to SaaS driving higher recurring revenue. Capital markets adjusted EBITDA margin expanded 60 basis points, to 47%, primarily due to its continued operating leverage. Turning to slide 14, we generated $786 million of free cash flow during the first quarter. Free cash flow increased by 41% year-over-year. We have invested heavily in innovation over the past five years, spending over $5 billion in CapEx over that time. We believe that this investment has peaked as a percentage of revenue and expect it to come down gradually over the next several years to approximately 6-7% of revenue. As a result, we expect free cash flow conversion to expand in subsequent quarters, and we remain on track to expand our free cash flow conversion toward 95% of adjusted net earnings for the full year. We increased our quarterly dividend by 21% to $0.47 per share, and we returned a total of $287 million in dividends to shareholders this quarter. As a reminder, we plan to increase our dividend by approximately 20% per year in order to gradually grow our dividend payout ratio over the next several years to approximately 35% of adjusted net income. In addition, we reduced debt by $1.2 billion, including repayment and foreign exchange benefit, ending the first quarter at three times leverage, which was a full 90 days ahead of schedule. We expect to maintain our leverage below three times and will resume share repurchase in the second quarter. At current valuation levels, we believe share repurchase is the best use of excess free cash flow. We expect to buy back approximately $3 billion in shares during 2022. We also anticipate utilizing excess free cash flow in 2023 to buy back shares. At current course and speed, this would be approximately $6 billion in share repurchases during 2023. Combined, this represents approximately 15% of our current market cap. Turning to slide 15 to review our guidance. There is no change to our full year outlook. We achieved a strong start to the year and remain on track to deliver 7% to 9% organic revenue growth, 50 to 100 basis points of adjusted EBITDA margin expansion, and 11% to 13% adjusted EPS growth for a range of $7.25 to $7.37 per share. The primary risk and opportunities to our forward guidance include the impact of foreign exchange rates, geopolitical risk, and the pace of pandemic recovery. Combined with the upside we delivered in the first quarter, we believe that this supports maintaining our outlook for the full year. For the second quarter, we expect organic revenue growth of 6% to 7%, consistent with revenue of $3.65 to $3.685 billion. We expect adjusted EBITDA margins of approximately 44%, resulting in adjusted EPS of $1.72 to $1.75 per share. Given the unusual puts and takes that are affecting organic growth rates for banking and merchant, I would like to provide you with some more color on our segment assumptions for the second quarter. In banking, we currently expect organic revenue growth to be in the mid-single digit range for the second quarter. This is primarily due to difficult compares created by the termination fees and pandemic-related revenue that we generated last year. We anticipate a similar growth profile of mid-single digits for our capital market segment in the second quarter. For merchant, we currently expect organic revenue growth of approximately 9% to 10% in the second quarter. This equates to strong sequential growth of approximately 15% for merchant. In addition, we expect adjusted EBITDA margins to step up each quarter throughout the year. Lastly, we include assumptions for FX, corporate and other, and several below the line items within the opinion section of our earnings presentation. In conclusion, I would like to thank our colleagues for their continued efforts and perseverance through the pandemic. You continue to execute at a high level and generate strong financial results. Operator, would you please open the line for questions?
spk00: Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question will come from George Mihalos with Cowan. Please go ahead.
spk02: Great. Thank you. Good morning, everyone. Thanks for taking my question and congrats on the results. Just to kick things off, on the merchant side, the yield was strong. It was somewhat stronger than what we expected. Any reason why that should not continue throughout the course of the year as some of these verticals like travel come back? And then, Stephanie, you talked about crypto and obviously your strong exposure there. How is that vertical performing, and how are you thinking about that over the remainder of the year?
spk09: Stephanie, I'll take the yield question. You can work on the crypto. George, we do anticipate yields to be a positive benefit to revenue over the course of the year. As we highlighted, really over the past 18 to 24 months, as certain verticals came off, the yields came off heavily. We saw yield benefit as those verticals are coming back online. Travel and airlines is a perfect example that we've been highlighting here. Again, we do anticipate travel and airline to be a tailwind over the course of the year, and we anticipate yield benefits throughout 2022.
spk04: Yeah, and then in terms of crypto, George, as you know, we've been talking about this for a while. We process for the top four out of five largest crypto exchanges. They come to us because of the level of authorizations and fraud rates that we can provide for them in terms of being benefits, but also because we're a large-scale provider for them. And so you're continuing to see us take share in the crypto vertical. We really like the crypto vertical. You saw us sign a partnership this quarter with Circle, which we will be the first provider of USDC crypto capabilities. So this is a really exciting vertical for us in our global e-commerce business. It continues to demonstrate the strength and differentiation of our e-commerce business, and we continue to be really excited about it.
