Q3 2023 FIS Earnings Call
Yeah.
Good day and welcome to the F. I S third quarter 2023 earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one one on your telephone.
You will then hear an automated message advising your hand is raised.
What's your all your question. Please press Star one again, please be advised today's conference is being recorded.
I'd now like to hand, the conference over to your Speaker today, George Melas head of Investor Relations. Please go ahead.
Thank you Abigail.
Good morning, everyone and thank you for joining us today for the FY <unk> third quarter 2023 earnings conference call.
This call is being webcast at today's news release corresponding presentation.
And webcast are available on our website as global Dot com.
With me on the call. This morning are Stephanie Ferris, our CEO and President and James <unk> Our CFO.
Stephanie will lead the call with a strategic and operational update followed by James reviewing our financial results and providing forward guidance.
Today's remarks will contain forward looking statements. These statements are subject to risks and uncertainties as described in the press release and other filings with the SEC.
The company undertakes no obligation to update any forward looking statements, whether as a result of new information future events or otherwise except as required by law.
Please refer to the Safe Harbor language.
Throughout this conference call, we will be presenting non-GAAP information, including adjusted EBITDA adjusted net earnings.
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 everyone for joining us this morning.
Let me start by saying, it's an honor and a privilege to lead this very talented team who are collectively building the future of Empire.
I am pleased to report that we had another strong quarter executing on both our financial and operational commitments.
This is our third straight quarter of solid financial results once again meeting or exceeding the high end of our revenue and adjusted EBITDA outlook and delivering strong free cash flow conversion.
We've taken decisive action to transform FIA us over the past year with growing predictability of meeting or exceeding our targets and expanding margins with measurable impact from our future forward program.
The world pay separation and our future for execution repositioned into.
Into a company with a strong balance sheet, which enables us to both invest in growth and increased capital return to shareholders. While at the same time reduces exposure to macro consumer trends.
Post the world pay transaction by Us will be a global enterprise software leader position for a resilient recurring revenue growth aided by beneficial secular trends a marquee set of global clients and best in class products and solutions.
Which will all accelerate profitable revenue growth.
The <unk> of the future builds on our strong foundation repositioning the company as a cloud based enterprise software as a service provider servicing the world's most complex financial institutions and capital markets participants.
This enables us to expand into new client segments, as well as into new faster growing verticals.
All of this leads to confidence in our current year outlook, our future prospects and our plan to drive long term shareholder value.
Our confidence is further reinforced by positive momentum we are seeing across a number of key leading indicators.
First we continued to deliver steady recurring revenue growth, which extends our visibility and serves as a foundation for sustainable revenue growth.
Our sales pipeline is robust and new customer engagement is strong.
We are seeing an increase in sales force productivity.
An increasing pipeline of high margin opportunities and a strong transition from onetime to recurring revenue as we take advantage of both market demand as well as secular trends.
Finally, the traction that we're getting by bringing many of our clients live on our new platforms like modern banking platform digital one and risk management solutions is driving positive future momentum.
Given our confidence in the business and the attractive valuation of our stock we are resuming share repurchases in the fourth quarter.
Increasing our total share repurchase goal to at least $3 5 billion.
By year end 2024.
Let's turn now to a discussion of our quarterly results.
Moving to slide six.
We delivered another strong quarter of financial results with broad based outperformance relative to our prior outlook.
The outperformance was driven by strong organic revenue growth of 4% led by 7% recurring revenue growth in the combined banking and capital market segments.
And from profitability improvements driven by our future carbon program.
We continue to generate strong free cash flow and are on track to exceed our 2023 free cash flow conversion target of greater than 80% for the year.
Year to date free cash flow conversion is a very strong 94%.
This is well ahead of our full year target is efficiency efforts related to future forward continue to cascade through the business.
Our teams are continuing to move with quality speed and high sense of urgency accelerating our path forward.
Turning to slide seven.
We are making significant strides in transforming our bias our royal pay separation remains on track to close in the first quarter of 2024 since.
Since our last earnings call <unk> achieved several important milestones necessary to advance the separation.
We are very pleased with the success of the recent $8 7 billion dollar world pay debt raise the.
The strong demand evidenced by the upsizing of the debt offering at favorable rates secures the committed financing required to close the deal.
Looking ahead, we are working towards securing the necessary regulatory approvals to close the transaction and finalizing terms around commercial agreement.
Moving to future forward, we are on track to deliver on all of our commitments, including $1 billion in that total savings across the enterprise by year end 2024.
The program is sharpening our focus on innovating and delivering best in class solutions and products to markets faster.
People buying our go to market approach and improving client experiences.
This in turn is driving improved new sales momentum.
Turning to slide eight.
<unk> is uniquely positioned as a leading software solutions provider to the most demanding and complex financial institutions globally.
And while recognized as the provider of choice for large and regional banks. Our next generation offerings are increasingly resonating with a broader base of clients, who have increased financial services needs.
This includes leading multinational corporates insurance companies, leading global Fintech and neo banks.
We have developed a full suite of cloud based component types enterprise solutions delivered via a SaaS offering.
