Fidelity National Information Services, Inc.

Good day and welcome to the FIS 4th Quarter 2022 Earnings Conference 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 your hand is raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Mr. George Mihalos, Head of Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone. Thank you for joining us today for the FIS fourth quarter 2022 earnings conference call. This call is being webcasted. Today's news release, corresponding presentation, and webcast are all available on our website at FISglobal.com. With me on the call this morning are Stephanie Farris, our CEO and President, and Eric Hogue, our CFO. Stephanie will lead the call with a strategic and operational update, followed by Eric reviewing our financial results and providing forward guidance. 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 Stephanie.

Thank you, George, and thank you all for joining us this morning. Today marks my first earnings call as the CEO of FIS. Let me begin by saying I feel incredibly privileged by the opportunity to reflect on our past, restart our future, and recommit to our clients, colleagues, and investors. FIS is a tremendous company with world-class assets and a marquee set of clients. We are an industry leader with more than five decades of history positioning where change, challenge, and opportunity intersect. Today, I will present to you the next chapter. We have a lot of ground to cover, including our fourth quarter financial results, 2023 guidance, and specific outcomes of our strategic review, which includes the planned spinoff of our Merchant Business World Pay. Let me start by sharing that I'm pleased to report that we met our financial goals for the fourth quarter. While this is a good first step, we recognize that we have a lot of work to do to meet our expectations going forward. Today, we will share a number of decisive actions we're taking to better align our business with the needs of our clients and the expectations of our shareholders. Let me take you through our path forward. Turning to slide five, we've set a new agenda to improve the operational performance of the business, sharpen our client focus, and improve both the free cash flow of the company as well as the earnings quality. We will do this by following three key principles that will underpin all of our go-forward actions to drive value. First, we will ensure that clients are at the center of everything we do by creating a client-centric culture. Second, we will continue to innovate across our portfolio of solutions to ensure growth for our clients. And third, we will simplify and streamline our operations, decision-making, and time to market to improve profitability. Combined, these principles form the foundation of our efforts to drive efficiency, effectiveness, and profitable growth. Turning to slide six. Over the past 60 days, we've moved with the highest sense of urgency and focus to advance a number of strategically important initiatives. First, in December, we announced that we initiated with the Board of Directors a comprehensive assessment of the company's strategy, operations, and structure, with the goal of positioning FIS to drive stronger results, increase shareholder value, and enhance client experience. As an outcome of this ongoing assessment, we announced today we are pursuing a spinoff of our merchant business, creating two world-class public companies, FIS and WorldPay. It is my pleasure to also announce that Charles Drucker, WorldPay's former CEO, has agreed to return as a strategic advisor to me. Charles, who is my close friend and colleague, will lead the preparedness phase of the plan spinoff and is expected to become WorldPay's CEO upon the closing of the transaction. Second, we announced in November that we were launching an enterprise transformation program. This program, which we have branded Future Forward, is moving ahead with speed to improve the operational performance of the company by driving efficiency, effectiveness, and profitable growth across every facet of the enterprise. When we launch Future Forward, we are targeting to deliver cash savings across the company of $500 million by year-end 2024. I'm happy to share that we now expect to exceed our $500 million original target by the end of this year. and I'm increasing our target to $1.25 billion in net savings prior to the effect of the spinoff exiting 2024. As I mentioned earlier, we are and will continue to be intensely focused on cost management, cash generation, and earnings quality. Third, we are realigning our incentive programs to be tied to shareholder value creation, company performance, and client satisfaction scores. In order for us to deliver on our commitments, this realignment is critical. And fourth, consistent with our December announcement, we've continued to reshape our board of directors for independent governance. I'm proud of what we've been able to do in the first 60 days. This is just the beginning for us. Slide seven describes our rationale for separating the two businesses. The pace of disruption in payments is rapidly accelerating, requiring increased investment for growth and a different capital allocation strategy for our merchant business. The separation of WorldPay from FIS will result in the creation of two standalone market leaders, each well positioned to capitalize on the significant value creation opportunities ahead in their respective markets. It is expected that FIS and WorldPay will maintain a close commercial partnership to deliver critical capabilities like embedded finance and loyalty through premium payback preserving a key value proposition for clients of both businesses and limiting potential to synergy. It should also simplify our operations and give each management team additional flexibility to operate the business in the way that best delivers value for all clients and shareholders alike. Specifically, it will enable FIS to pursue a strong investment grade credit rating while enabling WorldPay to invest more aggressively in growth. A separation also enables FIS and WorldPay to implement different capital allocation strategies which align to their growth targets and underlying market needs. Turning to slide eight, both companies serve a blue chip set of clients. FIS serves the technology needs of global financial institutions, regional community banks, and marquee set of asset managers across the spectrum. WorldPay serves the payments needs of the world's global technology, internet, and retail companies. Both companies boast unrivaled global distribution and operating scale. As separate entities, FIS remains the number one global FinTech provider, and WorldPay remains the number one global acquirer by transaction. Both companies will be market leaders in their own right, and by forging a commercial relationship together, we can affect a superior outcome as compared to