spk02: Appreciate the color. And just as a quick follow-up, obviously there's a lot of attention on e-comm nowadays with some of your peers reporting on what might be happening with the grow-over in that market. How, Stephanie, are you thinking about the opportunity for e-comm both for 2022 and longer term? Do you feel any differently about the growth trajectory within that sub-particle?
spk04: No, I think this is obviously a very differentiated asset for us across the company. And given the size of the TAM and the growth of the TAM in e-commerce, this has been a strategic imperative for us and will continue to be. We think about this business in terms of continuing to expand geographically as well as adding APMs. As you know, we are one of the two largest providers in this space and it's growing significantly We continue to take significant share. We really like what's going on in the global e-commerce space. We bought the Payrix asset so we could start to access SMB because we really have been up in the global space only, global multinational. And so this is a place you're going to continue to see us double and triple down in terms of investments. and focus. So, you know, we continue to be really excited about it.
spk10: Yeah, the only thing I would add to that, George, I mean, we did expand geographically by seven countries. We've got another 11 countries on target through 2023. That continued will also accelerate the growth. So, we feel very good about the guide we've given on overall merchant and the e-com is going to be, continue to be the fastest growing segment within it.
spk13: Thank you.
spk00: Thank you. Our next question will come from Darren Peller with Wolf Research. Please go ahead.
spk12: Hey, guys. Thanks. Nice job. I want to touch on the banking segment just because, again, I see it as still the largest category of your business. When we look at the sustainability to growth, obviously it's been strong, and it came in a little better than our estimate this quarter. If you could remind us on the confidence level and why the conviction is there for that elevated growth rate, and maybe it's the pipeline you're seeing or the backlog, to sustain itself for the next couple of years. Gary, I know we've touched on this, but more color on that now would be great. And then if you could also remind us on breaking down that. It's not just core banking or even bank pay. There's also the issue of processing in there. The other pieces would be helpful to understand also.
spk10: Yeah, look, Darren, first we appreciate the non-merchant question. That's great. You know, obviously we couldn't be more bullish on the banking business and how it's performed over the years. If you look, you've seen consistently strong execution in the sales pipeline. You've consistently seen strong building of the pipeline as well to replace the signings throughout the quarter, and we've seen strength over that. over the last four plus years. The backlog grew about 8% this year, which should give everybody confidence of the future opportunity in banking and capital markets, because predominantly those are the two businesses that contribute to that backlog number. We are seeing strength across all of our categories. Our issuer business has just done a really, really great job. Our leader there who's running our issuer business has done a phenomenal job. You continue to see it take share. Stephanie highlighted a really significant win on the issuer side all around our Payments One category, which we launched Payments One almost three years ago. It's the most advanced issuer platform in market. If you look also what's contributing to that growth, you're seeing a lot of acceleration in our Digital One offerings. which is really the third generation of digital experience. It's a true omni-channel deployment that we're now rolling full in market. We've seen a lot of growth in that over the last 18 months. Of course, this all started with our CodeConnect offering, which is the most open microservices API layer in industry. And then you culminate that with what we're seeing in modern banking platform. We've seen some really strong wins in MBP We have now a number of those customers live in production and more coming in, and the pipeline's very full on that. And as we highlighted, we've now enabled that on Microsoft Azure, which allows us to push out of the U.S. more effectively. So all of that should give everybody confidence that banking has truly been structurally transformed since its days of growing in low single digits. and it will continue to perform very strong given the backlog signings and the future pipeline. So we feel great about the business. All right. Thanks, Gary. It's great to see the transition.
spk12: Just very quick follow-up, Woody, on margins. I mean, we had thought you guys would be looking at more like a 43% margin for Q2. It looks a little better. Maybe just if we could touch on the components of the confidence on margins from here through the rest of the year. And thanks again, Gary.
spk09: Yeah, thanks. It's a good question. We do anticipate them to be about 44% in the second quarter. I think you are seeing some difficult comps in banking, as we highlighted, between term fees as well as some of the stimulus-related revenue from the prior year. That said, we are seeing good yields across merchant in the first quarter, and we anticipate that to continue to go forward and feel good about ramping margins over the entire course of the year. as we lap those difficult comps in the first half of the year in banking primarily. Got it. Thanks, guys.
spk00: Thank you. Our next question will come from Raina Kumar with UBS. Please go ahead.