Over this past year, we focus significant efforts on bringing these solutions to market across our core digital and issuing platforms.
As a result, our next generation core banking solution modern banking platform is now live with a number of tier one financial institutions and Fintech.
This includes a new digital savings platform for BMO in the U S.
A digital interest bearing deposit account product for Paypal and a deposit account for SMB SMB <unk> group member manufacturer banks, New digital banking Division genius Bank.
Looking ahead to 2024, we expect three more tier one banks to go live with MVP offerings as part of a broader multi year core modernization effort.
We are equally excited about the prospects for our digital one in payment one solutions, bringing enhanced front end digital experiences and complex issuer processing capabilities to the most demanding financial institution.
Our overall vision for our enterprise core platforms to leverage the full value of our open architecture and robust Apis going forward, eliminating math conversion complexity.
This creates an open environment that speeds the Fas product in development flywheel to bring new capabilities to our clients with increased flexibility.
In capital markets, we are seeing strong tailwind across the business a function of both increased wallet share and faster growth in non traditional verticals.
As the leading global provider of Treasury and risk solutions capital market is benefiting from several secular trends.
These include increased regulatory mandates.
Climate and environmental risk demands in verticals, such as insurance and asset management and.
And growth in lending from non bank providers.
Turning to slide nine.
I am very encouraged by our sales momentum during the third quarter and I'm pleased to announce several marquee wins across our banking and capital markets segments B.
With the enterprise core platforms <unk> was selected by Provident Bank to drive the bank's core modernization going forward.
In digital we had several wins in the quarter, including including origin Bank selecting our digital one suite over the offerings of notable disruptor.
We also had a particularly strong quarter in payments and network as money movement remains front and center for our banks fin techs and corporates.
Sales of the NYCE network accelerated in the third quarter with notable signings of several leading retailers restaurants and fintech.
And lastly, while still early days, we are encouraged by the interest we are seeing related to the rollout of fed now where we currently have over 109 90 clients in our pipeline up from 116 clients just last quarter.
Moving to capital markets.
During the quarter, we had a number of impressive wins, including newer expanded engagements with some of the largest financial services providers in the world.
We recently signed a long term extension for our industry, leading derivatives clearing solution with a top five U S financial institutions.
We also signed our largest contract ever for our private equity fund accounting software to a leading global Investor Services company.
Demand for risk tools was strong across all geographies and verticals, our Fas enterprise risk suite continues to gain traction with global investment banks and broker dealers, especially in the growing insurance vertical with new sales to several leading U S and international clients.
Overall, we are encouraged by the level and quality of engagement, we're seeing across the enterprise.
Moving to slide 10 during the third quarter, our differentiated solutions received a number of prominent industry accolades.
First leading research and advisory firm <unk> recognized three of Fas core offerings with awards in advanced technology customer base and breadth of functionality.
Our industry, leading treasury solutions were recognized by leading advisory firm IDC and several industry publications.
We are delighted to see that our solutions are not only resonating with clients, but also with leading experts and influential advisory firms in the industry.
Turning to slide 11.
Over the course of the year, we have been moving with a high sense of urgency to improve the performance of the business free cash flow and capital allocation.
We set a new agenda to ensure that clients are at the center of everything that we do to innovate across our portfolio with next Gen solutions.
We've made significant progress delivering on our financial and strategic commitments to date.
The separation of <unk> affords us the benefit of substantial upfront proceeds which creates immediate capital allocation flexibility for us to accelerate capital return to shareholders, while investing in growth.
We're excited about the outcome that this strategic transaction drives and remain confident in the underlying strength of our business and sustainable operating model going forward.
We look forward to hosting all of you at an Investor day in the second quarter of 2024.
With that I'd like to introduce James Kehoe, our new CFO, who brings decades of experience navigating the dynamic financial environment and managing its aspects unique to large international organization I will now turn the call over to James.
Thank you Stephanie and good morning.
Delighted to be here.
Look forward to meeting with all of you in the near future.
As noted in our earnings release.
The third quarter, we have transitioned the world pay business into discontinued operations.
Going forward, our ongoing financials will be presented on a continuing operations basis.
However for this quarter, we will also present some of our metrics on a total company basis.
And this will allow you to compared to our prior total company outlook.
Continuing operations now reflects two principal operating segments banking and capital markets.
As well as the corporate and other segment.
As you review the split between continuing operations discontinued operations.
I would note the continuing operations income statement understates, the true earnings power of that for us.
For example, the continuing operations financial results do not yet include the EPS contribution from our 45% equity stake in World Pig.
Nor does it include the significant EPS upside from the deployment of the rupee net cash proceeds include.
Including the planned debt reduction of approximately $9 billion.
On share repurchases.
At least $3 $5 billion through 2024.
Taken together these items will have a meaningful impact on the EPS and we estimate like for like earnings power of around $4 40.
To $4 55 for 2023.
Let's now move to our third quarter results.
Stephanie mentioned in the prepared remarks, we were pleased with our performance in the third quarter.
It is the third consecutive quarter of meeting or exceeding the high end of our outlook.
