Fidelity National Information Services, Inc.

and welcome to the FIS third 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 1 on your telephone you will then hear an automated message advising that your hand is raised please be advised that today's conference is being recorded I would now like to hand the conference over to your speaker Mr. George Mihalou, Head of Investor Relations. Please go ahead.

Great. Thank you, Operator. Good morning, everyone, and thank you for joining us today for the FIS Third Quarter 2002 Earnings Conference Call. This call is being webcast. 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 overview. Stephanie Farris, our president, will provide an operational update. Finally, Eric Hogue, our deputy CFO, will then review our financial results. 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, 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 is presented in our earnings release.

With that, I'll turn the call over to Gary. Thanks, George, and thank you all for joining us this morning. Let me begin by saying this will be Woody Woodall's last official day as Chief Financial Officer. His contributions over the past 14 years have been tremendous, and he has established a firm foundation for Eric Hogue as our new CFO to build upon in the future. I'm also very excited Stephanie Ferris will become President and CEO on January 1, 2023. Stephanie's 28 years of industry experience, varied executive roles, and her understanding of the FIS business and industry positions her well for this promotion. I am confident in her ability to lead this company going forward and excited to continue working with her as I assume the role of executive chairman of the board. Congratulations, Stephanie, on this well-earned promotion. I'll begin on slide five for a quick overview of results. In the quarter, we delivered revenue and adjusted EPS in line with our expectations, a testament to the fundamental resiliency of our business. Organic revenue growth for the quarter was 5%. Banking solutions grew 6%, merchant solutions grew 5%, and capital markets grew 6% all on an organic basis. Our profit margins in the banking and merchant solutions businesses saw continued pressure in the quarter. This resulted in an overall adjusted EBITDA margin contracting by 150 basis points year-on-year, primarily a function of inflationary cost pressures such as wage inflation and downstream supplier increases, as well as incremental macro headwinds such as consumer weakness in the UK. We are not pleased with the profitability performance of the business and are taking actions to address them. We did want to provide you some insight on the underlying performance of the businesses because given the backdrop we operate in and the continued economic slowdown we are seeing in certain geographies around the world. On the slide, you will see we provided some key growth trends with minor adjustments to help investors see the underlying performance of these businesses. As you can see, the underlying growth trends of the businesses are good in this backdrop. If you adjust for pandemic services, our banking revenue grew 8% during the quarter. Merchant Solutions grew 6%, adjusting for Russia-Ukraine, with their e-com business growing 22%. Capital markets had an impressive 9% growth, adjusting for the volatility of license fees, which we have discussed on numerous calls. We also executed on our commitment of returning capital to shareholders. Through a billion dollars of share repurchase, in addition to the almost $300 million of dividends paid, while maintaining leverage at 2.9 times in support of our investment grade credit ratings. Turning to slide six, we are seeing indications of a broader economic slowdown. In banking, as we discussed last quarter, we continue to see deals greater than $50 million taking more time to close than we saw over the last several years. Smaller transactions in banking continue to show good momentum. which allowed us to close more new contract value this quarter as compared to the same quarter last year. In merchant, across the United Kingdom, we saw even greater pullback than we expected last quarter. We continue to see stability in U.S. payment volumes through the first nine months of the year, but are beginning to see a shift in non-discretionary spending towards the big box merchants. Should there be economic pressure in the U.S., FIS is well positioned to capture volume shifts given our size and scale and market-leading distinction in the grocery and pharmaceutical verticals, as well as our strength in enterprise card presence and e-commerce capabilities. Capital markets continues to exceed our expectations as our pivot to a SaaS-based go-to-market strategy has strengthened the resiliency of that segment. This strategy has also supported the profitability of this revenue, as we benefit from a one-to-many operating model, allowing these clients to leverage our scale and expertise to simplify their complex needs. Given the demand for SaaS-based solutions in this segment and the continued macroeconomic issues we are seeing, our license fees each quarter will continue to come under pressure. We will continue to monitor this trend closely. I'll conclude with the actions we are taking to ensure long-term growth and stability. FIS investment grade credit ratings differentiate us from others in the industry and provides us with a strong foundation during uncertain times. We will continue to fortify our balance sheet with a focus on the long term. Because of this, we currently do not anticipate taking out incremental debt in 2023 to fund share repurchase above our excess free cash flow. We will remain focused on allocating capital efficiently, and should market conditions deteriorate, we will deploy our robust free cash flow to pay down upcoming maturities. Fortunately, the strength of our enterprise will allow us to continue to fund share repurchase with excess cash, returning incremental capital to our shareholders above and beyond our dividend. We are also announcing an enterprise transformation program to significantly enhance cash flows through the business with a focus on both operational excellence and prioritizing capital expenditures. As we have completed significant investment programs over the last several years, including our data center consolidation and several banking capital markets and merchant modernization programs, we are now able to reduce our capital requirements in the future. We are reaffirming our commitment to 20% plus annual dividend growth and a 35% payout target, a true differentiator of FIS compared to others in the industry and a testament to our cash flow generation. With that, I'll now turn the call over to Stephanie for the operational update.

