Q4 2022 Fidelity National Information Services Inc Earnings Call
Good day and welcome to the Fas fourth 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 you will then hear an automated message advising your hand is raised to withdraw your question. Please press star. One again, please be advised that today's conference is being recorded I would now like to hand the.
Over to your Speaker, Mr. George Me Hello head of Investor Relations. Please go ahead.
Thank you operator, good morning, everyone. Thank you for joining us today for the fourth quarter 2022 earnings Conference call. This call is being webcast at today's news release corresponding presentation and webcast are all available on our website at <unk> global Dot com.
With me on the call. This morning are Stephanie Ferris, our CEO and President and Eric <unk> our CFO .
Stephanie will lead the call with a strategic and operational update.
Led by Eric reviewing our financial results and providing forward guidance.
Turning to slide three today's remarks will contain forward looking statements. These statements are subject to risks and uncertainties as described in the press release and other filings with the SEC.
The company undertakes no obligation to update any forward looking statements, whether as a result of new information future events or otherwise except as required by law. Please.
Please refer to the Safe Harbor language.
Also throughout this conference call, we will be presenting non-GAAP information, including adjusted EBITDA adjusted net earnings adjusted net earnings per share and free cash flow.
These are important financial performance measures for the company, but are not financial measures as defined by GAAP.
Reconciliation of our non-GAAP information to the GAAP financial information is presented in our earnings release with that I will turn the call over to Stephanie.
Thank you George and thank you all for joining us this morning.
Today marks my first earnings call as the CEO of Fas.
Let me begin by saying I feel incredibly privileged by the opportunity to reflect on our past restart our future and recommit to our clients colleagues and investors.
<unk> is a tremendous company with world class assets in a marquee set of clients.
We are an industry leader with more than five decades of history positioning where change challenge and opportunity intersect.
I will present to you the next chapter.
We have a lot of ground to cover including our fourth quarter financial results 2023 guidance and specific outcomes of our strategic review, which includes the planned spinoff of our merchant business World pay.
Let me start by sharing that I am pleased to report that we met our financial goals for the fourth quarter.
Well. This is a good first step we recognize that we have a lot of work to do to meet our expectations going forward.
Today, we will share a number of decisive actions, we're taking to better align our business with the needs of our clients and the expectations of our shareholders.
Let me take you through our path forward.
Turning to slide five.
We've set a new agenda to improve the operational performance of the business sharpen our client focus and improve both the free cash flow of the company as well as the earnings quality.
We will do this by following three key principles that underpin all of our go forward actions to drive value.
First we will ensure that clients are at the center of everything we do by creating a client centric culture.
Second we will continue to innovate innovate across our portfolio of solutions to ensure growth for our clients.
And third we will simplify and streamline our operations decision, making and time to market to improve profitability.
Combined these principal form the foundation of our efforts to drive efficiency effectiveness and profitable growth.
Turning to slide six.
Over the past 60 days, we've moved with the highest sense of urgency and focus to advance a number of strategically important initiatives.
First in December we announced that we initiated with the board of directors, a comprehensive assessment of the company's strategy operations and structure with the goal of positioning us to drive stronger results increased shareholder value and enhanced client experience.
As an outcome of this ongoing assessment, we announced today, we are pursuing a spin off of our merchant business, creating two world class public companies.
And <unk>.
It is my pleasure to also announce that Charles Drucker World pays former CEO has agreed to return as a strategic adviser to me.
Charles He was my close friend and colleague will lead the preparedness phase of the planned spin off and is expected to become <unk> CEO upon the closing of the transaction.
Second we announced in November that we are launching an enterprise transformation program. This program, which we have branded future forward is moving ahead with speed to improve the operational performance of the company by driving efficiency effectiveness and profitable growth across every facet of the enterprise.
When we launched future forward, we are targeting to deliver cash savings across the company of $500 million by year end 2024.
I'm happy to share that we now expect to exceed our $500 million original target by the end of this year and I'm, increasing our target to $1 25 billion and net savings prior to the effect of the spinoff exiting 2024.
As I mentioned earlier, we are and will continue to be intensely focused on cost management cash generation and earnings quality.
Third we are realigning our incentive programs to be tied to shareholder value creation company performance and client satisfaction scores in order for us to deliver on our commitments. This realignment is critical.
And fourth consistent with our December announcement, we've continued to reshape our board of directors for independent governance.
I'm proud of what we've been able to do in the first 60 days. This is just the beginning for us.
Slide seven describes our rationale for separating the two businesses the pace of disruption in payments is rapidly accelerating requiring increased investment for growth and a different capital allocation strategy for our merchant business.
The separation of Royal pay from Fas will result in the creation of two standalone market leaders, each well positioned to capitalize on the significant value creation opportunities ahead in their respective markets.
It is expected that <unk> and world pay well maintain a close commercial partnership to deliver critical capabilities like embedded finance and loyalty through premium payback preserving a key value proposition for clients of both businesses and limiting potential dis synergy.
It should also simplify our operations and give each management team additional flexibility to operate the business and the way that best delivers value for all clients and shareholders alike.
Specifically it will enable us to pursue a strong investment grade credit rating, while enabling <unk> to invest more aggressively in growth.
Our separation also enables <unk> to implement different capital allocation strategies, which align to their growth targets and underlying market needs.
