Q1 2022 Fidelity National Information Services Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Fas first quarter 2022 earnings call. At this time all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone.
Be advised that today's conference is being recorded.
You require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker, Mr. Nate Rozanov head of Investor Relations. Please go ahead Sir.
Thanks, Larry Good morning, and thank you all for joining us today for the <unk> first.
<unk> 2022 earnings conference call. The 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 provide a business and strategy update Stephanie Ferris, our president will discuss our operating performance.
Woody Woodall, our Chief Financial Officer will then review our financial results and provide forward guidance and finally, Eric Hogue, our deputy CFO will also be joining the call for the Q&A portion.
Turning to slide three today's remarks will contain forward looking statements. These statements are subject to risks and uncertainties as described in the press release and other filings with the SEC.
The company undertakes no obligation to update any forward looking statements, whether as a result of new information future events or otherwise except as required by law. Please refer to the safe Harbor language.
Throughout this conference call, we will be presenting non-GAAP information, including adjusted EBITDA adjusted net earnings and adjusted net earnings per share and free cash flow. These are important financial performance measures for the company, but are not financial measures as defined by GAAP.
A 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.
Thanks, Nate and thank you for joining us today.
Starting on slide five.
We had a strong start to the year significantly exceeding our revenue expectations and achieving the high end of our EPS guidance revenue increased 9% organically to $3 5 billion and adjusted EPS increased 13% to $1 47 per share.
All of our segments meet our organic growth expectations in the quarter banking grew 7% exceeding our 6% expectation merchant grew 15% versus our low double digit expectation and capital markets grew 6% with 8% growth in reoccurring revenue new sales increased our backlog to 8% organic.
Lead to $22 5 billion.
This consistent strength in backlog aligns with our mid term outlook for 7% to 9% organic growth and our sales pipelines remain strong I would like to thank the team for their sharp focus on serving our clients and for their continued execution.
Turning to slide six the pace of change in our industry is very exciting. We've invested ahead of this change in throughout the pandemic to position us for success, we moved our technology infrastructure and application architecture to the cloud and we continue to bring new or significantly upgraded solution suites to market and.
Banking, our multiyear investment strategy has positioned us with a best in class capabilities across core and digital banking issuer processing in wealth management. We further expanded the modern banking platform geographic reach this quarter by enabling public cloud deployments with Microsoft Azure.
This will expand our reach into key markets like the UK, Thailand, and New Zealand. Our team is also successfully launched our new banking as a service hub. This platform offers an all in one finance experience for our clients and enables them to rapidly create and deploy new embedded finance offerings for their customers we.
We recently formed a partnership with circle to enable our merchants to receive settlement in USD coin and crypto Dot com will be our first pilot customer.
In addition to our ability to quickly deploy advanced technologies International reach is also a true differentiator for us our merchant business added seven new countries in 2021 and plans to add 15 more by the end of 2023 and.
In keeping with the crypto theme capital markets recently announced a new partnership with fire blocks to enable our clients to store and issue digital assets as well as to gain access to decentralized finance.
Across multiple verticals industries and client types, we continue to develop mission critical systems at global scale that empower our clients to innovate and grow the power of Fios doesn't stop with our ability to deliver unique solutions. The true value unlock is leapfrogging from leading solutions for individual client types to offering expansive embed.
<unk> finance experiences that can bring all of our capabilities to bear for every client.
We have technology platform initiatives underway to simplify the consumption of our cloud native capabilities, either as end to end solutions or as individual components more and more our clients are asking for access to solutions from all three of our operating segments to enable robust transformations across their enterprise.
These initiatives will speed access for them and open up rich new revenue streams for us.
We are also evolving our go to market strategy by aligning our sales organizations to directly target these new opportunities.
<unk> market fears about disruption at FES. We think we are the disruptor and we will help our clients win now and into the future with that I'll turn the call over to Stephanie to describe how this vision is translating to our operating segments into review their first quarter performance. Thanks, Gary and good morning, everyone. This was an exciting.
With momentum building for our new solutions as Gary discussed.
Starting with banking on slide eight we continue to see elevated organic growth posting our sixth consecutive 5% plus revenue growth corner, which is well above the historical trend.
Our multiyear investment strategy is paying dividends.
To bring our vision to life I'd like to highlight a few strategic new wins, which are a direct result of our technology investments payments.
Payments one is the most advanced scaled issuer processing platform in the market. We migrated approximately 500 of our existing clients to this platform and we continue to leverage its unique end to end capabilities to win new clients.
In the quarter, a top 20 U S financial institution selected payments, one for debit processing and card production.
We remain differentiated with our issuer processing capabilities and believe we have significant tam to capture with this innovative platform.
In addition, we're making significant investments in our wealth management platform, gaining a second landmark win with mutual of America. Following our T Rowe price win last year.
And in a third example, our premium payback loyalty network is a truly unique solution that combines our strength in issuing and acquiring to enable consumers to pay with points in store at the point of sale.
This quarter AT&T decided to join our loyalty network and consumers will be able to use points from participating issuers to pay an AT&T stores as.
As retailers and issuers continue to join we expect a powerful network effect.
Capital markets group revenue, 6% organically as shown on slide nine our team continues to transition the business to SaaS based revenue models, which drove recurring revenue up 8% in the quarter transitioning.
Transitioning to SaaS, not only increases the predictability and resiliency of growth, but also allows for incremental cross sell opportunities as clients look to transition to the cloud we.
We've made significant investments in our transfer agency solution to create an as a service offering that drives efficiency and automation.