spk05: Good morning. Thanks for taking my question. Just starting with the bank technology business, are you seeing any change in the competitive environment there, having any international players trying to enter the U.S.? ? And secondly, could you just help us understand the pricing trends for some of your largest FI clients over the next six to 12 months?
spk10: Yeah, Raina, it's a great question. I'll start, and Stephanie can add to it if she would like. Look, banking's always been a highly competitive marketplace for us. We've had a number of non-U.S. companies try to break into the U.S. for years. Frankly, the sophistication about the regulatory requirements have always been a deep moat to entry. But also, Raina, we absolutely participate really in the up market. So the larger the financial institution, the better. And then you just get differentiated, highly differentiated by scale. Our ability to square off against some of the largest banks in the country, right, with the complexity of solutions, it's more than just core banking. You have to bring robust issuer processing. You have to bring openness. You have to bring a robust professional services grouping. So we feel very good about our competitive position. Are we seeing it more competitive than we have in the past? The answer is no. It's always been competitive, and we've always done very well against that competition. When you think about pricing, all of our contracts are long-term in nature. Most of them have consumer price index adjusters in them. So As you start seeing CPI increase and inflation, you'll see that translate through our pricing models around per account, per transaction. So we do get coverage there as well. But we're not seeing an increased price competitive front. It's always been, as I said, it's always been competitive, and we're not seeing any more increase in competition than we normally do. We will say the demand continues to go up. I've talked a lot about this on multiple calls. we're really at an inflection point where a lot of financial institutions have really held on too long with their legacy technology. And so people are now pressed up against a timeline where they're going to have to start making some decisions. They're going to have to embrace cloud computing. They're going to have to embrace omnichannel. They're going to have to embrace openness. And that really plays in. to the significant investment we've made over the last five years that Woody highlighted in his prepared remarks. So all of that compounds that we really feel good about our position in the banking business.
spk04: Yeah, I think I might add, we just had our client conference a couple of weeks ago, and two points that I think are really relevant here. One is the financial institutions, at least within the United States, are very strong coming out of the pandemic. I also think To Gary's point, the pandemic has driven home from them the need to be digital and omnichannel because folks are struggling to come back into the banking centers. And so that is really contributing to Gary's point around demand. Demand is very high in terms of needing to be omnichannel, digital, and driving the next-gen technology. That's absolutely being recognized out there given the post-pandemic situation.
spk05: That's very helpful. And then just a quick one on merchants. Given the recent reduction by Visa on U.S. interchange for SMEs, do you expect to benefit to your merchant margin going forward?
spk04: Yeah, I mean, we always get a slight benefit there. We don't think it's going to be material, but there is a benefit whenever there's pricing changes. Obviously, we look and make sure we pass those along and then take an opportunity if we can. But we don't believe it to be material. Great. Thank you.
spk00: Thank you. Our next question will come from Jason Kupferberg with Bank of America. Please go ahead.
spk13: Good morning, guys. Thanks. I just wanted to start on U.S. merchant volumes. I think they were up 10% year over year and down 10% quarter over quarter, if I'm not mistaken. So somewhat below the industry, I suppose. And just wondering if crypto is perhaps a call out there or is it just kind of a function of Your debit mix has always been pretty high, and I know industry comps were just tougher on debit relative to credit. We just love some perspective there.
spk09: Yeah, I'll start, and then Stephanie can add on. Our volumes grew 10%, which at the end of the day really reflects the underlying mix in our business. We are under-indexed in SMB. We've got a heavy enterprise-based business. If you look at that compared to the fourth quarter, you have holiday spending in those big box. You have holiday spending at grocery, which we saw in the fourth quarter, that coming down a little bit. Obviously, we saw travel as a benefit in the first quarter, so there are puts and takes in there. At the end of the day, we always get the question around, are you losing share? We tried to highlight it very specifically. The Nielsen report showed that we gained two points of market share by volume for full year 2021, which is probably the best objective evidence or piece of evidence we can have that we're not losing share here. This is just seasonal movements where we see the first quarter always a little lower than the fourth quarter. At the end of the day, it's resulting in positive yields as well where we saw double-digit growth. in every segment and five points of yield during the first quarter.
spk10: I mean, look, Jason, if you play in the enterprise space, your biggest quarter is going to be Q4 because of the holiday season. So, I mean, you're just naturally going to see a drop in transactions and volumes going into Q1. To Woody's point, this is nothing more than normal mix that you would see in any Q4 to Q1.