Turning to slide eight.
Both companies serve a blue chip set of clients.
So if the technology needs of global financial institutions regional community banks, and marquee set of asset managers across the spectrum.
We're all pay serves the payments needs of the world's global technology Internet and retail companies.
Both companies boats.
Most unrivaled global distribution and operating scale.
By separate entities Fas remains the number one global Fintech provider and world pay remains the number one global acquirer by transactions.
Both companies will be market leaders in their own right and by forging a commercial relationship together, we can affect a superior outcome as compared to keeping them together.
Yeah.
Let me provide some additional context for what this transaction means for the Standalone <unk> business on slide nine.
<unk> is returning to its roots. This focus will allow the company to maintain its competitive advantage in delivering innovative next generation technology solutions to the most complex financial institutions.
Additionally, <unk> will be in a better position to balance return of capital to shareholders with organic investments and complementary M&A.
We remain committed to our investment grade ratings conservative capital structure and growing dividend.
Putting it altogether, we are returning to its historical quality compound our model, which is more closely aligned with the way that Fas operated before the world pay acquisition.
As a quality compound our Fas will emphasize steady recurring revenue growth.
<unk> margin expansion and disciplined capital return to shareholders.
Importantly, we will prioritize maximizing free cash flow and profitable revenue growth.
Consequently, I would expect our free cash flow conversion to move permanently higher post the spin.
Reflecting less working capital volatility volatility and lower capital expenditures.
Lastly, we are committed to improving the quality of our reported earnings. This includes narrowing the delta between adjusted earnings and GAAP earnings and presenting free cash flow measures that better align with the cash we have available to deploy.
Eric will provide additional color during his discussion of our financials.
Now I'll touch on the world pay strategies to drive enhanced shareholder value.
We're all pay operates in a more dynamic and disruptive end market relative to heritage us with more of a growth focus.
The separation from <unk> will allow <unk> to pursue a more growth oriented strategy, which we believe the company is better suited for and aligns more closely with investor expectations.
Central to the growth strategy is a return to more consistent M&A and a capital structure that does not require an investment grade rating.
Beyond inorganic investment the team is taking aggressive steps to re pivot the business back towards growth.
This includes the investment in the World paper platform strategy to strengthen the companys value proposition with Isps and a continued push towards increasing its total percent of e-commerce revenue.
While near term investments are impacting profitability. We are confident the business can return to growth and deliver value for shareholders as an independent entity.
Turning to slide 11.
Like to provide some additional insight into the durability of our banking and capital markets businesses.
And why I am so confident but they are poised to deliver accelerating revenue growth and margin expansion.
We are reorienting bias toward a path of more sustainable higher quality recurring revenue growth.
There are two challenges specific to 2023, which are masking the underlying performance of our business, particularly in the banking segment.
The first is our previously discussed elongation in sales cycles for very large transactions.
To be clear our pipeline of opportunities remains robust and our win rate on transactions is stable. We are confident at economic conditions stabilize sales will accelerate.
We also hired a chief revenue officer to focus on driving highly profitable recurring revenue growth regardless of deal size.
We believe this higher would help us cross sell and upsell with existing clients as well as better penetrate smaller sized financial institutions.
The second challenge is a growth headwind tied to nonrecurring revenue.
Largely onetime licenses and deconversion fees from bank consolidation.
We anticipate this to be another 1% headwind in 2023.
We do not expect onetime licensing deconversion fee revenue to remain a similar a similar headwind in 2024.
While the above trends are creating short term headwind for us we believe our normalized growth rate for these segments is approximately 3% to 5%, which demonstrates the underlying strength of our banking and capital markets businesses.
With our refocus on high quality recurring revenue growth and the benefit from our future forward initiatives, we're expecting margin expansion in banking and capital markets for 2023.
As a result of the timing around our actions. We are confident that these businesses have hit the low point of their margin contraction and will return to margin expansion in the back half of the year on.
On the back of all of the future forward actions, we have taken are in our planning to take.
Tying it all together <unk> is on a trajectory to create shareholder value at the quality compounds that generates consistent mid single digit recurring revenue growth margin expansion and robust robust free cash flow.
Turning to slide 12, we will provide you with regular updates on future forward.
I've already described our progress toward achieving $500 million and net cash savings by the end of this year.
And prior to the effect of the spin off one $2 5 billion by the end of 2024.
I'd like to take a moment to describe how we will achieve these targets.
Future forward as a multi faceted initiative designed to permanently improve the performance of the company by delivering improved outcomes for clients, while driving operational efficiencies internally free cash flow generation and earnings quality.
We are focused on more effectively meeting the needs of our clients by continuing to accelerate the development of next generation technology solutions and anticipating their future needs.
Driving toward a more efficient operating structure by prioritizing human and capital resources that best align with the needs of our clients and the returns expected by our shareholders and lastly, driving improved growth outcomes through sales productivity reduce complexity and a continued focus on clients.
These important initiatives will continue at Fas and world pay post spin.
I will cover our next steps on slide 13, before turning the call over to Eric for his financial review.
2023 will be a year of Recommitment for Fas as we work to reposition the business to return to sustainable growth profitability and value creation in 2024 and beyond.
First we are focused on executing the spin off of <unk>, which we expect to complete within the next 12 months.
Second we are sharpening our operational focus to continue to promote our client centric culture and to deliver on our commitments to all of our stakeholders.
