Q1 2023 FIS Earnings Call
Speaker 1: Good day and welcome to the SIS first quarter 2023 earnings call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised.
Speaker 1: To withdraw your question, press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Mr. George Mihalas, head of investor relations. Please go ahead. Good morning, everyone, and thank you for joining us today for the FIS first quarter
Speaker 2: and our CFO , Eric Hoke.
Speaker 2: Stephanie will lead the call with a strategic and operational update, followed by Eric reviewing our financial results and providing forward guidance.
Speaker 2: Turning to slide 3, today's remarks will contain forward-looking statements.
Speaker 2: These statements are subject to risks and uncertainties as described in the press release and other filings with the FCC.
Speaker 2: 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.
Speaker 2: Please refer to the Safe Harbor language.
Speaker 2: Also, throughout this conference call, we will be presenting non-GAAP information, including adjusted EBITDA, adjusted net earnings, adjusted net earnings per share, and adjusted free cash flow.
Speaker 2: These are important financial performance measures for the company, but are not financial measures as defined by GAAP.
Speaker 2: Reconciliation of our non-GAAP information to the GAAP financial information is presented in our earnings release.
Speaker 2: With that, I'll turn the call over to Stephanie. Thank you, George, and thanks to everyone for joining us this morning.
Speaker 3: Our financial results exceeded our expectations on all key metrics – revenue, adjusted EBITDA, and adjusted EPS.
Speaker 3: Organic revenue growth outperformed across all three of our operating segments.
Speaker 3: This outperformance was driven by a combination of both stronger execution, as well as better than anticipated macroeconomic impacts including consumer spending and higher levels of deposit account and transaction growth across the financial services sector.
Speaker 3: Here to Jeff I.S., which includes our banking and capital markets businesses, posted strong recurring revenue growth of 6%.
Speaker 3: business well ahead of the broader market.
Speaker 3: We remain focused on improving cash flow and efficiency across the company and are on track to delivering on our greater than 80% free cash flow conversion target for the year.
Speaker 3: These are very strong results against our expectations and can be attributed to our leadership team and our colleagues across the globe, all pulling together to build our future forward.
Speaker 3: I am extremely proud of the team and am very excited about and confident in the future of FIF.
Speaker 3: As a result of our strong performance, I am pleased to announce we are raising our full-year outlook. First quarter results meaningfully exceeded our expectations, reflecting stronger revenue growth of 3% across the enterprise.
Speaker 3: Solid execution in a more favorable macro environment fueled this out performance.
Speaker 3: Banking and capital markets recurring revenue growth of 6% exceeded our expectations.
Speaker 3: benefiting from elevated financial services activity, including higher levels of deposit account and transaction growth.
Speaker 3: Within the merchant segment, improved execution and stronger consumer spend of most of the revenue outside.
Speaker 3: E-commerce had another very strong quarter, with 18% organic growth, excluding the Russia-Ukraine impact in the quarter.
Speaker 3: contributing an additional point of merchant revenue growth relative to our internal expectations.
Speaker 3: We are updating our second quarter and boi your guidance to reflect consistent trends from the first quarter of the second quarter with a very slight moderation in the high levels of trading volume experience than you want.
Speaker 3: Our outlook for the full year has strengthened relative to the outlook we provided in February across all of our operating segments.
Speaker 3: Given our overall strong results in improving operating performance.
Speaker 3: We are increasing our full year 2023 outlook while continuing to account for risk associated with macroeconomic impacts to our emergency segment in the back half of the year.
Speaker 3: We understand the importance of delivering on our commitments and our confident and our recently raised outlook.
Speaker 3: We continue moving forward with a high sense of urgency and are making progress across our range of initiatives.
Speaker 3: The spinoff of WorldPay is on track. We are making meaningful progress both internally with the formation of our Separation Management Office and externally with our regulators. Our Future Forward initiative, designed to drive greater efficiency, effectiveness, and growth is off to an exceptional start.
Speaker 3: I'm confident we will not only deliver on our 2023 cash savings target of 500 million, but achieve at least our $1.25 billion of cash savings target by year-end 2024.
Speaker 3: On the governance front, we've taken broad steps forward to line all management compensation with operating share price performance. These changes were made in order to further align our executive compensation programs with long-term shareholder interest.
Speaker 4: videos.
Speaker 3: We are driving a performance-based culture both top-down and bottoms up across the globe. We are making good progress preparing for the plan to spin off of the World Pay Business. This is a testament to the hard work, focus and dedication of our FIS colleagues and business partners tasked with marshalling forward the separation quickly.
