Q4 2021 Fidelity National Information Services Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the F. I S fourth quarter 2021 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 this session you will need to press star one on your tongue.
Please be advised that today's conference is being recorded.
We require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker, Mr. Nathan Brown head of Investor.
Bester relations. Please go ahead.
Good morning, and thank you for joining us for the fourth quarter and full year 2021 earnings conference call.
Call is being webcast at today's news release corresponding presentation and webcast are all available on our website at <unk> global Dot com.
Gary Norcross, our chairman and CEO will discuss our operating performance in 2022 priorities.
Stephanie Ferris, our president will describe our strategy to unlock the value of Fas Woody Woodall, Our Chief Financial Officer will then review our financial results and provide forward guidance finally, Erik Coke or <unk> will also be joining the call for the Q&A portion.
Turning to slide three today's remarks will contain forward looking statements. These statements are subject to risks and uncertainties as described in the press release and other filings with the SEC.
The company undertakes no obligation to update any forward looking statements, whether as a result of new information future events or otherwise except as required by law. Please refer to the safe Harbor language.
Also throughout this conference call, we will be presenting non-GAAP information, including adjusted EBITDA adjusted net earnings adjusted net earnings per share and free cash flow. These are important financial performance measures for the company, but are not financial measures as defined by GAAP.
Reconciliation of our non-GAAP information to the GAAP financial information are presented in our earnings release with that I'll turn the call over to Gary.
Gary.
Thanks, Nate and thank you for joining us this morning.
<unk> on slide five by all metrics our colleagues delivered a historic operating performance for <unk> in 2021, our strategy continues to resonate with our clients and prospects in our team continues to execute at exceptionally high level for the full year revenue increased 11% to nearly $14 billion.
Margin expanded by over 200 basis points to 44% and adjusted EPS increased 20% to $6 55 per share growth.
<unk> growth for the year was driven by strong performance across our operating segments with banking at 8% capital markets at 8% and merchant at 19%.
In the quarter merchant came in softer than we expected due to the <unk> variant as.
As you will see in our deep dive on merchant later in the deck without this impact in late November and December are merchant growth would have been even higher for the year, we generated record free cash flow of $3 $6 billion.
We returned $3 billion to shareholders increased our dividend and acquired <unk>, which will accelerate merchants ecommerce offering for platforms that primarily serve smbs. We also successfully completed the world pay integration nearly a year ahead of schedule, beating our initial revenue synergy target by 50% and more than doubling our.
Initial expense synergy target, we had a very strong sales quarter, even with the omicron variance due to the strong demand for differentiated solutions, new sales increased our backlog to a record $23 billion, an increase of 8% organically by any account. This was a record year for us in the strongest operating.
Thats in our 53 year history.
Turning to slide six.
Given our sales success, we wanted to highlight several landmark wins across our company with clients and prospects have looked at us as a trusted technology partner to help them to expand or transform their business and banking. This includes a top 15 global financial institution, who wanted to accelerate their growth and expansion in the U S by executing.
A digital strategy. This innovative client selected FIS in the modern banking platform to modernize their infrastructure using our cloud native for processing platform. They.
They will also use our cloud native digital one platform to enable their strategy, which was a key selling point in their decision making process. Additionally, Ameren bank signed a significant deal to outsource most of their solutions.
Which allows them to transform their business from a multi vendor solution to a single innovation partner. This will drive a significant savings for amarin, while bringing their solutions to the most current technologies, which is a great example of the power of the portfolio.
These wins are indicative of how the differentiated capabilities in our banking segment drove the more than 30% increase in new sales for the year.
Turning to our merchant segment geographic expansion was a core tenet to our strategic rationale Goodbye world.
Throughout 2021, we entered seven new countries, which continued to push accelerated growth in our merchant offerings, especially E. Commerce, one of those markets was Argentina and as a direct result, we signed the country's largest airline this quarter. They chose <unk> because they are looking for a trusted partner with the sophisticated vertical X.
<unk> and global processing platform that will help them grow their business.
Another key rationale for the World pay acquisition is our ability to utilize our combined solutions and data to increase authorization rates, we now integrated our merchant and issuer processing solutions to create off Max preferred this innovative new solution dramatically increases authorization rates for transactions, where we are.
Both the merchant acquirer and issuer processor based on our insight into both sides of the transaction with this significant innovation, we can improve authorization of the historically declined transactions as much as 40% for trusted cardholders of world pays participating merchants. This generates significant revenue uplift for our COO.
Clients based on this advancement Netflix expanded our long standing relationship this quarter to quickly take advantage of this new capability given our strong pipeline. We are looking forward to building on our record new sales increase in merchant and more than 40% for the year.
In capital markets, we signed our largest deal in the history of this business, where Franklin Templeton like our T. Rowe price announcement, a few quarters ago in the wealth vertical this anchor client establishes us as a leading global player with a differentiated international transfer agency solution that will provide a new leg of growth for capital markets.
Additionally, the recent investments we've made in our cleared derivatives platform are driving significant new wins, including sock Gen. This quarter, which will transition their middle and back office to our innovative solution, we could not be more pleased with the structural transformation that has occurred within our capital markets business. This team has done an outstanding job of.
Combining our industry, leading products and to advance end to end solutions that are clearly resonating through our sales channel like our other segments capital markets had a record year in sales and organic growth with new sales increase of more than 40% for the year.
On slide seven I'd like to revisit a topic that we discussed last quarter, which is the opportunity that we're seeing in the market to bring solutions together from across our segments buyer preferences continue to move in our favor with clients consuming more of our solutions across our enterprise to create unique client experiences last.
