Fidelity National Information Services, Inc. Q4 FY2021 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to the FIS fourth quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star, one on your telephone. Please be advised that today’s conference is being recorded. If you require any further assistance, please press star, zero. I would now like to hand the conference over to your speaker, Mr. Nathan Rozof, Head of Investor Relations. Please go ahead.

Good morning and thank you for joining us for the FIS fourth quarter and full year 2021 earnings conference call. The call is being webcast. Today’s news release, corresponding presentation and webcast are all available on our website at fisglobal.com. Gary Norcross, our Chairman and CEO will discuss our operating performance and 2022 priorities, Stephanie Ferris, our President will describe our strategy to unlock the value of FIS, Woody Woodall, our Chief Financial Officer will then review our financial results and provide forward guidance, finally Erik Hoag, our Deputy CFO will also be joining the call for the Q&A portion. Turning to Slide 3, 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. Also, throughout this conference call we will be presenting non-GAAP information, including adjusted EBITDA, adjusted net earnings, adjusted net earnings per share, and free cash flow. These are important financial performance measures for the company but are not financial measures as defined by GAAP. Reconciliation of our non-GAAP information to GAAP financial information is presented in our earnings release. With that, I’ll turn the call over to Gary.

Thanks Nate, and thank you for joining us this morning. Starting on Slide 5, by all metrics our colleagues delivered a historic operating performance for FIS in 2021. Our strategy continues to resonate with our clients and prospects and our team continues to execute at an exceptionally high level. For the full year, revenue increased 11% to nearly $14 billion. Margin expanded by over 200 basis points to 44%, and adjusted EPS increased 20% to $6.55 per share. Growth for the year was driven by strong performance across our operating segments with banking at 8%, capital markets at 8%, and merchant at 19%. In the quarter, merchant came in softer than we expected due to the omicron variant. As you will see in our deep dive on merchant later in the deck, without this impact in late November and December, our merchant growth would have been even higher. For the year, we generated record free cash flow of $3.6 billion. We returned $3 billion to shareholders, increased our dividend, and acquired Payrix, which will accelerate merchant’s ecommerce offering for platforms that primarily serve SMBs. We also successfully completed the Worldpay integration nearly a year ahead of schedule, beating our initial revenue synergy target by 50% and more than doubling our initial expense synergy target. We had a very strong sales quarter even with the omicron variant due to the strong demand for our differentiated solutions. New sales increased our backlog to a record $23 billion, an increase of 8% organically. By any account, this was a record year for FIS and the strongest operating performance in our 53-year history. Turning to Slide 6, given our sales success, we wanted to highlight several landmark wins across our company with clients and prospects who look to FIS as their trusted technology partner to help them expand or transform their business. In banking, this includes a top 15 global financial institution who wanted to accelerate their growth and expansion in the U.S. by executing a digital strategy. This innovative client selected FIS and the modern banking platform to modernize their infrastructure using our cloud-native processing platform. They will also use our cloud-native Digital One platform to enable their strategy, which was a key selling point in their decision-making process. Additionally, Amerant Bank signed a significant deal to outsource most of their solutions to FIS, which allows them to transform their business from a multi-vendor solution to a single innovation partner. This will drive significant savings for Amerant while bringing their solutions to the most current technologies, which is a great example of the power of the FIS portfolio. These wins are indicative of how the differentiated capabilities in our banking segment drove the more than 30% increase in new sales for the year. Turning to our merchant segment, geographic expansion was a core tenet to our strategic rationale of the buy of Worldpay. Throughout 2021, we entered seven new countries, which continued to push accelerated growth in our merchant offerings, especially ecommerce. One of those markets was Argentina, and as a direct result, we signed the country’s largest airline this quarter. They chose FIS because they are looking for a trusted partner with sophisticated vertical expertise and a global processing platform that will help them grow their business. Another key rationale for the Worldpay acquisition is our ability to utilize our combined solutions and data to increase authorization rates. We have now integrated our merchant