spk04: Yeah, I mean, I think, you know, as the veteran merchant in the space, you know, seasonality from Q4 to Q1, that's what this is. So if you thought about 17% in the fourth quarter, it's really 11% constant currency. You know, there's a natural decel from retail and grocery, which is about six percentage points. That's very natural for this portfolio. It has nothing to do with share loss. And then we benefited a point from travel, and then there's nips and naps. So, you know, This is a seasonal thing. I know we like to talk about disruption a lot. There's seasonality in our portfolio. If you go back before 2019, you'll clearly see it. And to Woody's point, you know, from a Nielsen standpoint, we're not losing share. We picked up share. But we know this is a favorite topic of everybody. So hopefully that helps knit that number down.
spk13: Yeah, no, that helps a lot. I know you've got the snapback in Q2. I think you said about 15% quarter over quarter growth in merchant. So thanks for that. That's right. And just on the revenue growth outlook for the year, I know you're absorbing another, I think, $65 million of FX headwind, but obviously did not change the absolute dollar range for the year. And I'm just wondering if you're also absorbing any headwind from Russia in that number, and are you just kind of flowing through the outperformance from Q1, or, you know, it's nice to see that there seems to be some offsets to the headwind, or would you point us to the lower part of the range just because of some of these incremental headwinds.
spk09: Thanks. Yeah, I tried to highlight in the prepared remarks, we are seeing some potential headwinds from FX. We highlighted at a previous conference that Russia, Ukraine, and the impacts of that on the merchant business, we think we're about a point of headwind in the merchant business. That said, the overperformance in Q1, we're very pleased with the start to the year, and adding all those together, we have not changed the full year outlook on any front there.
spk07: Okay.
spk09: Terrific. Thanks.
spk00: Thank you. Our next question will come from David Koning with Baird. Please go ahead.
spk15: Yeah. Hey, guys. Thanks. Nice job. And I guess my first – yeah, yeah, sure. And first question, just when we think about the merchant mix of enterprise, SMB, e-com into the back half, I guess a couple things. Do you still expect kind of low double-digit growth for merchant overall in the back half? And then is the mix going to be pretty similar, like, you know, as what it was this quarter, that e-com is going to be a little better growth and the other two are going to be pretty similar?
spk09: Yeah, I think e-com will continue to be our highest grower over the course of the year, no doubt about that, Dave. You've got some comparables as we go through the remainder of the years. We tried to highlight, and I think some of the earlier questions highlighted that. And we're talking about 9% to 10% growth in the second quarter, and, Still looking at double-digit growth for the merchant business for the full year. So no real change there. There may be some movements, as you see, again, quarter to quarter as these comps kind of settle out and we get into a new norm as we go forward here. But e-com will continue to be our highest growth subsegment.
spk15: Yeah. Okay. And then just one kind of nerdy financial question. It looks like in guidance the back half DNA is lower than the first half. Is that right, and does that mean growth into 2023 is not going to be that big? That's a pretty big kind of driver for EPS next year if we can keep that low.
spk09: Yeah, a couple things there. You know, we're seeing CapEx come down over the course of the year that we highlighted. We anticipate seeing CapEx rolling into 23 and beyond in kind of the 6% to 7% area. So that combined with really you saw some impairment last year of some assets that that obviously will benefit DNA going forward into the 23 zone and going forward. So that's the primary change here, Dave.
spk11: Yeah, I think if you look at the first quarter number, we're expecting modest growth sequentially from here, you know, consistent with Woody's comments.
spk15: Yeah. All right. Thanks, guys. Nice job.
spk00: Thank you. Our next question will come from Lisa Ellis with Moffitt Nathanson. Please go ahead.
spk06: Good morning. Thanks for taking my question. I was going to ask one or two on the banking solutions segment as well, following up on Darren's earlier questions. Can you talk, kind of stepping back post-pandemic, one, the demand environment, who are you winning against in that market? Are you primarily still winning against in-house displacements of legacy systems? And then my second question related to that is that that business has historically been a U.S. business, but with the migration to the cloud and maybe some broader regulatory changes around the world, is there an opportunity over time for that business to expand internationally?