Quarter, we brought forward. The example of Amazon first utilizing our nice debit network capabilities from banking before consuming our omnichannel merchant acquiring capabilities and adding our treasury and cash management solution from capital markets given our success in revenue synergies with world pay integration, we continue to evolve our go to Mark.
Strategies through better organizational alignment, which allows us to take advantage of a broader addressable market for our unique solution set. These changes are driving real results as we grow our list of clients that are working across our business segments and unique and differentiating ways as we continue to build capabilities programmatically addressed.
This opportunity to create innovative new experiences truly unlocks the power of Fas, We will continue to bring this forward in the coming quarters. As we think this alone could accelerate our growth rates from current levels.
As we close out 2021, I'd like to take a moment to recognize some of the awards earned and the layout priorities for 2022 on slide eight this year, we saw tremendous recognition for our leadership in Fintech as a global company.
A few fast company magazine named FIS and their best workplaces for innovators list, which recognizes companies that empower their employees to improve processes create new products and invent new ways of doing business and merchant or access world pay earned honors for highest authorization right by the strong <unk>.
Group and banking <unk> wealth management platform was named best Technology for family offices in the Pam Awards and in capital markets. Our cleared derivatives suite was named post trade system of the year Global Investor Group we.
We were also recognized by fortune as the most admired company and we were named a best place to work for LGBTQ plus community for the fourth consecutive year. Lastly, we were recognized for the best ESG reporting by our magazine turning our focus to 2022 at <unk>, we have consistently invested for growth.
<unk> executed at scale and delivered innovation at the highest level. We will continue to focus on unlocking the power of Fas in an organized and systematically this will be centered around delivering compelling new solutions for our clients and taking advantage of our significant head start in the cloud to innovate at speed. We will also can.
<unk> component times, our technology stack to make all our industry, leading solutions available to every client regardless of the segment, where they reside today. This will enable us to expand into attractive new verticals like crypto to capture fast growing and emerging new markets. We have built <unk> into an industry leader over the past 50 years.
And in 2022, we will again demonstrate how <unk> will further its lead over the next 50 years. This business will continue to grow and generate exceptional profitability and free cash flow, which we'll use to maximize shareholder returns and drive continued strong organic growth rates.
Finally, I'd like to address a couple of executive announcements that we made this quarter first Bruce slow that or has decided to leave us to pursue a role outside of the company over the past 15 years, Bruce has been a champion of our transformation and the result of this focus on contributions has been a significant acceleration in growth at Fas.
Thank you for your service staff, Bruce we wish you all the best with your next role.
Second I am pleased to announce that I promoted Stephanie Ferris to be president of Fas Stephanie returned to the company in September of last year as Chief Administration Officer. After originally joining us from the acquisition of World pay in 2019. She is a seasoned global executive with over 25 years of experience leading payments and technology.
Platform businesses. She also has impressive experience driving digital transformation frontline customer engagement and inclusive growth.
This is a tremendous achievement and we're excited to have Stephanie step into this new role congratulation Stephanie.
She joins us today and will continue to participate on future earnings calls Stephanie welcome I will turn the call to you. Thanks.
Thanks, Gary Good morning, everyone.
Excited to be here and to share a little bit more about our vision to unlock the power of that fly ash.
<unk> is uniquely positioned with the best and broadest set of assets delivered at scale and with global reach.
All the start ups that are coming to market are trying to create what we already have.
Want to offer embedded finance solutions and are trying to build those capabilities one by one.
We already have leading deposit lending issuing <unk> solutions, and we have a large network of financial institutions capital markets and merchant participants to drive adoption at a global scale.
Clients compete effectively within their traditional segments, but the market post pandemic has shifted and the lines between traditional segments of lines.
By bringing all of our capabilities together to deliver embedded finance solutions, we have the unique opportunity to help our clients compete and win in this new reality.
I will build on this by providing an example of how we are translating our leading crypto capabilities within e-commerce to drive innovation across all of that fire.
Beginning with slide 10, we see merchant e-commerce opportunity is centered around three segments.
No prize platforms and small to medium sized businesses.
Today, our expertise is in the enterprise space multinational enterprises, and leading global brands choose us because of our global reach best in class class authorization and fraud rates and White glove service.
We consistently win landmark clients, who need our help to expand into new countries or to help them solve their challenges using our payments expertise.
The clients in these segments have unique needs.
Millions of small businesses directly or through our platform requires specialized capabilities like automated underwriting and onboarding.
Pay rates will modernize our client experience through their next generation product suite and enable us to deliver differentiated embedded finance and payments experiences for platforms that primarily serve F&B.
Speeding our entry into this hybrid growth segment of E Commerce.
Their team is extremely talented and we are excited to welcome them into the <unk> family.
Following the <unk> acquisition, we expect to formally launch our entry into platforms. Later this year and I will be back again next quarter to share an update with you about that.
But first on slide 11, I'd like to give you a little more color about how we operate an enterprise E Commerce and provide a case study about why we win in the Crypto protocol.
We serve four of the top five exchanges and have 100% client retention.
Our success reflects a combination of both our product and innovation leadership.
<unk> was the first offer Apple pay for crypto currencies and now we are launching direct settlement and crept down.
We offer <unk> thousand 14 payment methods across 46 markets and were named Crypto payment service provider of the year by crypto AAM in 2021.
We were able to quickly expand into this emerging vertical because we have the technology and the expertise to enter new markets faster than our peers.
We also have sophisticated solutions that we developed by serving other complex complex verticals like travel and airlines that allow us to assess and properly underwrite new clients that other players may not understand.
Here's where it gets interesting.
We are expanding our expertise in crypto from merchant to both banking and capital markets.