Speaker 3: We are making meaningful progress having created a separation management office to work with both Charles Drucker and me. In addition to working towards securing required regulatory approvals, we are urgently negotiating commercial revenue and separation agreements across the two companies with an eye towards minimizing business disruption and dis-energies.
Speaker 3: While we are not yet ready to provide formal this energy estimates on this call, we are actively working to minimize the impact of any disenergies. I'd like to offer framework for thinking through the potential impact, which we believe will be very manageable. Previously, the company disclosed that it achieved a total of $750 million in revenue synergies.
Speaker 3: and 500 million of operating expense entities post the WhirlPay acquisition. We expect to maintain the majority of the 750 million revenue synergy achievement with WhirlPay continuing to act as an important distribution partner for FIS, post-spin.
Speaker 3: We also expect to maintain a meaningful portion of FIS WorldPay operating expense integration savings. Additionally, my partnership with Charles Drucker is already bringing focus to the business and is driving meaningful results in key areas such as sales execution and maximizing pricing opportunities across all of FIS. As I mentioned earlier, our Enterprise Transformation...
Speaker 5: for our clients.
Speaker 3: As of first quarter of 2023, we've achieved a total cash savings on an annual run rate basis in excess of $210 million. We expect operating expense savings to accelerate over the course of the year.
Speaker 3: While we are reiterating our future forward cash savings target of at least $1.25 billion by year-end 2024, the team is continuing to identify additional opportunities across the enterprise to unlock growth, efficiency, and effectiveness for FIS and our clients.
Speaker 3: While we are confident the program will deliver meaningful cash saving for FIS, this will not come at the expense of clients who remain at the center of our decision making.
Speaker 3: We believe our solid first quarter, recurring revenue growth, underscores the importance of our customers place, our customers place on our offerings and services in our commitment to their own future. Given recent events across the global banking sector, we want to provide you with an update regarding trends across our banking segment.
Speaker 3: While recent developments have driven volatility in markets and across the banking sector, we do not expect this activity to impact us significantly in the near term, and believe FIS is well positioned to be a beneficiary of the recent disruption in the long term.
Speaker 3: Our confidence is underpin both by current factors we are presently seeing in our business and historical precedent.
Speaker 3: which points to resilient bank IT spend following periods of financial giraffe.
Speaker 3: A recent study by Kirinos, a leading provider of data, technology, and insights to financial institutions, noted, recent events should have limited impact on near-term revenue for core processors, as the current situation is impacting deposit balances, not accounts.
Speaker 3: Additionally, technology processing spend across the banking industry has also historically been resilient during prior challenging cycles of uncertainty.
Speaker 3: In line with CuraNOS's perspective, since the onset of the SVB fallout in early March, we have seen elevated increases in our accounts on file serviced across our core platforms.
Speaker 3: Inline with Kirinos' perspective since the onset of the SVV fallout in early March, we have seen elevated increases in our account on file serviced across our core platforms, which is the primary driver of our banking revenue.
Speaker 3: The resilience and accounts on files not surprising to us. It aligned with what the banking industry experienced during prior challenging periods as the Curinus study noted, and supports our confidence and our outlook for the banking segment.
As depositors disperse funds across multiple bank accounts, ultimately driving more account growth, FIS is well positioned to benefit as a leading provider of core banking technology, particularly to large financial institutions, which is the primary base of our FI business.
Additionally, to the extent the recent turbulence results in increased regulation,
FIS is well positioned to benefit across both the banking and capital market segments.
FIS boasts a highly diversified customer base with no one client accounting for more than 1% of company revenue.
Given our skew towards somewhat larger banks, consolidation across the FI space should benefit us as we would expect these larger banks, many of which are FIS customers.
to be the buyers of distrust financial institution.
And this is exactly what we've seen play out thus far with respect to recently sold the the Rhodes Financial banks.
Additionally, 60% of our revenue growth is predominantly tied to accounts and 40% transaction.
Since the SBB announcement, we've seen a modest acceleration and a count on transaction volumes remain steady.
Given these dynamics, we do not anticipate a significant impact to our business associated with the recent events.
Before turning it over to Eric, I'd like to close with a quick refresh of the new agenda we introduced just a few short months ago in the significant progress we were making executing against those goals.
As you can see, we are moving urgently to put FIS on a path for sustained value creation for all stakeholders.
The macroeconomic conditions, whether consumer or financial services related, have positively impacted our results in the first quarter, and regardless of whether they remain or decline from this point forward, we are confident enough to raise our outlook for the year.
The plan spin-off of WorldPays on track, creating two world class companies with a sharpened focus on their respective client bases.