Including <unk> total company revenue increased 2% on an organic basis to $3 $7 billion.
With an adjusted EBITDA margin of 44, 2%.
Adjusted EPS of $1 65.
The adjusted EBITDA margin expanded 50 basis points year over year 20 basis points above the high end of our expectations.
Driven by strong incremental margins on our recurring revenue.
<unk> benefits from future forward.
This marks the first year over year EBITDA margin improvement since the fourth quarter of 2021.
And we expect continued year over year margin improvement in the fourth quarter.
On a continuing operations basis revenue increased 4% organically to $2 $5 billion led by strong growth in recurring revenue across both banking and capital markets.
Adjusted EBITDA margin expanded 70 basis points year over year to 43% led by strong margin gains in bunge.
Adjusted EPS for continuing operations was 94 cents in the quarter, a decline of 7% compared with the prior year.
This was entirely due to higher interest costs.
For discontinued operations, which reflects our merchant segment revenue decreased 1% organically to $1 2 billion.
This was broadly in line with our expectations for the quarter.
Adjusted EBITDA margin expanded 30 basis points to 46, 8%, reflecting continued future forward efficiencies.
Adjusted EPS came in at 71.
Moving now to cash flow and balance sheet metrics, and we continue to drive improvements across multiple vectors.
Capital expenditures were reduced 5% year over year to $298 million or 8% of revenue.
We continue to optimize and prioritize investments.
We generated strong free cash flow of $907 million, resulting in a free cash flow conversion of 92% for the quarter of 94% at year to date.
This compares very favorably to our prior target of greater than 80% free cash flow conversion.
Lastly, we reduced our total debt by approximately $800 million to $18 $7 billion, yielding a leverage ratio of three times.
While also returning over $300 million to shareholders.
Turning now to our segment results on slide 15.
Recurring revenue increased 7% with strength across both banking and capital markets and this led to organic revenue growth of 4% for the quarter.
Backlog was $22 5 billion, increasing 2% compared to the prior year, reflecting improved sales execution.
Banking revenue grew 3% organically in the quarter and recurring revenue grew 7%, including a benefit of approximately four percentage points.
As a result of an outsized contribution from servicing federally funded pandemic relief programs.
Pandemic relief had little impact on the banking growth rates in the first half of 2023.
The third quarter results did exceed our expectations.
As anticipated we sold declines in professional services and other nonrecurring revenue of AC and 11% respectively.
These declines reflect the difficult year over year comparison in license revenue.
Lower customization projects in <unk>.
Professional services.
Banking, the EBITA margin expanded 120 basis points to 44, 6%, primarily driven by future forward cost initiatives.
Capital markets revenue increased 6% organically led by continued strong recurring revenue growth of 8%.
Consistent with our year to date trends professional services revenue decreased 8%.
As we continue to shift to recurring revenue engagements.
All other nonrecurring revenue increased 13% due to higher license revenue.
Capital markets adjusted EBITDA margin contracted 80 basis points to 49%, mostly reflecting the timing of operating expenses.
Turning now to the outlook for 2023 on slide 16.
This chart provides an outlook for the total enterprise prior to implementing accounting for discontinued operations.
Yes.
We are raising our revenue and adjusted EBITDA outlook ranges to reflect continued strong operational results.
Good visibility around fourth quarter trends.
Total company revenue is now projected at $14 $6 billion to $14 six 5 billion.
<unk>, an adverse currency impact of $25 million.
On a constant currency basis, we are increasing the lower end of the range by $125 million.
On the higher end of the range by $44 million.
As we close out the year, we are narrowing our ranges for segment growth.
In banking, we are narrowing our outlook to one three to one 7% in line with our prior expectations.
For capital markets, we now anticipate organic revenue growth of approximately five to five 5%.
Primarily due to an expected shift in license fees into 2024.
And lastly, we've improved our merchant segment outlook to account for our recent performance.
As expected.
This implies a slight deceleration in organic revenue growth in the fourth quarter for both banking and capital markets, reflecting difficult year over year comparisons related to nonrecurring revenue headwinds.
As a reminder, in the fourth quarter, we anticipate a five point headwind in capital markets as we lap a very strong year ago quarter for license revenue.
However, consistent with the trends we have seen all year, we do anticipate another solid quarter of recurring revenue growth.
With approximately 3% growth in banking and 7% growth in capital markets.
We are also increasing our adjusted EBITDA range to $6 $1 billion to $6, one 5 billion.
Reflecting higher revenues and improved EBITDA margin.
In summary, we are raising our full year outlook to reflect continued outperformance on a favorable future outlook.
Turning now to slide 17, where we are providing updated assumptions regarding the world pay transactions.
We now anticipate net proceeds of more than $12 billion.
An increase of approximately $300 million compared to our prior estimate obviously, we will provide a final net proceeds number once the transaction closes.
As previously disclosed the proceeds will be used to transform our capital structure by significantly delevering the balance sheet, while simultaneously returning capital to shareholders overall, we anticipate reducing gross debt to approximately $10 billion.
Leading to a significant reduction of interest costs post transaction.
