Q2 2022 Fidelity National Information Services Inc Earnings Call
Good day and welcome to the F. I S second quarter 2022 earnings conference call. At this time, all participants are in a listen only mode.
After the speaker presentation, there will be a question and answer session to ask a question. During this session you will need to press star one one on your telephone. Please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker, Mr. Nate Rosa with Investor Relations. Please go ahead.
Thank you good morning, everyone and thanks for joining us today.
This call is being webcast at today's news release corresponding presentation and webcast are all available on our website at Fas Global Dot com.
Norcross, our chairman and CEO will provide a business and strategy update Stephanie Ferris, our president will discuss our operating performance.
Our Chief Financial Officer will then review our financial results and provide forward guidance finally, Erik <unk>, our Deputy CFO will then review will be with us for Q&A.
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.
A reconciliation of our non-GAAP information to the GAAP financial information are presented in our earnings release.
Finally, I'm excited to share that George Mahalo, <unk> will be joining our team during the third quarter. He knows both our company and the industry extremely well and will be a valuable addition to Fas.
Gary I'll turn the call to you.
Thanks, Nate and thank you for joining us today I'd like to begin today's call by congratulating, Eric Coke as he begins to transition into his new role as Chief Financial Officer of <unk> and my thinking Woody for his more than 14 years of distinguished service with the company.
Eric is bandwidth that FIS for nearly 15 years working closely with woody throughout that time.
We spent most of his time, leading financial planning and analysis at FIA as Eric has a strong insight into both our business and financials.
This transition represents the strength of our talent development and succession planning and I have the utmost confidence in <unk> ability to meet or exceed our financial commitments, while returning capital to our shareholders is a key member of my leadership team what his contribution to <unk>.
As been immeasurable during his tenure he helped transform Fas with two of the largest strategic acquisitions in the industry. He meticulously manage costs, while at the same time empowering our businesses to accelerate their growth profiles. His leadership will be missed what he will step down effective November four and remain with the company 30 transit.
<unk> period as CFO of Merit is to ensure a smooth transition.
Sure.
I will now begin our earnings presentation on slide five <unk> delivered another strong operating performance in the second quarter.
Revenue grew 8% organically to $3 7 billion EBITDA.
EBITDA increased 5% to $1 6 billion and adjusted EPS grew 7% to $1 73 per share each of our segments exceeded our revenue expectations with banking growth of 6% merchant of 14% and capital markets a 7% our decision to continue to invest through the pandemic has put out.
And our leading position as we continue to see strong demand from our clients and prospects.
U S consumer health and client demand was strong throughout the quarter as evidenced by our financial results I want to highlight how proud I am of our team who remain focused on our clients colleagues and communities. They have continued to deliver excellent results in the face of increasing volatile macro conditions.
Turning to slide six and.
In addition to our strong financial model, our competitive position has never been better.
We have the most modern solution suites in the market with World class scale and differentiated end to end solutions in banking, we continued to be the leader in cloud native core processing with our modern banking platform. In addition, we are quickly becoming a leader in embedded finance under Stephanie's leadership, we continue to expand our capabilities to enable financial.
<unk> offered digital banking services to business and commercial clients through a SaaS based offering that can be quickly deployed as a consumer demands continue to evolve our embedded finance solutions are easily scalable and they create new revenue streams for our clients by enhancing their digital footprint.
And our merchant segment, and we continue to be a disruptor in the industry. We recently became the first payment processor to eliminate our clients' financial liability for charge backs due to fraudulent purchases the new guaranteed payments offering allows us to increase our already industry, leading authorization rates with fraud protection through a single integrated.
Solution. We have also continued to see exceptional strength out of our recent <unk> acquisition and we are actively integrating <unk> with our Isd channel to develop an enhanced SMB offering Stephanie will expand on these in a moment.
In capital markets, we continue to differentiate with end to end solutions using our reoccurring revenue SaaS model. For example are cleared derivatives suite as a high performing and modernized technology platform that seamlessly integrates with clients existing infrastructure and spans end to end post trade derivatives processing. We also.
To invest in self service automation, which is a key feature in our personal pension solution that recently drove a new win with the UK pension service. Despite the cloudy macro environment. This is an exciting time at <unk> from a technology and a client services standpoint.
Lastly, I'd like to touch on the strength of our balance sheet on slide seven.
<unk> has historically performed very well during periods of economic stress and the strength of our balance sheet is a key differentiator for us in the marketplace to that end, we reduced our leverage ratio to two nine times during the second quarter. We also successfully refinanced a portion of our debt in early July to increase our financial flexibility and to further decrease.
Interest rate risk. In addition return of shareholder capital is a priority for US we paid nearly $300 million in quarterly dividends and we intend to continue to drive to 20% plus annual dividend growth each year.
We also resumed share repurchase buying back approximately $300 million in shares during the second quarter consistent with expectations. Our cash flow conversion is robust, which we will utilize to sustainably invest for growth while simultaneously returning significant capital per shareholders through dividends and by default share repurchases.
