Q3 2021 Fidelity National Information Services Inc Earnings Call
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Go ahead I'm sorry.
Good day, and thank you for standing by welcome to the F. I S third quarter 2021 earnings call.
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I would not like to him the conference originate Rosa head of Investor Relations. Please go ahead Sir.
Oh, thank you.
Good morning, and thanks to everyone for joining the call today for the third quarter 2021 earnings Conference call.
This call is being Webcasted today's news release corresponding presentation and webcast are all available on our web site at F. I S Global Dot com.
Eerie Norcross, our chairman and CEO will discuss our performance and review our strategy to continue accelerating revenue growth and maximizing shareholder value.
What are you with all our Chief Financial Officer will then review our financial results and guidance then take you through some additional disclosures and our merchant segment.
Stephanie Ferris Chief administrative officer, and Bruce <unk> President of Fas will also be joined the call for the Q&A portion.
Turning to slide three today's remarks will contain forward looking statements.
These statements are subject numerous risks and uncertainties as described in the press release and other filings with the SEC the.
The company undertakes no obligation to update any forward looking statements whether it was 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 natural measures as defined by GAAP.
Reconciliations of gap information to the GAAP financial information are presented in our earnings release with that I'll turn the call over to Gary who will begin his remarks on slide five.
Thanks, Nate and thank you for joining us our third quarter results demonstrate continued strength of execution across the company, where revenue growing 10% to reach three and a half billion dollars.
Margins expanded 270 basis points to exceed 45% and adjusted EPS increased 22% to one dollar and 73 cents per share.
We continue to see elevated demand across our solution portfolio with sales execution and driving a 7% organic increase in our $22 billion backlog across banking and capital markets.
Revenue synergies related to our Worldpay integration increased $150 million in the quarter, bringing the total is $600 million on an annual run rate basis.
We remain on schedule to exceed $700 million exiting this year meeting our original target by 40%, while accomplishing this feet a year early or cost synergies tell a similar story, increasing the $875 million in the quarter and on scheduled to exit the year around $900 million. This is inclusive.
Of approximately $500 million in operational expanse as we look to conclude our world pay integration well ahead of schedule.
In the quarter, new wins across a wide range of clients illustrate that our strategy is working gives us confidence in our growth and banking. These include another two modern banking platform wins, including one with Paypal Paypal will utilize the modern banking platform to enable their new high yield savings account these new <unk>.
Wins continue to demonstrate diversity <unk> of our new cloud native software.
Turning to our merchant segment, we continue to build on its differentiated global ecommerce offering our extensive global reach has a significant differentiator for us we operate in 146 countries accounting for 126 different currencies and support more than 300 alternative payment methods.
This allows us to remove complexity and cost while increasing authorization rates for multinational enterprises like Microsoft who recently expanded our relationship from a single region to now span the globe.
Our ability to offer sophisticated capabilities and rapidly expanding emerging new verticals also differentiates Fas for example, we continue to build a strong foundation in crypto signing crypto Dot com. This quarter. We won this businessman demonstrating authorization rates that are far superior to their incumbent provider.
We also expanded our global travel and airlines market share winning allegiant as an impressive new domestic carrier and capital markets City is the latest example of a client transitioning from legacy in house.
Fully outsource solution with Fas, while another innovative technology company will leverage seven of our capabilities to help power their digital registered investment advisory solution, we cannot be happier with the significant growth. The team is driving out of our capital market segment are solutions are highly differentiated improve and throughout the industry.
It's important to note that are new wins across all our segments include financial institutions domestic and multinational merchants as well as leading technology companies and innovative Fintechs view other companies can provide such a complementary set of solutions I am proud of our team for their ongoing dedication to our clients and for delivering another strong performance.
This quarter.
Turning to slide sex, while our team continues to execute at a very high level our share price is clearly not performing well over the last few months our management team engaged in open and constructive dialogue with the investment community about areas, where we can improve the messaging and transparency of our business, we believe in the strength and value of our.
Company and on today's call, we will directly address the three most common questions. We heard all began by providing an update on our leading competitive position as well as our capital allocation strategy to sustain and accelerate growth. What are you will then provide a deep dive into the merchant segment. After he recaps the quarter's financial performance.
The bear case assumes that Fas expanding still are unable to compete and this is definitely not the case, we anticipated the changing competitive landscape and invested heavily in technology and innovation over the last five years ours is a durable business model and will remain a global leader was sustainable competitive advantages.
Now and into the future.
Therefore, we will continue to provide additional clarity is needed to ensure that our shareholders properly understand our business strategy and the true value of Fas.
Turning to slide seven.
<unk> has the best collection of assets in the industry banking capital markets generate approximately two thirds of our revenue mix with exclusive longterm contracts and deep client relationships covering mission critical applications needed to operate our client's businesses. These segments grew through the pandemic demonstrating the.
Durability of their revenue streams are growing faster than ever.
Our ongoing investment in new technologies Indian software sweets within these segments generates increased recurring revenue and accelerated organic growth <unk>.
Through three quarters are year to date, new sales already exceed that of the entire year in 2020, which was also a record year for Fas. This historical success has now created $22 billion in backlog of sign revenue, which I referenced earlier given our year. Today success 2021 is going to be another record setting.
Year for sales and that will drive continued strong growth across the segments into 2022 and beyond.
Our merchant segment currently accounts for about a third of our revenue mix. It both deep client relationships with exceptionally high retention rates that are supported by sophisticated vertical expertise and five-star client service. Our expert professionals are on the ground and every geography to meet any need.