Similar to banking, we had a second landmark win this quarter with a leading financial institution with more than one trillion <unk> one trillion in.
Continuing the momentum from our Franklin Templeton win last year.
This win builds on our long standing core processing relationship and we were thrilled to enhance our value proposition by bringing them, even more breadth of capabilities.
We also saw strength with privately held investment firms.
Our investment operations suite drove capital market's largest ever private markets deal with a premier high net worth multifamily office that will leverage our technology suite to transform their operations.
Finally, we expanded our relationship with Robin Hood in the quarter to empower their new stock loan income program.
This expanded relationship helps cement our long term vendor of choice partnership with Robin Hood, where we continue to expand our value proposition across traditional and digital assets for this client.
Overall, our end to end SaaS solutions are differentiated in the market and will continue to drive strong growth for capital markets.
On slide 10, our merchant segment generated 15% organic growth this quarter.
And our payments acquisition is already paying off by signing several SaaS based platforms in the quarter.
Pay rates more than doubled their client count as compared to last year and we highlight a few recent wins with platform spanning the education commercial and marketplace verticals on the slide.
We also continued our success as a leading acquirer for crypto currency Dot com signed with US this quarter after witnessing our capabilities and client service for another crypto exchange.
We're further attracted to our expansive global reach which will help them expand their own business.
Lastly, the Nielsen report recently published their 2021 U S merchant acquirer ranking which highlighted the strength of our E Commerce and software led strategy.
Our share of total U S volume increased by approximately 200 basis points to 20% in 2021 from 18% the year before.
Shouldn't be prouder of our team the pandemic put them to the test and they continue to put our clients first and execute at the highest level.
I'll wrap up by sharing the performance of our sub segments on slide 11.
Global ecommerce continues to be our fastest growing business with 23% growth on a constant currency basis.
As anticipated travel rebounded strongly in the quarter exceeding 2019 levels.
Our large enterprise business grew 14% organically and continues to be a differentiated source of scale.
Lastly, software led SMB grew 13% organically with restaurant and retail both growing double digits with that I'll now turn the call over to Wendy to discuss our financial results.
Thanks, Stephanie Thank you all for joining us today I'll begin with our financial results on slide 13, and I'll touch on our balance sheet and cash flow before taking you through our guidance.
We're very pleased with our 9% organic revenue performance and the strong results achieved across all of our operating segments. We maintained consistent margins year over year, as we were able to successfully offset wage inflation and difficult comparisons, including last year's stimulus related revenue.
This translated to 13% adjusted EPS growth, which is consistent with the high end of our full year guidance range.
Turning to our segments.
Revenue grew 7% on an organic basis, primarily due to continued client demand.
Adjusted EBITDA margins contracted 90 basis points to 42%.
The banking segment is where we experienced the majority of our margin headwind as it directly benefited from the paycheck protection program or PPP revenue in the prior year and was impacted by higher labor costs.
Merchant revenue grew 15% on an organic basis, reflecting strong results across all three sub segments as Stephanie mentioned merchant adjusted EBITDA margin expanded 30 basis points to 47% primarily due to high contribution margins on new revenue growth.
Capital markets revenue grew 6% on an organic basis, primarily due to continued strong new sales and the transition to SaaS driving higher recurring revenue.
Capital markets adjusted EBITDA margin expanded 60 basis points to 47% primarily due to its continued operating leverage.
Turning to slide 14, we generated $786 million of free cash flow during the first quarter.
Free cash flow increased by 41% year over year we.
We have invested heavily in innovation over the past five years spending over $5 billion in capex over that time, we believe that this investment has peaked as a percentage of revenue and expect it to come down gradually over the next several years to approximately 6% to 7% of revenue.
As a result, we expect free cash flow conversion to expand in subsequent quarters and.
And we remain on track to expand our free cash flow conversion towards 95% of adjusted net earnings for the full year.
We increased our quarterly dividend by 21% to <unk> 47 per share and we returned a total of $287 million in dividends to shareholders. This quarter.
As a reminder, we plan to increase our dividend by approximately 20% per year in order to gradually grow our dividend payout ratio over the next several years to approximately 35% of adjusted net income.
In addition, we reduced debt by $1 2 billion, including repayment and foreign exchange benefit ending the first quarter at three times leverage which was a full 90 days ahead of schedule.
We expect to maintain our leverage below three times, and we will resume share repurchases in the second quarter.
At current valuation levels, we believe share repurchase is the best use of excess free cash flow, we expect to buy back approximately $3 billion in shares during 2022, we also.
Anticipating utilizing excess free cash flow in 2023 to buy back shares at current course and speed. This will be approximately $6 billion in share repurchases during 2023 <unk>.
Combined this represents approximately 15% of our current market cap.
Turning to slide 15 to review our guidance there is no change to our full year outlook, we achieved a strong start to the year and remain on track to deliver 7% to 9% organic revenue growth 50 to 100 basis points of adjusted EBITDA margin expansion and a 11% to 13% adjusted EPS growth for a range of $7 25.
<unk> to $7 37 per share.
The primary risks and opportunities to our forward guidance include the impact of foreign exchange rates geopolitical risk and the pace of pandemic recovery.
Combined with the upside we delivered in the first quarter. We believe that this supports maintaining our outlook for the full year.
For the second quarter, we expect organic revenue growth of 6% to 7% consists.
Consistent with revenue of $3 65 to $3 68 5 billion.
We expect adjusted EBITDA margins of approximately 44%, resulting in adjusted EPS of $1 72 to $1 75 per share.