In the back half of the year and throughout 2023 with that I'll turn the call over to Stephanie describe how these strategic accomplishments are translating to our segment's operating performance Stephanie Thanks, Gary and welcome everyone. We've reached a pivotal moment in Fintech, where we've seen a fundamental shift in the way our clients and our customers want to consume financial service.
Yeah.
First financial institutions are both modernizing their financial technology stack and looking for ways to expand around driving increasing demand for banking as a service.
Second payments and financial capabilities are being embedded in software and across platforms driving demand for our financial technology partner to help create seamless consumer experience.
And finally rapidly evolving customer and digital experiences are pushing our clients to focus on their core businesses and products, creating demand for offerings using a cloud based as a service business model.
These trends have created large new areas of growth that cannot be served with traditional fin tech models and segments.
Our clients are looking for us to deliver these financial services and by creating new models that utilize our best in class assets combine in creative new ways.
We are uniquely positioned to capture these opportunities.
We spent the past five years developing the best in class next generation banking and capital markets technology.
One of the only truly global e-commerce platforms.
We have a marquee set of global corporate clients large global banks and asset manager.
And we've done all of this at scale with global distribution.
We're really pleased with our results again this quarter and you will see that many of our wins reflect these trends and opportunities.
In banking, we had a very strong quarter of core wins showing continued strength in our traditional banking channel.
We're pleased to share that we signed another two modern banking platform deals this quarter signing our first large bank outside of the U S with <unk> banking group, the second largest bank in Australia, and New Zealand.
Being selected by a global bank of this caliber clearly shows the MVP has global reach and scale.
Just as impressive as our recent core banking win with Columbia Bank in Umpqua Bank.
Umpqua has been a key client of ours for years, but they were recently acquired by Columbia, Historically worked with one of our competitors typically when a merger like this happens you would expect the acquiring bank to consolidate onto their corner instead.
Instead, I am proud to share that Columbia bank decided to consolidate onto the <unk> because of our expertise in serving large financial institutions.
Similarly, a large northeast regional financial institution Valley National Bank had made the decision to leave I ask our competitor <unk>.
However, the conversion got kept getting delayed and during that time. They acquired another bank who is also running on an up last quarter.
After a review of the capabilities that the combined bank needed and their experience with their previous attempts to convert off Fas. The bank made the decision to consolidate the new combined bank onto our most advanced regional banking solution.
These two examples point to our differentiation and strength in this larger regional bank market.
As we turn to new market growth is.
Capitalizing on the rising demand for banking as a service solutions as banks seek to create new revenue streams by widening their traditional distribution to end consumers through pentax.
And they're looking to leverage our embedded finance ecosystem.
As an example, a leading edge digital bank chose Fas's banking as a service solution to support Fintech and operating account opening money movement and card issuance to their customers.
They are an early adopter of expanding their reach through the Fintech landscape.
We've also seen increased demand for banking as a service solutions from fin techs that are demanding other use cases, such as embedded lending accounting money movement and faster payments.
And another exciting win for US block recently selected our national payments network to power their cash App card they.
They were drawn to the flexibility and service that we can offer them and are excited to leverage the power of our combined merchant and issuer ecosystem.
Opportunities like this are creating a growing pipeline across verticals for payments crypto and digital financing, so that banks and fintech can grow with us as they expand their embedded offerings, all demonstrating the power of unlocking our assets.
In addition to embedded finance, we also see an emerging opportunity to deliver our offerings using our cloud based as a service model and are experiencing this in the wealth and retirement space.
Franklin Templeton and T. Rowe price are two examples of strategic ASIC service wins for Fas.
In order to win their business, we live with our differentiated technology, and we demonstrated our ability to automate and scale our services across their expansive businesses.
The landmark wins required an as a service approach, resulting in a win win for both our clients and for us.
This business model enables both our clients and Fas to participate in the benefits of growing the organic base of revenue and margins of our clients and to date. These clients have grown organically, 10% and all have expanded their scope of services with us.
Finally, we are seeing significant momentum behind our digital banking solution digital one where we recently signed several new large regional financial institutions, including CIP and signature bank.
Given current signing the digital one flex solution will be supporting over 4 million customers by the end of 2023.
Turning to slide 10.
In capital markets, our end to end solution continue to meet our clients' needs.
We successfully signed the fourth largest bank in Japan, Sumitomo Trust Bank, who will implement our risk analytics manager to protect our operations from future regulatory changes.
Our growing relationship with this bank also underscores the importance of our world class scale and internationally.
Turning to Europe , we're expanding our relationship with UBS by adding additional modules from our clear derivative suite, which will help to enhance their existing operations.
This growing relationship highlights the competitive advantage that we created by using components highs architecture to deploy our new solutions.
Each of these important new wins demonstrate how our end to end solutions differentiate us from the competition by better meeting client needs with advanced technology.
On slide 11, our merchant results demonstrate that our long term strategy is working.
Our strategic focus on e-commerce for large as well as SMB and platform businesses is driving strong results.