Our clients depend on us to support their global ambitions by opening every sales channel to them with innovative software Latin omnichannel capabilities here too we are generating record new sales and revenue growth is accelerating as high growth channels account for an increasing proportion of the segments growth give.
Given the market dynamics in these high grow channels, we expect to consistently when new clients and expand our share of wallet.
Another key advantages are extensive global distribution, an enviable client portfolio, which enable us to quickly and effectively drive adoption of new technologies. There's.
There is a reason why incumbents innovators in disrupters consistently choose fas's their partner of choice. These durable revenue streams combined with our scaled delivery allow us to aggressively invest in differentiated solutions and capabilities.
Turning to slide eight I'd like to directly address the strength of our competitive position and why this company will continue to lead the way powering the global digital economy.
Powers, the intersection of software payments and embedded finance, our core competency as commerce enablement, whether that's the electron vacation of banking, enabling electronic transactions online or at the point of sale or automating Treasury, B, b and wealth and retirement, we have multiple competitive advantages including breath.
Capability global reach extensive distribution and an enviable plant portfolio.
What their infrastructure migration to the cloud now complete and the Worldpay integration coming to a close I would like to share our strategy to further enhance our competitive position and generate shareholder value.
Our strategy is to unlock the true value of Fas by weaving together are extensive digital assets into a global platform that facilitates the rapid adoption of new technology and speeds innovation.
My component dancing, our capabilities, we will expose our unique set of financial assets to the market as well as continue to push new product through this emerging platform.
It expands our time by positioning Fas is the destination for innovators and developers, where they can get everything they need to create exciting new customer experiences and helps them to do it faster by providing preconfigured capabilities low code and no code technology third party integration as well Sandboxes for <unk>.
[noise] Mentation and rapid prototyping complete with the developer Forum importantly for our shareholders. They will speed time to revenue for Fas through automation and self service, while simultaneously, creating additional scale benefits by eliminating technology that.
This strategy supports our mid term outlook for 79% revenue growth 50 to 100 basis points of annual adjusted EBITDA margin expansion and superior free cash flow. Our past success demonstrates that we execute major programs very well and our team will keep out by us at the forefront of the industry by executing the next phase.
Of our enterprise technology transformation.
As we do this over the next three years, you'll hear us talk less and less about segments as traditional silos and old ways of thinking fade to the background. Instead will begin sharing exciting examples of a new class of Super users, who combined technology across the breadth of Fas in new and exciting ways.
Each of these super users is buying capabilities from all three of our traditional segments, demonstrating a powerful value unlocked for Fas Amazon is a great example of the power that our portfolio brings to clients. They started their journey with us by leveraging our nice debit network capabilities, a decade ago today that utilize our enterprise.
<unk> capability for whole foods are global ecommerce capability enter new online markets and our Treasury cash management solution out of capital markets and we've expanded the relationship by leveraging our omnichannel capability to empower their new Amazon four-star in store concept internationally opening its first location in the UK.
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We embraced being a scaled technology later and look forward to continuing to advance the industry by enabling the next generation of innovative client experiences.
I'll conclude my prepared remarks by reviewing our capital allocation strategy on slide nine our priority is delivered a long term growth by investing internally to improve the value we bring to our clients, while expanding our tan and parallel we continue to actively pursue M&A that innovative new capabilities as well as to enter high.
Growth Adjacencies, our team is a well established track record of successfully integrating the businesses. We acquire consistently outperforming are synergy targets and driving shareholder value through this combination investments in organic and inorganic opportunities. We have successfully accelerated revenue growth by positioning Fas to deliver.
Ever innovative solutions and attractive markets, where our technology and expertise are highly differentiated.
The scale and profitability of our business puts us in the enviable position of being able to both invest for growth while simultaneously returning capital Paris shareholders year to date, we have repurchased $2 billion and chairs, reflecting our view that Fas currently represents a generational buying opportunity.
We still maintain significant headroom for accelerated share repurchase with 85 million shares of authorization remaining and we will buy back stock aggressively we are committed to consistent dividend growth enter increasing are expected annual dividend growth rate to 20% in 2022 and beyond.
This will enable us to expand our dividend payout ratio over several years without affecting our ability to invest in growth R. Capital allocation strategy is underpinned by a strong balance sheet and investment grade credit ratings. This strategy has been consistent for many years and we will continue to allocate capital to drive robust shareholder return.
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In conclusion, while competition is intense across our industry at biases built for purposes, the leading commerce enablement company at Fas, We're doing what no one else can bringing together a unique breath of capability and global reach to enable our clients to innovate at speed with that I will now turn the call over to what.
To discuss our financial results and to provide a deep dive into the merchant segment.
Thanks, Gary and thank you all for joining us today.
Starting on Salon 11, I will begin with our third quarter results in touch on our balance sheet cash flow and guidance before taking you through our additional merchant disclosures both.
Those reported in organic revenue growth were 10%.
Adjusted EBITDA margins extended 270 basis points, reflecting high contribution margins an ongoing synergy benefit.
Banking revenue growth accelerated 8%, reflecting continued new sales execution, the banking segments. Adjusted EBITDA margin expanded 250 basis points, 46%, primarily due to ramping revenues from reach a recent large bank wins as well as continued recurring revenue growth.
Capital markets revenue growth also accelerated to 11% this quarter, primarily due to strong recurring revenue growth as well as two points a tailwind created by the timing of client renewals capital markets adjusted EBITDA margin.
Then at 330 basis points to 48% again, reflecting high contribution margins and operating leverage Ali merchant for now and discuss its quarterly performance with it.
Later.
Turning to slide 12.