Our future forwarded initiative is progressing ahead of schedule, accelerating the transformation of FIAS into a more agile and efficient company better position to drive innovation.
And lastly, we're focused on returning Heritage FIS back to the compounder model of the past.
With the focus on steady revenue growth, margin expansion, improved free cash flow generation in a sustainable double-digit total shareholder return.
With that, let me turn it over to Eric who will take you through the financials. Eric?
Thanks, Stephanie, and thank you all for joining us this morning.
I'll begin on slide 14 with some additional detail on our financial results before moving into our increased guidance.
future forward achievement and capital allocation priorities for Heritage FIS.
Our first quarter results exceeded our expectations across all financial metrics.
Revenue increased 3 percent organically to $3.5 billion, with an adjusted EBITDA margin of 38.7 percent, and an adjusted EPS of $1.29.
Revenue growth came in two points above the high end of our outlook.
As Stephanie mentioned, this outperformance was driven by a combination of both stronger operating performance as well as better than anticipated macroeconomic impacts, including consumer spending and higher levels of deposit account and transaction growth across the financial services sector. Adjusted EBITDA and adjusted EPS succeeded expectations.
through both operational strength and a benefit net interest expense.
Moving to cash flow on our balance sheet.
Capital expenditures decreased 32% year-over-year to 279 million or 8% of revenue, reflecting the benefits of our future forward initiatives. We generated free cash flow of $641 million or 84% conversion and returned over $300 million to our shareholders through dividends.
Lastly, we exited the quarter with $20 billion in total debt, yielding a leverage ratio of 3.2 times at a weighted average interest rate of 3%.
Turning to our Heritage FIS results on slide 15, we're pleased to report organic revenue growth of 4% driven by 6% recurring revenue growth.
Our backlog continues to be strong and durable, exiting the quarter at $22.5 billion.
As previously mentioned, our sales teams are transitioning to target higher quality, more profitable new sales which will drive sustainable high margin growth.
Because of this, we would anticipate some softness and backlog over the short term as the team aligns to these initiatives.
This change in sales initiatives is fully incorporated into the increased outlook for the year. Ultimately, the result of this will be higher quality new sales, laying the foundation for sustainable growth in revenue, EBITDA, and cash flow, while providing best-in-class capabilities for our clients as well as emphasizing our high margin,
sticky recurring revenue offerings.
Overall, this is a very strong start to the year for Heritage FIF segments, as we saw stronger than anticipated operating performance.
Overall, this is a very strong start to the year for Heritage FIF segments, as we saw previous and
At the segment level, banking increased 2 percent organically in the quarter, which was two points above the high end of our outlook.
This outlook was underpinned by recurring revenue growth of 4%, which exceeded our expectations.
Strength in recurring revenue was driven by strong execution from our business in conjunction with elevated account and transaction growth during the quarter. As expected, adjusted EBITDA margins contracted 250 basis points to 40.1%, primarily driven by a 23% reduction in termination fees and one-time license revenue.
We are anticipating banking organic revenue growth of 0 to 2 percent, which incorporates a continued reduction in non-recurring revenue, and confident in meeting or exceeding our organic growth outlook for the year.
Turning to our capital markets results and outlook on slide 17. Capital markets increased 7% organically in the quarter, exceeding the high end of our outlook by two points.
The overperformance in the quarter was underpinned by 11 percent recurring revenue growth, with a four-point tailwind associated with elevated activity in the financial services industry.
Adjusted EBITDA margin expanded 30 basis points to 48.2%. Margin expansion in the quarter was driven by high contribution margins on our revenue growth as well as the underlying strength of the one-to-many operating model.
We continue to see resilient strength in the operating performance of capital markets.
and believe our multi-year transition to SAS-based engagements has laid the foundation for resilient growth.
For the second quarter, we anticipate organic revenue growth of 4 to 6 percent, primarily associated with an assumption of recurring revenue normalizing off the elevated growth seen in the first quarter.
For the year, we're reiterating our outlook of 4-6%, inclusive of a tough license compare in the fourth quarter.
Turning to slide 18, our merchant segment increased 2% organically, exceeding the high end of our outlook by two points, as we saw better than expected consumer spending and accelerated growth in e-commerce.
Broadly speaking, we're seeing continued strength in our e-commerce subsegment.
Accelerating to 15% in the quarter with strong sales and exceptional growth in our world pay for platforms offering.
World Paper Platforms continues to benefit from our ongoing investments and renewed leadership structure, and we continue to see a significant opportunity in this attractive vertical. Our SMB and Enterprise subsegments saw trends similar to our fourth quarter 2022 results.