Thank you, Gary, and thanks to all of you for joining us this morning. Let me start by saying what an honor and a privilege it is to be assuming the role of CEO of FIS on January 1st. Gary, thank you for your leadership and mentorship, and I look forward to working closely with you in your new role as executive chairman. I also look forward to working with our 65,000 colleagues and our thousands of clients and partners around the world. And finally, thank you to Woody, our outgoing CFO, for his many years of service, and congratulations and welcome to Eric Hogue, our new CFO. Let me echo Gary's comments that the third quarter was challenging. We are not satisfied with our results. Given the changing macro environment, the persistence of inflationary cost pressures, and the resulting impacts to margin and free cash flow, we are taking immediate action to permanently reduce the cost structure of the company via our Enterprise Transformation Program. Turning to slide nine. This program will focus on our business with a goal of maximizing revenue growth while simplifying our operating model. This will enable us to deliver significant reductions in both operating costs and capital expenditures through very targeted action, while always ensuring that our client remains at the center of everything we do. Our goal is to deliver long-term margin expansion while reallocating capital spend to the highest value-creating activities for our clients, thus driving improved cash flow conversion. This enterprise transformation program has two key pillars designed to restructure and reinvigorate our operating model. First, we're focused on permanently reshaping our cost structure through both cost reduction and containment initiatives. These include actions surrounding the optimization and reduction of vendor spend, the outsourcing of non-value-added activities, and reviewing and rightsizing the current workforce. Second, we are focused on increasing the revenue of the company by unlocking value through our targeted enterprise cross-sell program called Amplify, which will take advantage of the significant white space opportunity to sell our existing products across our current segments. We will also be focused on reviewing, aligning, and simplifying both our pricing and incentive structures, as well as various other commercial excellence initiatives. We have begun to take immediate actions towards this transformation program, Detailed planning is underway, and our early expectations are to deliver at least $500 million of cash savings, with additional upside to be determined as we go through the planning process. Given the economic backdrop, we are pressing to deliver as many of these savings in 2023 as possible. I plan to update you with a more complete sizing and framework for the program on our fourth quarter earnings call. Moving on to the third quarter, our segment results were mixed. Revenue came in largely as expected, with the exception of further deterioration in macroeconomic conditions, primarily in the UK. Adjusted EBITDA margins were challenged. I'll begin on slide 10 with a brief overview of our banking and capital markets segments, including highlighting several exciting new wins. Demand for FIS's mission-critical solutions across both segments continues to be strong, with solid positive sales growth and, even in this more uncertain macro environment, our sales pipeline remains robust. In our banking solutions segment, organic revenue grew 6% or 8% adjusting for the pandemic grow over. Strength was driven by continued demand for our next generation platform solutions across core, issuer, digital, and wealth management. Payments One, our next generation card management platform, had a strong sales showing. Key wins include a leading global card network provider that selected Payments One for its cross-border prepaid consumer and corporate solutions business that serves nearly 20 countries. Migrating from its in-house solution to our API-based platform will enable the company to realize end-to-end efficiency benefits at scale. Additionally, a leading Philippine financial institution selected PaymentsOne for processing of its credit card and unsecured loans portfolio, helping them to drive innovation and market expansion. And finally, one of the world's largest retailers went live with FIS premium payback across its U.S. locations. We see this as a tremendous proof point of cross-selling across our segments. As challenging economic factors like inflation play into consumer shopping decisions, premium payback offers significant discounts to shoppers, benefiting both merchants and card-issuing banks, who are looking to offer more innovative and frictionless ways for cardholders to monetize their rewards currency. Turning to capital markets, we had another strong quarter, even with a slowing sales backdrop. Revenue increased 6% organically, or 9%, excluding license revenue. Capital Markets has been on a multi-year strategy to shift to SaaS-based solutions from licensed solutions. We are very pleased to see the success of this strategy. We had several impressive client wins within the Capital Markets segment this quarter, including multiple wins for our cross-asset and trading platform with several leading FIs across Europe and Asia. Not only will our solutions provide these financial institutions with a single cross-asset platform to support their front, middle, and back office operations, The platform caters to changing regulatory environments, making local regulatory approval easier for the banks. We also deepened our relationship with a leading data analytics company as they expand their use of our receivables and payables solution for the purpose of empowering their corporate customers to drive automation, cost savings, and more effective cash flow management. Turning to slide 11, I'll touch on the performance of the merchant solution segment. Given past interest in our merchant strategy and its evolution in recent years, I'd like to take a few minutes to update you on the competitive position of the WorldPay business, as well as the strategic pivot that is currently underway. We will provide a much more comprehensive deep dive into our differentiated merchant solution strategy and its complementary nature to our other segments in early 2023. Merchant solutions revenue increased 5% on an organic basis, with growth negatively impacted by further deterioration in the UK, while US consumer spend remained consistent throughout the quarter. While our merchant business is not immune from an economic slowdown, we believe the business is well positioned to grow through a recession. Approximately 55% of the segment revenue is sourced from the e-commerce and enterprise subsegments, excluding the UK. We would expect these subsegments of the business to be more resilient in an economic downturn relative to SMB. Furthermore, our North American enterprise subsegment increased 7% in the quarter. This channel indexes towards non-discretionary spend categories, including big box retail, grocery, and pharmacy. While some of this growth is a result of strong year-over-year comparisons coming out of the pandemic, we continue to see and expect strong growth in this key segment of merchant solutions. We had several notable wins this quarter, especially in our e-commerce business, highlighting the strength that our global scale and reach offers to our clients. First, while still early days, we're very pleased with the momentum we are seeing for our recently launched global solution, Guaranteed Payments. which we introduced to you last quarter. A large global consumer electronics giant chose this end-to-end e-commerce solution to help them maximize order conversion rates and reduce order fulfillment times, all while eliminating the financial liability of fraud on approved orders. We have also expanded our relationship with a large U.S. discount retailer by expanding processing volumes and adding new services like the FIS premium payback solution, encryption, and tokenization services. I'm excited to announce that we officially branded and launched our WorldPay for Platforms offering, leveraging the capabilities provided by the PayRix acquisition. While still early days, I'm pleased with the momentum we are seeing. WorldPay for Platforms is our innovative approach to addressing the SMB market by empowering SaaS platforms with the unparalleled tools and capabilities across FIS's merchant and banking offerings. We believe we're at the forefront of the new era of payments that will drive the next evolution of services to SMBs via software and platforms, with payments and financial services leading the way. This quarter, we closed several notable wins in verticals such as media and veterinary. In response to your questions regarding the performance of the business post-pandemic and in an effort to improve transparency, we are providing some additional detail on this call. First, despite a fair amount of noise around disruption and market share shifts, Merchant Solutions' revenue and volume growth in aggregate when indexed to 2019 levels has remained stable, showing steady revenue growth and a high single-digit volume growth. Further, revenue and volume growth rates and yields have remained consistent by subsegment, albeit they are varied depending on the merchant size and vertical in each category. To be clear, while our S&P subsegment, which indexes to card present acquiring, has been adversely impacted by changing market dynamics. The strength in our e-commerce business where we continue to grow above market and in our enterprise business has allowed us to deliver consistent top line results. Going forward with continued market share growth in e-commerce, as well as our strategic shift to embedded payments and embedded finance, we expect e-commerce to ultimately account for 50% plus of total segment revenue. I will end where I started. I couldn't be more excited about the opportunity in front of us at FIS. And with that, I'll now turn the call over to Eric for further discussion of our third quarter results and our revised outlook for 2022. Eric?