Given the unusual puts and takes that are affecting organic growth rates for banking and merchant I would like to provide you with some more color on our segment assumptions for the second quarter in banking. We currently expect organic revenue growth to be in the mid single digit range for the second quarter. This.
This is primarily due to difficult compares created by the termination fees and pandemic related revenue that we generated last year.
We anticipate a similar growth profile of mid single digits for our capital market segment in the second quarter.
For merchant, we currently expect organic revenue growth of approximately 9% to 10% in the second quarter. This equates to strong sequential growth of approximately 15% for merchant.
In addition, we expect adjusted EBITDA margins to step up each quarter throughout the year.
Lastly, we include assumptions for FX corporate and other and several below the line items within the opinions section of our earnings presentation.
In conclusion, I would like to thank our colleagues for their continued efforts and perseverance through the pandemic.
Continue to execute at a high level and generate strong financial results. Operator would you. Please open the line for questions.
Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key please standby, while we compile the Q&A roster.
Our first question will come from George Melas with Cowen. Please go ahead.
Great. Thank you good morning, everyone. Thanks for taking my question and congrats on the on the results.
Thanks, Jordan Youll be wrong.
Just to kick things off on on the merchant side. The yield was strong it was somewhat stronger than what we expected any reason why that should not continue throughout the course of the year or some of these verticals like travel will come back and then Stephanie you talked about crypto and obviously your strong exposure there how is that vertical performing in.
How are you thinking about that over the remainder of the year.
Stephanie I'll take the yield question you can work on the crypto George we do anticipate yields to be a positive benefit to revenue over the course of the year as we highlighted really over the past 18 to 24 months as certain verticals came off the yields came off heavily we saw yield benefit as those verticals are coming back online.
Travel and Airlines is a perfect example that we've been highlighting again, we do anticipate travel and airlines will be a tailwind over the course of the year and we anticipate yield benefits throughout 2022.
Yes, and then in terms of crypto George as you know we've been talking about this for a while we process for the top four out of five largest with.
Kelly exchanges, they come to us because of the level of authorization and fraud rates that we can provide for them in terms of being benefits, but also because we're a large scale provider for them and so youre continuing to see us take share in the crypto vertical we really like the crypto vertical you saw a sign a partnership.
This quarter with circle, which is going to we will be the first provider of USB C.
Crypto capabilities. So this is a.
So really exciting vertical for us in our global ecommerce business. It continues to demonstrate the strength and differentiation of our E Commerce business and we continue to be really excited about it.
I appreciate the color and just as a quick follow up obviously, there is a lot of attention on E comm nowadays with.
With some of your peers reporting what might be happening with the grow over in that market.
Stephanie are you thinking about the opportunity for E com, both for 2022 and longer term do you feel any differently about the growth trajectory within that that sub market.
No I think.
This is obviously, a very differentiated asset for us across the company.
And given the size of the Tam and the growth of the Tam in E. Commerce. This has been a strategic imperative for us and we will continue to be.
We think about this.
In terms of continuing to expand geographically as well as adding APM. As you know we are one of the two largest providers in the space and it's growing significantly.
Continued to take significant share, we really like what's going on in the global ecommerce space.
Bought the <unk> assets. So we can start to access SMB, because we really have been up in the global space only global launch of multinational.
And so this is a place youre going to continue to see a double and triple down in terms of investments and focus. So we continue to be really excited about it the only thing I would add to that George I mean, we did expand geographically by seven countries. We've got another 11 countries on target through 2023 that continue and will also accelerate the.
Growth. So we feel very good about the guide we've given an overall merchant and <unk>.
E Comm is going to be continue to be the fastest growing segment within it.
Thank you.
Thank you. Our next question will come from Darrin Peller with Wolfe Research. Please go ahead.
Hey, guys, Thanks, and nice job I wanted to touch on the banking segment, just because again I see it is still the largest category of your your business when we look at the <unk>.
Sustainability to growth, obviously, it's been strong and it came at a little better than our estimate this quarter.
If you could remind us on the confidence level on why the conviction is there for that an elevated growth rate and maybe it's the pipeline you are seeing are the backlog to sustain itself for the next couple of years.
Gary I know we've touched on this but more color on that now would be great and then if you could also remind us on breaking down that it's not just core banking or even bank. There's all sorts of issuer processing in there. The other the other pieces would be helpful to understand also yes.
Yes look Darrin. We appreciate first we appreciate the the non merchant question that's great.
Obviously, we couldnt be more bullish on the banking business and how it's performed over the years.
Look you've seen consistently strong execution in the sales pipeline you can consistently seen strong building of.
The pipeline as well to replace the signings throughout the quarter and we've seen strength over that over the last four plus years. The backlog grew about 8% this year, which should give everybody confidence of the future opportunity in banking and capital markets predominantly those are the two businesses that contribute contributed.
That backlog number we are seeing strength across all of our categories. Our issuer business has just done a really really.
Great job.
Our leader there who was running our issuer business has done a phenomenal job you continue to see it take share stepping highlighted a really significant win on the issuer side all around our payments one category, which we launched payments one almost three years ago and it's most advanced issuer platform and market. If you look also what's contributing to that growth youre seeing.
A lot of acceleration in our digital one offering which is really the third generation of digital experience, it's a true omni channel deployment.
That we're now rolling full end market, we've seen a lot of growth in that over the last 18 months of course. This all started with our with our code connect offering which is the most.
<unk> micro services API layer in industry. So and then you culminate that with what we're seeing in modern banking platform, we've seen some really strong wins and.