Third future forward initiatives will continue within both Fas and we're all pay to maximize our cash flow and earnings quality and finally, we are laser focused on creating shareholder value with action and improved performance.
I am pleased with the progress we've made in such a short period of time I'm confident that we're on the right path forward and with that I'll turn it over to Eric to discuss our fourth quarter results and 2023 outlook Eric.
Thanks, Stephanie.
I'd like to start today by outlining some of our priorities as a new management team before touching on our financial results.
As I stated last call a priority of ours is to be transparent about our future expectations and we delivered results in line with that revised outlook.
Today I'd like to lay out a few more priorities for 2023 and beyond.
First we will manage this as a high quality compounded with predictable and consistent earnings growth.
Our operational structure and long term capital allocation strategy will prioritize delivering double digit total shareholder return.
This is the core tenant of our compound our investment thesis, which is operationally and financially positioned to achieve.
Next as Stephanie mentioned, we're focused on enhancing the cash flow characteristics of FY us.
In 2023, despite an anticipated reduction in EBITDA and earnings were taking actionable steps to increase our cash flow on a year over year basis.
This increase in cash will primary will be primarily driven by decreasing our capital expenditures by approximately $200 million.
We're also taking conscious actions to reduce onetime spend associated with transformation and integration programs.
I am confident we are taking the correct actions to deliver strong shareholder returns over the longer term.
With that as the backdrop, let's quickly touch on our fourth quarter results on.
On a consolidated basis revenue increased 4% organically to $3 7 billion.
With an adjusted EBITDA margin of 43, 2%, yielding an adjusted EPS of $1 71.
At the segment level banking grew 4% organically in the quarter.
<unk> margins were pressured due to unfavorable revenue mix and inflationary cost pressures.
We had an exceptionally strong quarter in capital markets with 10% organic revenue growth and 220 basis points of margin expansion.
Fourth quarter revenue growth included a four point benefit associated with the timing of license renewals, which drove a 22% increase in nonrecurring revenue.
As I look to proactively message any one off tailwind or headwinds this license benefit in the quarter should be flagged as a potential headwind in the fourth quarter of 2023.
Excluding this tailwind capital markets increased 6% organically well ahead of historical trends.
Additionally, recurring revenue grew 11%.
The fifth consecutive quarter of recurring revenue growth greater than 8%.
Our strategy to transition to durable SaaS deployments continues to resonate in the market.
Merchant grew 2% on a constant currency basis in the fourth quarter, including a point of headwind associated with Russia and Ukraine.
E Commerce revenue growth remained strong increasing 16% on a constant currency basis.
Our card present channel and SMB experienced softness as lower sales did not outpace attrition and compression trends.
These trends in SMB reflect a lack of new product investments, which we believe the spin will best enable us to remedy.
And in enterprise, we saw economic weakness in the UK and anticipate further deterioration this year.
Touching quickly on cash flow and balance sheet we.
We generated roughly $3 billion of free cash flow in 2022, which was lower than originally expected primarily due to negative working capital.
More specifically the timing of receivables within the merchant segment.
Total debt as of 12 31 was approximately $20 billion with a weighted average interest rate of two 6% and leverage was approximately three two times.
Turning to slide 16 for 2023 guidance.
Our philosophy remains conservative in our forward projections as we look to build credibility and deliver on our deliver on our commitments.
With that in mind for the year, we anticipate consolidated organic revenue growth of negative one to positive, 1% or $14 2 million to $14 $4 5 billion of revenue.
Adjusted EBITDA of five 9% to $6 1 billion.
Where margins of 41, 5% to 42, 2% and adjusted earnings per share of $5 70 to $6.
This outlook assumes further macro deterioration, including a global recession impacting our merchant segment.
To be clear.
Our guidance assumes macroeconomic trends continue to deteriorate throughout the year.
We expect total company margins to improve over the course of 2023 as we ramp the benefits associated with future phone.
At the segment level, we expect banking organic revenue growth of zero to 2%, which includes lapping difficult compares associated with nonrecurring revenue cycles nonrecurring revenues as well as the near term impact the impact of elongated sales cycles.
Banking margins will improve throughout the year with a return to margin expansion in the second half.
In capital markets, we expect 4% to 6% organic revenue growth coupled with continued margin expansion.
This segment continues to benefit over a multiyear shift to sustainable SaaS deployment over license revenue.
And merchant, we're anticipating organic revenue decline of 2% to 4%.
This guide reflects a 300 basis point headwind associated with attrition and compression in the SMB subsegment and further macro deterioration impacting growth by an additional 500 basis points.
We expect world pay to Reaccelerate post spin as it leverages its scale with both organic and inorganic investments to once again differentiate itself in the market.
Lastly, we're focused on our cash flow fundamentals and anticipate expanding our free cash flow conversion to over 80% in 2023.
Turning to slide 17.
As Stephanie mentioned, we have two temporary headwinds impacting these segments. This year and empirically believe the underlying growth rate is 3% to 5%.
We're undertaking various strategic priorities for these segments, which we believe will improve our fundamentals moving forward.
First we hired a new chief revenue officer to focus on higher quality and sustainable sales growth.
Specifically, while we still pursue large transactions, where <unk> is clearly differentiated.
To ensure that our cross selling to existing clients remains a priority.