As we get more visibility into net cash proceeds.
<unk> to deliver strong cash conversion, we are now comfortable reinstituting share repurchases of approximately $500 million by year end.
Today.
We are increasing the targeted share repurchases from two $5 billion to at least $3 $5 billion by the end of 2024.
We will continue to assess additional capacity throughout the year.
We will accomplish this share repurchase goal, while still remaining comfortably within our targeted leverage ratios.
We expect full year 2023, DNA of approximately $1 billion.
On a continuing operations basis.
And you should assume growth of 8% to 10% in 2024 as past capital investments flow through the income statement.
Some good news on tax rate, we now anticipate an effective tax rate of 17% to 18% down 200 to 300 basis points compared to the 19% to 21% we communicated previously.
We continue to expect the incremental future forward savings of $215 million in 2024.
And our forecast for adjusted EBITDA. This synergies remains approximately $200 million.
In 2024.
And finally, we can confirm that we will report the after tax earnings from our 45% stake in <unk> within our adjusted net earnings and adjusted EPS.
We'll include this in our 2020 for outlook.
Turning now to our outlook for continuing operations on slide <unk>.
The left hand side of this chart lays out our 2023 outlook for continuing operations excluding <unk>.
This results in adjusted EPS of $3 30.
To $3 40.
However, as I noted earlier the 2023 continuing operations income statement does not accurately reflect the true earnings power of Fas.
A good example is interest expense.
The continuing operations interest expense is burdened with the entire interest expense of Fas with no interest expense allocated to discontinued operations.
This artificially depresses the earnings of continuing operations.
Shifting to the right side of the chart, let's discuss the earnings power of Fas.
We will pay NCI.
Approximately 60 to 65.
Of adjusted EPS on a full year of 2023 basis.
On the deployment of the World paid transaction proceeds without 65.
As we meaningfully reduce interest expense and share count.
These benefits are modestly offset by a higher tax rate.
Overall this leads to a normalized 2023 EPS of $4 40 to $4 55.
We will provide our outlook for 2020 for revenue and adjusted EBITDA during our fourth quarter earnings call.
Switching gears now to future forward.
On a continuing operations basis, we delivered approximately $55 million of year to date savings.
This year, we anticipate $100 million of in period savings unexpected to exit the year with a run with run rate benefits of $200 million.
This aligns with our expectation of $215 million of year over year benefit to 2020 for adjusted EBITDA.
And we will provide quarterly updates through the life of the program.
Overall, we continue to anticipate $1 billion of total cost savings across all three categories of cash optimization.
Moving now to our capital allocation priorities on slide 20.
Post the world paid transaction <unk> will be in a very strong position with significant balance sheet flexibility.
A balanced set of capital allocation priorities.
We will prioritize investments to accelerate revenue and EPS growth.
While returning capital to shareholders over time.
We will target a strong balance sheet and maintain investment grade credit ratings.
Given our strong free cash flow generation and predictable revenue streams, we are reiterating our long term gross leverage range of two five to three times adjusted EBITDA.
We intend to maintain a competitive dividend.
And we will grow the dividend in line with adjusted net earnings.
Yes.
We will selectively invest in M&A targeting smaller complementary, but highly synergistic targets, where we can leverage our tremendous scale and distribution to drive faster growth across strategic verticals.
As mentioned earlier, we will deploy excess capital for share repurchases and going forward, we anticipate that share repurchases will be a key element of our value proposition to shareholders.
We are convinced that this balanced capital allocation framework provides a robust value proposition for long term shareholder value creation.
In closing, let me say again, how excited I am to be joining the <unk> team. During this time of transformation I.
I believe we are on the right path to unlock meaningful shareholder value as we reposition the enterprise for long term success.
As you have seen this quarter marks the third consecutive quarter of delivering on our financial commitments with results at or above the high end of our outlook.
Such we are confident in increasing our total company outlook for the year.
We have also introduced an outlook for 2023 continuing operations.
Line with our prior expectations and lastly, <unk>.
Given the confidence in how the business is performing our improved financial flexibility and the attractive valuation of our stock. We are re instituting share repurchases with approximately $500 million in the fourth quarter.
And we are raising the total buyback to at least $3 5 billion.
Through 2024.
With that operator would you. Please open the line for questions.
Thank you at this time, we will conduct a question and answer session.
As a reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
One moment for our first question.
Our first question comes from Ramsey El <unk> with Barclays. Your line is open.
Hi, Good morning, Stephanie and welcome James.
I wanted to ask about continuing operations adjusted EBITDA margins as we move past the world PE sale next year.
F 'twenty three outlook on slide 18 shows lower EBITDA.
EBITDA margins than we've seen year to date in banking and capital markets. I'm. Just wondering if you could help us think through what what the normalized margins in the business will look like once we get past the sale.
Yes.
I think it's fair that we we really don't want to get into giving any guidance for 2024 on this call.
However, I would.
Give you some information based on communications previously won his future forward. This has been an incredible success year to date and frankly, its just gaining momentum.