And in BP, We have now a number of those customers live in production and more coming in in the pipeline is very full on that and as we highlighted we've now enabled that.
On Microsoft Azure, which allows us to push it out of the U S. More effectively so all of that should give everybody confidence that banking has truly been structurally transform census stays are growing in low single digits.
And they will continue to perform very strong given the backlog signings and in the future pipeline. So we feel great about the business.
Alright, Thanks, Gary it's great to see the transition just very quick follow up Woody on margins. I mean, we had thought you guys would be looking at more like a 43% margin for Q2, it looks looks a little better.
Maybe just if we could touch on the.
The components of the confidence on margins from here through the rest of the year and thanks again guys.
Yes. Thanks, it's a good question, we do anticipate them to be about 44% in the second quarter. I think you are seeing some difficult comps in banking as we highlighted between term fees as well as some of the stimulus stimulus related revenue.
From the prior year.
We are seeing good deals across merchant in the first quarter and we anticipate that to continue to go forward.
And feel good about ramping margins over the entire course of the year as we as we lap those difficult comps in the first half of the year and banking primarily.
Got it.
Thanks, guys.
Thank you. Our next question will come from Reena Kumar with UBS. Please go ahead.
Good morning, Thanks for taking my question, just starting with the bank technology business.
Are you seeing any change in the competitive environment, there, having any international players trying to enter the U S. And secondly could you just help us understand the pricing trends for some of your margin.
Fi clients over the next six to 12 months.
Yes, Ryan it's a great question I'll start and Stephanie can add to it if she would like look banking has always been a highly competitive marketplace for us we've had a number of.
No.
Non U S companies trying to break into the U S for years frankly, the sophistication about the regulatory requirements have always been a deep moat to entry, but also Rana.
Absolutely participate really in the upmarket so the larger the financial institution better and then you just get differentiated highly differentiated by our scale our ability to square off against some of the largest banks in the country right with the complexity of solutions, it's more than just core banking you had to bring robust issuer processing.
You have to bring the openness yet to bring a robust professional services grouping. So we feel very good about our competitive position are we seeing it more competitive than we have in the past. The answer is no. It's always been competitive and we've always done very well against against that competition. When you think about pricing.
All of our contracts are long term in nature most of them have consumer price index adjusters in them. So as you start seeing CPI increase in inflation, you will see that translate through our pricing models around per account per transaction. So we do get we do get coverage there as well.
We're not seeing an increased price competitive front its always been as I said, it's always been competitive and we're not seeing any more increase in competition. We normally do we will save the demand continues to go up I've talked a lot about this on multiple calls were really at an inflection point, where a lot of final.
<unk> institutions have really held on too long what their legacy technology and so people are now pressed up against.
Timeline, where theyre going to have to start making some decisions are going to have to embrace cloud computing theyre going to have to embrace omni channel, they're going to embrace openness and that really plays in to the significant investment we've made over the last five years that Woody highlighted in his prepared remarks, so all of that compound. So we really feel good.
Our position in the banking business, Yes, I think I might add we just had our client conference a couple of weeks ago and two points that I think are really relevant here. One is the financial institutions at least within the United States are very strong coming out of the pandemic I also thank to Gary's point, the pandemic has driven home from them the knee.
Need to be digital and Omnichannel, because folks are struggling to come back into the banking centers and so that is really contributing to gary's point around demand demand is very high in terms of needing to be omnichannel digital and driving the Nextgen technology is absolutely being recognized out there given.
Given the post pandemic situation.
That's very helpful. And then just a quick one on the margin given the recent reduction by visa on U S interchange for SME is expected benefit to your merchant margin going forward.
Yes, I mean, we always get a slight benefit there. We don't think it's going to be material, but there is a benefit whenever there is whenever there is pricing changes, obviously, we look and make sure. We pass those along and then taken opportunity. If we can but we don't believe it to be material.
Great. Thank you.
Thank you. Our next question will come from Jason Kupferberg with Bank of America. Please go ahead.
Good morning, guys. Thanks, I just wanted to start on U S merchant volumes I think they were up 10% year over year and down 10% quarter over quarter, if I'm not mistaken.
So somewhat below the industry I suppose and just wondering if crypto as perhaps a call out there or is it just kind of a function of.
Your debit mix has always been pretty high and I know industry comps were just tougher on debit relative to credit would just love some perspective there.
Yes, I'll start and then Theres definitely can add on our volumes grew 10%, which at the end of the day. It really reflects the underlying mix in our business.
We are under indexed in SMB, we're got a heavy enterprise base business. If you look at that compared to the fourth quarter you have holiday spending in those big box you have holiday spending at grocery.
We saw in the fourth quarter that coming down a little bit obviously, we saw travel as a benefit in the first quarter. So there are puts and takes in there.
At the end of the day, we always get the question around are you losing share we tried to highlight it very specifically the Nielsen report showed that we gained two points of market share by volume for full year 2021, which is probably the best objective evidence or piece of evidence. We can have that we're not losing share here. This is just seasonal movements, where we see the <unk>.
First quarter always a little lower.
Then the fourth quarter and at the end of the day, it's resulting in positive yield as well, where we saw double digit growth in every segment and five points of yield during the first quarter on Antelope, Jason If you play in the enterprise space Youre going to have a <unk>. Your biggest quarter is going to be Q4 customer holiday season. So you just naturally going to see.
Transaction volumes going into Q1 to Woody's point. This is nothing more than normal mix that you would see in any Q4 to Q1.