The breadth of solutions, we have between banking and capital markets will continue to take market share as we expand our lasting relationships with our valued clients.
We also see the benefits of future forward ramping through 2023, and 2024 to support an already expanding margin profile.
Lastly, as Stephanie mentioned, we believe the spinoff of our merchant segment will help simplify our operating model and focus our investments on the most pressing needs of our clients.
With that ill.
I'll turn to an overview of the merchant growth profile on slide number 18.
Accounting for two known headwinds, we believe merchant normalized growth is 4% to 6%.
The first of these headwinds has been a lack of new product investments driving compression and attrition in our SMB sub segment accounting for approximately three points of headwind in our merchant Guy.
We're confident this is this is near term in nature and will be directly addressed with a successful spin of world pay as it transitions to a growth oriented capital structure and investment philosophy.
Second is the macroeconomic impact we anticipate this year.
Our guidance assumes further macro deterioration in the U K and a recession in the U S.
This recessionary assumption accounts were approximately five points of headwind in our merchant guide.
Similar to our strategic priorities in banking and capital markets, we're taking actions to accelerate off this 4% to 6% normalized growth rate.
The merchant segment will benefit from new product investments to enhance its competitive profile and growth profile.
Additionally, future forward will help support increasing profitability later in 2023 and beyond.
I'll finish by noting that as revenue accelerates in the segment. It carries a very high contribution margin, which will drive underlying margin expansion beyond the future forward benefit.
We view the segment is accelerating off the 4% to 6% normalized revenue growth in 2023 with margin expansion incorporated in the model.
Moving to our breakdown of EBITDA expectations on slide number 20.
Both our banking and capital markets businesses are expected to increase adjusted EBITDA and expand margins in 2023.
In banking, we would anticipate margin expansion of over 50 basis points and capital markets to expand margins by 50 to 100 basis points.
This significant margin expansion in banking and capital markets reflects both underlying strength and the contribution margins as well as future forward.
These segments are positioned for durable and profitable growth over the longer term leveraging a one to many operating model with high concentrations of recurring revenue.
Conversely, we anticipate a weak or weaker performance in our merchant segment, coupled with higher corporate costs.
In merchant, we anticipate a reduction in EBITDA associated with lower revenue and increased expense associated with residual payments.
In our corporate segment, we're seeing the impact from divested businesses in 2022, and a temporary headwind associated with a tough comparable on incentive compensation.
Looking beyond 2023, we're confident that we're moving the company to the appropriate path of margin expansion. There are two key tenants tenants underpinning this confidence.
First we expect the benefit from our future forward initiatives to continue to ramp with incremental benefit in 2024.
Second we will continue to benefit from our newly implemented sales and commission structure, which emphasizes higher margin revenue growth.
Both of these initiatives will support consistent and ongoing margin expansion at Fas moving forward.
Turning to slide 21 for an overview of how future forward, we'll continue to rightsize, our expense base and further support profitability and cash.
We expect to generate approximately $150 million of in year operating expense reduction.
Savings will ramp to approximately $600 million on a run rate basis exiting 2024.
In addition to these opex savings future forward will support our priority to improve our cash flow through a reduction in capital expenditures and onetime program spend.
We're targeting a $200 million reduction in Capex during 2023, and we intend to reduce capex by another $100 million in 2024.
We're also aggressively ramping down spend associated with transformation and integration projects such as platform consolidation, resulting in a benefit to cash.
Taking all of this into account we're pleased to increase our expected net cash savings associated with future forward to approximately $1 25 billion exiting 2024.
We will continue to provide quarterly updates on achievement of those targets throughout the life of the program.
These initiatives are the bedrock for improving the operational performance of Fas and align directly with our priorities outlined today.
I'll conclude with with our current capital allocation priorities on slide 22.
In 2022 in 2023, we're focused on paying down debt, increasing our dividend and decrease in capex.
First we'll utilize excess free cash flow to reduce debt in support of our investment grade credit ratings, which is a key pillar to <unk> long term capital and operating strategy.
Next we recently announced an increase to our quarterly dividend of more than 10% and we anticipate to exit the year approximating our 35%.
<unk> payout ratio.
Moving forward, we intend to continue increasing our dividend roughly in line with earnings growth.
As mentioned throughout my prepared remarks, Stephanie and I are also prioritizing a reduction in capital expenditures this year.
We're putting a heightened focus on ROIC to ensure an appropriate return on investment and.
And are making targeted investments aligned to client needs.
Finally in conjunction with the spin will conduct a comprehensive review of our capital structure to reduce future volatility in our net interest expense.
We're moving with a high sense of urgency to drive these outcomes.
While we faced challenges we remain confident that this is the right path forward to improve the company's performance free cash flow and earnings.
I'd like to thank everyone for their time. This morning. Please note additional guidance assumptions and next steps on the spin in our appendix.
Operator would you please open the line for questions.
Thank you as a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again due to time restraints. We ask that you. Please limit yourself to one question and one follow up question. Please standby, while we compile the Q&A roster.
Today's first question will come from Tien Tsin Huang with Jpmorgan. Your line is open.
Hi, Thanks, so much and is definitely a lot of thought and hard work went into the spin decision. So wanted to ask on that and what change too.
Move away from project to amplify, which I know, we've talked about as well and the promise of.