spk10: Thank you. Yeah, Lisa, let me start. You know, the competitors differ depending on size of institution. So as you're dealing with large regionals or large national financial institutions, we're competing much more with in-house developed, typically with a very old legacy core system at the center of their in-house development exercise. And that's the predominant competition we would see You would see people going through an analysis, do we try to build it again like we did 40 or 50 years ago, or do we partner with a company like FIS? You'll see certain startups in there, but frankly, the startups don't have near the scale or the technology to be able to deliver for all the answers I gave you. And, Darren, as you move down market and as you move into small regionals, large community banks, you know, community banks, call it that, $5 billion and greater, you would see, you know, classic competitors of Fiserv and Jack Henry in that space competing there as well. Once again, as you start looking, our market share grows as you get larger and larger in market. So as people combine, you know, together, you're still seeing M&A activity a lot in the banking space as they continue to grow through M&A and through just their organic growth efforts, and they get larger, we become the more natural landing spot. Once again, back to the sophistication of the solution, the breadth of the capabilities, our ability to allow them to have flexibility to run their business, whereas when you're in smaller community banks, You have a much more one-size-fits-all approach. As we move down in community bank markets, we also have capabilities there. And once again, in traditional community banking, we do very well. But that's when you really do just start seeing the traditional competitors. As far as your global question, your non-U.S. question, we think it's a great one. We have traditionally, we've been outside of the U.S. in our banking business for a number of years, but it has not been a strategic focus given the level of activity we've seen in the U.S. markets. We've really pivoted that whole banking business and accelerated its growth rate just off U.S. focus. We do think our new technologies, whether it's the modern banking platform, whether it's payments one, whether it's digital one, and Code Connect do allow us to expand in that. We highlighted this quarter we just certified our MVP platform on the Microsoft Cloud. That's going to help us move into a couple of other countries, and we do think it will be a contributor to further accelerate the growth for the banking business going forward.
spk06: Super helpful. Thank you. One quick follow-up just on PayRix. Can you just clarify how PayRix is integrating into the US S&B business? I guess I was just looking at slide 11, and it looks like, at least on the slide, you've got it grouped with the global e-com business. But is it operationally integrated into your small business business and sort of cross-selling into that existing base?
spk04: Great question, Lisa. So the way we thought about PayRix is enabling us to – embed payments and access SMBs and card not present. So it's really a strategy that actually covers both in terms of it accesses the e-commerce market for SMBs. Technically, it's going into the e-commerce segment. So as you think about the e-commerce segment, it's all things both large and small. Now, strategically, your point is a good one, which is if you said, okay, what are you thinking about your software-led business, which is the traditional ISV business, we are taking a look at that and determining which of those clients would want to transition to an embedded payment strategy or stay with an integrated payment strategy. So the way we think about SMBs these days is you can have a traditional integrated payment strategy, now you can have an embedded payment strategy, and so it adds to that SMB capability. But as you know, our SMB, our software-led SMB strategy today has been card present. And so PayRix really opens up the card not present piece, and we are booking that into the e-commerce segment to keep it pure. Got it. Terrific. Thank you.
spk00: Thank you. Our next question will come from Jamie Friedman with Susquehanna. Please go ahead.
spk14: Hi, Gary, Stephanie, Woody. Compliments on the slide deck. I really like this slide six, enterprise use cases. But I had a question on the The macro, so Gary, I heard in your commentary about bank IT budget from the macro, but is there any high-level assumption, and you don't have a crystal ball, but at a high level on management's macro outlook for, say, merchant on the macro side?
spk10: Yeah, look, I think we see a real good opportunity in our merchant segment. We're really good about, we feel great about our e-commerce, our enterprise segment. We feel good about the pay risk acquisition and helping us in the SMB market with Cardanoff present. Clearly, you're seeing mixed issues as we come out of the pandemic, but we continue to take share in the enterprise and e-commerce. The Nielsen rating substantiates that. So, We feel very bullish on the overall merchant business and feel very comfortable with our guide on that, not only this year, but going into the next several years. So, you know, I think we're very well positioned.
spk14: Okay, and then just so we can harmonize the models, Woody, with your prior commentary about the impact from Russia and FX, because... Those did seem to deteriorate relative to the prior guidance. I mean, just so I hear you right, you for 22 are maintaining the guidance despite those incremental headwinds?
spk09: That is correct. That was a very specific call out in my prepared remarks. If you go back and look, we are maintaining the guide as is right now. Got it. Thank you. I'll drop back in the queue.
spk10: Thanks, Jamie.
spk00: Thank you. Our next question will come from Ashwin Shirvaikar with Citibank. Please go ahead.
spk01: Thanks. Hey, Gary, Stephanie, Woody. Hey, good to speak with you guys. I wanted to start with the free cash flow question. I guess in seasonal terms, this was a better quarter, but could you maybe explain talk to the dynamics of getting to 95% conversion. And then from a use of cash perspective, does the, I guess, over-indexing on return to shareholder imply that you're stepping away potentially from M&A or is Tuckins still in the picture?