I think as the veteran merchant in this space.
Analogy right from Q4 to Q1, that's what so if you thought about 17% in the fourth quarter, it's really 11% constant currency.
There is a natural DSL from retail and grocery which is about six percentage points. That's very natural for this portfolio. It has nothing to do with share loss and then we benefited appoint from travel and then Theres nips and naps. So.
This is a seasonal thing I know, we like to talk about disruption a lot. There is seasonality in our portfolio. If you go back before 2019, you'll clearly see it and to <unk> point from a Nielsen standpoint, we're not we're not losing share we picked up share, but we know this is a favorite topic of everybody. So hopefully that will help that helps net that number now.
Yes, no that helps a lot and I know you've got the snapback in Q2, I think you said about 15% quarter over quarter growth in merchant so thanks for that right.
And just on the revenue growth outlook for the year. I know you are absorbing another I think $65 million of FX headwind, but obviously did not change the absolute dollar range for the year and I'm. Just wondering if you were also absorbing any headwind from Russia in that number.
You just kind of flowing through the outperformance from Q1 or it's nice to see that there is seems to be some offsets to that headwind or where would you would you point us to the lower part of the range just because of some of these incremental headwinds. Thanks, Yes, I tried to I tried to highlight in the prepared remarks, we are seeing some potential headwinds from.
FX, we highlighted in our previous conferences that Russia, Ukraine, and the impacts of that on the merchant business. We think we're about a point of headwind.
In the merchant business.
That said the over performance in Q1 were very pleased with the start to the year and Youre, adding all those together we have not changed the full year outlook on any front there.
Okay terrific.
Thanks.
Thank you. Our next question will come from David Koning with Baird. Please go ahead.
Yes, Hey, guys, Thanks, nice job and I guess my.
Yes sure.
First question just when we think about the merchant mix of enterprise SMB E com into the back half I guess, a couple of things do you still expect kind of low double digit growth for merchant over all in the back half.
Then is the mix going to be pretty similar like low.
As what it was this quarter that E comm is going to be a little better growth in the other two are going to be pretty similar.
Yes, I think E comm will continue to be our highest grower over the course of the year no doubt about that they've got some comparable as we go through the remainder of the year as we tried to highlight and I think some of the earlier questions highlighted that.
Talking about 9% to 10% growth in the second quarter and still looking at double digit growth for the merchant business for the full year.
So no real change there may be some movements as you see again quarter to quarter as these comps kind of settle out and we get into a new norm.
As we go forward here.
We will continue to be our highest growth highest growth sub segment.
Okay, and then just one kind of nerdy financial question. It looks like guidance for back half DNA is lower than the first half.
Is that right and does that mean growth into 2023 is not going to be that big it that's a pretty big kind of driver for EPS next year, if we can keep that low.
Yes, a couple of things there that we're seeing capex come down over the course of the year that we highlighted we anticipate seeing capex rolling into 'twenty, three and beyond and kind of the 6% to 7% area.
That combined with really you saw some some impairment last year of some assets that obviously will benefit DNA going forward into the 23 zone and going forward. So that's the primary change there Dave.
Yes, I think if you look at the first quarter number we're expecting modest growth sequentially from here.
Consistent with what he's comments.
Alright, thanks, guys nice job.
Yes.
Thank you. Our next question will come from Lisa Ellis with Moffett Nathan. Please go ahead.
Hey, good morning, Thanks for taking my question.
I was going to ask.
One or two on the banking solutions segment as well.
Following up on Barron's earlier question can you.
Can you talk okay.
Think that pandemic, one the demand environment.
We are winning against in that market are you primarily still winning against in house.
Placements of legacy systems, and then my second question related to that is that.
That business has historically been a U S business, but with the migration to the cloud and maybe some <unk>.
Regulatory changes around the world is there an opportunity over time for that business to expand internationally. Thank you.
Yes, So let me let me start.
The competitors differ depending on size of institution, so as youre dealing with large regionals or large national financial institutions, we're competing much more with in house developed typically with a very old legacy core system.
At the center.
Of their in house development exercise and Thats. The predominant competition, we would see you would see people going through an analysis do we try to build it again like we did 40 or 50 years ago or do we partner with a company like Fas Youll see certain start ups in there, but frankly the <unk>.
<unk> don't have near the scale of the technology to be able to deliver for all of the answers I gave you and Darren as you move down market and as you move into small regionals large community banks.
Community banks call it that $5 billion in greater you would say classic competitors of fiserv and Jack Henry in that space competing there as well once again as you start looking higher market share grows as you get larger and larger in market. So.
As people combine together youre still seeing M&A activity a lot in the banking space as they continue to grow through M&A and through just our organic growth efforts and they get larger we become the more natural landing spot once again back to the sophistication of the solution the breath of the.
Abilities, our ability to allow them to have flexibility.
Run their business, whereas when you're in smaller community banks.
You have a one or <unk>.
Much more <unk>.
Size fits all approach as we move down in community Bank markets. We also have capabilities there.
And once again small in traditional community banking, we do very well, but thats. When you really do just start seeing the traditional competitors as far as your global question. Your non U S question, We think it's a great. One we have traditionally we've been out.
Then outside of the U S and our banking business for a number of years, but it has not been a strategic focus given that level of activity. We've seen in the U S markets, we've really pivoted that whole banking business and accelerated its growth rate just off U S focus we do think our new technologies, whether it's.
The modern banking platform, whether it's payments one whether it's digital one.
And coke and that do allow us to expand in that we highlighted.