We generated free cash flow in excess of $1.1 billion in the quarter, representing 33% of revenue or 107% of adjusted net earnings we tripled the pace of our share buybacks during the quarter repurchasing 9 million shares were approximately $1.2 billion. While we are aggressively buying stock back right now we remain active in the <unk>.
<unk> market.
As Gary mentioned, we are increasing our dividend growth rate in 2022 from 10% to 20% per year.
We're going to continue to invest for growth and this will have no impact on our ability or intention to do so in fact, it will only consume about $100 million of incremental cash during 2022, which is insignificant as compared to our annual free cash flow to.
To be clear if our adjusted EPS grows mid teens and our dividend grows about 20%, we will reach the 35% payout ratio towards the end of this decade.
Oh slide 13, you'll see that we're keeping our full year guidance, mostly unchanged after raising it earlier this year.
We're increasing the lower end of our adjusted EPS range to $6 50 from $6.45 per share.
We brought up the lower end of our EPS Guide you to our operating results and share repurchase during the third quarter.
To add further color owned fourthquarter consensus revenue in EPS are in line with our expectations I'm expecting some incremental pressure on margins due to rising labor costs and for this to be offset by lower share count.
As it pertains to the platform initiatives Gary mentioned this does not represent incremental investment but continues the enterprise transformation that we've been executing on for the past five years. This is included in a mid term outlook of 79% revenue growth and 50 to 100 basis points of margin experiencing as.
As usual, we will provide detailed guidance assumptions in the appendix.
With that let's begin the merchant.
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As Gary mentioned, we heard your feedback and they're striving to further increase transparency into the merchant business.
We will provide an additional layer of revenue detail in outlook for the business in the next several slides.
Starting with our third quarter results merchant revenue, 18%, excluding about four points of headwind created by the unusual timing of the U S tax filing deadline in 2020 <unk>.
<unk> adjusted EBITDA margin expanded 380 basis points to approximately 52%, which reflects the segments high contribution margins and ongoing synergy benefits.
Many of our shareholders told US later evaluating merchant growth rates compete versus the comparable period in 2019, therefore, I will describe growth rates through the rest of this deep on that basis as compared to 2019 and pro forma for the work they acquisition.
It's clear that our business is rebuilding with revenue growth accelerating from 3% in the first quarter to 9% in the second quarter to 16% in the third quarter.
<unk> 16, we shall how closely are volumes continue to track with the networks clearly the three of US don't grow exactly the same every quarter and or in every country, but the consistency of fas's performance relative to the networks throughout the pandemic chat.
Challenges the bear case in my mind and.
In addition, we included quarterly volume in transaction data within our earnings release going back to the first quarter of 2019, we provide this extra level of transparency to create easy comparisons. So the shareholders can better evaluate any concerns about shareholders.
We provide additional revenue detailed by client type on slide 17, or global E. Commerce business. So is web only merchant and excludes Omnichannel merchant revenue, which is included in enterprise Global E. Commerce is our fastest growing client tight and creates a key strategic advantage.
Enterprise includes north American merchants with more than $5 million in annual sales volume in the UK.
This is a scale business with meaningful cross selling opportunities, we have powerful distribution channels and sort of marquee brands across both global ecommerce and enterprise, making us to go to choice for new technology partners striving for adoption.
Finally software, let SMB is comprised of use small merchants with less than $5 million in annual sales volume.
We service these merchant primarily through software lit or technology enable partners, who are attracted to our world class scale and leading enterprise capabilities.
Moving downloads loved the Pie chart show merchants revenue mixed by these three client times the text below the pies defines each client and summarizes our respective strategies for each along the bottom of the slide we show the quarterly revenue growth progression on a pro forma basis as compared to 2019, where the clear takeaway is the.
Recovery, thus far.
The next three slides dove deeper, including Tam growth for each client site based on total merchant according to him from Bcg's global payments twenties Global payments 2021 report.
Beginning on slide 18, or global E Commerce business as differentiated by global it's global reach we have the unique ability to help leading multinational companies and global brands seamlessly transact around the world.
Unlike most of our peers with gateway domestic card enough present transactions within various countries, we enable multinational transactions with local licensing to support our clients global expansion.
In the upper right hand corner, we shall global ecommerce is estimated Tam growth of 13% to 15% on a revenue basis or economics split roughly 50 50 between the us and international as you can see domestic E come to him is growing upper single digits, while cross border team is growing 25% to 30%.
This is more of a global reach is so important it provides a distinct advantage in the fast growing area fastest growing area of the market.
Lastly, SNB E com team is growing 12% to 14%.
We don't currently play in this portion of the market and see it as a strategic expansion opportunities.
As you can see by the elevated growth rates in the lower right corner Fas is benefiting from the accelerating shift online.
Our mix of fast growing he come revenue continues to increase creating the opportunity for us to continue to outpace global merchant according to him as a whole.
Turning to slide 19 to discuss enterprise many of our enterprise relationships are decades loan and built on sophisticated virtual vertical expertise such as our unique debit rallying snap and capabilities within the grocery vertical serving global enterprise clients require significant scale economies to compete at low price points, while quickly and then.
Integrating new technologies.
Enterprise teams growing 4% to 7% split between the us and international within.
Within the enterprise, we see the greatest potential for future growth through continued geographic expansion enabled by our global footprint in international banking relationships.
Our software, let F&B business is shown on slide 20 use SNB team is growing 7% to 9% we.
We have experienced significant recovery each quarter of this year with most of our verticals growing 20% plus during the quarter.