Our diversified e-commerce portfolio in terms of size of clients and verticals that we serve recent new wins share of wallet gains from existing customers and the addition of the <unk> capability, which opens up our ability to serve SMB via SaaS platforms are all contributing to outstanding performance.
We continue to open new geographies as well as add differentiated new solution capabilities like our recently launched guaranteed payment solution.
With this solution <unk> was the first payments processor to guarantee e-commerce merchants increased approval rates and eliminate the financial liability of fraudulent purchases.
Built on the back of our investment to improve authorization rates for our clients. This new solution now take that investment to the next level, creating an end to end solution for merchants to banks.
And not only eliminates ruled at the merchant level through sophisticated machine learning decisioning, but allows them to increased transactions through our issuer partnerships, allowing us to pass broad scores and information on compromised cards from our merchants to our issuers.
This solution ultimately helps to merchant drive significantly more revenue by authorizing an improving more transactions.
A large global health and beauty retailer will be an early adopter of guarantee payments, which they will use to help maximize their revenue.
As an early adopter, we've seen their approval rates increased by 600 basis points, increasing our annual revenue by approximately $45 million, while also eliminating financial fraud liability.
Because of the significant value that this brings to our merchants were able to increase our revenue in most cases, doubling what we're earning of our processing revenue.
We have many examples of clients getting value from our ecosystem and full suite of solutions, including on one of the world's largest grocers, who continues to expand their relationship with us, adding more banking capability to their operations and a very large global retailer who is expanding their loyalty portfolio by tapping into <unk> network of merchants for rewards redemption.
These two.
Spansion deals combined drove more than $30 million of new contract value on the corner.
All of these recent wins demonstrate that our strategy is working.
Our expansion into SMB e-commerce with our new platform is also going exceptionally well.
<unk> is exceeding our expectations for growth and we're leveraging its embedded payments as a service model to expand into SMB E Commerce and two way.
First it enables us to serve cloud based platforms like Maximo, which is the <unk> subscription management and financial operations platform that recently selected us to be their payments as a service layer.
We didn't have the ability to serve cloud based SaaS platforms like this before paybacks.
Second it enables us to offer e-commerce capability to our existing ISP clients for.
For example, rebel is a longstanding ice via var, serving several verticals.
We traditionally serve them for card present, only and now they're expanding and embedding <unk> technology to enable payments in their online ordering and delivery services as well as card not present options to their end customers.
We're in the process of bringing our capabilities for SaaS platforms and traditional isc's together into an enhanced platform offering. This platform strategy is critical to our future and we're continuing to invest to bring new capability leveraging our full assets.
We expect a full rollout during the third quarter and I'm looking forward to sharing more with you on the next call.
I'll wrap up with slide 12, which describes how merchants, 14% constant currency growth is built up by sub segment.
E Commerce continues to be our fastest growing business consistent with our strategy. It's.
Its revenue growth accelerated to 28% in the second quarter from 23% in the first quarter on a constant currency basis.
Enterprise and SMB are also both continuing to grow very well generating 9% and 8% revenue growth this quarter respectively.
Despite the noise that circulated about where I'll pay during the pandemic our strategy for our merchant business is clearly advantaged in the fastest growing and most strategically important segments of the market.
I want to end my remarks, where I started we spent the past several years investing to bring forward. The next generation of Fintech solutions. The market is recognizing our shift I am pleased to share that for the second year in a row. We've been named the fast company's 100 best workplaces for innovators list jumping 14 spots in just a year's time competing with over 1500 comps.
From various industries, our inclusion in this exclusive lift as a result of our demonstrated commitment to encouraging innovation at all levels, attracting top talent and bringing bold new ideas to market. It's a reward and recognition of the investments. We've made we've made with that I'll now turn the call over to Wendy to discuss our financial results.
Thanks, Stephanie and thank you all for joining us today.
I'll begin with our financial results on Slide 14, we are very pleased with our 8% organic revenue performance for the quarter and 9% for the first half of the year, which was driven by strong topline results achieved by all of our operating segments.
In addition, we drove below the line leveraged and achieve it.
Adjusted EPS of $1 73 per share.
Turning to our segments banking organic revenue growth was 6% as the team continues to execute on our strategy and recent wins banking.
<unk> adjusted EBITDA margins contracted 130 basis points to 44%.
Primarily due to the high contribution margins associated with last year's term fees and the pandemic related revenue that we had to grow over as well as ongoing wage inflation.
Merchant revenue grew 14% in constant currency and 12% on an organic basis, which includes a little over one point of headwind from the Russia, Ukraine conflict.
We're particularly pleased with e-commerce growth at 28% in constant currency and 22% on an organic basis. We continue to anticipate e-commerce to grow about 30% in constant currency and more than 20% organically for both Q3 and Q4.
Merchant adjusted EBITDA margin contracted 280 basis points to 47%.
The Russia, Ukraine conflict had a negative impact in margins of about 50 basis points and we continue to invest in Geo expansion for ecommerce plus payer sales channel expansion to capture strong demand.