<unk> seen $55 million of savings year to date ramping up to 100 in the full year. So that's the benefit in the current year and the run rate exiting the year was 200. So I think you can be quite comfortable on margin improvements over time across the business on continuing operations.
And I did say in my prepared comments, maybe I would just reemphasize that.
I Hope you noticed from my comments that we said, we will increase EBITDA margins on continuing ops in the fourth quarter.
Got it okay.
And.
A follow up from me you've increased your buyback target.
It looks like Capex as a percentage of revenues is trending in the right direction is there an opportunity to return additional capital beyond what you've already laid out.
I think I'd wait until.
The year end call and as Stephane said, we're also going to do an investor day sometime in April.
<unk> now and then we'll get more visibility on our 2024 plan on our long term plans, we have scenarios already quite detailed ones.
I think I would point to the way we laid this out we said at least $3 5 billion. So the short answer is do a question is theres probably more capacity.
Based on the continued strength of free cash flow delivery, which is coming in well ahead of our expectations. So in short, yes, but we're going to monitor the risk and we're not going to over promise.
Anything here.
Got it thank you very much appreciate it.
One moment for our next question.
Our next question comes from Tien Tsin Huang with Jpmorgan. Your line is open.
Thanks, So much good morning, James would love to hear a little bit more on what.
What attracted you to join <unk>, what your priorities and books areas might be as you come in here and how your prior experience.
It can be leveraged your RFS, what can we expect that kind of thing. Thank you.
Well, what I've said internally are joined for the three piece because I like the can take a peek things relatively simple I think it was.
It was passion, so Stephanie first interviewed the passion and the drive to really change the company to was the people I met in the interview process. The leadership team are these people that will drive the company to success and then the last one was potential.
I know you want that we definitely wanted the share price to increase.
<unk> looked at other than I think the plans we have are incredibly compelling.
Joining for the potential of the future.
What can I bring.
10 weeks in on I spent an awful lot of time on accounting.
Actually in the content, but I would have gone through discontinued operations and I can tell you. This is absorbed an incredible amount of time, the <unk> transaction the accounting behind us.
Put a lot of energy and focus into our capital allocation priorities of how do we clarify a lot of the previous communication around world.
Under our own capital allocation priorities.
But looking forward I think.
Just my personal goals are to engage more with the investor groups.
And then two is the 2024 and beyond plans what are the business plans or the incredible how do we generate more cash from the business and then how do we ensure that we have a balanced capital allocation framework and that was the key word of what I present, it as balance I think we need this correct balance between.
How do you grow the business organically Inorganically, but also returning sufficient capital to shareholders and I think the current set of communications achieves that.
Is there more we can do over the next 12 to 18 months. The answer is yes, but Stephanie Stephanie and I are intensely focused on this.
Good glad to hear and welcome to the call as my follow up I thought I'd add just a little bit about I.
Thank you both mentioned good visibility.
As we go into the fourth quarter I know that sometimes.
Hi, with mixed with license sales. So just the danger of us using this fourth quarter outlook to enforce.
Four of them are 24 growth expectations, I know youre not going to give us going forward numbers per se.
Wanted to separate the license from the recurring piece, though.
The thing else to say Theyre under the backlog was up 2%, but just want to make sure we're not we're.
We're getting all the puts and takes right.
Yes, thanks for the question Tien Tsin.
I would say absolutely.
If you think about the strength and what we continue to lean into all year and as well into the fourth quarter is the strength of recurring revenue both in banking solutions and capital markets I think James mentioned in his prepared remarks, we're expecting recurring revenue in banking in the fourth quarter to be 3% capital market, 7%. So a lot of <unk>.
Strong recurring revenue growth, we would expect to see that continue as you think about 2024.
There is some lumpiness in the nonrecurring lines. He mentioned if you recall last year capital markets had a very large one time license renewal.
That drove a significant growth rate in the fourth quarter of last year. So we're lapping that.
I agree would not over pivot in terms of.
Reading the nonrecurring headwinds in fourth quarter into 2024.
I think as we think about 2024 and reflecting on 2023, we talked about strong recurring revenue growth, but having some headwinds coming into 2000 22023 around nonrecurring I would expect as we move into 2020 for those headwinds to dissipate.
So to James' point, while we won't give 2020 for guidance on this call and we will certainly look to it on the fourth quarter call do not see those headwinds recurring in 2024, So would really hope that everyone would lean into the strong recurring revenue growth trends, we're seeing across the board in banking and capital markets and those would be the <unk>.
<unk> trends as we move into 2024 from a recurring standpoint.
Perfect Yeah, that's useful thank you for that.
One moment our next question.
Our next question comes from James Faucette with Morgan Stanley. Your line is open.
Thank you very much.
I wanted to follow up on <unk> question, there generally and more specifically capital markets. It was up.
7% can you talk about.
What drove that specifically was it some of these nonrecurring items are and I'm just trying to get a handle on how we should think about growth in that segment on a on a go forward basis.
Yes, so capital markets has been trending very strong recurring revenue growth all year, we would expect that to continue.
The trends underpinning that are both.
Sales.
Increasing within existing wallet share, so selling more to existing clients as well as being able to sell our products and services and to non traditional verticals that have a lot of faster growth. So.