Restaurant is the notable exception while it's also demonstrating a strong recovery trend is growth was slower than other verticals, it's difficult to discern whether this is due to slower reopenings staffing challenges or the performance of some of our partners. However are when rates continue to improve on leads given to us by our ISP partners and we continue to soar, New ISP partners.
Making it clear that there is not a problem with our service.
Further our software with strategy provides significant advantages across the SNB space, representing deep vertical expertise as I mentioned earlier, we believe it expanding SMB he come as a significant opportunity for us, especially following the loss of access Worldpay.
In any event as you can see on slide 21, it's 2% of our consultant in revenue.
I would like to leave you with two thoughts before we open the line to Q&A first we continued to enjoy a significant competitive advantages across the breadth of our business, 65% of our revenues driven from banking capital markets with long term contracts and sticky client relationships within the 32% of our revenue mix and merchant we are.
Differentiated by our global E Com enterprise and software led capabilities, while the market appears to be focused on USA SNB, which represents a sliver of our revenue our strategy is about driving growth across the enterprise by enabling digital commerce. In every segment in every vertical is Garry described.
Second.
On slide 20, do we believe that 8% to 10% Tam growth for the total acquiring market reinforces our outlook for sustained double digit revenue growth within merchant.
We have a strong e-commerce business that continues to grow as a portion of our overall revenue mix the international expansion opportunity and enterprise creates additional left side and we have a really unique opportunity to drive R E com capabilities downstream into SMB.
We are confident in the future of Fas and I would like to thank our colleagues with their continued efforts and serving our clients and driving our business phone operator would you open the line for questions.
Thank you and as a reminder to ask a question you're wanting to start a number one on your telephone.
Just to make sure your question press the pound key.
Our first question comes from the lineup can get hot with J P. Morgan.
Go ahead.
Thank you and good morning to all of you guys to spin.
Been busy going through all this data so thanks, so much for sharing it.
It's really really useful I'll start with that and I had a bigger picture question for Gary If you don't mind. That's my follow up just on the on the on the merchant volume and transaction data, you've given us a lot of.
Good stuff here the lines clearly show your tracking very well with.
With the network data, but I guess the revenue side, you do derive revenue both from volume and transactions. So if we want to benchmark revenue against some of those metrics how would you.
Guide us there and I think ultimately I'll want to get a better sense of pricing like for like and and then how 'bout evolving because mix clearly plays a role.
Yes. It certainly plays a role to engine, we tried to allone, both volume growth and transaction growth within the detailed materials in the press release.
I think we also gave growth back to 2019 as many of us have been trying to.
Effectively forget 2020.
And some levels in ways, we have seen volume growth compared to 2019.
Track very closely to the networks, we've also see transaction growth.
Slow a little bit in terms of its growth rate ultimately, providing us incremental yield all net volume, which is what we expected and where we expected to continue to track. If you look at 2002 Q2 thousand 19 growth of revenue versus the global volume compared to the third quarter, we had about nine.
<unk> of incremental yields benefit.
That really takes out kind of the noise between.
Both 2020, and the mood shifted the tax movement. So that's the one we have been very focused on but we try to be extremely transparent today to give you every piece of data that we look at it and thinking about a revenue growth trajectory.
Thank you for that we'll we'll definitely be we'll definitely be studying it is my follow up if you don't mind, just bigger picture Viguerie I really.
On hone in on your Super user comment because I thought that was really interesting a lot of things to think about their but I'll summarize I guess does this mean you you envision Fas servicing larger diversified clients that I would imagine have some buying power, but are you also suggesting that there's a shift from maybe point solutions or.
Best of breed consumption versus.
Bundled buying just trying to think about all of this because you have different peers and of course, you have a lot of scale across all these different businesses, but what's division here longer term and.
Yeah, no absolutely I would tell you a tangent we're already seeing it right I mean, so I think a lot of people want to put us in a point point world. What we've seen across all markets. All industries is really what we've talked about is more around solutioning and being able to leverage a platform in a way to drive very dynamic.
Nick outcomes for our customers and that's what we're all about so as you think about Fas all large companies are going to have to go through a massive transformation and so we started that about.
Five years ago, and we've now have completed completely completed our transition to cloud. So we've made that migration and we get into all of the benefits of the cloud.
Platforms that are available. We then leaned in with next generation application stacks and we've talked a lot about that through component <unk>, whether it's modern banking platform, whether it's payments one whether it's digital one whether it's nap. The list goes on and on so now the next phase is how do you bring that together and leave that together.
Until one stop place for inner innovators.
Large conglomerates anybody looking to take advantage of various capabilities in the open market and we see it as a huge opportunity. We highlighted just a very small subset of clients already leveraging our next generation capabilities across all three segments, you're going to see that grow very dramatically.
Over the next three years, you'll also continued to say our level of technology that get displaced.
As our existing clients migrate to this framework as well so we're real excited about the future. We we highlighted another two wins on modern banking platform. The day one of those wins was the first customer that has signed up for an existing.
Core banking system of FIA to start transitioning to MVP. So as we've talked a lot. We're really at the forefront of this transformation and this is just the next step in and Fas's journey, and we will continue and while we are so confident hanner longterm guide or 7% to 9%.
In mid teens, EPS and you'll continue to see that resonate in the coming years.
Good stuff thanks for your thoughts.
Thank you.
Next question comes time, Jason cover a Burger with Bank of America. Your line is now open.
On margins and I know, you're targeting 50 to 100 basis points a year on average of expansion there and certainly we understand these natural economies of scale in the business, but I just wanted to make sure do you feel this type of margin expansion still gives you enough flexibility to invest in the business to the extent that is contemplated.