Capital markets organic growth of 7%, primarily due to 10% recurring revenue growth that was driven by strong sales momentum and our transition to SaaS.
Capital markets adjusted EBITDA margin expanded 140 basis points to 48% as the segment continues to benefit from operating leverage and diligence.
Overall, I'm very pleased with our strong revenue growth through the first half of the year.
We continue to see wage inflation is an ongoing challenge, but have pulled operating levers to help offset this cost accordingly, we still anticipate adjusted EBITDA margins of 44% to 45% for the full year.
Turning to slide 15, we generated over $800 million of free cash flow during the second quarter, which is in line with expectations. We remain on track to achieve free cash flow conversion approaching 95% of adjusted net earnings for the full year as free cash flow conversion expands in the second half consistent with normal seasonality.
That was down by approximately $675 million, which helped us push leverage below three times and restart our share repurchase program.
The absence of M&A, we are focusing on share repurchase.
And are on track to buy back approximately $3 billion in shares. During 2022, we also anticipate utilizing excess free cash flow in 2023 to buy back shares.
Turning to slide 16.
We are maintaining our expectation for 7% to 9% organic revenue growth for the full year and adjusting our EPS outlook to account for our recent macro changes and divestitures.
Since we initially provided full year guidance on our fourth quarter earnings call geopolitical and macro environments have changed materially.
Ukraine conflict created a little over a point of headwind within our merchant business that we have covered so far with stronger revenue performance in E Commerce, and we expect to be able to continue to offset this headwind without affecting guidance. We've also been able to offset rising costs from inflation and do not anticipate needing to change guidance for this season.
With the strength of our financial model, we were able to overcome one or two headwinds in most years.
This year the macro environment also changed by another two vectors that our initial guidance cannot absorb foreign exchange and interest rates.
An effort to provide as much transparency as possible.
Implications of FX and interest of our full year 2022 guidance.
First the U S. Dollar has appreciated a multi decade high as compared to the pound Sterling and the euro making foreign currency translation of our largest revenue.
Yes.
This FX translation is about the impact on our full year 2020 to EPS as compared to original expectations.
Rising interest rates are impacting our net interest expense. This increase interest rates on our variable rate debt in conjunction with our recent bond issuance accounted for another 13 cents of EPS headwinds.
Finally, we sold two businesses within our corporate and other segment consistent with our strategy to divest or wind down of non strategic assets. As these transactions close we intend to use the proceeds to help fund share repurchase, but assume about a <unk> <unk> impact on the year.
Combining FX interest and divestitures are driving our guidance revision as our operating performance remains quite strong.
When excluding these macro factors, we are effectively raising the high end of our guidance by <unk> <unk> and the low end by forces are.
I am extremely proud of our colleagues here at <unk>, who have worked diligently to continue to drive our business forward through volatile macro conditions.
Slide 17, we provide our typical guidance update for.
For the third quarter, we expect organic revenue growth.
6% consistent with the range of $3 five $8 to $3 64 billion.
This includes organic revenue growth assumptions for banking in the mid single digits capital markets in the mid to upper single digits in merchant in the upper single digits.
The third quarter faces difficult comps, particularly in banking as we had a large termination fee in the third quarter of the prior year. We also had expected the term fee in the third quarter of this year that is pushed out to the fourth quarter.
We expect adjusted EBITDA margins of approximately 45% for adjusted EBITDA guidance range of about one six to $1 63 billion.
Lastly, adjusted EPS is expected to be in the range of $1 74.
The $1 78 per share.
For the full year, we expect organic revenue growth to land in the middle of our original 79% organic growth range at about 8%.
Our full year revenue range is 14, 6% to $14 7 billion.
At the segment level, our organic revenue growth assumptions are unchanged, including banking of 6% plus capital markets in the mid to upper single digits in merchant in the low double digits.
Finally, we expect full year adjusted EBITDA margins of 44% to 45%, resulting in adjusted EPS of $7 $7 10 per share.
Updated assumptions for DNA that interest expense tax and share count are included in the appendix section of this presentation.
I would like to conclude on a personal note.
<unk> enjoyed my time at <unk> and I wouldn't trade any of the last 10 years have been a CFO .
We've seen tremendous growth and I'm proud to have played a part in what <unk> is today.
Gary Thank you for your friendship partnership and leadership over the past 14 years.
The board of directors for their advice and support over these years.
I'd also like to thank all of my colleagues here at Fas. They are the ones that are truly made a difference.
I'd like to congratulate Eric holder's promotion to CFO . He has been an invaluable partner and I'm confident that I'm, leaving you all in good hands.
I will Miss my time here I am looking forward to return.
With that operator, we please open the line for questions.
Thank you as a reminder to ask a question you will need to press star one one on your telephone.
Ask that you please limit yourself to one question and one follow up question. Please standby, while we compile the Q&A roster.
Our first question will come from Jason Kupferberg with Bank of America. Please go ahead.
Thank you guys congrats to Eric and what are you on your retirement as well.