Thanks, Stephanie, and thank you for joining us today. This morning, I'd like to dive deeper into the third quarter results, particularly around EBITDA margins, touch on our balance sheet and cash flow metrics, and then move to capital allocation and forward-looking commentary. I'll begin with our third quarter financial results on slide 13. As Gary mentioned, revenue increased 5% on an organic basis and adjusted EPS was $1.74, in line with our expectations for the quarter. On a consolidated basis, adjusted EBITDA margin contracted 150 basis points to 43.7%, as margin expansion in capital markets and a reduction in corporate expenses was more than offset by contraction in banking and merchant, reflecting a mix of inflationary costs, high margin pandemic grow overs, and incremental macro headwinds in geographies such as the UK. Turning to our segment results, banking revenue increased 6% organically with adjusted EBITDA margin contraction of 320 basis points to 42.9%. Margin contraction was primarily driven as high variable costs associated with inflationary pressure, a reduction in pandemic related revenue, and ramping as a service deals which are currently dilutive to segment margins. While these as-a-service deals are currently dilutive, they have aided in our strong banking growth over the past several quarters and will continue to expand margins over time. As expected, termination fees were down compared to the prior year period, but a pull forward on license revenue mostly offset this impact, resulting in growth in non-recurring revenue. We have also seen some elongation and fail cycles, particularly for larger deals, where we remain a market leader versus others in the industry. This is negatively impacting both revenue growth and margin in the quarter, and we expect this headwind to persist for the remainder of the year. Turning to merchant solutions, revenue increased 5% on an organic basis with margin contraction of 430 basis points to 47.4%. Margin contraction was primarily driven by incremental investment in emerging channels, as well as macro impacts associated with the UK and Europe, wage inflation, and FX. Capital markets organic growth was 6%, demonstrating the consistency and resiliency of the segment over the last several quarters. Margin expanded by 90 basis points to 49.3%, primarily driven by strong cost discipline and operating leverage within the segment. Turning to slide 14. In the quarter, we returned approximately $1.3 billion of capital to shareholders, maintained leverage of 2.9 times, and had a weighted average interest rate of 2%. We generated $684 million of free cash flow, including an approximate $250 million headwind associated with a taxable gain from our cross-currency swaps in the quarter. This resulted in free cash flow conversion of 65%. Excluding this impact, free cash flow conversion would have been approximately 84%. Reflecting our year-to-date conversion and outlook for the fourth quarter, we now anticipate free cash flow conversion of approximately 80% for the year, and excluding the tax impact in the third quarter, we would anticipate a more normalized 88% conversion for the year. We anticipate share buyback of approximately $500 million in the fourth quarter as we utilize excess free cash flow to buy back stock. We're highly focused on improving our free cash flow conversion moving forward, driven by a targeted reduction in capital expenditures aligned with the priorities outlined in the Enterprise Transformation Program. Turning to slide 15 for commentary around capital allocation philosophy. As Gary mentioned, we're putting a heightened focus on the balance sheet given the macroeconomic environment. Said plainly, we no longer anticipate taking out incremental debt in 2023 to fund share repurchase. This will modestly delever our enterprise in conjunction with EBITDA growth, further supporting the strength of our balance sheet as a competitive differentiator. We remain committed to our annual dividend growth of 20 plus percent and continue to believe that a 35 percent payout ratio is an appropriate target. Beyond our dividend and capital expenditures, share repurchase will be our default use of excess free cash flow consistent with our historical capital allocation strategy. Turning to slide 16, reflecting several incremental and persistent headwinds that Gary, Stephanie, and I have discussed throughout the presentation, we're adjusting our full year 2022 guidance. There are three primary vectors driving the reduction in our outlook for the year. First, we've seen incremental macro factors impacting various portions of our revenue streams. Most notable of these macro factors is the recessionary trends within the UK and broader Europe, putting pressure on our merchant volumes within the region. Given the slowing level of bank consolidation due to deteriorating credit markets, we've reduced our assumption for termination fees in the quarter. While this is ultimately a benefit to the health of FIS over the longer term, it's driving a material reduction to our 2022 expectations. The second vector would be inflation and cost pressures impacting the expense base. This is inclusive of incremental wage, infrastructure, and vendor costs. Additionally, while inflation has been an incremental benefit to some revenue streams via price escalators, it has also resulted in higher pass-through revenues, which carry low to zero margins. This has negatively impacted revenue mix and margins. The last vector is associated with sales timing and execution due to continued elongation in our larger transactions, resulting in a push on certain previously forecasted revenues. We also incorporated our third quarter results into this revised outlook compared to original expectations. While the backdrop is challenging, the size of our backlog and concentration of our recurring revenue has allowed us to offset most revenue challenges. however, with a different mix of businesses and margin profiles. We're looking to address these cost pressures through our announced enterprise transformation program that Stephanie discussed earlier, and we believe that longer-term margin expansion remains a staple within our operating model. A key priority of mine and the finance teams will be managing the things inside our control very closely. While we cannot control the macro, we'll look to manage the micro across both operating and capital expenditures to drive profitability and incremental cash through the enterprise. Turning to slide 17 for a summary of our revised guidance. For the year, we now anticipate consolidated revenue of $14.47 billion to $14.52 billion, resulting in organic revenue growth of 6% to 7%. Adjusted EBITDA of $6.17 billion to $6.21 billion, or margins of 42.6% to 42.8%, and adjusted EPS of $6.60 to $6.66. We are proactively de-risking our fourth quarter and full year 2022 guidance to incorporate additional macro deterioration from what our business is currently experiencing. To be clear, our current forecast is above our fourth quarter guide. For banking and capital markets, we are lowering our assumptions associated with high margin, non-recurring revenue given decreased visibility. With respect to merchant, we're incorporating further consumer challenges across both the UK and, to a lesser extent, the US. As the incoming CFO, given the more uncertain backdrop, I think it prudent to err on the side of caution as it relates to setting forward expectations. As investors, you should expect this to be my guidance philosophy going forward. Turning to slide 18. Given the uncertainty in the macro backdrop, we are reassessing our midterm guidance which we will readdress early next year. While it's premature at this juncture to provide a formal 2023 outlook as it relates to operational performance, I do want to offer some color on several below-the-line assumptions for the purposes of updating your models. Beginning with depreciation and amortization, our current projection is a range of $1.28 billion to $1.32 billion for the full year 2023. Moving to net interest expense, assuming the refinancing of maturing debt, our net interest expense would be in the range of $650 to $700 million for the full year 2023 at current interest rate projections. As economic continues to progress through 2023, if debt reduction becomes a more optimal use of capital over share repurchase, we'll execute accordingly. Presently, we would expect share repurchase to be our backend loaded in 2023. I expect our effective tax rate to be slightly higher, around 15% to 16%, and our period end 2022 share count should be approximately $595 million. At this time, we believe our below-the-line assumptions are in a reasonable range to communicate externally for the upcoming year to assist in modeling our financials. As I wrap up my prepared remarks, I'd be remiss if I did not acknowledge the contributions of my predecessor, Woody Woodall, to the company and his mentorship as I now assume leadership of the finance organization. I'll finish by saying I'm excited for the next chapter of FIS and commit to being a prudent allocator of capital, a disciplined expense manager across the enterprise, and a transparent and conservative communicator to the investment community. FIS continues to differentiate through expertise with enterprise merchants and financial institutions. We continue to provide mission-critical capabilities with highly recurring revenue streams and we benefit from a one-to-many operating model to drive underlying margin expansion, all of which we believe will deliver consistent and sustainable results through challenging macroeconomic conditions, driving value to our clients and shareholders for years to come. Thank you again for your time this morning. Operator, will you please open the line for Q&A?