By the updated capital allocation strategy is given the dynamics in your various and markets are obviously changing faster than ever and maybe just as an extension to that.
What's your current thought process around where consent to search for 2022 I think it is kind of exactly in line with your multiyear guide, but just wanted to see how you're feeling about that.
With regard to the 50 to 100 basis points of margin expansion, we do think that sustainable through our mid term outlook as we've talked about numerous times, there's tremendous operating leverage within the business.
We continue to drive automation and drive.
Efficiencies through normal operations of the business incremental revenues have high contribution margins that help with that margin expansion as well with regard to the investment side of it we've based in our expectations of investment into that 50 to 100 basis points of margin expansion. So we feel good about our our ability to.
Need to invest to drive and sustain that accelerated growth profile that we've built out.
So yes, Jason those are the two comments I really would think about margin. If you think about 2022.
Updating our formal 22 to guide until February.
That said, we're not changing anything in terms of our midterm outlook.
One 2022, 7% to 9% revenue growth and 50 to 100 basis points margin expansion. So.
Continuing to keep that as a longer term outlook consistent with what we've been saying for a number of quarters.
Okay understood and just for my follow up I wanted to ask on M&A sounds like a little bit more emphasis there as part of the updated capital allocation strategy Dana Stephanie spending a lotta time in that area can can you help us understand.
Where are you in terms of M&A pipeline build it certainly sounds like the help there will be towards some higher growth assets and could you be considering deals that might be dilutive initially.
Yeah, Let me, let me start Jason and then we'll let others add on certainly Stephanie's return focusing on strategy and Hilton drive and continuing to focus on M&A is important I would say our strategy has not shifted their we've been very focused on M&A throughout the years as you know we've also been very consistent.
Out getting there.
Large M&A opportunities behind us before we typically move on into into other areas. We've talked on prior caused the market's pricey.
And things, but we're definitely going to continue to lean in on M&A, we're going to be a buyer in the market on things that fit our strategy that expand our Tam that drive is new product or new capabilities that drive us in the adjacent market anything we do we will look for.
Things that will accelerate our growth.
And so that's going to continue throughout 22021, and 2022 and and beyond so it will always be an important part of our strategy.
We also saw some emphasis there as we round out and complete the Worldpay integration, we're very focused on completing each integration before we move to the next so we feel good about where we're at all and that integration SEC.
Secondly on your accretion dilution comment around whether we would do something this dilutive. We don't look at accretion dilution is the only value metric in fact, we think it's just one of many.
<unk> creation long term.
As much more than how we think about M&A, whether it's enhancing our growth profile or filling out gap strategically into our product portfolio that we can push through our distribution channel.
So yes, we would think about something potentially dilutive from an accretion dilution analysis, but never that does it drove incremental value to shareholders long term.
Thank you.
Our next question.
You come sign is Darren Keller with Wolf research your.
Your line is now open.
Thanks, guys. Thanks for all the disclosure in the merchant side for this though I really want to focus on the banking in the capital markets side for a minute just given obviously, it's still the majority of your revenues.
Very strong growth with 8% on the banking side, 10% organic on cat markets. I know there was some some items pulled forward, but can you just touch on especially the pipeline on the banking side. When you think about how well bought our banking platform has been doing.
The demand we're hearing about from just end markets and financial services for tax in general.
What kind of growth do you see that potentially being able to generate over the next several years. When you when you see that kind of demand on the banking and the products you offer and then maybe just quick quickly touch on the strength in cap markets for a minute.
Yeah, Darren I'll start will let Bruce add on.
This I mean, we couldn't be more excited about what we see going on and in banking capital markets. Both I'll remind you. We started this journey over five almost five years ago. As we started really embracing cloud computing and then we started really leaning in on next generation capabilities.
That I've mentioned when I was talking to 10, Jan about and all the investments. We've made so you're now seeing the results of that our pipeline is the full list continues to grow you are also seen record quarters being put up by the sales team and record years year after year.
If you'll remember in banking specially this journey started well over three years ago, and you've seen that growth rate moved from low single digits to mid single digits and now it's performing consistently in the upper single digits. So we feel we feel great about the business, we feel great about our solutions that we.
The <unk> is very broad because obviously, we're not just a domestic player in the U S. We can expand out into international markets as well in global markets. So we've got a really bright future with this group and frankly, it's where the industry's moving more importantly capital markets as I said in my prepared remarks can be.
Prouder of the team of what they've done we we need to go back to 2015, you had a business that was growing negative about negative 2%. We repositioned the portfolio, we invested heavily in product and Solutioning, we started going and we expanded out side of traditional.
Customers because what we found is there was a lot of market that needed those kind of capabilities and you are now saying the results.
That's a very very clean quarter for capital markets. I mean, there was a two percentage point tailwind on on license renewals, but once again, what a great part of that business as those licenses are term in nature and so you get those bumps, but even if you had just that out this really really strong results.
I would just add.
On the Gary a little bit here I think again.
Again, we started this.
Four years ago, we really had a strategy around how we're going to accelerate growth.
In those vertical obviously before worldpay became part of the organization and.
Even so the question earlier, we've focused on how do we cross sell we've had this big broad.
Set of assets that we wanted to be able to cross sell into our client basis and our teams are really rallied around that they've done an excellent job of building up the products.
Building I'll help people consume and put us in a very good position is.
As Gary mentioned, our pipeline has been excellent sales execution has been an all time high yet again after all time high last year.
Capital markets same thing a lot of Creek.
The other comment I would add is as we've gone through these projects over the last several years.