Consistent with our guide, margins contracted 350 basis points to 43.5%, primarily due to unfavorable revenue mix.
Global volume increased 9% on a constant currency basis to $551 billion. This acceleration was a result of stronger consumer spend across our enterprise and e-commerce subsegments. In the quarter, volume growth outpaced revenue growth as a result of higher spend in non-discretionary verticals.
For example, grocery and drugstore market share gains within the payback vertical.
Turning to slide 19 for a further review of Heritage World Pay's outlook for the year. As we entered the year, we had anticipated organic revenue decline of 2-4%.
The guide reflected a 300 basis point headwind associated with attrition in the SMB subsegment and further macro deterioration impacting growth by an additional 500 basis points. Our first quarter results outperformed our expectations by two points compared to the high end of our outlook.
While the business continues to be impacted by the headwinds in the SMB subsegment, consumer spending performed better than expected in the US and the UK.
As a result, we're updating our second quarter and full year guidance to reflect relatively consistent trends from the first quarter to the second quarter.
As a result, we're updating our second quarter and full year guidance to reflect relatively consistent trends from the first quarter to the second quarter and improved consumer spend in the back half of the year.
Because of this, we now anticipate second quarter organic revenue growth of negative 1 to plus 1 percent, and full year organic revenue growth of down 2 to 1 percent, a material improvement compared to initial expectations.
This outlook for the second quarter assumes relatively similar trends across our subsegments compared to the first quarter.
On the margin front, we will continue to see improvements through the year, consistent with normal seasonality, and further aided by our future forward initiatives.
Turning to slide 20 for a review of our increased 2023 guidance.
Given our strong start to the year, we're confidently increasing our full year 2023 outlook to incorporate the overperformance seen in the first quarter.
Specifically, we're increasing our revenue and EBITDA ranges by $85 million and $35 million respectively.
accounting for a $0.06 increase in our adjusted earnings per share outlook for the year.
This increase is aligned directly to our first quarter results compared to the high end of our prior guide. Our increased outlook over the remainder of the year has strengthened relative the outlook we provided in February , based on the current trends in our businesses. With that in mind for the year, we now anticipate consolidated organic revenue growth in the next quarter.
conservative in our forward projections as we continue to build credibility and deliver on our commitments.
This increased outlook continues to account for risk associated with macroeconomic impact in our merchant segment.
and we would anticipate further upside if macro trends remain stable.
As previously mentioned, we continue to anticipate margin improvement over the course of 2023.
as we ramp the benefits associated with future forward, and we're reiterating our outlook for free cash flow conversion of over 80%.
Lastly, we provided additional assumptions on our poorer guidance in the appendix as well as a revised 2022 organic base to account for some small shifts in our operating segment roll-ups.
Turning to slide 21 for a financial update on Future Forward. We remain committed to right-sizing our expense base while ensuring minimal impact to our clients or colleagues. Aligned to this commitment, Future Forward centers around investing in sales and support, automating and improving processes, and improving the ways we work.
As Stephanie mentioned, we're reiterating our targets for operational expense savings of $300 million exiting 2023 and $600 million exiting 2024.
We had a strong start to the year with annual run rate savings of over $100 million exiting the quarter, with an in-quarter benefit of over $15 million.
We continue to target a $200 million reduction in capital expenditures during 2023, with an incremental $100 million reduction in 2024.
In the quarter, we achieved annualized CAPEX savings of over $110 million.
as we execute it rapidly on the future forward initiative. We're extremely pleased with our early progress and will continue to provide quarterly updates on achievement throughout the program.
I'll conclude with a recap of our capital allocation priorities for Heritage FIS on slide 22. Following the successful execution of the spin, Heritage FIS will remain focused on reducing debt, increasing our dividend, and utilizing excess capital for share repurchase or tuck in M&A.
First, we continue to target a long-term leverage ratio of approximately 2.8 times. To achieve this, we would anticipate reducing total debt while also benefiting from adjusted EBITDA growth over a multi-year period. Next, we remain committed to a 35% dividend payout ratio for heredage FIS. Following these two pillars. This area will continue to share with us that the broadbody and ø will continue to share with us that the broadbody and ø
we will utilize excess cash or debt capacity for share repurchase or optionality around tuck-in M&A opportunities.
Our default use of excess capital will prioritize share repurchase at current valuations.
while we assess M&A opportunities and their risk adjusted returns. This capital allocation strategy is conservative in nature while providing a robust value proposition for long-term shareholder value over a multi-year period.
I'd like to thank everyone for their time this morning. Operator, would you please open the line for questions?
Thank you. As a reminder, to ask a question, please press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. Due to time restraints, we ask that you please limit yourself to one question and one follow-up question.