Our clients in all of our segments want access to this high growth vertical.
We're enabling banks to open crypto currency accounts for their customers and we enable them to buy sell and hold crypto in partnership with <unk>.
By integrating digital one our clients can offer these accounts to their customers through their mobile apps, displaying crypto and traditional checking and saving accounts side by side.
We're also blazing the trail for crypto card issuing within our banking segment.
Fas will handle all aspects of card management and processing for CE ask Dot Io.
This crypto exchange is offering a new line of crypto based consumer cards across Europe , and the U K by leveraging our innovative capabilities.
Additionally, our capital market segment develops the software that powers exchanges traders and asset managers.
These solutions are in demand by a crypto exchange clients and we are quickly deploying our expertise there.
In summary, we are expanding the reach of our crypto expertise from merchant to banking and capital markets in order to enable all of our clients to participate in this high growth vertical.
With that I'll now turn the call over to Woody to discuss our financial results and provide 2022 guidance Woody.
Thanks, Stephanie and thank you all for joining us I'll begin with our fourth quarter and full year results then touch on our balance sheet cash flow in 2022 guidance before taking you through our enhanced merchant disclosures.
Starting with the fourth quarter on slide 13.
On a consolidated basis revenue grew 11% and adjusted EBITDA margins expanded 120 basis points generated adjusted EPS of $1 92 per share.
Both banking and capital markets revenue grew 8%, while merchant revenue growth accelerated by 500 basis points sequentially to 19%.
<unk> adjusted EBITDA margin expanded 30 basis points to 45%.
Due to continued operating leverage.
<unk> adjusted EBITDA margin expanded 140 basis points to 52%, primarily due to revenue and cost synergies associated with the <unk> acquisition <unk>.
Capital markets adjusted EBITDA margin remained constant at 52%, primarily reflecting higher bonus expense related to strong revenue growth, which offset operating leverage from new wins.
Turning to full year results on slide 14.
Consolidated basis revenue grew 11% adjusted EBITDA margins were 44%.
Adjusted EPS was $6 55 per share.
Adjusted EBITDA margins expanded 220 basis points, primarily due to operating leverage and strong execution of revenue and cost synergies associated with the <unk> acquisition and.
In banking revenue growth accelerated to 8%, primarily due to strong new sales execution.
Based on our large and growing backlog as well as our expanding pipeline of new opportunities. We expect banking to continue to grow high single digits in the midterm.
In 2022 banking will grow 6% or more due to approximately 200 basis points and grow overs. This is primarily due to lapping pandemic related stimulus and expected lower termination fees.
Merchant revenue grew 19%.
While new variance of COVID-19 are affecting near term results are strong new sales gives us confidence that merchant will grow low double digits in 2022 and beyond.
Capital markets also continues to execute will with revenue growth of 8%. This segment is well positioned to accelerate revenue growth to the mid to upper single digits in 2022.
Driven by another strong year of new sales and cross sell opportunities and recurring revenue growth.
Turning to slide 15, I'll touch on the strength of our balance sheet and free cash flow, we generated $3 $6 billion of free cash flow for the full year, which we used to buy back 15 million shares and we paid nearly $1 billion in dividends during 2021 during.
During the fourth quarter, we generated approximately $850 million in free cash flow, which we primarily used to acquire <unk> and.
In addition, our board of Directors recently increased our quarterly dividend by 21% to <unk> 47 per share.
We intend to increase our dividend by approximately 20% per year.
This will allow us to gradually grow our dividend payout ratio to approximately 35% of adjusted net income.
Turning to our guidance on slide 16 in.
In the first quarter, we expect organic revenue growth of 7% to 8%.
We expect our adjusted EBITDA margin to increase by approximately 50 basis points to 41% and lastly, we expect to generate adjusted EPS $1 44 to $1 47 per share.
For the full year, we expect organic revenue growth of 7% to 9%. We expect our adjusted EBITDA margin to increase by 50 to 100 basis points to approximately 45%.
We expect to generate 150 to 200 basis points of margin expansion from operating leverage and annualized <unk> of synergies. This will be partially offset by higher labor costs, resulting in our guidance of 50 to 100 basis points of margin expansion for the full year.
As a result of our accelerating revenue growth and expanding margins, we expect adjusted EPS growth of 11% to 13% to a range of $7 25.
To $7.37 per share for full year 2022.
We expect to generate free cash flow growth of approximately 15% and improved conversion of about 27% of revenue, which is approaching 95% of earnings for the full year.
To start the year, we will repay debt reduce our leverage below three turns before we resume share repurchase.
Our guidance assumes share repurchases of approximately $3 billion.
Mostly during the back half of 2022.
Please note that we have provided our detailed assumptions for depreciation and amortization tax rate and share counts within the appendix of this presentation on slides 26 and 27.
Turning now to our enhanced merchant disclosures on slide 18, our volume trends continue to track closely with the networks as compared to 2020 global volume growth remained stable at 17%.
As a reminder, the networks also experienced stable volume growth between the third and the fourth quarters.
Our U S volume growth accelerated by 200 basis points to 19%. This trend is again consistent with the networks.
On slide 19, we show volume growth trends as compared to 2019, our global volume growth remained consistent at 23%, while the network's volumes accelerated modestly.
This is due to our larger UK exposure, where almost grown variant had a significant impact as I will show you in a few minutes in the U S. Our volume accelerated by 100 basis points to 26%.
Not currently serve SMB E com or platforms, which helped the networks to accelerate slightly more than us. This quarter. We're looking to use <unk> as a first step to close this gap Stephanie mentioned earlier.
