Fidelity National Information [FIS] Conference call transcript for 2023 q1
2023-04-27 12:33:03
Fiscal: 2023 q1
Operator: Good day, and welcome to the FIS First Quarter 2023 Earnings Call. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Mr. George Mihalos, Head of Investor Relations. Please go ahead.
George Mihalos: Good morning, everyone, and thank you for joining us today for the FIS first quarter 2023 earnings conference call. This call is being webcasted. Today's news release, corresponding presentation and webcast are all available on our website at fisglobal.com. With me on the call this morning are Stephanie Ferris, our CEO and President; and our CFO, Erik Hoag. Stephanie will lead the call with a strategic and operational update, followed by Eric reviewing our financial results and provide forward guidance. Turning to Slide 3. Today's remarks will contain forward-looking statements. These statements are subject to risks and uncertainties and as described in the press release and other filings with the SEC. The company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Please refer to the safe harbor language. Also, throughout this conference call, we will be presenting non-GAAP information, including adjusted EBITDA, adjusted net earnings, adjusted net earnings per share and adjusted 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'll turn the call over to Stephanie.
Stephanie Ferris : Thank you, George, and thanks to everyone for joining us this morning. I'm pleased to report that FIS is off to a very strong start in 2023. Our financial results exceeded our expectations on all key metrics: revenue, adjusted EBITDA and adjusted EPS. Organic revenue growth outperformed across all three of our operating segments. This outperformance was driven by a combination of both stronger executions, 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. Heritage FIS, which includes our banking and capital markets businesses, posted strong recurring revenue growth of 6%. Merchant revenue grew 2% driven by 15% organic growth in our e-commerce business, well ahead of the broader market. 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. 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. I'm extremely proud of the team, and I'm very excited about and confident in the future of FIS. 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. Solid execution and a more favorable macro environment fueled this outperformance. Banking and Capital Markets recurring revenue growth of 6% exceeded our expectations, benefiting from elevated financial services activity, including higher levels of deposit account and transaction growth. Within the Merchant segment, improved execution and stronger consumer spend drove most of the revenue upside. E-commerce had another very strong quarter with 18% organic growth, excluding the Russia-Ukraine impact in the quarter, contributing an additional point of merchant revenue growth relative to our internal expectations. We are updating our second quarter and full year guidance to reflect consistent trends from the first quarter to the second quarter, with a very slight moderation in the high levels of trading volume experienced in Q1. Our outlook for the full year has strengthened relative to the outlook we provided in February across all of our operating segments. Given our overall strong results and improving operating performance, we are increasing our full year 2023 outlook, while continuing to account for risk associated with macroeconomic impacts to our Merchant segment in the back half of the year. We understand the importance of delivering on our commitments and are confident in our recently raised outlook. We continue moving forward with a high sense of urgency and are making progress across our range of initiatives. The spin-off 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 initiatives, designed to drive greater efficiency, effectiveness and growth, is off to an exceptional start. 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. On the governance front, we've taken broad steps forward to align 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. We've also reorientated our sales force compensation plans to align to our stated goal of pursuing high-quality, higher-margin deals. We are driving a performance-based culture both tops down and bottoms up across the globe. We are making good progress preparing for the planned spin-off of the Worldpay 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. We are making meaningful progress having created a separation management office to work with both Charles Drucker, he 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-synergies. While we are not yet ready to provide formal dis-synergy estimates on this call, we are actively working to minimize the impact of any dis-synergies. I'd like to offer a 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 and $500 million of operating expense synergies post the Worldpay acquisition. We expect to maintain the majority of the $750 million revenue synergy achievement, with Worldpay continuing to act as an important distribution partner for FIS post spin. 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 program Future Forward is off to a great start. We are confident not only achieving our targeted $500 million of cash savings in 2023, but have direct line of sight into executing on the additional $750 million of cash savings expected in 2024, while investing in improved client service and next-generation product development for our clients. 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. While we are reiterating our Future Forward cash savings target of at least $1.2 billion -- $1.25 billion for 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. While we are confident the program will deliver meaningful cash savings for FIS, it will not come at the expense of clients who remain at the center of our decision-making. We believe our solid first quarter recurring revenue growth underscores the importance of our customers' place on our offerings and services and 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. 