Just wanted to start on the third quarter organic revenue growth outlook to five to six in a little below what we were anticipating you walk through the segments. There. It seems like you'll need to see reacceleration, so maybe around 8% to 9% in Q4 to get to the full year, 8% target. So just wanted to get a sense of your visibility on that reaccelerate.
I know you mentioned a termination fee in banking moving into the fourth quarter, but if you can just walk us through that to start.
Got it.
Yeah, Thanks, Jason Eric why don't you take that one yeah sure Jason Nice to meet you.
A couple of things on the third quarter to fourth quarter shift So we talked and there's a connection here to margin as well so in the second quarter, we talked briefly about wood in his prepared remarks talked about the termination fee moving.
That we had a headwind associated with termination fees year over year.
We've got that same termination fee headwind in the third quarter as well so as we move to termination fee in 2022 from the third quarter to the fourth quarter.
It pulls banking growth down modestly.
But it also impacts margin rates. So as we begin to talk about rest of year revenue growth in rest of your margin.
Termination fee dynamic is real.
That's the predominant change between the third quarter and the fourth quarter in banking solutions banking solutions being about half the company's revenue.
Obviously impacted the total the total growth for the company. What are you anything you want to add on there. The other thing I would highlight as you remember Jason last year December the UK was shutdown from Covid.
So we've got an easier comp in the fourth quarter on the revenue side as we don't anticipate the UK to be shut down like it was last year. So those are really the two biggies that we see always have high visibility into the revenue base as we go through there, but obviously tried to highlight both in the prepared remarks again through the Q&A that shifts that we're seeing in Q3 to Q4.
Sure.
Okay. Thanks for that and just on the interest expense can you just walk us through the pieces. There I think everyone knew would go higher just given the rate environment, but how much of this increase is from the.
Latest refinancing versus kind of the pre existing.
That stack, if we could just understand the math there and then did you guys not disclose the merchant volume and transaction growth this quarter I might have missed it but curious on that thank you.
On the interest cost itself.
Got about 40% of the debt is variable in the stack.
We anticipate another two raises from.
From the fed is at least our assumption right now at about another 100 basis points from where we are today, which is about $2 25 at the fed level. We also saw some increase in the ECP.
Raising rates over there and then the bond issuance that we just did was about $2 5 billion.
Just under 5% so combination of those factors is what's driving interest we think interest for the full year based on those assumptions is about $2 85.
Right now from where it was so obviously seeing some headwinds there.
On the volume side, we saw some.
Sequential volume decreases in line with Fiserv visa Mastercard and global very similar.
Constant currency volume was about 6% and we saw yields at a plus 5%.
Thank you.
Yes.
Okay.
One moment. Our next question that will come from the line of Reena Kumar with UBS. Please go ahead.
Good morning, Congratulations Aric annuity can you provide any color on conversations you've had with core processing customers on any early indications for bank technology spend next year and any hints at the macro environment causes pullback in spending.
Yes, Ryan this is Stephanie happy to answer that I would say.
Ending continues to be robust financial institutions.
Gary I've spent a bunch of time with all of our financial institutions over the last six months coming out of the pandemic.
We are feeling very strong with respect to their own the soundness and their financial institution themselves. They also benefited.
A lot from the Pvp A&P.
And they also recognized through the pandemic the importance of the digital transformation and remain on the line your conference will resume shortly.
Yeah.
Hmm.
Operator are we still live.
Keep going Stephanie I think we are still alive.
Sorry about that so what I would say, it's still robust so theres still a high demand for bank technology, we're seeing ladies and gentlemen, please standby.
Operator is the line open.
We're seeing the customers continue to have high demand for banking technology solutions.
Because they're wanting to drive their own digital transformation I talked in my prepared remarks about embedded finance banking as a service solutions. We continue to win our modern banking platform. So we're seeing high demand, we're not seeing any slowness in that at all.
Gary would you add anything.
No I think you covered it I think the banking environment has never been stronger and that when we look at.
The interest rate increases when we look at everything that all contributes to the to the bank's balance sheet contributes for their problem May know your line your conference will begin shortly.
And so that so the results of that as we've seen very strong.
We came off our biggest single core sales environment that we've seen in Q2.
Got it that's very helpful and we did hear your complete answer so I appreciate it guys. Thanks, alright, thanks, Ron Thanks Ryan.
We're trying to figure that out like you guys, but bottom line is the banking industry is very strong as I said, we just came off a really strong sales quarter on actual retail core banking sales one of the biggest ones in the last several quarters to more modern banking wins, but also really strong strength in our regional and community Bank.
Offerings and large financial institutions. So so so feel good about the buying behavior right now.
Perfect, Okay, and Stephanie you touched on this in your opening remarks, but I'm just curious to hear more about the progress with payers the <unk>.
Eric.
Gration any.
Key milestones that we should look out for and any metrics you can share on it for the quarter would be helpful. Thank you sure.
<unk>.
<unk> does continue to go phenomenally well for US as you know with the acquisition of that we now have access to card not present for Smbs.