As we begin 2022, our volume trends continue to be consistent with the networks in January .
International volumes began to improve in January as new Homochrome cases started to slow in the UK.
In the U S volume growth slowed modestly in January as we lapped last year's stimulus as the Omicron variant received we expect our volumes to continue to track to track closely with the networks.
Turning to slide 20, we updated the detail sub segment data that we showed last quarter to include our fourth quarter results as compared to 2019.
While all our sub segments continue to grow well above 2019 levels, the omicron very impacted the fourth quarter <unk>.
Homochrome, primarily affected revenue yield as compared to 2019 by reducing the mix of SMB travel and international volumes for the quarter on a more positive note as compared to 2020 merchant yield improved both sequentially and on a year over year basis, demonstrating our future revenue growth potential is high yielding segments recover from the pandemic.
Over the next few slides I will talk you through the results of each sub segment and how they contributed to our merchant revenue growth.
Global ecommerce generated $1 $2 billion in revenue during 2021 as shown on slide 21.
During the fourth quarter Global E. Com revenue grew 31% as compared to 2019, excluding travel and airlines even with these strong results. We saw the effects of <unk> in travel and Airlines. The chart on the right shows our monthly travel volumes versus 2019 travel accelerated through November , but then pulled back to may levels in December .
The difference between same store sales and our total volume growth is due to new client wins.
As travel comes back and exciting new verticals like crypto continue to emerge we see significant opportunity for future growth.
Turning to slide 22 enterprise generated $2 billion in revenue during 2021 during the fourth quarter revenue grew 16% year over year and 8% over 2019.
In the upper right hand corner the impacts of <unk> on the UK are obvious where growth dropped to zero in December from mid teen levels previously.
Our U S enterprise business also saw some pullback in December but it was not nearly as severe as in the UK.
SMB revenue growth over 2019 decelerated to 11% in the fourth quarter as shown on slide 23. This is clearly due to omicron as a deceleration occurred in all verticals.
This variant receipts, we expect growth to Reaccelerate. However, we are more excited by the opportunity to push into Smbs with E Commerce.
In summary.
While we continue to see impacts from the pandemic in the short term merchant Tam is expected to grow 8% to 10% through the midterm as shown on slide 24 further as we continue to grow e-commerce as a larger and larger portion of our overall revenue mix, we're confident in our ability to outpace tam growth and to generate low double digit merchant revenue growth in 2022 and beyond.
The combination of merchant growth with our continued strength in banking and capital markets gives us confidence in our 2022 outlook.
And in the future of Fas I would like to thank our colleagues for their continued efforts in serving our clients and driving our business forward with that I'd like to open the line for Q&A operator.
Thank you to ask a question you will need to press star one on your telephone to withdraw.
<unk> your question press the pound.
Please standby, while we compile the Q&A roster.
First question will come from <unk> Kumar with UBS. Please go ahead.
Good morning, Gary and team and congratulations Stephanie can you comment on land banking solution demand environment, and where you expect your financial institutional clients the focus.
And this year.
Yes, Ryan Thanks.
It's a great question honestly, we don't we're not seeing a lot of change from a demand standpoint, it's been very strong and it continues to accelerate that strength into 2022, we're coming off a record year in banking sales that was off a record year.
In 2020 as well in 2019, so we've seen consistent acceleration of our signings what we're seeing in that industry is a massive transformation and the needs to occur off legacy technologies and we are well ahead of this trend as you know we started our cloud migration.
Over five years ago, we started our cloud native development applications in market three years ago, and then brought modern banking was the last one that we brought forward. So seeing a really strong pipeline around all of those topics as financial institutions around the world are going to need to transform to go to more.
<unk> highly nimble architectures open systems to allow them to drive and innovate against some of the some of the other disruptors that are entering in the space as you as you think about interest rates and obviously theres been a lot of counting of interest rate expansion. This is a good news for our <unk>.
Anshul and station so it'll actually embolden them to continue to accelerate that spanned in that demand on those fronts, but we think we're extremely well positioned going into 2022 were coming off.
Great year.
In banking and that's going to continue throughout.
Throughout next year.
Got it very helpful answer.
<unk>, that's a very interesting acquisition. If you can talk about what the acquisition brings to the table for US I asked in regards to vertical exposure and e-commerce capabilities and then for the purposes of modeling what impact should we anticipate from pay rates on your revenue and earnings this year. Thank you.
Yes, no I'm happy to talk about that so payments is a small but really highly strategic acquisition for us first of all it brings our leading global ecommerce capabilities Downs.
Downstream to SMB through platforms.
Similar to stripe connect specifically.
Specifically it brings capabilities around automated underwriting and Onboarding, which are really critical for us to be able to access that market place secondly, and even more strategically is it enables us to add our unique card present capability to create an omnichannel experience along with our embedded finance capabilities whether.
Deposit taking issuing.
Banking as a service capability. So we think about this acquisition as being very strategic both in terms of.
Accessing an e-commerce market, we haven't been in before but also really unlocking the value of that by us as we start to be able to deliver embedded financial service embedded financial services out to this marketplace.
In terms of its financial impact I would tell you it's immaterial to the top line organic growth rate.
And probably a few pennies dilutive so modestly dilutive to EPS.
Got it thank you.
Thank you. Our next question will come from Jason Kupferberg with Bank of America. Please go ahead.
Good morning, guys. Thanks for taking the question I just wanted to go back to the slides, where you outlined the volume growth versus the networks. Like you said the trajectory is quite similar but just the absolute level of growth obviously, the spread widened out a bit in the quarter. I mean do you attribute all of that to omicron I'm just trying to.