Cross selling et cetera versus fluctuating here the spin in simplifying and.
And management focus that kind of thing.
Thank you.
So yes, as you might imagine very excited about what we've been able to accomplish in a very short time period.
It really came down to capital allocation and our ability to allocate capital both M&A and organic to what is looking like to be two separate end markets. So the payments market as you know.
It needs a lot more M&A associated with it that the banking and the capital markets piece. So as we came in and we looked at that really need to set those two separately from each other.
And so that was the primary driver I think secondly, and thirdly, obviously operational simplification and management focus is always important as you think about simplifying operating models and breaking things apart I would say finally on the amplified piece, we're actually full speed ahead on that in terms of cross selling across all three of our divisions.
And it will become very important what we will establish commercial partnerships.
Between us both we're all paying us to facilitate that cross sell so we still view that as a big opportunity will just set those up as commercial partnerships with their respective revenue shares to make sure that we don't lose the dis synergy and opportunity there.
Right, Okay, that's perfect so I understand.
The M&A piece, I guess that'll happen post spin.
Between now and the actual spin or are we going to learn a little bit more about the commercial agreement between.
Remainder co Fas and world pay in.
Is there going to be a cross selling component built into that just my final question. Thank you yeah. Yeah. Yeah. So we are working at high speed you can see from my high sense of urgency. So we will be Charles and I will be working out the commercial partnership specifically.
And as soon as we have those worked out we'll get them, we will get them back out to you you can expect us to give an update on the spin every quarter, but you would expect to see those relationships worked out specifically and so that we have incentives on both sides to continue to cross sell each other's products and mitigate the dis synergies.
Thank you one moment for our next question.
Come from the line of Reena Kumar with UBS. Your line is open.
Good morning, Rod Thanks for taking my question.
You mentioned your guidance assumes a recession in the U S and UK Im just curious how your overall growth with lock.
Economic conditions persist as they are today.
So the existing guide does include a recession, there's a couple of underlying drivers to that first as.
As you said, we've got the UK macro the second piece is in the U S. We're seeing a shift from goods to services predominantly in our enterprise sub segments. We are seeing some elongation in the sales cycle that we've spoken about for the last several quarters and our banking business and as we as you saw in.
In the deck, roughly we've incorporated roughly 500 basis points of headwind in our merchant guide associated with macro.
Got it thank you.
Thank you one moment for our next question.
From the line of Lisa Ellis with Moffett Nathanson Your line is open.
Hi, there thanks for taking my question.
A lot of good stuff good detail here guys. Thank you.
I wanted to ask I know, it's early days I know, we'll get more detailed but just.
Any commentary you can give on your expected.
How are you going to handle I guess, the unwinding of the cost synergies that you saw from the <unk> acquisition that merger together like how are you thinking about.
Managing through.
The separation of the re separation of the businesses should we be assuming that a lot of those costs have to come back in or are there ways to mitigate that thank you.
Yes, Thanks, Lisa so.
So Charles I feel very confident given this will be the third time, we will have spun it out sold it and spun it back out. So we are really familiar with the cost structures and the benefits that come with putting in it and taking it out.
I think the way to think about it is we did we did realize a lot of cost synergies, bringing it in I think we know what those are we would enter into as many commercial relationships as we can to not have as many dis synergies. We think that the synergies are fairly manageable. So we think through the combination of commercial partnerships as well as continue.
<unk> to lean in to future forward future forward will continue IR for both <unk> and <unk>. So to the extent that we continue to push that lever forward, we think that as well will offset offset the dis synergies, but look we were not going to scoff at that they are there and we had the benefit of them coming in but we will tightly manage them on both.
Size as we come out.
Got it okay, Okay, and then just.
My follow up.
Can you just elaborate a little bit on the capital allocation point that you made you said that ultimately it really came down to that so what I guess, what have you been unable to do as a combined entity on the capital allocation side that will change.
Being separated.
Yes, great question, Lisa So from an <unk> standpoint, as you know, we're very committed to our investment grade rating.
Which underpins our ability to drive growth, we haven't been able to allocate any capital historically or as we move forward into M&A and.
And Thats really been a big weakness for us in the payments business I think if you look at our peers. They have been doing M&A over the last couple of years. Unfortunately for US we just haven't been able to do that historically.
Allocating towards share repurchase.
Which is fine, but the payments business itself given that it is a scale platform with global distribution in the end market moves so quickly.
We do believe having a different capital allocation for that business will enable M&A that we just cannot give it.
Inside the parent.
Thank you one moment for our next question.
And that will come from the line of Dave Koning with Baird. Your line is open.
Yeah, Hey, guys. Thank you and I guess my first question.
<unk> merchant I think in the first quarter.
Is going to be down slightly but the full year is down a little more could you give a little context at a win when that might bottom and then kind of how do you see the longer term and even <unk> I think it's been pretty stable through the year I think it was expected to grow a lot and just how may be that transpiring as well.
Yes, I might qualitatively take a Dave and if if if.
Eric thinks we need more fine points on the numbers that we have good I think broadly we would say we have seen in the fourth quarter, obviously continue to duration from a recession standpoint in the U K and the U S consistent with what visa Mastercard talked about a shift from goods to services and so we have been.
Kicked in our guide throughout the year that continued shift I think Eric just talked about the overall economic impact on merchant to be about 500 basis points.