Thank you. As a reminder, to ask a question, you will need to press star 1-1 on your telephone. Due to time restraints, we ask that you please limit yourself to one question and one follow-up question. Please stand by while we compile the Q&A order. And today's first question will come from the line of Dave Koning with Baird. Please go ahead.

Yeah. Hey, guys. And thanks, Woody, for all the time over the years. It's been great working with you. And I guess... My first question, just when we think of merchant, it seems like most of the competitive data points we've gotten have been around 10%, maybe a little over. You guys were mid-single digits. You explained some of the moving parts with UK, but maybe what do you think are the gaps, again, between you and the industry, and what does it take to get back, and maybe how soon do you think you can grow in line with industry again?

Yeah, Dave, thank you. This is Stephanie. I'll take that. So I think Look, I think Merchant, if you look at 2022 over 2019, has been a mid-single-digit grower consistently. It's been pretty consistent quarter over quarter. Let's break down what's in here in terms of thinking about what's strategic for us and then what we strategically are deprioritizing. So if you think about the business broadly, as you know, we are one of the largest global e-commerce providers. That is by far and away our most strategic piece of the business. along with being a large-scale enterprise card present provider in the U.S., which provides the scale we need to continue to really drive a lot of market share gains. Post the pandemic, given the structural shifts in the industry, we are seeing significant changes in our SMB portfolio, and we're strategically deprioritizing it and moving all of those partners that we've historically had there over to our embedded payment strategy with WorldPay for Platforms. So the way we see the world as we go forward is we have been and will continue to be a mid-single-digit grower. You will see us continue to add and drive growth in our e-commerce segment, which, as you know, has a higher growth part of the portfolio. We are pivoting our strategy from card-present SMB to card-not-present SMB. And over time, that mix shift will take the e-commerce piece of this business upwards of 45% to 50% of the total portfolio and and then should pivot the business back to a higher growth rate.