Get a sense of how investors expectation should maybe be calibrated. During 2022 do you think there can actually be some convergence in the absolute level of volume growth for Fas merchant versus the networks and is there any way to perhaps suggests what merchant volume or revenue growth in the quarter would have been if not sure on the cross. Thank you.
Yes, I think it definitely was homochrome unrelated I think it is very clear as you look at the UK and our exposure to the UK compared to others potentially <unk>.
13% or so of our revenue comes out of the UK from the merchant segment.
And obviously it dropped to zero in December so you've clearly seen the impacts as that comes back we certainly anticipate volumes to come back around that as well.
So we feel like it was definitely OMA korlym related we saw some improvement in volumes in January particularly in the U K as we started to see cases reduce there and some of the reopening come back there.
And obviously, it's having a little bit of an impact on our guide for the first quarter, but its omicron related.
Okay.
Understood and then just a follow up on the SMB E Comm strategy. It sounds like there'll be more formal announcements over the next quarter or so but how long do you think this takes to move the needle on overall merchant segment revenue growth once the strategies implemented in U.
To execute out in the market.
Why don't I start and then will let Stephanie ad.
We are guiding to.
For the merchant business, we really see the merchant business growing in low double digits.
This coming year, if you look at historically based on where the merchant business group prior to Covid. This is certainly a substantial acceleration given our exposure into E. Commerce at the enterprise level, we counted E com growing at greater than 30% minus travel and airlines. So we've got a really strong business.
This actually in 2022 in the short term is going to be.
Very little tailwind for us, but we do think it's very strategic to move into this new market that we've talked about on prior calls that we are not traditionally and so that's why we think this acquisition is going to be very important for our future expansion in this end market, but I'll, let Stephanie add to that no I think Gary Gary Neil.
The answer to that the other thing I would say is as we look at the merchant segment, and we think about e-commerce as being one of them.
Best in class and being able to access the market we haven't been in before it's obviously very strategic it also enables us to bring the embedded finance capabilities of the banking and capital markets segments.
This customer set and really starts to unlock that full value and we do we're very excited about that now granted thats going to take us a bit of time to Gary's point, but.
The asset is really strategic for us both from accessing the E Commerce segment as well as really starting to deliver those embedded finance capabilities that we already have so we're really excited about it.
Alright, well thank you for the comments.
Thank you. Our next question will come from John Davis with Raymond James. Please go ahead.
Hey, Good morning, guys first of all I just wanted to touch on banking what are you called out about 200 basis point kind of grow over headwind stimulus and term fee. So first maybe a break out there is that basically 100 basis points. Each and also do you have anything in the guide for any of the CPI in flavors.
They are in the contracts in the banking segment or is that just upside that 6% number.
Yes.
The impact on stimulus is about 150 basis points, primarily paycheck protection program and the lending capabilities that we rolled out last year.
The term fees or roughly 50 basis points and our expectation of just lower term fees. This year, we do have CPI within our contracts they roll over in terms of how the contracts roll in terms of annualized nation. So that'll come on over the course of the year. It's really how we think about the shape of the year to where we expect a little higher growth in the back half.
For the year.
Contracts kick in with CPI.
Okay. Thanks, and then just a quick follow up on free cash flow, you talked to 95% conversion, but 15% free cash flow growth, which is a little bit faster than than EPS growth I mean, I guess, how do we think about that 95% going forward and would you expect the EPS growth to catch the cash flow growth once the.
Got it capex roll through to DNA.
Yes, it's a great point, John we're trying to highlight it as well.
We've been spending heavier than many in the Capex world for the past several years.
We anticipate capex of about 8% to 9% this year, but I could see it rolling towards the lower end of that outlook as we see that youll see cash flow outpace earnings per share potentially for the next few years and then it will normalize out where you've seen it go the other direction for the last several years.
Where we were expanding Capex and then the DNA is catching up right now so the DNA right now is one of the headwinds that we're seeing in terms of.
Higher teens, EPS growth, but youre seeing it converted to free cash flow with that 15% growth level.
Okay I appreciate it thanks guys.
Thank you. Our next question will come from Darrin Peller with Wolfe Research. Please go ahead.
Thanks, guys.
Shifting gears to the banking segment for a minute I know a lot of talk about Brexit, but just given the magnitude of the growth there and the size along with it maybe just touch on cap markets to.
Gary can you just tell us if you think you have all the right assets now theres been a lot of <unk>.
Smaller companies moving up the value chain in terms of trying to get bigger in work on bigger banks, but in terms of what you can offer from a cloud based offering for both core and so the some of the ancillary products.
Do you have enough to see yourself growing in that segment in that 7% to 9% range call. It medium term medium to long term.
The banking and then look I mean cap markets has been strong, but just remind us what's really driving that and is that sustainable in your mind.
Yeah, Darrin, it's great question.
The quick answer is absolutely I mean, we think these are.
In the near term easily 7% to 9% growers.
We get beyond a couple of these headwinds and banking from an asset pool I think we're best in class at this point in time, what are you just highlighted in our free cash flow is increasing because of our large program spend is coming down because our large programs are completing right and so we knew we were going to have to go through this process, but if you look from a banking staff.
Endpoint and you look at our digital one capabilities, which is truly.
Omni channel digital experience cloud native from the ground up built we're into hundreds and hundreds of institutions now that have deployed various components of that digital one platform. When you look at code connect we've got a similar scenario you look at our modern banking platform and some of our key wins.
With that being said, we have had some competitors announce that they are entering into the space and we think that just endorses our strategy that we started.
<unk> three plus years ago. So today, we're a leader in cloud deployment no. One can beat us on availability no. One can beat us on total cost of ownership and delivery through our private cloud as well as our ability to burst of the public cloud when you look at our application stack.