Through that platform business. The good news for US is they were already integrated into our backend acquiring stack. So now it's about really us continuing to take massive share in the marketplace.
And so what I would say is the best driver is really looking at E. Commerce growth you can see our E. Commerce growth is outperforming across the board in terms of volumes and revenue growth and so that would be the really the key metric as we continue to grow both the traditional e-commerce space, which was really global enterprise and now.
With pay rates being able to access that SaaS platform.
Base Youre going to see us and that's our strategy. It is all about e-commerce and accessing both the large and the small and now with payback firsthand a significant ability to do that.
Perfect. Thank you.
One moment for our next question.
That will come from the line of.
Darrin Peller with Wolfe Research. Please go ahead.
Hey, Thanks, guys.
Could we just touched on here the embedded assumptions in the second half for the year. When we think about constant currency guidance I know there was.
Quite a bit of changes from FX and <unk>.
And divestitures, which largely we're expecting for the guide, but really the implied constant currency trends per segment is what I'm trying to figure out.
And maybe on the merchant volume side also.
Stephanie just a quick follow up I'll put it all together now is really just when you mentioned wins with block.
Can you just explain what the kind of win is what actually you're doing for them.
Some of the other doer type wins, if you could just expand on some of those as well as the SaaS My follow up thanks, guys.
Perfect.
What do you take the FX and talk about that and Eric will chime in and then.
And then we will address your block question, yes on the ethics, there we've got a little over 15% of our revenue in pound Sterling and euro.
Obviously those are very high contribution margin businesses for us so that profitability has some exposure to translation.
<unk> seen the pound and the euro dropped.
13% year to date.
Obviously, driving an impact both on revenue and.
EBITDA, that's where we got the <unk> sits on the translation from an EPS perspective, if you're looking back to constant currency organic growth really.
We continue to believe banking at 6% plus capital markets and mid to high single digits in merchant in the low double digit area.
For the full year. So we haven't had no change in that outlook from a revenue growth profile on a constant currency basis. The other component I would tell you as I did highlight in the prepared remarks, we do see payers contributing to E com growth.
We're looking at organic growth North of 20, which is consistent with our previous remarks, we're looking at constant currency growth of both the third quarter and the fourth quarter at about 30% level for E Commerce.
Stephanie you want to take block Yeah. So block is a super exciting win for US. It continues to show the strength of our issuer and acquiring capabilities coming together, we are powering their cash App card, which as you know is it.
As a big strategic position.
Positioned for them and we are excited about that we won that business very competitively, but again it continues to demonstrate that.
The benefit of our assets across our segments.
Also to talk a little bit about what we're seeing in banking as a service and embedded finance I mean, youre seeing a lot of disruptors come out and talk about their ability to really do that and as we think about our own I believe yes, we've launched banking as a service as well we have one of our new digital banks I mentioned, who is using.
Our banking as a service product really.
To expand out there market share to fintech. So they can offer a digital account opening embedded money movement embedded payment fluff, we really see this is where the industry is growing as we think about disruption and we think we have a huge advantage given our assets across our segments to bring those together and drive.
New meaningful revenue not just in traditional ways, but also to access new markets like embedded finance like banking as a service and then as we come into the third quarter I'm going to be really excited to announce our world paper platforms, but youre going to see all of that start to come together as well there and so we really think about our traditional business by opening up new.
Markets not only for ourselves, but our customers as they want to use our fin tech stack in a different way either as a service model.
In a way for them to advance their own customers' ambition, yes.
Yes, and just add Darrin on your on your block question Stephanie referenced in her prepared remarks, we're leveraging our network there, which was a key component of what allowed us to win that cash app to drive individual revenue back into block and so so it just shows and kind of paint the strength of the overall asset.
Understood is this the network nice or is this issue of profit just to be clear I'm, sorry, well, we're doing both right. So we're doing the issuer side of it but we're also leveraging our nice debit network and rounding the transactions.
And that combination is what allowed us to differentiate and win.
Alright really helpful guys. Thanks again.
Thank you one moment for our next question.
That will come from the line.
Of Lisa Ellis with Moffett Nathanson. Please go ahead.
Yes, good morning, and congratulations from me as well to both <unk> and Eric I wanted to follow up Stephanie I'm guessing. This one for you is for you on the the new guaranteed payments offering and merchant that does sound kind of new in the marketplace. So can you just elaborate a bit on which customers specifically is.
At most relevant for and.
And and.
And just to elaborate a bit more on kind of that.
But sort of from two like how it's different from what you're offering them today. Thank you.
Sure So as you know.
Lisa the big.
Competitive value prop and E. Commerce is all about driving more authorizations and approvals.
To our end clients because card not present.
Rates are much lower than card present, and as you know that drive meaningful revenue to our end customers and we have been all of us have been significantly advancing our capabilities. There. We are really excited about guaranteed payments. We think it is an industry precedent setting product for us what we are able to do it.
Use both our merchant acquiring data as well as our issuing data and are issuing relationship.