Yeah, great. Thank you. And then just on margins, I guess if we look first just at merchant, it was close to 100% incremental margin in both 2020 and 2021. And now this year, it's closer to zero. And I think all the businesses are feeling some of that pressure. Are we in a position where maybe that really started, I don't know if it was eight, 10 months ago. We're not that far away from anniversarying the big pressure from costs just on inflation. When we anniversary that, can we start to see normal incremental margins again, plus this cost savings program? Is that kind of the expectation?

David, hey, it's Eric. Yes, I think that's a fair way to think about it. As I think about the third quarter margins, really two predominant drivers here. One, it's continued investment in emerging channels, which would be geographies and payricks, as well as broad-based macro impacts where we're seeing revenue come down at very high incremental margins, which would include the UK and Russia-Ukraine. Okay.

Great. Thanks, guys.

Thank you. One moment for our next question. And that will come from the line of Jason Kupferberg with Bank of America. Please go ahead.

Thanks, guys. Good morning. I appreciate you taking the question. So I know you mentioned that there'll be an update on the medium-term guidance coming next quarter. I mean, Eric, I know when we met with you in September, it certainly sounded like cost is a pretty high priority for you, even relative to revenues. You seem to be underscoring some of that today. So is that kind of the right mental model we should have as we think about how the multi-year financial outlook may evolve. And I think Stephanie may have just said in response to the last question, you know, merchant trending kind of mid-single digits for some period of time at least. Are those some of the piece parts we should be considering just as we try and get our models properly adjusted in the out years?

Jason, that is a fair way to think about it. As I mentioned in my prepared remarks, we're not going to get deep into the operational performance in for 2023 and beyond, but, you know, referencing back to the sell side lunch, you know, I believe that there were the four things that we, the four key points that we talked about during that session, I think are still very, very relevant. The macro continues to be a challenge for us. We're focused on spending across both operating expense, capital expenditures, as well as one-time items as well. We wanted to ensure that we've got some visibility into 2023 for interest expense, and then lastly, You know, we've got ongoing commitment associated with excess free cash flow going to share repurchase.

Right, right. Yeah, no, that caller was helpful, and slide 16 was actually really helpful, too, just doing that guidance walk there. Just as a follow-up on the $500 million-plus in cash savings you talked about, it sounds like you're trying to get at most of that in 2023. What's, at this point, your sense of the rough mix of the OpEx versus the CapEx component, and how much would you expect to drop to the bottom line versus reinvest?

Yeah. Good morning. I'll answer that. Don't know yet. So we are aggressively going after, as we talked about, both operating expenses. As Gary mentioned, we're at the end of our investment cycle. As you guys know, we've made significant investments in modernization in our products across capital markets, banking, and merchant. investments yielded very, very significant and positive momentum in terms of products hitting market at the right demand. But as a natural cycle, it makes sense now for us to take the capital investment in those down. So we're going very active around, you know, the reduction and reallocation of capital. After operating expenses, as Eric mentioned on the call, we are experiencing some significant increase in inflationary and then and then non-recurring. Overall, we're really looking at driving as much of the $500 million in cash flow and improving our cash flow margins in 2023, but I just don't yet have how much that's going to impact in 23 versus coming into 2024. We're pushing into 2023, and I don't have a feel for you yet on OPEX, CAPEX, et cetera. We'll come back to you in the fourth quarter because we're just detailed planning and actions happening now.

Okay. We'll stay tuned. Thank you.

Thank you. One moment for our next question. And that will come from the line of Darren Peller with Wolf Research. Please go ahead.

Thanks, guys. You know, my question is really around historically FIS has always been a good manager, a portfolio manager, looking at different assets throughout the business. And so just looking at some assets that are obviously continuing to grow well, whether it's cap markets or banking assets, versus parts of the merchant business makes me wonder, again, if it makes sense to reconsider that, right? Whether there's assets that could be better off just being with another company while you could reinvest in areas that really do want to be in focus. You could use cash from those sales. So any further consideration of portfolio management, whether it's divestitures or, and then maybe just a real quick revisit on whether there's, you know, given some of the broken assets out there, if there's acquisitions that make sense into the merchant side as well.

Yeah, Darren, thanks for the question. Absolutely. We have strength, I would say, here at FIS in two things. One, which is being very strong portfolio managers and making sure that we divest underperforming businesses, reallocate capital, et cetera, as well as strategically. I think we've been a really, really good strategic provider of M&A. So just looking at that as I come and Eric and I come into the business, We are doing a full-scale review top to bottom in terms of what we think we should be doing. Although, that being said, I believe strategically it's really important for these three segments to be together on one platform. So you're not going to look to see us do any big, large transaction either buy or sell. What we're really focused on right now is making sure we focus on the underlying cost structure of the company, getting the capital allocation correct, simplifying the operating model. You might see us look at things like getting out of certain countries where we don't think we're getting the right return, selling certain small areas of our business that we think would be better suited with someone else. But strategically, we believe in these assets being together. And why we do is because of the ability for us to cross-sell products across segments. So that being said, we are always prudent allocators of capital. We always focus on value creation. And so we always will continue to look at that. But what we're really focused on over the next two quarters is driving out the costs we need to drive to make sure that we can really return the operating leverage and the cash flow of the company.