On a positive note we are seeing a positive January .
But.
We wouldn't expect to flow that through so so from a broad based recession standpoint, that's how we're thinking about the business.
Think that we just have that continuing throughout 2023, we do think as those recessionary ties reside or come back and with the allocation of more M&A capital.
Our business can really get back to a mid single digit grower.
And be back on a growth trajectory.
Alright, alright, Thank you and then I guess my follow up.
Kind of a long leases question.
The corporate expense of merchant is there any way for us to think about.
What percent of revenue, maybe we have to add like 3% of revenue or something.
When we think of kind of are some of the parts and everything.
Yes, not yet Dave will be back out to you on that I think we have to be thoughtful I am not sure. We can just come right back into what it was before and so we will be back to you on that.
Thank you one moment our next question.
And that will come from the line of Jason Kupferberg with Bank of America. Your line is open.
Good morning, guys I wanted to start on the banking side since that obviously would be the biggest part of the remain co.
<unk> grew 6% organically in 2022, and Youre expecting I guess about 500 bps of deceleration at the midpoint in 2023 can you just.
Past that a bit I mean, just considering you've got 80% recurring revenue there.
Somewhat somewhat surprising thank you.
Yes, Hey, good morning, Thanks for the question so.
So a couple of things.
Good morning.
And walking the 'twenty two to 'twenty three number.
Theres two predominant drivers here one is the lapping of large deals. So we spent some time in the second quarter third quarter calls talking about some.
Some of the very large deals total contract value in excess of $50 million.
Those deals have elongated which is driving roughly half of the step down from 22 to 23 and the second is a reduction in nonrecurring revenues.
Nonrecurring revenues predominantly license fees and termination fees, which over the longer term will drive higher recurring revenue and improve the overall health of the banking segment.
Okay.
For my second question I wanted to go to merchants for a minute.
If we look at the down 2% to 4% for 2023 can you give us a sense of what youre, assuming for enterprise versus E comm versus SMB. Thank you, yes sure.
Sure.
So the enterprise sub segment, which is roughly half the book down mid single digits. This is where the UK sits.
The SMB subsegment down low double digits.
And our E Commerce book continues to perform well up.
Up double digits.
Thank you one moment for our next question.
That will come from the line of Darrin Peller with Wolfe Research. Your line is open.
Thanks, guys.
If I wanted to just if we could just follow up for a minute on the banking segment frankly.
Frankly, the top market segment as well.
And that showed strong growth banking.
Our guidance is as you talk about how some items in it but.
Help us just touch on the balance between your cost saving initiatives and the investments you need in that business to really sustain the growth you'd want it to be medium term I know you have.
Some good assets, whether its modern bank.
Okay. That's Warner digital what are others, but anything you can give us on your conviction level in that business returning to that mid single digit rate of growth, despite where and where the costs are coming out of.
It will not affect the growth profile.
Yeah.
Darren happy to take that a little bit so.
In terms of making sure that we have the right amount of investment associated with that.
The revenue I think.
The business has benefited over the last three to five years from a significant significant amount of capital investment to deliver some of the best in class products you see out there modern banking platform as you mentioned payments one digital one et cetera.
All of that investment has really.
Played out nicely for us in terms of.
Being in market driving real recurring revenue growth as we move forward. So we feel very comfortable around reducing the investments associated with that to what we would consider more normal run rates. So a lot of our reductions in expenses are around capital around one time and then on the operating expense side as you would expect.
<unk> or <unk>.
Definitely protecting the business to ensure that we can deliver on that recurring revenue growth so focused on a more.
Infrastructure costs or costs in the functional side of things, we believe very strongly in the ability for this business to have underlying margin expansion as you know it has high margin of new business coming on.
We believe and are committed to the 3% to 5%. We believe it will reaccelerate in 2024 as Eric said in terms of the two items really impacting it.
So we feel very good about the underlying revenue growth as well as our ability to continue to expand margins and our future forward initiatives as we laid out.
Really arent about kind of cost cutting for cost cutting sake, you can see that we're really focused on faster time to market faster implementations.
Speed agility et cetera, and making the engine go faster versus just a flat out reduction of expenses.
Okay. Thanks, just a quick follow up on the merchant side of the business. When we think about the growth profile you are talking about that getting back to.
I guess, maybe just revisit the strategy on the SMB side for a moment and is that an area that you foresee.
Being able to really show an acceleration or is it just basically E comm still getting what's the strategy of the segment.
Of the overall segment.
Yes.
I mean is it merges thanks, Okay Yep Yep Yep, So I think look.
The strategy is consistent I think the challenge for US is because of our lack of M&A, we haven't really been able to feed it enough product.
As the pandemic created some real structural challenges in some of our key segment. So I would say broadly we're really focused on continuing.
To drive more e-commerce into the segment as you know, we're the largest global acquirer in the World I think we're the largest e-commerce provider as well that's primarily been in the large space.
And.
With the acquisition of Pei risks.
We now have the ability to move down market and.
And bring not only embedded payments, but also be focused on platform. So it's accessing for us.
Not only large ecommerce clients, but also the small.
Yes.
So that continues to be our strategic imperative as you know we have some historical businesses and our SMB space that our ISO primarily card present or the pieces of our ISP book that are.
Our structurally impaired in terms of.