Along with all the investments we've made in machine learning artificial intelligence and data broadly and bring together what is we believe best in class and no. One else is done where we are able to increase authorization rates guarantee the authorization rate increase and also at the same time with relief.
Stem from any chargeback liability so historic.
Increase authorization rates guarantee the authorization rate increase and also at the same time with release them from any chargeback liability. So historically a lot of merchants haven't been wanting wanted to lean into new potential payment models.
Or they haven't been able to get the increased authorization rates up as high as we're able to get them and if they did they have to take on more potential fraudulent losses. So with this product they get both increased authorization and approval rates with a guaranteed no fraud charge back loss rate. So it's very very.
<unk> Hewitt.
It would be relevant for everybody that's in the card not present space. So we're in pilot mode. Today. We've obviously launched the project we've seen 600 basis point improvement with the product immediately out to drive increase authorization rates and as you can imagine it's so much revenue for the end merchant, we're able to actually charge a completely different beast.
Capability, what's up with most times doubles the amount we're charging for processing revenue, we think it's groundbreaking and we're super excited about it.
And and so you'll be absorbing the chargeback liability is that how it will work.
So you are you charging significantly more as you just highlighted and then.
And then you'll be absorbing any chargeback liability that would normally closer to the merchant.
Well because of our capability, we've driven down the charge back liability to be very nominal, but yes that would be the view in terms of how we would do that but.
Net net it's a really really strong profitability model.
For us because of the way we've used all the data.
Okay. Okay, and then maybe my my second question is a broader.
Recession business resilience question.
Can you just comment on how you think about it if in fact, we do see broader macro slowdown more severe than what we're seeing now.
<unk> business.
We'll react to that I know, we can all kind of go back and look at the former Fas back during the financial crisis et cetera, and maybe comment a little bit on kind of what's different now and how you think about what pieces of your business.
More resilient in a downturn versus less Joe. Thank you.
Eric why don't you guys look to thank you.
Hey, Lisa So I think it depends on the nature and the depth of the recession. So.
That said we've demonstrated during prior economic downturns that at a high level, we feel really confident about the business and that we can deliver top and bottom line growth.
We feel good about the business both from an earnings and from a cash flow perspective, so banking and capital markets very resilient businesses long contract terms on.
On average in excess of four years, we've got monthly minimums price escalators liquidated damages.
And then on the consumer side consumer spending, which would obviously be impacted in an economic downturn, but the consumer does continue to spend and while it may be more tilted towards.
Our central spending we feel like we're positioned very well.
Like other companies most companies right now we are experiencing some wage inflation and employee attrition.
But we're dealing with that with with existing operating levers that would he mentioned in his prepared remarks.
But broadly speaking I would say that we expect to continue to grow well during <unk>.
Recessionary times.
Thank you.
Thank you one moment for our next question.
That will come from the line of David <unk> with Evercore ISI. Please go ahead.
Thank you good morning, Gary and congratulations.
Eric and Woody.
For the second half of this year good morning, Gary.
For the second half of this year, what have you incorporated into your merchant solutions revenue growth from the global Air travel.
Related rebound.
World pay is very U K centric and there's been a lot of press about London, Heathrow airport limiting capacity as well as.
British Airways, so just very curious for your thoughts there.
Okay great.
I'm happy to take it so.
<unk>.
You are right, we have some strength in travel and airlines.
British Airlines and Heathrow is very immaterial in terms of the broad portfolio.
You can certainly see the weakening of the pound impacting us overall on an FX standpoint, but travel and airlines has been obviously, a rebound or for us in the last couple of quarters.
Arent, we arent seeing any concerns around the issues with the airlines and Heathrow et cetera, it's not material to the portfolio. It also not expecting anything in the back half to be impacted by any yes, I would say David at the end of the day, we're kind of returning now to a more normalized environment really it's the strength of our balanced portfolio.
It is travel and airlines growing faster than we thought going in through throughout this year gas. We've got some other portfolios that are growing slower than we thought but the balance of the portfolio is really strong and that really kind of gets back to Lisa's question around recession, it's really around where we are where consumers spend goes.
But we do believe that travel and airlines is going to continue to be a strong piece of the book in the back half of the year and model that we.
We think there is some other industries that will continue to.
Under some stress, but we're confident with the strength of the overall portfolio. We're very pleased where the growth is I mean at 14% constant currency on the quarter end.
And very pleased where were seeing that shape up for the full year.
Thank you just as my follow up.
I am curious for your thoughts Gary about the Bill proposed by Senator <expletive> Durbin and Richard Grassley to try to create more competition in the routing of credit card processing fees in the U S for visa and Mastercard and in particular, I'm wondering whether you could repurpose the NYCE network.
And bind with your merchant acquiring capability.
Perhaps take over that routing function to the extent the merchant wants to route it away from visa and Mastercard.
Look it's a great question I mean, we continue to monitor all the changes going on in Washington, like everybody does I mean, theres a lot of different bills that get put forward that could impact us in very different ways.
The regulatory change is always a really big positive for us I've said that in the past.
We typically always find ways to grow our revenue through that because our customers need assistance and <unk>.