keeping them together. Let me provide some additional context for what this transaction means for the standalone FIS business on slide nine. FIS is returning to its roots. This focus will allow the company to maintain its competitive advantage in delivering innovative, next-generation technology solutions to the most complex financial institutions. Additionally, FIS will be in a better position to balance return of capital to shareholders with organic investment and complementary M&A. We remain committed to our investment grade ratings, conservative capital structure, and growing dividends. Putting it all together, we are returning FIS to its historical quality compounder model, which is more closely aligned with the way that FIS operated before the WorldPay acquisition. As a quality compounder, FIS will emphasize steady recurring revenue growth, consistent margin expansion, and disciplined capital return to shareholders. Importantly, we will prioritize maximizing free cash flow and profitable revenue growth. Consequently, I would expect our free cash flow conversion to move permanently higher post the spend, reflecting less working capital volatility and lower capital expenditures. Lastly, we are committed to improving the quality of our reported earnings. This includes narrowing the delta between adjusted earnings and gap earnings and presenting free cash flow measures that better align with the cash we have available to deploy. Eric will provide additional color during his discussion of our financials. Now I'll touch on the WorldPay strategies to drive enhanced shareholder value. WorldPay operates in a more dynamic and disruptive end market relative to Heritage FIS with more of a growth focus. The separation from FIS will allow WorldPay to pursue a more growth-oriented strategy, which we believe the company is better suited for and aligns more closely with investor expectations. Central to the growth strategy is a return to more consistent M&A and a capital structure that does not require an investment grade rating. Beyond an organic investment, the team is taking aggressive steps to re-pivot the business back towards growth. This includes the investment in the World Pay for Platform strategy to strengthen the company's value proposition with ISVs and a continued push toward increasing its total percent of e-commerce revenue. While near-term investments are impacting profitability, we are confident the business can return to growth and deliver value for shareholders as an independent entity. Turning to slide 11. I'd like to provide some additional insight into the durability of our banking and capital markets businesses and why I am so confident that they are poised to deliver accelerating revenue growth and margin expansion. We are reorienting FIS toward a path of more sustainable, higher quality recurring revenue growth. There are two challenges specific to 2023, which are masking the underlying performance of our business, particularly in the banking segment. The first is our previously discussed elongation in sales cycles for very large transactions. To be clear, our pipeline of opportunities remains robust and our win rate on transactions is stable. We are confident as economic conditions stabilize, sales will accelerate. We also hired a chief revenue officer to focus on driving highly profitable recurring revenue growth regardless of deal size. We believe this hire will help us cross-sell and up-sell with existing clients as well as better penetrate smaller sized financial institutions. The second challenge is a growth headwind tied to non-recurring revenue. Largely one-time licenses and deconversion fees from bank consolidation. We anticipate this to be another 1% headwind in 2023. We do not expect one-time license and deconversion fee revenue to remain a similar headwind in 2024. While the above trends are creating a short-term headwind for us, we believe our normalized growth rate for these segments is approximately 3% to 5%, which demonstrates the underlying strength of our banking and capital markets businesses. With a refocus on high-quality recurring revenue growth and the benefit from our Future Forward initiatives, We are expecting margin expansion in banking and capital markets for 2023. As a result of the timing around our actions, we are confident that these businesses have hit the low point of their margin contraction and will return to margin expansion in the back half of the year, on the back of all the future forward actions we have taken and are planning to take. Tying it all together, FIS is on a trajectory to create shareholder value as a quality compounder that generates consistent mid-single-digit recurring revenue growth, margin expansion, and robust free cash flow. Turning to slide 12, we will provide you with regular updates on Future Forward. I've already described our progress toward achieving $500 million in net cash savings by the end of this year. and prior to the effect of the spinoff, $1.25 billion by the end of 2024. I'd like to take a moment to describe how we will achieve these targets. Future Forward is a multifaceted initiative designed to permanently improve the performance of the company by delivering improved outcomes for clients while driving operational efficiencies internally, free cash flow generation, and earnings quality. We are focused on more effectively meeting the needs of our clients by continuing to accelerate the development of next-generation technology solutions and anticipating their future needs. Driving toward a more efficient operating structure by prioritizing human and capital resources that best align with the needs of our clients and the returns expected by our shareholders. And lastly, driving improved growth outcomes through sales productivity, reduced complexity, and a continued focus on clients. These important initiatives will continue at FIS and WorldPay post-spin. I will cover our next steps on slide 13 before turning the call over to Eric for his financial review. 2023 will be a year of recommitment for FIS, as we work to reposition the business to return to sustainable growth, profitability, and value creation in 2024 and beyond. First, we are focused on executing the spinoff of WorldPay, which we expect to complete within the next 12 months. Second, we're sharpening our operational focus to continue to promote a client-centric culture and to deliver on our commitments to all of our stakeholders. Third, future forwarded initiatives will continue within both FIS and WorldPay to maximize our cash flow and earnings quality. And finally, we are laser focused on creating shareholder value with action and improved performance. I'm pleased with the progress we've made in such a short period of time. I'm confident that we're on the right path forward. And with that, I'll turn it over to Eric to discuss our fourth quarter results in 2023 outlook. Eric?