The most advanced solid application stack end market today, and even our capabilities are driving further.
Outcomes through back office type services et cetera, when you look at capital markets is a very similar story.
Told everybody that we were going to start leaning into software as a service and deploying in a one to many model our leading capabilities. After we brought our applications together and modernize those through an end to end solution stack you look at what we saw in 2021 and you look at what we're seeing in 2022 that.
<unk> just going to continue that the only headwind we have in that market is really our license fee grow over business, which over the years, we've been telling the market very consistently the percentage of revenue tied to license fees continues to decline.
But we do still have license fee volatile.
Volatility due to the term nature of those fees. The reoccurring revenue on capital markets has been growing very very strong now for a number of years that continued through 2021. So both of these businesses.
Have.
<unk> to perform exceptionally well and our timing has been very strong given now this inflection point that all of our financial institutions and large investment houses private equity firms are going to need to be going through our modernization strategy and they are all looking to drive that in a highly resilient.
Outsource fashion, so we feel great about these two businesses.
A little headwind in the banking business. This year due to the grow over 40 talked about but this is this is a very these two businesses can easily grow greater than 7% in the coming years, and we feel very good about it.
Alright Thats helpful. Gary just a quick follow up is on the capital allocation.
Our strategy and the focus there just given if you believe everything you are saying the stock should obviously move in the right direction. So can you remind us of the liquidity of the capital. The liquidity you really have when considering free cash and your debt capacity that you can actually put towards either buybacks or even M&A in on M&A, obviously, there's probably a narrowing of bid ask spreads.
Some of these smaller fintech royalty companies. So what are your what are your thoughts now given the way the market is trading around even on the private side some of the valuations for some of these growth assets. Thanks guys.
Yeah Darrin, it's interesting you talked about we've got a couple of things going there one we're going to pay that down below three turns.
In a rising interest rate environment, we think our credit rating is extraordinarily important.
The pandemic put us behind probably.
Two years in terms of reducing our debt back to below three turns and so we're going to focus on that first at that point in time call. It mid year. This year, we will look to either buy back shares or do additional M&A as you've heard us consistently talk about we would rather do M&A, but we look as share buybacks.
Purposes.
The other point is also very interesting where theres. Some interesting assets that are in the marketplace valuations look a lot differently than they did say six months ago.
So it may be reset as a bit of a chess board for <unk>.
Other assets that are out there that we might be able to consolidate or bring into our distribution channel. Yes, Darrin. The only thing I would add to that is look I mean, what is kind of hitting on it. The aperture gets more open right as some of these pullbacks occur in valuations, we've always talked about it.
When we look at M&A, we've got to find capabilities that are driving new product or service to an existing market, we serve or break us into an adjacency financials matter right. Obviously, we've got to make a strong investment for our shareholders and that returns important culture is important but we can have a pretty wide aperture when it comes.
The things that we look at now given the given the scope of our business, but M&A will continue to play play an important role once we get our balance sheet reloaded and we'll continue to look for strategic ways to accelerate our growth from here, we were not looking to do turnaround available some that we've been very clear about that.
We've gone through a tremendous transformation at Fas you can go across any one of our businesses and you look at this modernization effort.
<unk> is starting to become behind us right with our capabilities and market, even when you look at <unk>.
Access world pay in the new acquiring platform on the merchant side, so really it's going to be all about things that can accelerate our growth from these current levels and last year was a record growth year for us.
So.
Just really strong operating performance. So we will continue to evaluate that lands on M&A.
Thanks, guys.
Thank you. Our next question will come from Ramsey El <unk> with Barclays. Please go ahead.
Hi, Thanks, so much for taking my question. This morning I wanted I was wondering if I could ask you about revenue yield and sort of the trend for the rest of the year, whether we should continue to expect to see expansion in fiscal 'twenty. Two I guess due primarily to travel recovery in travel volumes and other mixed related factors, but any commentary on the revenue yields.
Kind of trend and expectations in 'twenty two it would be appreciated.
Yes, Thanks Ramsey.
Yes, we anticipate revenue yields to continue to improve as you compare to 2020.
Revenue yields were minus three in the third quarter to plus two in the fourth quarter. So you're starting to see that you compare back to 2019, we saw a little bit of a step back for omicron, but over the course of the year.
And two versus 2019, you saw minus 14 of minus 16, then you saw a minus 7%. So improvement and then minus 10 are really impacted by <unk> in the fourth quarter, but obviously, we expect those yields to continue to come forward in the <unk>.
The highlight that really looking at the sequential and year over year in 2020 yields.
Got it alright, and follow up for me I wanted to ask about the.
Slide seven and the component tied to cross segment solutions that you discussed what type of internal work.
Needs to be done technologically organizationally, what type of integration that needs to be done in order to really execute on that strategy and just also if you could just comment on whether share repurchases contemplated in the EPS guide.
Yes, So let me take let me take the cross segment sales I think I think the team has done an excellent job.
Driving cross sales through the World pay acquisition, we exceeded.
700, more than $700 million in cross sales and so far exceeded our original guide of what we thought we would get what that has opened up is this opportunity that.
We just got significant cross sell opportunities across the entire base. So what needs to be done from a product standpoint, we need to continue to drive our investment in some of these modern innovation platforms and exposure through component Ization, we're going to continue to work on that through this year and then.
<unk> programs will predominantly be completed at that time, you've seen us lay the ground work and some of the some of the stuff we've done through cloud.
We've got now over 83% of our compute in the cloud so a lot of the technical aspects of this are done now organizationally, we are starting to pull the organization together in a very different way with our go to market motion. So historically.