Implementing those regulations. So assuming there is a change their own credit routing then obviously, we will look at ways to help our customers with that help maximize their revenue. Therefore us grow our revenue through that process, but we will continue to watch it as it evolves and then we will bring forward more information as we know.
What the what the outcomes of some of these discussions might be.
Understood. Thanks, so much.
Thank you. Thank you one moment for our next question.
And that will come from the line of Dave Koning with Baird. Please go ahead.
Hey, guys, thanks, and congrats to Woody and Eric I was great working with you guys.
And I guess first of all just when we look at margins I think the first three three quarters now the way you are kind of setting this up as margins to be kind of flat to down a little bit.
Q4, though it looks like the implications is up 200 to 250 bps and I know you talked to you a little bit of the banking term fee, how big is that to margins or dollars or whatever how big is that and maybe what's the difference in underlying margin expansion in Q4 relative to the first three quarters as well.
So hager ill take this one.
Hey, David Good to hear from you. So a couple of things on fourth quarter margins from the from the third quarter to the fourth quarter, we expect margins to build and build rather materially as you just mentioned.
A couple of reasons for that first first quarter is always the high watermark for margins. This is the period, where we sell the lion's share.
Of revenue upfront license revenue.
During the course of the year the termination fee has pushed.
From the third quarter to the fourth quarter, which is also driving driving growth and then.
And then on the cost side.
As we mentioned earlier on we are pulling operating levers to ensure that.
Some of the some of the headwinds that we're experiencing with Russia, and labor inflation or offset as well. So those are the predominant drivers for margin expansion in the back half of the year, it's onetime highly accretive and profitable revenue with license.
Our outsized termination fees offset with.
Cost actions.
Got you got you, thanks, and maybe just.
As a follow up question just interest expense it looks like the Q4 implications of $115 million or so.
Is that the right way to think about 2023, just assume $1 15, a quarter or should we think about it you think you have a couple of billion dollars coming due that's low rate debt, maybe a little higher than that as we look into into next year.
Got a couple of things there.
One we've refinanced the debt so.
The $2 5 billion of debt that we issued will cover both the fourth quarter maturity in March 'twenty three maturity.
Out there and secondly, we do have a maturity in June or July of 2023, we've got to look at the real question. Dave is how much incremental debt that we've taken on to buy back shares next year.
Our subs has been to maintain leverage at two nine.
If we do that we take on some debt to buy back shares. So we're looking at the interest rate impact of that as well. So I would not look at it as just $1 15 as your jumbo forward looking forward, where do you guys think about that combined with.
The higher incremental shares.
Talking about buying back in 2023 as well.
Yes, and then think about the accretion from the buybacks on top.
That's right that's exactly right.
Great. Thanks, guys.
Thank you one moment for our next question.
Yes.
That will come from the line of Ashwin <unk> with Citi. Please go ahead.
Thank you.
Hey, Stephanie.
DNA.
Hey, congratulations.
Thank you Ed I guess my first question is with regards to cross selling and it's something that you guys are on lease.
Done within a business unit obviously.
But living.
Living at cross business unit.
And as sort of FRS becomes.
The company kind of was intended to be after that.
After the Mega merger.
Can you talk about that what kind of traction youre seeing is kind of looking at this key global boosted adding banking capabilities.
Good luck.
It seemed like it was interesting.
Anecdotal.
Or is it.
More broad based.
Yes, Ashwin great question, you've played right into my hand, thank you.
Yes.
Usually successful driving revenue synergies on the royalty transaction and as I came back into the company was even more excited to look across the segments and see the demand in here the demand from customers. So we've actually coined and initiatives that youre going to hear us start to talk about <unk> <unk>.
Where we do believe there's a huge amount of revenue and value to unlock by selling assets from existing segments into other segments. We've always done it for the last couple of years.
Transparently, we've been really kind of come out of the pandemic. There was a very large focus for me coming out of the President's chair in terms of I'll look at how big that could be you are seeing the large grocery or do it youre seeing the large retailer our alpha resonate outside of their existing segments, our banking asset specific.
Typically resonate very very well, whether it's banking as a service embedded finance.
<unk> is a great win for us.
Got it.
Great position in Australia, and New Zealand market, we've got.
A lot of head count in that market very comfortable in dealing with it so but I will say over the next 10 years, you're going to see the entire core banking enterprise move too.
Cloud based technologies and so just getting started with the transformation, but it's going to be a global one and certainly there is a huge opportunity for us outside the U S as well as within the U S. As we continue.
To sell new customers in the U S markets and as we've talked about in the past, where we will eventually want to start moving our.
Our back book are older technologies to this platform as well for our existing customers. So pretty excited and continue to be very excited about the future of the modern banking platform got it. Thanks, So much and what are you best of luck on your next chapter it's great working with you. Thank you and I appreciate that.
Ladies and gentlemen, thank you for participating in today's question and 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 for delivering another strong quarter. If you 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.
This concludes today's conference call. Thank you for participating you may now disconnect.
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