Darren, let me add just one thing there. I mean, you did also ask about future M&A. We fundamentally do believe we're heading into a macro environment of softening. The reality is, historically, you wouldn't do M&A going into that macro environment downturn. You would do M&A when you see the trough and you're starting to come out. That's when the valuations will be at their lowest level and that would be the opportunity. So one of the things we're doing as we talk about fortifying the balance sheet is just that, right? Really puts us in a position to evaluate is there going to be an economic recession or not, how deep, how long, but then it'll give the team an opportunity given that balance sheet to take advantage of that based on if and when that occurs and when they see the trough and the recovery. So just wanted to share that. That's a great point.

Yeah, no, that makes a lot of sense. Just the quick follow-up is the information you gave on merchant and the thoughts on Midsend will make sense. If we could just touch on capital markets and banking for a minute, it's been very strong and resilient. And so when we think about that resilience now, what are you seeing in the market around it? Is demand as strong as it's been and even with some questions on the macro front, into next year or two?

Yeah, no, listen, how about I give some color commentary and then Eric can add on a few things. I didn't get enough there. But I would say demand continues to be really strong, both in banking and capital markets. The investments we made to modernize the products, also the financial institution market broadly continues to be very significantly spending on digitization and omni-channel capabilities that they need and our solutions meet those needs at the perfect time. So the demand continues to be really high. What we're seeing, and we started seeing it in the second quarter and we flagged it, is just elongating sales cycles. And so that's why we're somewhat calling the macro here. We're seeing financial institutions taking longer to make decisions. We're not seeing that they don't like the products. They certainly like the products. but we are seeing decisions slow. And as we saw decisions slow in second quarter and then third quarter, we have great visibility. We have a great pipeline. It's very strong, but we're becoming a little bit challenged in terms of the transparency of when those are going to close. And I think that's just the financial institution market being a little prudent with what they're seeing across the economy. So I would say, The demand there continues to be strong. What we're calling out for you is a bit of the macro in terms of how we're seeing people behave.

Let me add a little bit to that, Erin. I was on with three different CEOs yesterday alone talking through what they're seeing in the market, what's going on with our relationship, et cetera. It's interesting. I've never really seen the banking industry stronger. You know, you're seeing massive interest rate increases, so their NIMs expanding, so profitability is going way up. You're seeing their credit quality very strong. I actually had on all three separate occasions the comment of what is everybody else seeing that we're not? And it's causing them to pause because they're just, the reality is they're concerned that, well, maybe there's something we don't know. And so we've seen this in the past. It's not a demand issue, but that's what's elongating the sales cycle. So something that might have taken 90 days to close might take 180 days because they're just cautious, rightfully so, even though they're having a very, very strong profitability and strong growth. They're just concerned with the rhetoric in the market. And you saw the equity markets yesterday, how it responded to the latest interest rates, right? We continue to say it's baked in and then there's messaging that occurs and you see the decline. All of that makes very prudent business leaders just take a little more time in decisioning. And that's what we're seeing. But the demand is very strong and very good and our products are very well timed. Got it. Thanks, Karen. Thanks, Stephanie.

You bet.

Thank you. One moment for our next question. That will come from the line of David Togut with Evercore ISI. Please go ahead.

Thank you. Good morning. Since Heritage World Pay is largely UK-based, what steps are you taking to mitigate the earnings pressure in the UK? In other words, is a specific part of the enterprise transformation plan really aimed at Heritage World Pay in the UK?

Yeah, so I'll take that. The U.K. is 15% of WorldPay, so I don't consider it WorldPay-based. Actually, I would consider the WorldPay business broadly North American-based. If you think about it, there's a North American portfolio, which is primarily large card present enterprise, and then a lot of our global e-commerce is also in North America, as you would expect, given the size of the market. So the U.K. piece of it is 15%. You are right. It is a very challenging economic time there. I mean, you know, we gave a guide in second quarter 90 days ago. We thought we felt pretty good about considering what was happening in a recession there. And then they changed prime ministers at least once, maybe twice. And so the economic conditions in UK are pretty challenging. And, you know, as we look out, even over the next 60 days, it's tough to call it. They're in a recession. Their consumers are struggling. And we're tied to consumer spend. So as that goes up and down, it is a high margin business, just like payment processing. So in terms of costs, our $500 million of cost program is broad-based. Of course, we're looking at the UK, but it is really so small. We really couldn't make the margin expand just on the UK, but we're very conscious of the business there. And what you'll never see us do is make cuts such that will impair the ability for the business to grow, or it will impact our customers. So I would say that Enterprise Transformation Program is just that. It's enterprise-wide. And we will be focusing on everything across our entire global portfolio.

Appreciate that. I was thinking of Heritage World Pay before the Vantage merger. Just a quick follow-up. Stephanie, your comments on SMB weakness in merchant solutions in Q3, revenue down 1%. How much of that is market-based versus FIS-specific?

I mean, I think the – so that's our card present portfolio. So think about that being primarily terminal-based, ISO book, ISV book. I would say for us it's probably largely us from a market perspective in terms of we are strategically pivoting that business. to our platforms business, so an omni card not present capability. So that piece of our business, whether it's our ISO business or ISV business, we are strategically pivoting away from that. It's just not a high growth business for us. And we want to be an SMB via platforms and more focused on e-commerce. So I would say the number is probably more us than the broad market.