spk09: Yeah, thanks, Ashwin. On free cash flow itself, first quarter for us is typically a lower conversion quarter in general as we think about shape of the year every year. Last year and this year, we had some timing around working capital. So you saw very good growth year over year in the first quarter of about 41%. Again, that translated to about 87% conversion of free cash flow to adjusted net earnings. gives us a high level of confidence in getting to that 95% of adjusted net earnings for the full year, as we'll see conversion increase over the course of the year like we normally do. You combine that with the commentary around our CapEx investment that has peaked as a percentage of revenue, and we anticipate it actually to come down a little bit more over the course of the year. We're looking at 23 forward. We're looking at more 6% to 7% CapEx. So those items combined give us a lot of confidence in that 95%. Again, with only 87%, just a few points below the 95%, even in Q1. So feel very good about that outlook there. Gary, if you want to touch on the sort of MA versus share buyback, that might be great.
spk10: Yeah, look, I mean, Ashwin, our view on this hadn't changed. I mean, given the current valuations of our stocks, given the current dislocation of where we think the share price should trade, the the best use of cash on a de-risked return is buying back our own shares. With that being said, we have traditionally done M&A as a company. And so it's been a key component of our strategy. And obviously, we want to make sure that we continue to watch what's going on in the market. But right now, we feel very good about our competitive position. We feel we're strong across all three of our segments. They're executing very well. As I said, Nielsen should substantiate this share loss narrative in merchant. You see what we're doing in the banking business, and let's not forget about our capital markets business, and that's performance, which shows the strength of the overall capability, the strength of our go-to-market, and the strength of our execution. So right now, the best use is certainly deploying that capital through share repurchase. As we get a recovery in our stock price, we would certainly look to at some point in time, open up our lens again and start thinking about M&A and what are new markets we could possibly break into, what are new capabilities that we could put through our distribution channel to further accelerate growth from here. But at this point in time, we're very comfortable with share repurchase and obviously returning cash to our shareholders through our dividend, which we increased 21% as well. And as Woody said in his prepared remarks, we're prepared to do that again at the early next year as well. So hopefully that gives you context.
spk01: Yeah, no, that's very useful. Thank you. And if I can maybe ask on capital markets, you know, 6% growth, but the part that you want to grow faster is 8% growth. That's good. If you could remind us what the SAS-based recurring revenue percent is and When you highlight some of these notable wins at transfer agency and private markets and so on, if you could talk a little bit about the sort of the proclivity of your client base to look at your platform modernization. Is that sort of bringing people in? Can you give us an update on the platform modernization process?
spk10: Let me start, and let's let Woody get to the specific percentage of total revenues of SAS. I mean, I'll remind you on capital markets, this was a very detailed transformation that we drove through in our capital markets business. It started at the acquisition of SunGuard, moving it from a product company to a solution company, and then deploying those solutions through a SAS-based model. When we bought the company, it was in the low 60% reoccurring revenue. And most of that reoccurring revenue was in the form of either a processing fee or in the form of a highly reoccurring maintenance fee. So we wanted to transition that business and really start deploying capital markets once we built all the solutions and modernized them and put them together through a more SaaS deployment. The team has done an excellent job of that. We've continued to accelerate our SAS-based reoccurring sales model. It was up 8% this quarter alone. You've seen that very consistent, Ashwin. We've been holding our license fees flat. So what we've been trying to do is we run a little over 300 million license fees a year. We don't want to dig the hole while we're growing through the transformation. This is the exact playbook that we executed in the banking business two decades ago. The customers are very willing to take advantage of our processing environment, our SaaS deployment, and our modernized solution. And the reason why is because, as Stephanie commented, when we were at the user conference, what you're seeing large financial institutions are realizing processing is no longer a differentiator. Total cost of ownership, speed to market, resiliency, capabilities is where they're going to differentiate And the capital markets business is very well positioned to take advantage of that.
spk09: So over the last couple of years, we've managed to grow that, Woody, from low 60s to... Yeah, when we bought the asset, it really was about 60% in terms of the recurring or SaaS percentage there. Coming out of the first quarter, it was a little over 70%. 72% was the actual number. Continuing to see that grow over time. We anticipate that to grow... into the 80s and even look closer to banking over time with a reduced license and PS being the only other component of revenue in that group. So very pleased with the enhancement structurally around that, also the visibility. And as we've talked about before, it's enhancing the growth profile.