Like insurance asset management Auto finance, there is a lot of secular trends there that are driving.
Growth and demand, including in our regulatory management mandates climate in ESG, So really expect capital markets recurring revenue growth to continue to trend very strong.
Don't see any change in those growth rates as we think about.
The recurring side of the business here in the fourth quarter as we go into 2024.
I do think as you know capital markets has historically had very lumpy nonrecurring numbers when the license do come up for renewals. It is a timing related thing so in the fourth quarter of last year. If you recall there was one very large licensed that.
<unk> that we signed in the fourth quarter.
So that's really what's driving a total capital markets revenue number in the fourth quarter, a little bit down, but the recurring revenue growth continues to be strong driven by high demand.
Got it.
And maybe just a more broad question.
Can you kind of touched on one of the most recent metrics but.
Given the nature of remain co on a go forward basis, how should we think about measuring performance in new bookings and signings.
In this segment for warrant maybe more generally is backlog growth the right number and what are some of the nuances that we should keep in mind over the next six to 12 months, especially since some of these larger deals have been taking longer to close.
Yeah, I think it's a great question I think as we look to come into Investor Day, we'll attempt to give you some different key performance indicators.
<unk> sales.
Sure.
Selling good about the backlog going up 2% year over year, I'll give you a little bit more color.
Market demand across the board for our solutions is strong both in banking and capital market.
As you know we started the year with the transformation of our sales force really refocusing them on selling higher margin technology enabled solutions. So all the investments we've made in making sure that we sell more of those versus the lower margin, we're seeing that really start to take route our sales pipeline.
Has gone up 10% on a year over year basis, as we look to rebuild that pipeline with a different mix. We've seen it we've seen increased sales productivity. This quarter think of that like same store sales growth within sellers is up 12% year over year.
And then overall our quality of sales has improved the margin contribution from new sales with improved 50 bps. So we're really starting to see some strong growth in sales, albeit remember the goal here is to sell more recurring.
And so it'll be a bit of time before those show up in the P&L, but the actual sales themselves are starting to take to take rate and cautiously optimistic as we move into the fourth quarter in 2024.
Thanks, so much for the color there Stephanie.
You bet.
One moment for our next question.
Our next question comes from Dave Koning with Baird. Your line is open.
Yes.
Our next Sanjay.
Dave Koning with Baird David Your line is open.
One moment for our next question.
Okay.
Our next question comes from Jason <unk> with Bank of America. Your line is open.
Good morning, guys. Thanks for taking the questions. So I just want to make sure. We're on the same page with the Q4 organic growth numbers. I know you gave an update on the full year I guess it looks like just backing into a banking could be down a little bit year over year in capital markets up a little bit year over year.
Just wanted to verify if that's right and.
Whats what would be driving that.
T cell on the banking side in Q4 and are you assuming any material benefits continue from that.
Our old pandemic relief program.
Yeah. So thanks for the clarification, so banking I would say is more flattish fourth quarter.
I think we talked about recurring continuing strong growth in the 3% range and so you know that.
As we expected and has been an issue all year, the nonrecurring coming in and really being what's driving.
Recurring from 3% down to flattish in the fourth quarter again when over pivot on that as we think about 2024 would really encourage you to think about 2024 recurring and in a lot of that nonrecurring headwind to abate capital markets light up yes, as we said I think we talked about recurring and.
The fourth quarter of 7% if you recall last year, Jason we had a one time capital market Slide I think it drove about five percentage points of growth last year. So we're growing over that.
So the fourth quarter number is while overall, our softer there driven by nonrecurring items.
We wanted to be transparent around the recurring continues to be strong and we would expect those headwinds to abate as we move into 2024.
Right right. Okay, no. That's a good clarification and then just coming back.
Backlog.
It's been pretty stable since the end of the first quarter.
Are you thinking about the Q4 backlog whether you whether you are looking at it I don't know if you guys are focused more on a quarter over quarter or year over year, but just wanted to get a view on that into.
Thank you.
Yeah. It's a great question I mean, I think we've seen broadly over the last.
Seven quarters, and I would expect to see over the next three or four quarters.
Backlog in the range of 22, 5% to $23 $5 billion pretty steady as we bring new business on and then we work really hard to increase the level of implementation so coming out of that backlog number.
It is a wonky accounting numbers, so I think as we come into Investor day, We'd hope to give you a better set of metrics, but I think broadly we think that number is that stable range of 22, 5% to 23 and a half it might go up and down per quarter, and we think we've proven pretty.
Essentially at this point that that that number will sustain a nice recurring revenue growth number for us.
And if you remember in the sales transformation, we really are trying to focus on.
Less of those really large whale deals and more of consistent sales of a lot of our platforms that we've invested heavily in and driving the margin over the overall sales number up.
And so while we may not from a dollar standpoint drive it up.
This year, we would expect it to come up next year as.
As we look to see some of those sales come in so hopefully that helped.
Thats good color. Thanks, Stephanie.
Our next question.
Yes.