While our capital was originally on data center consolidation and some of those things as we've come to a close of those were taking that capital and redeploy near the new products and accelerating our new products to meet the challenges of our customers and we spend today.
Excited about the opportunities to continue to grow to continue to cross sell we see lots of Tim expansion as we are moving into these markets and we feel very comfortable that we can continue to grow this business.
And a very healthy clip.
Okay. That's that's really helpful. Just a quick follow up I mean, when you look at the growth profile. These two segments. I mean, these higher more elevated rates is that somewhat of a new norm for you guys and some some regard in terms of especially on the cat market XI versus what it used to be.
I would like you mentioned 2015 was obviously negative so you won't be there again, but just curious if you think the debate.
Yeah, I think there and I think at the end of the day you got it back up a little bit and really look at these businesses and look at the customers. They serve in these customers have traditionally been on an older more legacy technologies and so I've shared for the last several quarters were at an inflection point where.
<unk>, our clients and our prospects are gonna have to start moving and lower their overall total cost of ownership increase their openness in the way they deliver increased their speed, which is what Bruce likes to always talk about the speed at which they serve their customers and you just can't do that on your historical.
Oracle point to point solutions.
We've made the investments that time this shift and so now you are seeing the benefits of what that timing is starting to Purdue. So these are very long term contracts or high reoccurring.
Averaging nine to 12 months sales cycle, we're averaging about nine months now on an onboarding cycle, Bruce and his team has done a nice job of pulling that back and that'll get faster overtime, but you are seeing a very different.
Businesses in very different segments position very well for a unique inflection point in the in.
In the industry and so you will continue to see these.
These segments maintain and grow not only mid but upper single digits.
Given the nature of what's going on in the markets.
And I would just add reiterating there's a lot of.
Our clients that have the need for all of the products that we have right. So it's running their business and one of the things that we've been able to do in the financial services vertical over the years is be able to help those institutions one their business, we're taking that same model capital markets.
During management those things are really applicable across all of our client base.
So we talked about and prior quarters as well one of the things that happens even an e-commerce clients as they are looking for a partner that can offer a broad set of solutions.
Handle everything they need to do that trend is continuing and we're position exceptionally well to capitalize on that.
Very little guys. Thank you.
Our next question is from the line is Dana Katherine from Evercore ISI.
Your line is now open.
Q and good morning also appreciate the extended disclosure on merchant Kpis.
Looking at slides 17.
Highlight of 12 percentage point headwind to global E Commerce revenue growth looking at the two year stack versus 2019.
As you look to 2022.
Merchant solutions revenue growth.
How do you expect to travel on airlines or like global travel recovery to progress in terms of thinking through.
What's your growth rate could be next year and merchant solutions.
Thanks, David we continue to see travel improve I would tell you if from a few quarters ago is probably improve slower than we originally anticipated.
So we do anticipate travel to continue to improve over the course of 2022.
I will tell you I don't know that we believe it is going to be back at 100% by the end of 2022.
It's certainly going to be better than where it is today, which is at about 65 or 70%.
Of what we saw in 2019.
It will help in terms of 2022, and just help support that outlook for low double digit growth and the merchant business through 2022, Yeah, just add I mean, it's going to be a good tailwind force going into 2022 and end of 2023, but the reality is given the nature of our e-commerce business and how rapidly it is.
Growing.
You say the disclosure there almost mid 30%.
The last several quarters and trending up <unk>.
<unk> will become smaller and smaller segment of our overall business and so that's what we're really thrilled about our positioning in the merchant space as you look at that business, where best position in the market area that is growing the fastest and so and we've got industry leading capabilities. There so as long as we can.
<unk> to execute on it like what he said were saying all slowing in the recovery in TNA, but the good news is the other side of the business is actually accelerated a little faster and some of the vertical. So so all in all we've got a great business model and we've got one that's going to continue to perform.
In the double digits going forward in 2022 and beyond.
I appreciate that and just as my follow up what he could you expand upon your commentary for 2022 free cash flow outlook <unk> cut their free cash flow outlook for this year by 10% last week just wanted to make sure I understand your comment on free cash flow conversion for.
For 2022 versus 2021.
Yeah haven't giving you free cashflow conversion for 2022, yet that said, we don't anticipate any reduction in our conversion metrics or ratios.
This quarter, we did 33% in terms of revenue conversion at 107% in terms of.
Earnings adjusted earnings conversion and.
Feel very good going into 2022 that will continue to be generating those levels of free cash flow conversion as we've previously guided high twenties being the revenue item and roughly 90% plus on.
Adjusted net earnings going forward so.
No we're not we're not having to pull back any cash flow conversion for investment or anything else feel very good about how we're position going into 2022.
Understood. Thank you very much.
Thank you.
The next question is from days Honey.
Please go ahead.
Start off the it's such a hot button topic with just every metric as it pertains to 19 and I think your U S numbers I think we're 125% Mastercard visa maybe high one twenties.
The bears would just say well that signals that you're losing sure but is there really a bullish argument to say, it's just a mix issue and if anything as you catch up that means there's outsized growth coming like do you think it's just a mix issue that causes that little bit of gap.
Absolutely. We believe it's just a mix issue, Dave and we have outside growth coming it continues to show recovery from the pandemic volumes are coming back yields are coming back travels coming back everything that we've talked about over the course of the last year is portraying or outlet laying out the way we thought so.
So yeah I think that's the only thing you got there and given this level of granularity. We provided you today I mean, I think as you guys really start digesting all of this you will see the same thing I mean, it just various various vehicles have come back at different rates. So it's absolutely a mix, but we feel very good about the business and I would just add just operationally, we're seeing a lot of sales.