spk10: Yeah, I'll remind our investors, this is a business that at some point in time, we will start discontinuing license fees. So right now we're renewing these term license with existing customers. We're taking on very few new logos through the licensing channel. All of our new logos are coming in through our SaaS-based model, which shows the strength of that product and how many actually new customers we're also bringing into the mix. But there will be a point where we'll start discontinuing the license model, and then that will accelerate it to Woody's point of where it will be upper 80s, perhaps even low 90s, and you'll have a very, very small percentage of licensed business going forward.
spk01: Thank you for all the details. Appreciate it.
spk00: Thank you. Our next question will come from Dan Dolev with Mizuho. Please go ahead.
spk03: Hey, thanks for taking my question. So this was actually a really good, clean quarter, and congrats on this. I do have a question, I think maybe more for Stephanie, on the merchant acquiring side. Can you, I know it was asked before, but can you help bridge the, you know, the 200 basis point share gain versus Nielsen share? and kind of what we're seeing versus the network more from a enterprise slash debit mix because I feel like the narrative last year was enterprise was really strong, debit was very strong. So maybe you can parse out a little more in terms of like debit versus credit and how much does that affect the discrepancy or the apparent discrepancy maybe.
spk04: Yeah, so happy to, happy to. So I think, you know, first of all, let's start with Nielsen. So if you peel apart Nielsen, which is really where you can understand share gain and loss, because, you know, and in fairness, I understand as we all went through the pandemic, we had to try and tie ourselves to MasterCard and Visa, but portfolio mix really does matter here. And so if you look at the Nielsen report, you can see we gained share. that clearly the share loss is coming from smaller non-scaled acquirers, which isn't surprising in terms of the level of technology, the level of complexity. It's somewhat of the same story that's been going on within merchant acquiring for a number of years. But you can clearly see that the share gainers are really the large-scale players, and the share loss is coming from smaller players. Obviously, there's some small players that are doing well, but that's the general trend. Now, when you look at our portfolio and you think about fourth quarter to first quarter, and so I don't really, and this is going to be maybe tough to absorb, I don't really spend a lot of time thinking about MasterCard and Visa. I think about our portfolio makeup, and if you think about the merchant book, we're almost 30% global e-commerce. about 45% large enterprise in UK, and then 30% SMB. So if you think about the fourth quarter to the first quarter, and you think about we grew volume 17% in the fourth quarter and 11% constant currency or 10% in the first quarter, really that step down to me is normal seasonality based on the mix. So if you thought about 45% of our business and you added in the SMB space, which is brick and mortar, you got to think about the holiday season. So I'll just walk back through it. Like you start at 17%, you had 6% of step down fourth quarter to first quarter from retail and grocery. That's just holiday spend. That's normal seasonality holiday spend. That if you go back out of the pandemic, we always have both revenue and volumes trend down in the first quarter. Then we got a point of travel benefit, travel and airlines, but we're not nearly as big in travel and airlines as everybody else, but that's obviously been impacting yield. So we did get a point benefit there. And then we had a little bit of nits and nats in other places. Someone mentioned crypto, but it's just not that big. So if you think about that, to me, it's more around seasonality, fourth quarter to first quarter, and then Nielsen really talks to you about where you see us gaining share and who's losing share. The MasterCard volume trend, for me, I don't think about our business that way. That is a GDP grower around the world, and so they make up the whole world. We make up a certain segment of the world. So, Tijan, that's how I really think about it.
spk10: So, Dan, just kind of to build on that, if you think about our enterprise business, to move 200 basis points, you've got to take a lot of transaction volume to do that. That's where our enterprise play comes in. We've highlighted over throughout the pandemic, strengthen our sales engine in enterprise, right, and in e-comm. And so, You know, you're just really seeing not only the large enterprise share gainers, right, that Stephanie referenced, but also our success in coming out of the pandemic, you know, invigorating our sales engine and enterprise as well. So all of those things are playing a contribution to the 200 basis points. The question around debit and credit in our enterprise play specifically really doesn't have a play for us. It really doesn't matter. For us, we're there to capture transactions. And whether it's presented as a credit or a debit transaction, really our fee structures are very resilient in that. So you've got great stickiness in the enterprise because of scale. We have very, very low turnover. So clearly what you've seen is just us taking share through the sales engine our large existing enterprise customers taking share through their scale, and then the resiliency of the revenue stream credit and debit, really, we're virtually immune to. It's really more transaction-based than volume-based.
spk04: Yeah, apologies, Dan. I missed the debit credit. I agree with Gary. Because of our large-scaled players, we don't have a skew to debit credit, so it just doesn't matter for us.
spk10: That's right.