This quarter, we just certified.
Our MVP platform on the Microsoft Cloud Thats going to help us move into a couple of other countries and I do think it will be.
We do think it will be a contributor to.
Further accelerate the growth forward for the banking business going forward.
It's very helpful. Thank you one quick follow up just on <unk>.
Can you clarify how that helped <unk> integrating into the U S. SMB business I guess I was just looking at slide 11, and it looks like at least on the slide you've got it grouped with the global E Com business.
But is it operationally integrated into your small business business.
Ross selling into that existing base.
Great question, Lisa So the way, we thought about <unk> is enabling us to embed payments and access Smbs and card not present. So it is really a strategy that actually covers both in terms of access is the e-commerce market for Smbs.
Technically it's going into the E Commerce segment.
As you think about the.
E Commerce segment, it's all things both large and small now strategically your point is a good one which is if you said okay. What are you thinking about your software led business, which is the traditional IC business. We are taking a look at that and determining which of those clients would want to transition to an embedded payment strategy or stay within.
Integrated payments strategy. So the way we think about SMB. These days as you can have a traditional integrated payments strategy. Now you can have an embedded payments strategy and so it adds to that SMB capability, but as you know our SMB. Our software led SMB strategy today has been card present, and so pay rates really opens up the car.
Not present piece and we are booking that into the E Commerce segment to keep a PR.
Got it terrific. Thank you.
Thank you. Our next question will come from Jamie Friedman with Susquehanna. Please go ahead.
Hi.
Gary Stephanie <unk>.
Compliments on the slide deck I really like this slide six enterprise use cases.
I had a question on <unk>.
The macro so Gary I heard in your commentary about bank.
<unk>.
From the macro but is there any high level assumption.
I have a crystal ball, but at a high level on management's macro outlook for same merchant on the macro side.
Yes look I think we're I think we see a real good opportunity in our merchant.
Segment, we are really good about we feel great about our E Commerce, our enterprise segment, we feel good about the pay rate case acquisition and helping us in the SMB market with card not present, clearly youre seeing mix issues as we come out of the pandemic, but we continue to take share in the enterprise and E Commerce.
The Nielsen ratings substantiate that so we feel very bullish on the overall merchant business and feel very comfortable with our guide on that and not only this year, but going into the next several years. So.
I think we're very well positioned.
Okay, and then just so.
We can harmonize the models what do you with your prior commentary about the impact from Russia and FX.
Because those did seem to deteriorate relative to the prior guidance.
Just so I hear you right you.
For 'twenty two are maintaining the guidance despite those incremental headwinds.
That is correct that was a very specific call out in my prepared remarks, if you go back and look through.
We are maintaining the guide as is right now.
Got it thank you I'll jump back into queue.
Thanks, Jamie.
Thank you. Our next question will come from Ashwin <unk> with Citibank. Please go ahead.
Thanks, Hey, guys.
Stephanie.
Good.
Hey, good to speak with you guys.
I wanted to start with the free cash flow.
I guess in seasonal terms this was a better quarter.
But could you maybe.
Talk to the.
The dynamics.
Getting to 95%.
Version.
And then from a use of cash.
With respect to.
Does the.
I guess OLED indexing on return to shareholder.
Imply that youre stepping away potentially from M&A or tuck ins still.
In the picture.
Yeah. Thanks Ashwin.
Free cash flow itself first quarter for us is typically a lower conversion quarter in general as.
As we think about shape of the year every year.
Last year and this year, we had some timing around working capital. So you saw very good growth year over year in the first quarter of about 41% again that translated to about 87% conversion of free cash flow to adjusted net earnings.
It gives us a high level of confidence in getting to that 95% of adjusted net earnings for the full year as we will see conversion increase over the course of the year like we normally do you combine that with the commentary around our capital Capex investment that has peaked as a percentage of revenue we anticipated actually to come down.
A little bit more over the course of the year.
We're looking at 'twenty three forward, we're looking at more 6% to 7% Capex.
So those items combined give us a lot of confidence in that 95%.
Again with only 87% just a few points below the 95% even in Q1.
Feel very good about about that outlook there.
Gary if you want to touch on the sort of M&A versus.
Share buyback.
Yes look I mean ashwin our view on this hasn't changed given the current valuations of our stock given the current dislocation.
Where we think the share price of trade the the best use of cash on a de risk return is buying back our own shares with that being said.
We have traditionally done M&A as a company.
And so it's been a key component of our strategy and obviously, we want to make sure that we continue to watch what's going on in the market, but right now we feel very good about our competitive position.
We feel were strong across all three of our segments are executing very well as I said Nielsen should substantiate this share loss narrative and merchant you see what we're doing in the banking business and let's not forget about our capital markets business and Thats performance, which shows that the strength of the overall capability the strength of our go to.
The strength of our execution, so right now the best use.
It is certainly deploying that capital through share repurchase as we get a recovery in our stock price we would certainly.
Look to at some point in time open up our lands again and start thinking about M&A and what are new markets. We can possibly break into what are new capabilities that we can put through our distribution channel to further accelerate growth from here, but at this point in time.
We're very comfortable with with share repurchase and obviously returning cash to our shareholders through our dividend, which we increased 21% as well and as Woody said in his prepared remarks, we're prepared to do that again.
Early next year as well so hopefully that gives you context.
Yes.
Well thank you.
And if I can maybe.
As Glenn on capital markets.
6%.
The parts that you want to grow faster is 8%.
So that's that's good if you can remind us what's the SaaS based recurring revenue percent is and when.