Thank you. Congratulations, Gary and Stephanie. Thank you. Thanks, David.

Thank you. One moment for our next question. That will come from the line of Chansen Huang with JP Morgan. Please go ahead.

Hey, thank you so much. Good morning. I wanted to build on, I think, some of the answers you've given already. Just thinking about, I know, Gary, we talked about the super buyer. I think you've relabeled it as Project Amplify. And, Stephanie, you mentioned cross-selling is still important. But I'm just curious. You know, if the intensity of that has changed because the market focused on super apps and providing equity and merchant services and banking, it feels like it's changing a little bit. So I just want to test, again, the importance of the project Amplify. Do you have targets in mind as that changed in any way?

Go ahead. Go ahead, Stephanie. So, Tenjin, I would say we are even more bullish about it. So, you know, I think we've evolved this a bit. You're right. We have super users. I mean, if you look at our top 200 clients across the enterprise, the majority of them have some sort of product set across all three segments, which is really encouraging. And when we go out and talk to, for example, whether it's a large technology provider in our global e-commerce book or we're talking to the largest grocery realtor company retailer and the CEO, all of them are really looking at us and talking to us about, not just about the payments piece, but about financial services. And if you think about what's happening in the world broadly, we're seeing financial services continue the evolution almost to the point of transaction and embedding in every transaction that we're doing. And so our broad breadth of capabilities resonates across all of our segments and large customers. And so We are formalizing it into what we're calling our Amplify opportunity. We'll be back on it more in the fourth quarter, giving a lot more view towards size, and absolutely we're goaling it, and we're seeing some initial success. It's one of the reasons why I'm very excited about the opportunity. We have a very significant opportunity to drive incremental revenue growth by doing more of it. And so I don't know that it's evolving other than we continue to be very excited about it.

Yeah, I'd just add one little thing. I'd add one thing to it, Tenjin. I mean, you used the concept super app, so I want to be real careful. We would view a super user different than a super app. Super app would dictate that we're going to do a large development. This is simply taking the success that we had with the WorldPay integration of cross-sales and amplifying that up to the next level. So starting to think about our really large customers across all of FIS, not within the traditional segments they housed. And Stephanie is absolutely all over driving the sales team and incenting that behavior to drive cross sales in a more fundamental way. You know, our large enterprise customers, the reality is most of them need the capabilities in all three segments, not just the one segment they're in. So there's not a large development effort here. There's not a large spend effort here. there's a focus incentive that Stephanie's driving.

Perfect. No, thanks for clarifying that. And, look, I can think of a lot of merchants I know that want to bank their users and do similar things, and there's some overlap there. So I'm glad you clarified that for me. If you don't mind, just my quick, I don't know if it's quick, my follow-up, just on the SMB side, I know we're going to learn more, but it sounds like FIS is willing to be the wholesale provider in face-to-face. within SMB and then pivoting more to doing, I think you just said it, platform and Omni, which makes sense, I think, because SMB is moving more towards platform-type services. Does this mean you need to invest in new areas to service that platform piece, either organically or inorganically? I know pay-in, pay-out, for example, is really important there. A lot of SMBs are moving onto larger platforms, and you can do that on enterprise, but it feels like it's a different – need there within Econ Platform? Do you have what you need to be successful there? Thank you.

Yeah, great question. We are absolutely shifting to be our embedded payment strategy to deliver capabilities, both payments and financial services through our platform structure. That was the significant reason behind buying the PayRix asset. So that asset enables us to not only embed payments, but also embed financial services, so think embedded finance. So that's the strategic pivot that we are embarking upon. And, Chinjin, your point's exactly right. So we have embedded payments today. We have the three biggest capabilities people want into those SMBs through the platform's wishes, which is issuing as a service, deposit-taking as a service, and lending as a service. because we have the technology already that we are integrating into the WorldPay platform, and then we have the FIs that sit behind it that will deploy their balance sheet. So if you think about it from our standpoint, we've been historically the infrastructure as a service provider. That's effectively where we've kind of sat in the ecosystem. To be that with respect to SMBs, whether it's embedded in software or in platforms, you have to have three things. You have to have the global e-commerce capability. You have to have a platform that will enable it. And then you ultimately have to be able to provide the financial service capability. What we're not going to do is use our own balance sheet, but because of the connectivity we have to the financial institutions, we think we're uniquely positioned because we have the technology to tap into their balance sheet. So you're exactly right. We are embarking on a platform strategy here. We believe we have the components. and the components were already organically building, so it's not a huge build for us. The big strategic piece was getting the platform that we bought through Payrix, and now it's enabling all the capabilities we already have.

Yeah, that was the only ad I was going to have, and Stephanie just hit it, and Jen, I mean, Eric referenced, I mean, some of the margin pressure we're seeing in merchant is related to investment in the platform, so let's not, but it's all organic internally on a well-established base, so The product's doing very, very well. We're seeing very, very strong growth. It's early days, but it's certainly a key component to the future of the overall merchant business, but it will be organically funded.

Okay. No, thank you, and forgive me for the long-winded question. Thank you. No, no, it's good.

Thank you. One moment for our next question. And that will come from the line of Lisa Ellis with Moffett Nathanson. Please go ahead.