Acceleration as well you go back from last year to this year you are seeing an increase in close redone deals. So a lot of positive momentum in the merchant space for us across the board.
Gotcha, well thanks for that and then just secondly, as we look at just sequential trends in merchant I know in 19, I think merchant was up 9% sequentially that seemed to be more normal last year was actually down sequentially is this year just back to that more normalised pace and maybe what was so different about last year.
Yeah, COVID-19, we think it's a more normalized pace going forward, we'll even give you. Some color that we think the fourth quarter continues to accelerate sequentially and compared to the 2019 two year stack. So.
We think we're just headed back in the right direction.
Okay, well, thanks, guys nice job.
Thank you.
And next question is from George and Hollers from Helen.
Your line is now open.
Thank you for for all the improved disclosure and and all of the data out there I guess first question for me. If we look at slide 22, just talking about the double digit growth that you're expecting.
Merchant going forward is the right way to think about it for global e-commerce that that business should be able to sustain growth rates call are kind of in the hiking and is that increases as a percent of revenue.
I would think that would be accretive to your revenue yield right you should be able to increase that and there's no reason you shouldn't get back to where you were in 2019, if not higher going forward is that is that the correct assumption.
Yes, a couple of things in their first year, we've tried to give some color that we think on a normalized basis globally come will grow 20% plus for us.
That certainly helps as we get to a larger and larger portion of our revenue mix.
Think there's been at least some some skepticism that we won't be able to support double digit merchant merchant growth for the long term and we really tried to highlight that that we do not believe that is the case with globally come really helping us drive that accelerated growth longer term <unk> to sustain that accelerated grows longer term, but I think you're right.
We continue to see yields coming back as we thought we think over time is everything normalizes out call at end of 2022, you'll see those yields where they were pre.
With continued double digit revenue growth within the merchant business.
Okay. That's great. We really appreciate the the 20 per cent I think that's really important to get out there and just as.
As a quick follow up just kind of going back to the capital allocation priorities may be a little bit on the spending the M&A side, what it sounds like again, we shouldn't really expect any sort of a change.
From a capex perspective as as.
A.
A a percent of revenue or anything like that going forward.
Emanate side.
<unk> is that predominantly going to be focused on M&A within merchant or is it sort of a broader stripes. One that you guys are targeted thank you.
Let me touch on the Capex out and then I'll, let Gary would give you a point of view of only M&A, you're correct our expectations around call at eight 5%, which I think is where we're at year to date on Capex to revenue, we would probably continue to drive about that level of capex going forward into 2022 and beyond the.
The discussion today does not anticipate any incremental capex, which I think is supported by my continued free cash flow yield discussion.
And that we're not changing anything around keep free cash flow yields our expectations. There so no incremental capex over what we have historically been doing and and Gary you could touch of yeah. Yeah look I mean, George on our M&A strategy Israeli unchanged, we have an opportunity to have a wide aperture. We're looking for things that can accelerate our growth and continue to drive our growth from here.
<unk>.
Where we're going to continue to I. Appreciate you pointing out really our capital allocation strategy has not changed other than we are raising our dividend.
Starting next year by 20%, but what he taught through all the financials that it's really immaterial in the overall use.
Use a cash so we've got a we've got a very open lens of our free cash flow to either by companies or <unk>.
Continue to buy back our share back and you as you saw it. So we think it's a generational buying opportunity for <unk> at the moment.
We really leaned in in Q3, so, but we will continue to look for things that we think can accelerate our growth rate from where we are.
Keeping in mind that really all three of our segments are really operating at some of the highest levels and their history. I mean, we just Q3 was the biggest quarter for capital markets and banking I think in its history of this company and so but.
But Meanwhile, you see merchant every trend will give you chose a merchant setting in the right direction at an accelerated rate over where it was prepandemic.
And it's a very durable business. My all three are very durable business model. So if we can find M&A that compliments at from a strategy standpoint that expands that market drives new Tam grossest faster than we absolutely are going to be in.
Continue to be in the M&A business.
That's great. Thank you.
Our next question is from <unk> <unk>.
Missoula. Please go ahead.
Thank you greatly those guys a.
Quarter.
So thanks, Thanks to Amazon and then I have a follow up.
You got it I have a question and then I have a quick call up and I'm, sorry, if I missed it I mean, you did 16% right in this quarter over 19, and it sounds like you're very bullish into the fourth quarter.
Are we talking about high teens are we talking about potentially having it to handle on it.
In terms of the comparison versus.
19, and kind of where you are seeing October trends, and then and then I've got a Coca Cola.
Consistent with how we described it last quarter, we expect mid to high teens growth compared to 2019 and both the third and the fourth quarter. We did 16% on that comparison in the third quarter actually anticipate a bit of sequential growth into the fourth quarter, but still keeping with the mid to high.
Teens.
Comparison to 2019.
Got it makes sense.
And then regarding restaurants I know this would like if I look through the release I need that needs to be maybe the L. D.
That's not as good there I know Gary you mentioned at the beginning but you're still does.
Does it make sense.
I guess operating in that space.
Some point, where you're saying well I'm better off focusing on on what might forties like e-commerce et cetera.
Got it from a well respected.
Yeah, Dan look obviously will continue to lead an E. Com, we're going to continue to lean in on that our software led strategy and SNB, though has been very sound since the start what he did.
I think a very good job of describing what's going on in our software led initiatives Nsmbc, specifically you have seen restaurant starting to recover I mean, it's a very small overall percentage of our company.