Can you highlight some of the notable wins.
So in agency.
In private markets and so on.
If you could talk a little bit about the.
Sort of the clarity.
You'll see our client base to look at your platform modernization is that sort of bringing people in can you give us an update on the platform optimization process.
Let me start unless let woody get to the specific percentage of total revenues SaaS I mean, I'll remind you on capital markets. This was a very detailed transformation that we drove through in our capital markets business. It started at the acquisition of Sungard moving it from a product company to a.
Lucian Company and then deploying those solutions through a SaaS based model when we bought the company. It was in the low 60% reoccurring revenue and.
Most of that reoccurring revenue was in the form of either a processing fee or in the form of a highly reoccurring maintenance fee.
So we wanted to transition that business and really start deploying capital markets. Once we built all the solutions and modernized them and put them together through a more SaaS deployment. The team has done an excellent job of that we've continued to accelerate.
Our SaaS base reoccurring sales model it was up 8% this quarter alone you've seen that very consistent ashwin, we've been holding our license fees flat. So what we've been trying to do is we run a little over $300 million license fees a year, we don't want to dig the hole, while we're while we're growing through the transformation.
This is the exact playbook that we executed in the banking business two decades ago.
The customers are very willing to take advantage of our processing environment, our SaaS deployment in our modernized solution and the reason why is because as Stephanie commented when we were at the user conference what Youre seeing large financial institutions are realizing processing is no longer a dip.
<unk> total cost of ownership speed the market resiliency capabilities is where theyre going to differentiate in the capital markets business is very well positioned to take advantage of that so over the last couple of years, we've managed to grow that Woody from 60 Houston.
When we bought the asset it really was about 60% in terms of the recurring or SaaS percentage, there coming out of the first quarter. It was a little over 70%, 72% was the actual number continuing to see that grow over time.
We anticipate that to grow into the <unk> and even look closer to banking over time with a reduced license and PS being the only other component of revenue in that in that group so very.
Pleased with the enhancement structurally around that also the visibility and as we've talked about before it's enhancing the growth profile, yes, I'll remind our investors. This is a business that at some point in time, we will start discontinuing license fee. So right now we're renewing these term license with existing customers we're taking.
On very few new logos through the licensing channel all of our new logos are coming in.
Through our SaaS based model, which shows the strength of that product and how many actually new customers. We're also bringing into the mix, but there will be a point, where we'll start discontinuing the license model and then that will accelerate it to woody's point of where it'll be upper eighties, perhaps even low ninety's and you'll have a very very small percentage of license business.
Forward.
Thank you for all the detail appreciate it.
Thank you. Our next question will come from Dan <unk> with Mizuho. Please go ahead.
Hey, Thanks for taking my question. So this was actually really good clean quarter and congrats on this I do have a question I think maybe more for Stephanie on the merchant acquiring side can you I know it was asked before but can you help bridge the.
The 200 basis points share gain gain versus Nielsen and kind of what we're seeing versus the network more from me.
Enterprise Slash debit mix because.
It'd be like the <unk>.
Narrative last year was.
Enterprise really strong debit was very strong. So maybe you can parse out a little more in terms of like debit versus credit and how much does that affect the <unk>.
Kind of the discrepancy.
The apparent discrepancy maybe.
Yes, so happy to happy to so I think.
First of all let's start with Nielsen.
<unk> part Nielsen, which is really where you can understand share gain and loss because.
And in fairness I understand as we all went through the pandemic, we had to try and tie ourselves to Mastercard and visa but.
Portfolio mix really does matter here and so if.
If you look at the Nielsen report you can see we gained share that clearly this share loss is coming from smaller non scaled acquirers, which isn't surprising right in terms of the level of technology. The level of complexity. It's somewhat the same story, that's been going on within merchant acquiring for a number of years.
But you can clearly see that the share loss is the share gainers are really the large scale players in the share losses coming from smaller players.
Obviously, there are some small players that are doing well, but thats. The general trend now when you look at our portfolio. When you think about fourth quarter to first quarter and so I don't really and this is going to be may be tough to tab dark I don't really spend a lot of time thinking about mastercard and visa.
I think about our portfolio make up and if you think about the merchant book were almost 30% in global E Commerce.
About 45% large enterprise in the U K and then 30% SMB. So if you think about the fourth quarter to the first quarter.
Do you think about we grew volume, 17% in the fourth quarter, and 11% constant currency or 10% in the first quarter really that step down to me is normal seasonality based on the mix.
So if you thought about 45% of our business or and you added in the SMB space, which is brick and mortar.
You got to think about the holiday season, So I'll just walk back through like you start at 17%.
You had six percentage step down fourth quarter to first quarter.
From retail and grocery that's just holiday spend that's normal seasonality holiday spend.
That if you go back go back out of the pandemic, we always have wrapped both revenue and volumes trend down in the first quarter. Then we got a point of travel benefits travel and airlines, but we're not nearly as big in travel and airlines.
As everybody else, but that's obviously been impacting yield so we did get a point benefit there.
And then we had a little bit of nits and gnats and other places someone mentioned crypto, but it's just not that big.
So if you think about that to me, it's more around seasonality fourth quarter to first quarter, and then Nielsen really talk to you about where you see us gaining share and who's losing share.
The Mastercard volume.
Trend I guess for me I don't think about our business that way.
That is a GDP grower around the world and so they make up the whole world, we make up a certain segment of the world and so so Tien tsin, that's how I really think about it. So so Dan just kind of to build on that if you think about if you think about our enterprise business to move 200 basis points, you've got to take a look.