Our next question comes from Darrin Peller with Wolfe Research Your line is open.
Hey, Thanks, guys first of all James Congrats on a welcome but Stefanie when we think about the demand environment and what you're seeing that's giving us so much conviction in the sustainability of that recurring revenue growth rate in 2000.
Fourth quarter, putting us again, putting aside the one time items, everyone seems focused on it I guess.
Really a good idea so just sustainable trends into Q4, and then Q1, we still seemingly confident that it's three 4% type banking growth on the revenue side. Despite the noise on bookings. So can you just tell us what's under the Hood what exactly is the demand what are customers actually utilizing before more today than they were a year ago and then.
The customer is there is your employee base.
Energizes.
Is it is the wheel turning properly again I guess is the question. Thanks again.
Yes, no. Thanks, Thanks Darin.
So in terms of demand I would say broadly.
Let's separate the demand environment from what really drives the recurring revenue.
<unk>. So demand is high do you think about our capital markets business I continue to talk about increasing demand from our existing customers. So increasing share of wallet from a lot of the modern isolation, we brought into market.
We talked about the cleared derivatives platform, which is having a lot of success and not only selling into our existing.
Customers, but really opening up the door to sell those types of capabilities now that theyre SaaS enabled into other capital markets participants who may not be traditionally there. So we see increased wallet share and then we see the sales of the products on the capital market side being really.
High demand from other people who are not traditional.
And that segment I think on the banking side.
Given the focus of banks on deposit generation, there is a high focus and demand for digital solutions, that's been in market, it's not necessarily new although it's definitely heightened.
And we're seeing a lot of demand for that and we called out a couple of those wins.
This quarter, so we feel really good about that.
I think that from a demand standpoint, I would say the other thing is.
In terms of thinking about what's driving the recurring yes. It continues to be.
Delivering those products and solutions into market, but also remember there is an inherent same store sales growth number that we get the benefit of from number of transactions that go across.
The platform as well as deposit accounts and so there isn't there isn't inherent same store sales growth number.
We get benefits from in addition to.
Being strong on the sales side.
So we're feeling good that's not to say that in one quarter its going to flip, but we're feeling the momentum is there and we're feeling good about it I think from a culture standpoint.
It's going really well I couldnt be more proud of the team honestly the amount of passion and energy that they brought.
Two future forward that they've brought to refocusing and repositioning the company in the world pay separation James mentioned that it was a lot of work in accounting, it's just a lot of work period to separate two companies.
And people that have worked together for four years so.
<unk> would say the teams have really rallied around that it's not easy.
But they are definitely taking up.
The call of duty there and between future forward in the world pay separation I couldnt be more proud of what the team has been able to do it. So I think the culture is good.
It's great to hear thanks, guys. James just a quick follow up Thats Slide 18 was extremely helpful. In clarifying some of the moving parts. So just to be clear I mean, we looked at 'twenty three and you back out the we wanted to back out of the world for their contribution.
Let's call. It 447 at the midpoint at minus that 60 to 65 I.
I think what you said was that that gives you a sense of 23 pro forma co earnings but it also doesn't account for the fact that there is high interest if there are certain elements I think you said right.
Alright.
<unk> expense in there I mean, it still ends up with a number of very close to what we modeled for an anchor but I'm curious what you're looking for.
<unk>.
Yes, I think I think they.
The key part is the right hand side of that chart.
Which.
Just to explain the disc ops theres a set of rules around that are somewhat logical because the company does not always fully logical and you can only allocate to a disc ops P&L something thats actually directly related so you can't count allocate.
Allocate the only thing you can put in the interest cost so unless the legal entity of interest cost. So thats why on the right hand side. While we were thinking of is we're going to we're going to we've actually flow quarterly income statements for disc ops remain co.
I hope you rebuild your models, but a few rebuild based on what we gave you you'll arrive at 330 to $3 40 for remain co.
It's wrong right, because you've got $630 million and $650 million of interest expense once we pay down the debt that's going to go down by.
I'm, just giving you rough numbers and then two ways Youre thinking youre, taking the repurchases and all we did in calculating this cup.
Capital deployment. The 65, we basically say you are paying down.
$9 billion of debt on your payment bone of the average interest rates, which is quite low it's three 2%.
The other part is you're taking the share repurchase on this is quite conservative because what we've done is we took the tree in the house.
And we assume that we would have repurchased shares during the course of 2023.
But a few flip out.
2000, 22023, and then a few flip out because this is trying to represent what the base year would look like if the transaction was done at the beginning of the year, but if you look at some of the opportunities first of all youre going to grow off the $4 50, $444 55 base, so you're going to have a normal year of.
Growth, but also youre going to get the full year impact of the share repurchase program right.
Once we start doing that youre going to youre going to get the full year now that'll hit more in 2025 and then.
As I look at this I see there is incredible opportunity on the NCI line. So this 60 to 65, so I think theres a lot of opportunity there.
This is a.
Standalone company it'll be more aggressively managed for cash I think we will pay down debt incredibly quickly because they have loaded it with so much but the actual change in EPS contribution will be probably quite a fast clip.
