The FIS Second Quarter 2023 Earnings Call began with the Operator welcoming everyone and advising that the call is being recorded. George Mihalos, Head of Investor Relations, then handed the call over to Stephanie Ferris, the CEO and President, and Erik Hoag, the CFO. Stephanie and Erik will provide a strategic and operational update and review the company's financial results and provide forward guidance. The call includes forward-looking statements and non-GAAP information. Stephanie will lead the call with her update.

FIS announced a landmark transaction with GTCR on July 6th and their second quarter results exceeded expectations. Their Future Forward initiatives are simplifying their business and improving financial outcomes. They reported solid financial results with recurring revenue growth of 4%, and are confident in their ability to deliver sequential adjusted EBITDA margin improvement in 2023. They are on track to deliver on their free cash flow conversion commitment and post the Worldpay transaction, they expect free cash flow to align with net earnings.

FIS has signed a definitive agreement to sell a 55% stake in the Worldpay Merchant Solutions business to GTCR, a private equity firm, which will provide FIS with an attractive market-aligned value for the business, as well as upfront proceeds of at least $11.7 billion. This transaction will allow FIS to de-lever the balance sheet quickly and return capital to shareholders, while also allowing FIS and Worldpay to focus on their respective markets.

FIS is well-positioned to serve clients on the move towards digital money movement, the need for cloud-native technology with modernized user interfaces, and competition from upstart fintechs, global technology companies, and retailers. The annual flagship industry conference, Emerald, with 4,000 attendees showed that clients are excited about the path forward and are looking for trusted technology partners. FIS is looking to generate meaningful returns for shareholders and will provide updates on developments as they approach closing by first quarter 2024.

FIS has invested heavily in cloud technology, launching several digital-native solutions. They have seen growth in account numbers and transactional growth across their platforms, and have partnered with blue chip banks and fintechs to power digital-only account offerings. Additionally, they are seeing increased demand for balance sheet and treasury management solutions due to increased regulatory oversight, consolidation across the financial industry, and acquiring institutions needing to onboard new accounts at scale.

FIS is a relative beneficiary of industry consolidation due to its focus on larger financial institutions, and they have seen success in their enterprise core platforms, payments & networks, capital markets, and Amplify initiatives. Notable wins in the second quarter include the sale of their Digital One platform, several new Premium Payback engagements, strong demand for their institutional solutions, and increased penetration across non-traditional verticals. The Amplify initiative is also driving sales, particularly the selling of Acquiring Services into multiple Banking and Capital Markets clients.

FIS reported an increase in revenue of 2% to $3.7 billion with an adjusted EBITDA margin of 41.4% and adjusted earnings per share of $1.55 in the second quarter. They are continuing to prioritize investments in modernizing their technology stack and leveraging the cloud to improve the digital experience for their customers. They are also exploring the potential of AI to improve employee and client productivity, accelerate development and implementation timelines, reduce costs, and improve product quality and customer care. Worldpay is expected to remain a key distribution channel for Banking and Capital Market services.

The company's Capital Markets segment exceeded the high end of its outlook, and Merchant returned to expansion. Adjusted EPS exceeded the high end of the outlook, and the company generated free cash flow of $953 million. Capital expenditures decreased 13% year-over-year, and total debt was reduced by $500 million. Banking and Capital Markets saw organic revenue growth of 3%, with a large and stable backlog of $23 billion.

Backlog growth has been stable over the past few years, with recurring revenue posting growth within the cycle guidance. In the first half of 2023, Banking and Capital Markets have seen healthy recurring revenue growth. The Banking segment saw a 2% organic increase, with a contraction in the adjusted EBITDA margin due to a 10% reduction in one-time revenue. The Capital Markets segment saw a 7% organic increase, with an expansion in the adjusted EBITDA margin due to strong sales execution and the shift to a SaaS-based go-to-market strategy.

FIS is pleased with their progress in the first half of the year and have seen a 1% growth in Worldpay revenue. The Future Forward program has resulted in $175 million in annual run-rate operational expense reduction and $35 million benefit to the quarter. The capital allocation priorities for FIS include reducing debt, paying an appropriate dividend, and using excess capital for share repurchase or tuck-in M&A.

FIS is committed to a strong balance sheet, investment-grade ratings, and paying a dividend. They will use excess capital for share repurchases, tuck-in M&A, and returning to shareholders. They have updated their outlook and revised their guidance for the second quarter, and in the third quarter the Worldpay business will be transitioned to discontinued operations. Adjusted EPS will no longer be meaningful.

FIS is focusing investors on revenue and adjusted EBITDA until they provide an updated outlook. They anticipate organic revenue growth of 1%, with margin improvement in Banking and Capital Markets and free cash flow conversion of over 80%. Following the close of the transaction, FIS will retain a 45% equity stake in the Worldpay business valued at over $4 billion, and an effective tax rate of 19-21%. They also expect $10 billion of total gross debt with a weighted average interest rate of 3.25-3.75%.

In the announcement of the transaction, it was noted that FIS would anticipate deleveraging to approximately 2.5 times, translating to an adjusted EBITDA of approximately $3.9 billion to $4 billion. The Future Forward program is expected to bring substantial cost savings of approximately $1 billion post the Worldpay separation, with an annual run rate of approximately $425 million exiting 2024. There will be adjusted EBITDA dis-synergies for FIS of approximately $200 million, including $100 million of revenue dis-synergies and $100 million of incremental operational expense dis-synergies. Stephanie and Erik also gave details on changes being made to the Banking salesforce.