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. Our confidence is underpinned both by current factors we are presently seeing in our business and historical precedent, which points to resilient bank IT spend following periods of financial duress. A recent study by Curinos, a leading provider of data, technology and insights to financial institutions noted: Recent events should have a limited impact on near-term revenue for core processors as the current situation is impacting deposit balances, not accounts. Additionally, technology processing spend across the banking industry has also historically been resilient during prior challenging cycles of uncertainty. In line with Curinos 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, which is the primary driver of our banking revenue. The resilience and accounts on file is not surprising to us. It aligns with what the banking industry experienced during prior challenging periods as the Curinos study noted, and supports our confidence in 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 FIS business. Additionally, to the extent the recent turbulence results in increased regulation, FIS is well positioned to benefit across both the banking and capital markets segments. FIS boasts a highly diversified customer base with no one client accounting for more than 1% of company revenue. Given our SKU towards somewhat larger banks, consolidation across the FIS space should benefit us as we would expect these larger banks, many of which are FIS customers, to be the buyers of distressed financial institutions, and this is exactly what we've seen play out thus far with respect to recently sold failed financial banks. Additionally, 60% of our revenue growth is predominantly tied to accounts and 40% to transactions. Since the SVB announcement, we've seen a modest acceleration in accounts on file and 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 and the significant progress we are making executing against this goal. 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 planned spin-off of Worldpay is on track, creating two world-class companies with a sharpened focus on their respective client bases. Our Future Forward initiative is progressing ahead of schedule, accelerating the transformation of FIS into a more agile and efficient company better positioned to drive innovation. And lastly, we're focused on returning Heritage FIS back to the compounder model of the past, with a focus on steady revenue growth, margin expansion, improved free cash flow generation and a sustainable double-digit total shareholder return. With that, let me turn it over to Eric, who will take you through the financials. Eric?
Erik Hoag: 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% organically to $3.5 billion, with an adjusted EBITDA margin of 38.7% and adjusted EPS of $1.29. Revenue growth came in 2 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 exceeded expectations through both operational strength and the benefit in 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 in 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 FIS segments as we saw stronger-than-anticipated operating performance, driving results above our expectations. At the segment level, Banking increased 2% organically in the quarter, which was 2 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 onetime license revenue. This performance in margin improved compared to our fourth quarter results, and we continue to anticipate sequential margin improvement through 2023, leading to expansion in the back half of the year. For the second quarter, we are anticipating banking organic revenue growth of 0% to 2%, which incorporates a continued reduction in nonrecurring revenue, and we remain 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 2 points. The overperformance in the quarter was underpinned by 11% recurring revenue growth, with a 4-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 multiyear transition to SaaS-based engagements has laid the foundation for resilient growth. For the second quarter, we anticipate organic revenue growth of 4% to 6%, 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% to 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 2 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 Worldplay for Platforms offering. Worldplay for 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 nondiscretionary verticals, for example, grocery and drug store, market share gains within the PayFac vertical. Turning to Slide 19 for a further review of Heritage Worldpay's outlook for the year. As we entered the year, we had anticipated organic revenue decline of 2% to 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 2 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 U.S. and the U.K. 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%, and full year organic revenue growth of down 2% to 1%, 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 to 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 of 0% to 1%, adjusted EBITDA margins of 41.5% to 42.2% and adjusted earnings per share of $5.76 to $6.06. As I stated in our last earnings call, our philosophy continues to remain 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 forward guidance in the appendix, as well as a revised 2022 organic base to account for some small shifts in our operating segment rollouts. Turning to Slide 21 for a financial update on Future Forward. We remain committed to rightsizing 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 executed rapidly on the Future Forward initiative. We're extremely pleased with our early progress, and we'll 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 multiyear period. Next, we remain committed to a 35% dividend payout ratio for Heritage FIS. Following these two pillars, 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 in 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 multiyear period. I'd like to thank everyone for their time this morning. Operator, would you please open the line for questions?
Operator: [Operator Instructions] And today's first question will come from the line of Tien-Tsin Huang with JPMorgan. Your line is open.
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Operator: And our last question for Jay will come from the line of Ashwin Shirvaikar with Citi. Your line is open.
Operator: Thank you all for participating. This concludes today's program. You may now disconnect.