Consolidation in the retail restaurant software.
And so those are pieces of our business that will continue to process for those software providers, but now they've become more like very large enterprises. So I would say strategically the pay.
<unk> strategy going forward continues to be focused on ecommerce and omnichannel capabilities.
Using the global platform and the global distribution capabilities to deliver best in class products I think the challenge for us over the last couple of years is our inability.
To use M&A to make sure that we get the best product, we need to put across the platform.
The end market moves.
Thank you one moment our next question.
Yes.
It will come from the line of John Davis with Raymond James Your line is open.
Hey, good morning, guys.
I just wanted to talk a little bit about the remain co and how we should think about the EPS growth I will go on a go forward basis. So you said three to five top line going to expand 50 basis points. This year is that a good way to think about going forward could you get more margin expansion and then on the capital allocation front I assume.
Actually we get high single digit.
Kind of EPS growth going forward and the Winco any comments there.
Yeah. Thanks, Sean So look we're focused on kind of going back to the FERC the future returning to our roots around becoming a calm pounder.
I think what you should look we look for is really us to focus on double digit TFR.
Through obviously margin expansion, but also the focus on free cash flow and pursuing a balanced portfolio of both dividend share repurchase and then M&A to the extent that makes sense for us going forward.
Okay. Thanks, and then Eric it looks like merchant margins are implied down like another 350 400 basis points. This year, how much of it is from the weaker topline versus kind of investments that youre, making in the merchant business just any color there would be helpful.
Hey, John a couple of things going on in the margin side number one you're right we're down on.
We've got lower high margin revenue. So thank you Kay and crypto I think think Russia, Ukraine to the extent that that annualize.
<unk>.
To your point, we are investing in sales and product and the third thing I'd note is.
We're also seeing some higher residuals and compression in the SMB book.
Thank you one moment our next question.
And that will come from the line of David <unk> with Evercore ISI. Your line is open.
Thank you good morning could you flush out a little bit.
Your commentary.
<unk> remains strong and banking solutions that you continue to see elongation elongated sales cycles. What are your assumptions in other words for closing some of these deals in the pipeline.
<unk> ahead.
Yes, no happy to thanks, David So if you think about where we sit in terms of what financial services we serve.
We serve all sizes, but we're also the premier provider to really large financial institutions.
And so what we saw in 2022 quite frankly was some of the large very large deals that we have historically won if you think about historically T. Rowe of Franklin Templeton are examples.
<unk> driven a point of growth, where we're really one of the only providers that can serve that size of client as economic conditions in 2022, just became more uncertain.
Those financial institutions became more cautious.
Just simply put so those transactions continue to be there. They just continue to push out in the pipeline. So we feel really good about them.
But frankly until those really large financial institutions feel a little bit better about where the economy is going to go there.
We're going to continue to be cautious in terms of wanting to sign on the dotted line. There we have high visibility they still hanging out there, but that's also why we don't have those significantly closing in 2023.
We have them in the pipeline and we continue to work them.
But given that kind of normal conditions and our prudent.
<unk>, we really don't want to have a big number and have happened to us in 2020 to happen to us again in 2023.
Understood and then as a follow up.
What are your plans to rollout additional modules in modern banking platform. This year and whats incorporated in your guide from that.
Yeah. So modern banking platform continues to be a really strong product demand for us I mean, you saw us over the last couple of years sign up a significant amount of clients. We are in full swing implementation mode. Each one of them in a different.
Space and those all continue to go well I think for us.
<unk>.
Our focus is more around making sure that we can implement those clients and continuing to sell the existing assets and deployment versus significant incremental new modules.
But I do know that our deposit taking module is good and we continue to work on our lending modules, but I would expect that the current demand and the current products that they will meet each other.
Thank you one moment for our next question.
And that will come from the line of Ashwin <unk> with Citi. Your line is open.
Thank you.
Thanks, Stephanie.
Good morning, I guess.
Thanks.
Meaningful set of investors that believe maybe.
Different course of action might have been.
Spinning or semi cap markets your best performing business currently.
Should we assume.
The strategic review is.
Diluted and this is the structure.
Or is it still ongoing.
And then.
One question because you didn't mentioned multiple times the M&A needed.
Sure.
For the merchant business.
Could you talk about the.
So the view on things, such as allowing us to better leverage that youre, putting on the two pieces.
Can you were doing.
M&A like <unk> and the current structure. So I just wanted to get more clarity on as well.
On what.
What else is needed here.
Yes happy to so I think first of all we announced our strategic review 60 days ago, I'm really pleased with how with the sense of urgency to what we've been able to decide thus far.
I think with respect to what we have cooking for the next couple of quarters, we're really focused ashwin on making sure we execute on this merchant spend as quickly as possible.
Given the need to get those guys out and refocus on M&A. We're also really focused obviously on delivering future forward all that being said no. We will not conclude a strategic review after 60 days. So we'll continue to evaluate opportunities.
The thing that really pressed forward in terms of the merchant separation, though was our inability to allocate capital and for it to grow properly on the capital market side. We don't have that same issue with respect to it continuing to grow well in the capital allocations in the merchant business. It became a much bigger burning platform for us.
We'll always continue to evaluate them in terms of the second piece on the newco.
I'm going to speak in broad terms I think the way we would think about it and again this is going to go to Charles and his team as he takes over but clearly.