So it's really a bit of immaterial at this point in time, but you have seen it starting to recover and whether that was due to closures whether that was due to staffing issues whether that was due to some of our software partners didn't respond to some of the changing needs as quickly as they might should have during the pandemic.
All of that would be open to debate, but we feel very good about our software's led strategy within SMB and go into that we're partners that team has done a great job of continuing to sign up partners throughout the pandemic Bruce just highlighted our sales strength and that's not just an SMB or strengthen E K.
<unk> has been fantastic and what we've seen driving across R. E. Commerce segment, we've disclosed a lot here on what we're seeing the growth rates going on with them without travel you can actually see travels improvement Q2, Q3, which what he talked about from a domestic standpoint now we've got to start leaning in international but the <unk>.
Is this is really solid across all of those fronts and and we will continue to go to the SMB market. There are software led strategy.
Great I appreciate all the detail great quarter. Thank you.
Thank you.
Thank you. Our next question comes and asks Ashwin sure by car from city.
Your line is open. Please go ahead.
Thank you folks appreciate the genetic dancing on some of these questions from from from investors.
As he as he digest that it's quite clear that you've done a lock on the cost deliberately front.
Queen cloud and component component intonation and so on.
Can you speak to ongoing innovation, perhaps the level of intended spend how do you stay nimble.
Do you do you need a consulting an essay.
Saint of relationships.
Nikki Nikki <unk> and.
In N out from a cannon perspective.
<unk> touched on that would be great.
Well, let's first start with the with the last part, which do we need a consulting group as you know ash when we owned a consulting.
Company for a number of years and actually didn't see that fit in our overall strategic narratives. So we will continue to partner.
With large system integrators out there and other large consulting firms as you can imagine given the investment we've made in component innovation, we have a lot of people wanting to partner with us on that front, which is which is great and given the demand. We've had you'll continue to see those partnerships partnerships growth owning another.
Consulting group is not is not necessary I think Bruce summed it up on a prior question very well and Woody just confirm that if you look at the amount of Capex that we're investing back into our existing systems really right. Now is operating about 85% of revenue that's trended up a little bit historically, but.
We started on this journey as you might remember it was down in the four and a half type range. So we traded it up years ago, because we saw this coming.
The reality is as you think about it. This this transformation has come in waves right. We had to embrace the cloud technology to get our costs down to get our availability up to get our speed on delivery up you're saying that in the numbers. You then sauce come on our application wave and really building out within our industry verticals why.
That's nap access Worldpay why that's modern banking platform payments, one digital one well that's all the things we're doing in capital markets around Solutioning and really going into in in front mental and back office you have now or just talk about on this call where now waving rolling out the next generation of our platform, which.
Really taking those components and weaving them together in a really way to embrace new markets that we're not serving today. So we're still going to be taken advantage of all of the markets were in driving the kind of growth you are saying, but now as you leave that in through a platform is you start bringing in low code or no code environment.
As you start bringing in places for innovators to come and incubate, we see that a whole another opportunity to expand Pam given the investments we've made and we don't think that's going to require an increase capital investment at all because as those other programs are closing that frees up cap over then I'll redeploy so I think it.
Shows a real confidence in execution, given where our guide is it shows a real confidence in the company and we will continue to lean in on all those fronts.
Yeah, just add I think.
The the team has done a very nice job.
<unk> to focus on innovative products and accelerating the revenue that we're driving from new product. So when retracted internally we looked at.
What our revenue as a percentage.
From new products and continues to accelerate so we feel very good about the innovation engine in the ideation of new products in partnership with our customers trying to solve the challenges that they're facing in our team has done a nice job delivering new solutions to market.
Understood Okay looking at.
22 is that global declining Tan.
Nick chart mean, one of the things that.
Sticks out obviously is.
You are.
<unk>.
You're very big in the enterprise segment, that's kind of how.
Oh, it's been four years.
But that also happens to be the the slower kaigler right. So in terms of actively pvt nicks towards faster growth areas.
Could you talk a little bit more about the.
That that particular strategy I mean, you have to stay exposed to enterprise because the donald's that large, but but how do you <unk> how'd you Pillock faster is the question.
Ashwin that's a great question I think you've heard us over the last several quarters and really even.
Pre our acquisition of Worldpay that the world team and we believe it was the right strategy continues to focus and invest R E com and to drive E com growth even faster. If you remember this 27% of our revenue mix and the highest growing segment was significantly lower four five points lower than that just a few years ago.
Most of our investment in Geo expansion most of our investment in most of our investment in excess worldpay continuing to improve speed of onboarding capabilities and market and investment and growth profile, that's absolutely where we've been focusing further if you go back to the global ecommerce slide where we talk about it.
Typically are mix right now 50 50 between domestic and cross border. We think you can also grab some incremental e-commerce market share overtime, and a pretty high growing SMB market, where we really don't play today. So yes, that's where a lot of our focus is to drive this portion of our revenue mix up significantly.
<unk> hopefully over time getting it as much as 50% of our total revenue mix in these high growth markets and we think that's an excellent way for us to continue to sustain very strong growth in the merchant segment.
For the 30th.
Thank you at this time I'd like to turn the call back over to Gary Norcross for any closing remarks.
Thank you again for joining us this morning, and thank you to our dedicated colleagues who continue to show their commitment to providing world class technology solutions for our clients. So that they can stay ahead of the curve. This commitment will lay the foundation for our growth in 2022 and beyond you have any further questions that were not addressed on this call.
Please reach out per Investor Relations thing. Thank you and I hope you enjoy the rest of your day Goodbye.
Concludes today's conference call. Thank you for participating you may now disconnect.
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