While our sales have been enterprise in nature, they've been enterprise in nature within the segment. We're now lifting those up and we're starting to bring our sales teams together, where their enterprise in nature across the entire company and we're doing that by focusing first.
Our top 200 client base, that's where most of our revenues generated we want to lean in on to that base purposes, and really drive that sales team to engage where they're bringing the full capability of Fas. We're really just getting started on that we've got a little over there is a little over 20 of our top 200 clients today.
That are executing across all three segments, that's going to grow exponentially with with this first change we've had a lot of success with this in the past, where we've lifted up our sales from the product level too.
<unk> to the customer level, and then to the segment level. We're doing the same thing now with lifting it up to the enterprise level. So we're really excited about this opportunity. We think this alone could accelerate our growth rate from where our current 79% targets are so we're going to certainly continue to keep our investors up to date.
On this just made the change.
Last week as we rolled it out.
Through our sales kickoff meetings and so.
Really excited about what the future holds here to answer the second part of your question around share buyback, we do anticipate a modeled about $3 billion in share repurchase and that's mostly in the back half of the year range.
Thank you very much appreciate it.
Thank you. Our next question will come from Dave Koning with Baird. Please go ahead.
Yeah, Hey, guys. Thank you and maybe to ask the yield question. Another way I think yield. This year is about 89% of 2019 is there any reason that the mix is permanently shifted or do you think it could come back to a normal economy and if so if we'd get back to a 100% you can have a volume year.
Of normal, 10%, let's say plus 10% extra from yield but could you have a 20% merchant yield just because merchant gets back to normal kind of mix of business.
Yes, as we've talked about as recovery occurs, particularly in the high yielding verticals, we certainly would anticipate that to invert the other way.
We've talked about for <unk>.
The last several quarters actually.
That said, we don't see travel coming back 100% in 2022, we do continue to expect it to increase over the course of the year, but not to be at 100% of pre pandemic levels, but youre right. We do anticipate seeing yields being a net benefit.
Higher.
Higher yielding verticals return back to more normalized levels simply stated they were seeing no difference in yields as they decline due to the pandemic as they come back after the pandemic.
Yields return. So there is there is we're seeing zero lab.
Of anything impacting your yields from that viewpoint.
Got you. Thank you and then just as a follow up I think if I remember right back when you announced the world pay I think you assumed kind of mid teens EPS growth kind of through the.
In the future and I know youre guiding to 11% to 13% this year.
Despite pretty good revenue growth and recovery type revenue growth, maybe what's what's the delta there and can we get back to mid teens or better in the future.
Yes, I think we can I think you've got a couple of things in terms of the yields here. We've got some labor costs that are a bit of a headwind about 100 basis points of headwind in that 50 to 100 basis points.
Margin expansion guide when we pull that together originally I don't think we anticipated this level of labor cost.
And then youre seeing some of the DNA being a little bit of a headwind in the short term and as we normalize that over the next few years.
Youll see that mid teens growth against an EPS.
Got you thanks, guys.
Thank you. Our next question will come from Timothy Chiodo with Credit Suisse. Please go ahead.
Great. Thank you and good morning, Thanks for taking my question. It's on the embedded finance opportunity you talked a lot about addressing this with new platforms and expansion into SMB E. Commerce, maybe you could talk a little bit about the opportunity for embedded financed with your existing book.
Software partners through the traditional integrated payments business and as a follow up maybe you could just give us an update on the number of software companies that you are already working with through.
That business I understand it's a pretty large absolute number and a good starting point.
Yes, no great. It's a great question happy to chat so.
Our existing ISP business, we have about 1000 partners there in order for us to really enable embedded finance, we needed automated onboarding and underwriting capabilities.
Don't do that as a one off you do that really automated so that's what the pay rates acquisition brings to US is those capabilities. We've been partnered with them they've been integrated tests using our best in class acquiring payment capabilities. Since they started in 2015, so they bring that automated boarding and underwriting and so youre exactly right. We can offer out.
Now that capability to our existing Isd base to the extent it is relevant to them because as you know its vertical specific in terms of if this capability works for you.
But it is an opportunity to go to our existing base as you know our strategy has been software led.
Not the current market the current term for that as platforms, but our strategy within F&B has always been software led dating way back to when we bought Mercury acquisition of payments really starts to strategically pivot us.
<unk>, our software led strategy, but now getting us to access our e-commerce capabilities and our embedded finance capabilities. So we're pretty excited about it both in terms of being able to access the platforms that fit in market. We can't serve today, because we didn't have the CMP capabilities, but also to go back to our existing <unk> base.
An offer out these capabilities as well, including not just payments, but also embedded finance so really excited about it.
Great. Thank you.
Thank you and our next question will come from Lisa Ellis with Moffett Nathan. Please go ahead.
Hi, Sharon Thanks for taking my question I wanted to follow up on the announcement you made around off Mac preferred you had highlighted this capability I recall at the time of the world the acquisition the ability to connect.
The issuer processing side and the acquiring side together to offer this differentiated squeeze it in can you just maybe dimension a bit how we should think about.
What portion of either the Tam or your existing customer base. This type of capability is applicable to and kind of what opportunity that could drive.
Yes.
Yes. It is.
Great question I'll start well, let Stephanie add in on this but at the end of the day I mean, this is a fantastic product.
Specific not specifically it is good for all of our merchants, but our ecommerce merchants really are going to like this solution. As you pointed out. This was an area that we thought there was a unique opportunity for as we put the companies together.