Given the amount of M&A that they probably will want to do in <unk> historically did.
I don't think they would go after an investment grade credit rating it would probably impede them in terms of delivering the value that they want.
I suspect they'll look at something.
Slightly below that historically as you know we were high yield and it worked out worked out quite well for us but.
Given all of that the capital markets are in a bit of a different position.
I don't think there'll be investment grade, but I also don't want to speak for them I think in terms of M&A.
We have some strategic partners that were coupled up with today I think there is.
And given the market and where things sit in terms of valuations coming down I think the timing of the spin and their ability to get market will be quite fortuitous and that was ultimately why I moved with such a high sense of urgency.
As you can see from the results of this segment.
There is a different capital allocation structure that it certainly needs.
Wally.
I guess the other question is for the normalized growth rates would you assume for each segment.
What is the.
Normalized margin structure that one should think about.
Yes.
I think from a banking and capital markets standpoint, we would expect to continue to see margin expansion I think once the world PE returns to growth you would expect to see margin expansion there.
As you know these these businesses are highly margin accretive on the right growth trajectory highly recurring revenue generative.
I can't speak to exactly how much you can see from future forward in terms of how much cost we are driving into the business.
And in the banking capital market segment, Unlike merchant Theres really nothing structurally wrong, there and so we should continue to be able to expand those segment margins like we have historically.
Thank you one moment for our next question.
And that will come from the line of Ramsey El <unk> with Barclays. Your line is open.
Hi, Thank you for taking my question.
I wanted to follow up on Ashland's question. His first question and just inquire as to whether you would be open to entertaining possible bids on parts of the merchant business.
Would it be conceivable between now and the spin to potentially.
So some of the higher growth more attractive parts of that business or whether we should think about that part of the strategic review and keeping that business intact over the long run as sort of the final the final step.
Yes, I think we're focused on the spin of the whole business I think the fundamental the fundamentals of our merchant business are that they are scaled platform with global distribution.
We certainly looked at pieces and parts, but I think I think the best path for this particular business is to spend the whole thing.
Let the management team on the other side then determined structurally what they wanted to do from there.
For us again.
The catalyst here is really the need for a different capital allocation structure, so pieces and parts doesn't really help that.
Because I, it's Fas parent can't I can't feed at the M&A it needs.
Okay truth.
Thank you and one follow up for me more generally Stephanie can you talk about your thoughts on your confidence levels around balancing the sort of cost and particularly opex reduction while also investing for growth and potentially accelerating growth as we move forward. How do you gain confidence that you can kind of threat that.
Needle.
By not.
Where can you find those sort of excess cost to take out that doesn't impact your ability to kind of grow on a go forward basis.
Yeah Ramsey, it's a great question and it's one that I think about everyday all day, so I think Ah.
Couple of things look we are focused in 2023 and.
Returning the banking capital markets business to 3% to 5% revenue growth going forward.
The investments that we've made in product.
Have been very significant and we will continue to develop those albeit at lower capital expenditure levels.
We do have a great set of modernized.
Products.
And I think with the new Chief revenue officer, and focus around product and profitability and mix.
That that revenue growth will will be will be very attainable as we move into 2024.
On the cost side.
You saw a lot of margin contraction.
And the banking business over the last couple of quarters I am happy to report that we will deliver expanding margins in both banking and capital markets.
That's through the benefit of our future forward program and like I said that program, which is really being led by my President's and Kelly <unk>, our corporate performance officer.
Is really focused on not just being a cost cutting program, but being a.
Speed to market delivering results faster lots.
Lots of things like that versus just being a cost program and I did that purposely because I wanted to make sure that we could balance appropriately revenue growth and margin expansion.
Thank you and we do have time for one final question that will come from the line of.
Dan the loss with Mizuho Your line is open.
Hey, Thanks for squeezing me in guys Stephanie I appreciate it.
And congrats on the decision I was just wanted to know maybe just a housekeeping thing maybe I missed it but the banking and capital market guidance for 'twenty. Three also assume a recession than either very short follow up.
Hey, good morning, Dan Thats right.
Sure.
I would say broadly speaking as Stephane you talked about a couple of minutes ago. The elongation of sales cycles is the predominant element that we've included in our guide for banking and capital markets.
Got it so I guess it does and then just a quick follow up just maybe I missed it on slide 20.
Can you maybe just.
Maybe unpack the margin guidance by segment and again apologies if I missed it. Thank you.
Sure sure so the banking business, we have margins expanding.
Fully 50 basis points, we have got capital markets, expanding 50 to 100 basis points.
And we've got margin headwinds in both corporate merchant and corporate segment associated with the revenue declines that were experiencing in those segments.
Thank you. Thank you all for participating in today's question and answer session I would now like to turn the call back over to MS. Stephanie Ferris for any closing remarks.
Thank you for joining everyone on such short notice I very much appreciate it as I noted earlier 2023 will be a year of Recommitment profile.
And with that in mind, we are making great strides and taking bold actions to move the company forward with a focus on creating incremental value for shareholders and clients alike I'm.
I am proud of our colleagues across the globe and the great progress, we're making in just a few short months toward delivering on our commitments to our stakeholders.
Look forward to keeping you updated on our journey moving us into the future. Thank you.
Thank you all for participating. This concludes today's program you may now disconnect.
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