Stephanie Ferris is discussing conversations with banking clients about deposit gathering, new banking accounts, and profitability. Banks are looking for digital solutions, such as D1 and MBP products, to increase deposits and transactions, which drives organic recurring revenue growth. Banks are also looking to outsource activities and move more products to digital, which are potential conversation starters with Ferris' company. Erik mentioned that the sales backlog is flat, which was expected.

Stephanie Ferris of Worldpay discussed the feedback they have received from Worldpay clients since the GTCR announcement and the lack of concerns regarding the impact on existing commercial relationships or the sale of the business to private equity. She also discussed their plans to introduce new cloud-native componentized core bank solutions offerings within MBP.

Stephanie Ferris of FIS discussed the rollout timeline for MBP, a best-in-class next-gen componentized architecture for core. Consumer deposits are already live and consumer lending went live in the second quarter. Commercial deposits are the next step and several large financial institutions are in the conversion timeline. Ferris also discussed the pipeline of opportunity to pick up online processing away from Visa and Mastercard with Reg II coming online.

Stephanie Ferris mentioned that the company's guidance assumes that backlog will remain flat to slightly down over the next three to four quarters. Additionally, Erik Hoag provided a summary of the call-outs from the column, which included an adjusted EBITDA range of 3.9% to 4%, post-transaction, that includes a revised corporate expense estimate for FIS moving forward. Jason Kupferberg asked if the $4 billion of pro-forma adjusted EBITDA for RemainCo next year is inclusive of the $200 million of dis-synergies that were mentioned, to which Erik Hoag confirmed it was.

Erik Hoag discussed the outlook for recurring and non-recurring revenue for the Banking and Capital Markets segments. He stated that Banking should have steady recurring revenue growth for the rest of the year, and Capital Markets should have elevated recurring revenue growth in the first half, although the growth was due to some anomalous transactions in the first quarter. The full-year Capital Markets guide was raised from 4-6% to 5-6%.

Stephanie Ferris explains that FIS is continuing to invest in the Capital Markets business due to its strong product set and high demand, and they are not seeing any delays in their backlog. Ferris also mentions Future Forward, a program that focuses on faster implementations, which includes the use of AI and machine learning.

Dave Koning from Baird asked about free cash flow conversion and post-spin equities. Erik Hoag responded that cash flow conversion is strong and is expected to improve post-separation. He also mentioned that they have seen success with Future Forward, collecting faster and spending slower, as well as CapEx and deferred contract costs being down year-over-year. Regarding post-spin equities, Hoag mentioned that there will be a minority interest stake and $100 million in revenue dis-synergies.

Stephanie Ferris and Erik address Darrin Peller's questions: Ferris talks about the cultural transition of the company from focusing on larger banks to mid-size banks, and how they have the right people for the transition. Erik addresses Peller's question about the recurring revenue growth rate in the Banking segment, and the one-time or tough comps, such as the anniversary of T. Rowe, and license fees and term fees.

FIS serves the largest financial institutions, regional banks, and community banks by providing them with products and services. They provide the best-in-class products and services, which is beneficial for the community banks because it prevents them from having to add more vendors and simplifies their back office. John Durrant leads the Banking Solutions segment and is supported by the other leaders within the company.

Stephanie Ferris states that the Capital Markets business serves the largest financial institutions globally and does not serve the smallest community banks or credit unions. Erik Hoag adds that the recurring revenue in the first quarter was 4% and second quarter was 3%, and that this is expected to remain steady in the back half of the year. Stephanie Ferris also states that the grow-overs are now in non-recurring, which is keeping the overall revenue growth guide down.

Erik Hoag discussed the improvement in EBITDA margins, which was mainly due to Future Forward success. Stephanie Ferris then discussed how they looked at the products in the mix to improve variable and fixed costs to make those product margins better. However, since they have long-term client contracts, it is difficult to renegotiate them until they are up for their natural renewal.

Stephanie Ferris and Erik Hoag answer James Faucette's question about how changes in salesforce and their focus on Banking segment may affect the mix of products in backlog and, ultimately, revenue. They explain that while they are interested in large transformative deals, they are not relying on them to drive organic recurring revenue growth. They also state that they feel good about their consolidated guide and their macro assumptions.

Stephanie Ferris explains that Amplify, their cross-selling initiative, has been successful since the acquisition of Worldpay, but there has been no revenue share between the two segments. Going forward, a normal commercial agreement will be established, with a revenue share for whichever distribution channel is selling the other's product. This revenue share will only apply to products sold pro forma, not historically.

FIS has been an active player in account-to-account networks globally and in the US, and they have seen early momentum in the FedNow certification process. They have 115 banks in the pipeline and the ability to ramp up hundreds more depending on demand. FIS is ready to enable customers who would like to use the service, but it is still too early to tell what the overall financial impacts will be. The $3.9-4 billion mentioned does not include synergies or Future Forward savings.

Stephanie Ferris clarified that FIS is not stepping away from the large financial institution market, and that they have previously called out some large strategic transactions like a T. She then answered Vasundhara Govil's question about what needs to happen to get the Banking side back to its normalized 3-5% revenue growth, saying it is mostly a macro issue.

Stephanie Ferris explains that FIS is still interested in large strategic transactions, but that they will not be relying on them as a driver of growth for the company. She also clarifies that any large transactions they do win are likely to have a different margin profile than their normal recurring backlog activity. When asked what it would take for FIS to start winning more of these deals, Ferris explains that it is a macro issue.

Banks have refocused their efforts on deposit gathering and profitability, which has led to a slowdown in large transformative deals. Worldpay and FIS estimate $200 million and $300 million of dis-synergies, respectively, in terms of revenue and cost. The dis-synergies will result in a total EBITDA impact of $500 million.

The program has come to an end and the participants can now end their connection.

This summary was generated with AI and may contain some inaccuracies.