We're just we were careful here not to give guidance on the future, but what we're saying is we're trying to put a stake in the ground and say the base here is this.
It'll be kind of strange next year, because once we start reporting against continuing operations and we separated the two companies we will be reported very high EPS growth rates.
Because we will be comparing against the $3 $33 40.
It will be you will be implementing a buyback of $3 5 billion and youll have a huge saving on interest expense. So the headline EPS growth rates will be extraordinary, but what we're trying to say that some of that is coming from the fact that you are recovering from the dilutive transaction. So that's why this chart.
Hope it hopes every participant Thunder spun the way we're thinking about this but for $44 55 is the floor and against the floor, we're going to grow next year.
That's really helpful. Thanks, guys appreciate it.
You.
One moment for our next question.
Our next question comes from Dan <unk> with Mizuho. Your line is open.
Dan Donlan with Mizuho Your line is open.
Your line is muted. Please on mute please rejoin using the call me feature.
One moment our next question.
Okay.
Okay.
Our next question comes from Antara with.
<unk> with <unk> Your line is open.
Hi, Thank you for taking my questions I guess, the first one Stephanie on just the macro backdrop and any help you can provide us on sensitivities that we might see in the banking and gas market segment of the economy were to soften a little bit from here.
Oh, you want me to tell the future that's a hard one.
[laughter].
I would say.
You know what's interesting on consumer spend.
Banking capital markets are no longer as positioned towards consumer spend like the merchant business. The royalty business. So we think we've moved largely away from that not to say were totally not totally immune because we do process debit card transactions.
I think from a macro standpoint.
A concern that I think we should have and we will keep a close eye on be transparent as round is around if we see demand drop for our products and solutions and we're not seeing that.
And so as you think about both the financial institutions.
And the capital market participants.
They're all undergoing different levels of stress, where they are in the industry, but our solutions are still in high demand in terms of whether theyre digital or a nextgen banking platform.
Wanting to drive more money movement. So the secular trends are there we'll continue to watch them, but we're not we're no longer exposed.
From the world pay side in terms of consumer spend going up and down and not impacting us that's probably the best I can <unk>.
Thank you that's helpful. And then just a quick follow up on the debit routing for Geismar President Dino you mentioned, a few wins with retailers and Fintech, which was nice to see.
It's clearly a share gain opportunity for the night network do you think it could be a needle mover for the business in FY 'twenty four.
I think it should be I think the challenge and we need to we'll be been tripling down on it and selling it we actually are one of the few next networks.
That had that up and running very quickly and have the dual messaging capability that's required.
We continue to press on and we've had some significant wins.
The main payments guys I'll tell you I continue to press them very hard on it should it should continue to accelerate growth so more to come as we come into 2024, but we do think we have a strategic advantage there.
Thank you very much.
One moment for our next question.
Our next question comes from Dan <unk> with Mizuho, Dan Your line is open.
Oh, Hey, Thanks, again somehow I didn't hear you before great result, guys two questions. One Stephanie I mean, you talked about the Salesforce Salesforce transformation.
Can you maybe tell us what makes you feel more confident.
Sales force thanks.
Yeah. Thanks, Dan.
Bank.
Yes.
We spent a bunch of time in the first half of this year really refocusing the sales force on both selling all the products and solutions that we have across the segments, which we're seeing which we call. It amplify what you are seeing a lot of uptake there, but more importantly, I'm really making sure that we were selling the technology enabled software that.
<unk> invested in and that we think really should be where we should drive some high returns I'm feeling really good about that like I said.
We have seen the quality of sales has improved as.
As we came into this quarter.
New sales have improved 50 bps in terms of overall margins and.
So as we look to transform.
The sales force over time, we're seeing that really start to take route I think to moving away from some of the nonrecurring in terms of selling and into the recurring is also starting to be.
Pretty good for us and we're feeling good about that continuing to underpin that recurring revenue growth as we move into 2024. So feel good about the sales pipeline feel good about sales productivity feel good about the quality of sales, but it's still early days.
And we are managing it very closely.
And the teams.
I'm on a sales call every week and I have my own win loss ratio I hold myself accountable as well so feeling good about where we are but we will continue to be pressing on this as it's critically important for us.
Okay, great well since the market opened I'm going to spare you. My second question I think people want to lease.
Thank you.
Thanks, Dan.
Thank you that concludes the question and answer session. At this time I would like to turn the call back to Stephanie Ferris for closing remarks.
Well. Thank you for everyone for joining us. This morning as you can tell we're very excited about the next chapter for <unk>, while we're only in the first year of our journey, we have already made significant progress unlocking shareholder value delivering.
Delivering our third consecutive quarter meeting or exceeding our financial commitments. We're excited about the <unk> separation and future forward, we're delivering significant upside by resuming our buyback program and with an upsized commitment to further reposition Fas for attractive long term growth all of this leads to confidence in our current year outlook, our future prospects and our plan.
To drive long term shareholder value. Thank you for your interest in and not by US we look forward to connecting with you over the next coming days and weeks.
Thank you for your participation in today's conference. This does conclude the program you may now disconnect.
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