Hi, good morning. Thanks for taking my question. Stephanie, this one's for you. You know, we've covered a lot of ground today. You have a lot of good initiatives underway here. Just tying it all together, when you are thinking about your vision and priorities for FIS, how should investors be thinking that FIS will look differently 12 to 24 months from now?

Well, thanks for the question, Lisa. So thinking about from my standpoint, first, We're gonna continue to do what FIS has its strength in, which is deliver best-in-class products and services across our customer base. But in terms of thinking about how to do that differently, possibly over the next 12 to 24 months, is continuing to pivot to a platform strategy to drive incremental cross-sell and revenue growth, either through Amplify, which is taking our existing products and selling them across our existing segments, Or as I just described, pivoting to in the world pay space or in the payment space, not only embedded payments, but also embedded finance. But probably most importantly, over the next six to 12 months, you're going to see us really focus on the operating model and the underlying cost structure of the company, really focused on value creation and how we make sure that the operating model and cash flow conversion continues to be best in class like FIS has been. And once we get the operating expenses and capital expenditures and free cash flow back where we want it to be, I think then you'll see us start to think about where do we want to return capital. And to Gary's point, really go back to looking at M&A, which is a strategic strength of ours. And given our balance sheet, given our strength, given where we think we'll be in the marketplace, after we've made some really, really significant improvements on the cost structure, I think you would see us then start to look at redeploying cash for M&A. So that's how I think about where I'm focused and Eric is focused over the next 18 to 24 months.

Okay, good. Thank you. And then just to follow up, because you just mentioned it on the CapEx side, I know you called out in the presentation today, it's running at about 9% of revenue, excluding the new corporate headquarters. What are some of the biggest areas? I know it's on the list for the Enterprise Transformation Program. So What are some of the areas where you think you can bring down CapEx? And then I'm just thinking about how you kind of balance that with the investments you were just calling out after Tinsen's question, you know, in the platform side of the business. Thank you.

Yeah. So it is literally just that. So as Gary mentioned in his prepared remarks, we've made significant investments over the last five years in data center consolidation, modern banking platform, D1, P1, new acquiring platform, access world pay, clear derivatives, I mean, so we have made investments in all of the segments and their products. They're now in market. Demand is high. We're seeing a great uptake in them. So it's just at the end of a natural cycle for us to start bringing a lot of that investment down to more normalized levels. So that's the first thing we're doing. And honestly, as much as I would say it's not that hard because it is at the end of a normal investment cycle. So we're pulling those down. Now, you're exactly right. We are investing and making sure that we're focused on value creation and investing some of it, definitely not all of it, some of it back into making sure that we have all the capital we need to strategically grow our platforms, business, et cetera. But it is not nearly the heavy investment that we've been making. And so you will see us bring down to normal levels and then reallocate into where we see growth in the businesses over the next 12 to 24 months. But we wouldn't expect to need 9% of revenue capital expenditures going forward. Not yet ready to call where we think it will end up, but we would see it significantly coming down over time.

Thank you. Terrific. Thank you.

Thank you. And one moment for our next question. And that will come from the line of Ramsey LSL with Barclays. Please go ahead.

Hi, thanks so much for taking my question this morning. And this is sort of a follow-up to Lisa's question, and you may have sort of started to touch on the answer just now, but it's a question on free cash flow conversion and just whether the business has become more capital intensive over time, whether the you know, there's more of a heightened requirement for capital investments, perhaps because of, you know, competition and larger tech requirements. Should we think about the free cash flow conversion profile of the businesses having changed over time? It sounds like you're seeing it as much more of a, you know, sort of a non-recurring impacts, and it'll return to a more normalized levels as we go forward.

Hey, Ramsey, I think you're thinking about it right. There's nothing structural in our model that would, you know, that would lead us to believe that it's anything other than one time in nature.

Okay. And I had a follow-up question. I think it was Jason's question from earlier around the Enterprise Transformation Program. Where do you see the sort of lowest hanging fruit there? I know you called out some sort of larger buckets. Are there any particular areas in terms of expense reduction that seem to be kind of the lowest hanging fruit, as it were?

Sure, happy to give some color on that. I think what I just spoke about, which is just the natural evolution of the capital expenditure coming down, is fairly low-hanging fruit for us in terms of thinking about bringing that down to normalized levels. The second is around vendor spend. So as we've brought the company together, as you can expect, we have great prudent capabilities around vendors. But given the inflationary pressures that we have coming through us, We can continue to be very proactive around our vendors and making sure that we are offsetting our inflated costs there. So we see a lot of opportunity in vendor spend. And then we're really looking hard at duplication of activities across operating segments, cost containment, and then really looking at the workforce first broadly. And then, obviously, we operate, we are a global company. We operate in a lot of countries around the world, so rationalizing if we need and want to be in all those countries. But those are some of the high-level things we're looking at.

That's super helpful. Thanks so much.

Thank you. This does conclude today's question and answer portion of today's call. I would now like to turn the call over to Mr. Gary Norcross for any closing remarks.

Thank you. In closing, I'd like to share that it has been a privilege to have served this company for more than 34 years, including serving as CEO since 2015. The company we have built has made to withstand an uncertain economic backdrop, and we will continue to build upon our leading position across the markets we serve. I look forward to staying actively engaged as executive chairman as we embark on the next chapter of FIS. Thank you to our 65,000 colleagues for your dedication to our clients. At FIS, we will continue to advance the way for joining the call today.

This concludes today's conference call. Thank you for participating. You may now disconnect.