spk03: Perfect. Can I squeeze in a very short follow-up? As you look throughout this – thank you for the detailed answer. As you look through your portfolio, where do you see the biggest opportunity for price increases in your – maybe in your S&B book or anything? Is there any specific vertical or anywhere where you could say, hey, we could actually increase prices? We're below market. Thank you.
spk04: Yeah, I think – look, we all – Up in the large space, so if you're a global e-commerce or large enterprise, as everybody knows, those are scaled players who demand the price that they demand. The good news for us there is there's only a couple of us that can play there because you need scale. I mean, historically, I think this industry has looked at SMBs in terms of a place you can increase price. I think we've seen, you know, we continue to have that ability. There's no pressure there. I think you've probably heard that from other people. But do I think there's a big pricing lever sitting in our book today? I don't. I think it's the same amount of opportunity it's always been. I don't see anything significant or new, but it's always there, and we always take advantage of it when we can.
spk03: Thank you.
spk00: Thank you. And today's final question will come from James Fawcett with Morgan Stanley. Please go ahead.
spk08: Thank you very much. I appreciate all the details on the business. My questions are primarily around CapEx and capital allocation. First, did I hear you correctly say you expect to buy back $6 billion in 2023, or is that across 2022 and 2023?
spk09: No, we anticipate buying $3 billion in 2022 standalone and utilizing all free cash flow in 2023. Excess free cash flow, we'd be buying $6 billion in 2023. The combination of those two would be about $9 billion or about 15% of our current market cap.
spk08: Got it, got it, got it. Okay, I wanted to make sure I understood that correctly. And then when you talk about being able to bring down CapEx as a percentage of revenue, can you give a little detail as to where investment's been made that you can kind of allow the growth and revenue to increase in such a way that you don't need to continue to match that growth in overall capital spending?
spk10: Well, look, James, I mean, we've been in business for a very long time, right? So as you think about it, a lot of technologies in financial services are based on historical legacy platforms. We pivoted the company back in 2015 to really start focusing on the next generation capabilities that you're going to need to compete for the next 20, 25 years. And so As you start looking at whether it was in the merchant platform where we invested heavily in the new acquiring platform and Access World Pay, we've got that fully online now. Whether you look in the banking sector and you look at what we've done around modern banking platform, which is the most leading technology for cloud-native core banking system in market, you've seen that with our wins. But look at what we did on PaymentsOne, which is a cloud-native issuer platform. for both debit, credit, prepaid. You then move into our digital one or our omni-channel experience that wraps around those capabilities. Once again, coming fully online in market and then our Code Connect platform for our microservices layer. You then move into what we did in capital markets where we really leaned in our solutioning about bringing our capabilities and launching that in the in the cloud to leverage both buy side and sell side type capital markets capabilities on a SAS deployment. That all boils down to we're wrapping up those programs. And so we increased our capital starting back in 2015. We were running at about 5%. And we ramped that up to, I think, as high as 11% of total revenues. And as those platforms have now come to conclusion, you would expect those investments to come down. What we've all talked about, we'll maintain that around 6% to 7%. We think there's an opportunity to continue to lean in and add functionality and continue to grow and expand our revenue growth and our share. But all programs come to a natural conclusion, and we're just on the backside of the modernization of our solution stack. Now, we do have a historical back book that at some point in time will start migrating. Stephanie highlighted some of the stuff we're already doing in banking. We've migrated more than 1,500 of our clients to PaymentsOne as an example, but more to come on that as we upsell and migrate our existing customers to those capabilities. But we feel very good about our competitive position. You see all of our segments growing and taking share by various metrics and so at this point in time we're just we're wrapping up a lot of these platform transformations yep no that's got to feel great to get past seven plus years of extra investment thanks for that yeah yeah no exactly exactly we feel great about it well look uh i want to thank you uh for joining us this morning and thank you to our dedicated colleagues for another strong quarter Before we conclude, I wanted to give a special thanks to our team for hosting a very successful Emerald client event. We had over 4,000 participants. This live event was a remarkable showcase of our solution suites to industry leaders. We are grateful to be interacting in person where our client-centric culture truly shines. Feedback from the event has been exceptional. As clients and prospects learned how our innovative capabilities can solve their most pressing business needs. We remain committed to providing world-class technology solutions to our clients so that we can stay ahead of the curve. This commitment will lay the foundation for our growth in 2022 and beyond. If you have any further questions that were not addressed on this call, please reach out to our investor relations team. Thank you, and I hope you enjoy the rest of your day. Goodbye.
spk00: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
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