Lot of transaction volume to do that and Thats, where enterprise play comes in we've highlighted over throughout the pandemic strengthen our sales engine in enterprise right and in E com and so you're just really seeing the not only the large enterprise share gainer.
<unk> right that stepping referenced but also our success and coming out of the pandemic.
Invigorating, our sales engine and enterprise as well so all of those things are playing a contribution to the 200 basis points. The question around debit and credit and our enterprise play specifically really didn't have a play for us it really doesn't matter for us we're there to capture transactions and whether it is presented as a <unk>.
Credit or a debit transaction really our fee structures are are very resilient in that so.
<unk> got great stickiness in the enterprise because of scale, we have very very low turnover. So clearly what <unk> seen is just us taking share through the sales engine.
Large existing enterprise customers, taking share through their scale and then the resiliency of the revenue stream.
Credit and debit really.
We're virtually immune to their yeah, it's really more transaction based and volume, but yes, I apologize Dan I missed the debit kind of agree with Gary.
Because of our large scaled players we don't have a skew to debit credit. So it just doesn't matter for that right.
Perfect can I squeeze in a very short follow up as you look throughout this thank you for the detailed answer as you look through your portfolio, where do you see the biggest opportunity.
For price increases in Europe .
And maybe in your SMB book or anything is there any specific vertical or anywhere where you can say hey, we could actually increase prices were below market. Thank you.
Yes, I think.
Look we all win.
Up in the large space, so if you're a global ecommerce or large enterprise as everybody knows those are scaled player through demand the price that they demand. The good news for US there is theres only a couple of us that can play there because you need scale I mean, historically I think this industry has looked at smbs in terms of a place you can increase price I think we've seen we continue to have that ability.
There is no pressure there I think you probably heard that from other people, but do I think theres, a big pricing lever sitting in our book today I don't I think it's the same amount of opportunity. It's always been I don't see anything significant or new but it's always there and we always take advantage of it when we can.
Thank you.
Thank you and today's final question will come from James Faucette with Morgan Stanley . Please go ahead.
Thank you very much I appreciate all the details on the business.
My questions are primarily around <unk>.
Opex and capital allocation first.
Did I hear you correctly, you say you expect to buy back $6 billion in 2023 or is that across 2022 and 2023.
No we anticipate buying 3 billion in 2022, Standalone and utilizing all free cash flow in 2023 excess free cash flow, we'd be buying 6 billion in 2023. The combination of those two would be about $9 billion or about 15% of our current market cap got it got it got it okay. Just wanted to make sure I understood that correctly and then.
When you when.
When you talk about like being able to bring down capex as a percentage of revenue can you give a little detail as to like where investments been made that you can kind of allow the growth in revenue to increase in such a way that you don't need to continue to match that that growth in overall capital spending.
Well look James I mean, we've been in business for a very long time right. So as you think about it a lot of technologies and financial services are based on historical legacy platforms. We took.
We pivoted the company back in 2015 to really start focusing on the next generation capabilities that we're going to need to be that youre going to need to compete for the next 2025 years and so as you start looking at whether it was in the merchant platform, where we invested heavily in the new acquiring platform and access world pay we.
Got that fully online now whether you look in the banking sector and you look at what we've done around modern banking platform, which is the most leading technology for cloud native core banking system and market, you've seen that with our wins, but look at what we did on payments, one which is a cloud native issuer.
Platform for both debit credit prepaid you then move into our digital one or.
Omnichannel experience that wraps around those capabilities once again coming fully online in market and then our code connect platform for our micro services layer. You then move into what we did in capital markets, where we really leaned in.
Our solutions about bringing our capabilities and launching that in the in the cloud to leverage both buy side and sell side capital markets capabilities on a SaaS deployment that all boils down to we're wrapping up those programs and so we we increased our capital starting back in 2015, we were running at about 5%.
And we ramped that up to I think as high as 11% of total revenues and as those platforms have now come to conclusion, you would expect those those investments to come down now.
We've all talked about we'll maintain that around 6% to 7%, we think theres an opportunity to continue to lean in and add functionality and continue to grow and expand.
Our revenue growth and our share, but all programs come to a natural conclusion and we're just on the back side of the monetization of our.
Our solution stack now we do have a historical back book that at some point in time, we will start migrating stephney highlighted some of the stuff we're already doing in banking, we've migrated more than 500 of our clients. The payments one as an example, but more to come on that.
As we upsell and migrate our existing customers. So those capabilities, but we feel very good about our competitive position you see all of our segments growing and taking share.
Various.
Metrics and so at this point in time, we're just we're wrapping up a lot of these platform transformations.
Yes.
Got it feels great to get past seven plus years of extra investment. Thanks for that yeah, Yeah, no exactly exactly we feel great about it.
Well look I want to thank you for joining us this morning, and thank you to our dedicated colleagues for another strong quarter.
Before we conclude I wanted to give a special thanks to our team for hosting a very successful annual client event. We had over 4000 participants. This live event was a remarkable showcase of our solution suites by industry leaders, we are grateful to be interacting in person, where a client centric culture truly shine.
<unk> feedback from the event has been exceptional as clients and prospects learned how our innovative capabilities can solve their most pressing business needs. We remain committed to providing world class technology solutions to our clients. So that we can stay ahead of the curve. This commitment will lay the foundation for our growth in 2022 and beyond.
Have any further questions that were not addressed on this call. Please reach out to our Investor Relations team. Thank you and I hope you enjoy the rest of your day Goodbye.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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