Please stand by while we compile the Q&A roster.
And today's first question will come from the line of Tingen's Wang with JP Morgan. Your line is open. Great. Thank you so much and I appreciate all the discos you're hearing. The results. I wanted to dive in on the banking side, which is really good to see. And just.
Is the formula different now than maybe what we saw with the banking turmoil and SPB, etc.? Any thoughts there?
Yeah, thanks, Tingin. Yeah, so happy with the output for first quarter, very confident in our guide for banking. I think what you've seen is, as we came into this year, we had expected backlog growth to mute. That was in our guide.
and we're not seeing any incremental impact from anything going on in the banking business. What we're seeing is organic growth, and you saw it come through in the first quarter, as we benefit from accounts across the financial services landscape increasing broadly across our portfolio. So we're seeing net new deposit accounts, and broadly net new financial services accounts across.
across our entire portfolio. So we feel really good about the organic growth. You can see it there in our first quarter and we feel really good about the guide. Great. I appreciate all that. Site 11 is really useful. Just on the on the merchants front with Eric, I think you talked about the spread there. Can you just maybe give a little bit more on what's driving that mix versus...
pricing. I know you mentioned the payback piece but a little bit more will be great. Thank you. Yeah, I'll take that and Eric can add on if you like too. So look we were really pleased with the volume growth. They're just kind of starting at the top. You saw really strong volume growth. That was driven by both our enterprise.
discretionary. So think in our enterprise book, think like Croger and drugs or grocery and drug. Those became a higher mix and as you know those are priced on transactions, not on volume. And so those drove a little bit of a lower yield off the higher volume. And then the second thing is we continue to take pretty significant market share gains in our pay-fac business.
which is very strategic for us, which as you know, it is a lower yielding higher volume piece of our business. So those two really drove the yield impact in the fourth quarter. We do expect to see sequential yield improvement each quarter throughout the rest of the year as we continue to perform positively in the mixed recess itself.
Those are the two big reasons. Thank you. One moment for our next question.
big reasons. Thank you. One moment for our next question. That will come from the line.
of James Fawcett with Morgan Stanley . Your line is open. Thank you very much. I wanted to talk a little bit just about your expectations for the macro environment. Generally, obviously the first quarter came in a little bit stronger with better economic resilience than need.
anticipated in your original outlook. If we look at the magnitude of BEAT versus the guidance raised, it seems like that we're not increasing the guidance quite as much as the BEAT this quarter. Have you just anticipated that some of that weakness that you originally built in kind of pushed out, or can you just talk through the assumptions that lead you to that kind of...
current guidance outlook. Sure.
Maybe I'll start with, so when we provided guidance a quarter ago, we provided 500 basis points of presumed headwind in.
the guide associated with merchant macro. The full year guide at the time was minus two to minus four. We've increased the merchant guide to minus one, minus two. The midpoint of the guide has improved by 150 basis points. I would think about the remaining residual merchant macro headwind at roughly 350 basis points.
Got it, got it. Thanks for that. And then as far as onto the
I know you are working through that. What is your sense in terms of if there are any incremental changes that may be needed in interest expense and how should we think about the timing of when we will be able to start to look at what capital structure.
I think it has been very clear what particularly you want the Heritage FIS overall.
view to be but just wondering how we should think about the timing and other factors that need to be taken into account besides just disenergies.
Yeah, so James, we are diligently working. Hopefully everyone can see we're working at pace to try and get all of that nailed down. Don't have a good update for you right now as you might expect as we work through it. And Charles is in here working with us very tightly in terms of thinking through all those pieces. I think as we get closer to the spin, we'll have a view of that.
I can't really make a commitment in terms of next quarter, but you should know that we're working really tightly towards it. But until we have a really much stronger view, can't really give you much of a guide there yet. Thank you. One moment for our next question. Okay seniors.
And that will come from the line of Dave Koning with Baird. Your line is open. Yeah, hey guys and great job.
Yeah, I guess my first question, capital markets, you mentioned something about some elevated activity creating kind of a 4% tailwind in the quarter. What was that? Is that somewhat of a less recurring part that falls off a little in Q2?
Yeah, thanks for asking that question. So lots of trading volume across all of our banking cores as well as across our capital markets business. We saw trading volume at a peak that we haven't seen since COVID. So that business and the leader of that business did a fantastic job.
supporting all that volume growth. And that's what drove a couple percentage points of the beat in recurring revenue that we had posted. So as we come into the second quarter, we're slightly moderating that growth back down as we're starting to see people moderate in terms of transaction volume across those portfolios, but it's still pretty elevated.