<unk> has successfully come together there was a lot of work here and getting getting these two data streams, together and really being able to tie all this together successfully launched this in very late Q4, as we highlighted Netflix very early adopter of it.
Really can see some significant improvement in decline rates and when you are especially in.
The E Commerce World that decline rate is very very important to manage that and to make that as strong as possible.
<unk>.
Onboarding growth. So I think we will see a lot of demand early on from our E com merchants, but it'll push down into all of our merchant capabilities is just another way for us to differentiate the strength of that going forward, but just launched it in late Q4, and just coming online so excited about the future of it.
Yes, I think it is very relevant as Gary said by our global E Commerce clients.
Having issuing and acquiring data together is very powerful I also think that keep beating this drum on platforms, but I also think that it's really relevant for platforms that serve smbs are marketplaces, because as Gary said, they're really about driving those businesses revenue.
And so being able to authorize a transaction or more transactions.
Really relevant to them it drives revenue to the end business and so we think it not only is really relevant for our global ecommerce space, but also for really any a software as a service platform our marketplace out there who is really trying to help.
Smbs deliver more revenue.
Their end customers.
Mhm.
Okay, and then my follow up was going to be on.
Smbs E Comm strategy that you highlighted on the right hand side of slide 10.
This is.
You highlighted the bottom attractive new Tam opportunity I know Smbs is an area, where if I ask has historically not been a huge focus can you just elaborate a bit here.
What youre going to be doing differently to really differentiate us in this space.
Relative to.
Some of the more I guess vertical specific like pay facts and other players.
It's a pretty competitive space with a lot of players maybe coming out from the very small end of that.
Yeah. So really it's all about we do believe that saw payments is going to be embedded in software software is how payments are going to be consumed and so whether you're getting.
Getting a payment through a platform or through a marketplace, we do ultimately see.
Being the leading capability for that.
Which is why we bought the pay rates at least we're starting with platforms that software led piece and then we are giving ourselves some optionality around F&B direct but our strategy is really around enabling software as a service platforms to enable their SMB long term.
We do see vertical specific strategies as you know we haven't been a buyer of software. We don't think that's the right answer for US we think the right answer for US is to be the embedded financing payments player for all those software as a service companies and you can really start to see theres a lot of niche players that are coming up and providing.
All kinds of as a service capabilities platform software is our onsite payments as a service checkout as a service risk as a service we see in the mid term we stand perfectly positioned to deliver those types of services. We're just starting with what we have in house, which is payment and banking as a service solutions, but we do.
Don't see these platforms long term wanting to have that many vendors and not much complexity in their back office, so hopefully that helps.
Yes Super helpful. Thank you.
Thank you and we do have time for one last question that will come from Tien Tsin Huang with Jpmorgan. Please go ahead.
Hey, Thanks, so much good morning, I just wanted to follow up on Tim.
Tim and Lisa's question here in what you said there is tough and by the way congrats on the.
On the title and the change I'm happy for you just on the on the integrated versus embedded payments sort of strategy change just thinking about the back book and now the front book of how you're describing it what are the implications therefore.
For revenue and.
Those two coexist I'm, just trying to understand how that.
That transition plays out here.
Yeah.
Great question Tien Tsin, So I think the world started with integrated I think as software push down market and became much more competitive.
It has moved in about two embedded those platforms. The integrated solution will always be available, but it is a bit of an evolution, which is now we need an embedded payments capability and then I think you or even the next gen as well as embedded Fintech I don't envision embedded payments lives by itself very long either IV. Thank you.
We're seeing the world converge on embedded Fintech I think the nice thing about the <unk> acquisition for us as it enables us to give any model people want so some people might be really happy with their integrated solution in that model. We now have the embedded payment solution in that model and as you know we have a payback solution in that model.
We do have a pretty significant backlog of card present, Isps and we're pretty excited about it because we think that we can now offer out embedded capabilities remember along with these embedded capabilities beyond Onboarding and underwriting. There is also all kinds of other Ala Carte services, we can offer.
Like <unk> credit risk monitoring a lot of capabilities that these platforms have been looking for but we do have to keep a close eye out on the financials around that but we think we're pretty good at that and we're excited about the opportunity both of our front.
Ambac bought got you got you know it's good to have the full spectrum. So.
This is not one solution that fits everyone. So I think I appreciate that I know you are in an hour here, but I wanted to ask one on margins. If you don't mind just.
You're guiding a little bit more expansion than what we had expected do you have enough room to invest and make the push towards some of these.
The platform side as well as implementing the back book, which sounds like the bookings were quite good just just curious around the balance of investing integrating versus.
Playing out the normal margin expansion. Thank you.
Yeah. Thanks, Tien Tsin, it's a great question, we always try to balance margin expansion versus investment.
We havent pulled back on our capital as well.
These synergies and the level of synergies that we were able to push through in the operating leverage within the business.
It allows us to continue to invest but still drive that margin expansion, even in light of higher labor costs. This year. So we feel good about having enough money to invest in having enough resource focus towards that investment.
You also when we talked about Capex, maybe not being quite as high as it has been in the past we still have a good bit of Capex call it 8% of revenue.
Outlet to build out some of those capabilities definitely is talking about as well so.
We think we're properly resource and feel good about being able to deliver these capabilities that will help drive revenue growth in 'twenty, three 'twenty four and beyond.
Great. Thank you.
Ladies and gentlemen, thank you for participating in today's question answer session I would now like to turn the call back over to Mr. Gary Norcross for any closing remarks.
Thank you again for joining us this morning, and thank you Derrick 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.
Any further questions that were not addressed on this call. Please reach out to our Investor Relations team. Thank you and I hope you enjoy the rest of your day Goodbye.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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