and issuer processing solutions to create Authmax Preferred. This innovative new solution dramatically increases authorization rates for transactions where we are both the merchant acquirer and issuer processor based on our insight into both sides of the transaction. With this significant innovation, we can improve authorization of historically declined transactions by as much as 40% for trusted cardholders of Worldpay’s participating merchants. This generates significant revenue uplift for our clients. Based on this advancement, Netflix expanded our longstanding relationship this quarter to quickly take advantage of this new capability. Given our strong pipeline, we are looking forward to building on our record new sales increase in merchant of more than 40% for the year. In capital markets, we signed our largest deal in the history of this business with Franklin Templeton. Like our T. Rowe Price announcement a few quarters ago in the wealth vertical, this anchor client establishes us as a leading global player with a differentiated international transfer agency solution that will provide a new leg of growth for capital markets. Additionally, the recent investments we’ve made in our clear derivatives platform are driving significant new wins, including SocGen this quarter, which will transition their middle and back office to our innovative solution. We could not be more pleased with the structural transformation that has occurred within our capital markets business. This team has done an outstanding job of combining our industry-leading products into advanced end-to-end solutions that are clearly resonating through our sales channel. Like our other segments, capital markets had a record year in sales and organic growth with new sales increasing more than 40% for the year. On Slide 7, I’d like to revisit a topic that we discussed last quarter, which is the opportunity that we are seeing in the market to bring solutions together from across our segments. Buyer preferences continue to move in our favor with clients consuming more of our solutions across their enterprise to create unique client experiences. Last quarter, we brought forward the example of Amazon, first utilizing our NYCE debit network capabilities from banking before consuming our omni-channel merchant acquiring capabilities and adding our treasury and cash management solution from capital markets. Given our success and revenue synergies with the Worldpay integration, we continue to evolve our go-to-market strategies through better organizational alignment, which allows us to take advantage of a broader addressable market for our unique solution set. These changes are driving real results as we grow our list of clients that are working across our business segments in unique and differentiating ways. As we continue to build capabilities, programmatically addressing this opportunity to create innovative new experiences truly unlocks the power of FIS. We will continue to bring this forward in the coming quarters as we think this alone could accelerate our growth rates from current levels. As we closed our 2021, I’d like to take a moment to recognize some of the awards FIS earned and to lay our priorities for 2022 on Slide 8. This year, we saw tremendous recognition for our leadership in fintech as a global company. To name a few, Fast Company Magazine named FIS in their Best Workplaces for Innovators list, which recognizes companies that empower their employees to improve processes, create new products, and invent new ways of doing business. In merchant, our Access Worldpay earned honors for the highest authorization rate by The Strawhecker Group. In banking, our Unity wealth management platform was named Best Technology for Family Offices in the PAM awards, and in capital markets, our cleared derivative suite was named Post-Trade System of the Year with Global Investor Group. We were also recognized by Fortune as the Most Admired Company, and we were named a Best Place to Work for the LGBTQ+ community for the fourth consecutive year. Lastly, we were recognized for the Best ESG Reporting by IR Magazine. Turning our focus to 2022, at FIS we have consistently invested for growth, executed at scale, and delivered innovation at the highest level. We will continue to focus on unlocking the power of FIS in an organized and systematic way. This will be centered around delivering compelling new solutions for our clients and taking advantage of our significant head start in the cloud to innovate at speed. We will also continue to componentize our technology stack to make all our industry-leading solutions available to every client, regardless of the segment where they reside today. This will enable us to expand into attractive new verticals like crypto to capture fast-growing and emerging new markets. We have built FIS into an industry leader over the past 50 years, and in 2022, we will again demonstrate how FIS will further its lead over the next 50 years. This business will continue to grow and generate exceptional profitability and free cash flow, which we’ll use to maximize shareholder returns and drive continued strong organic growth rates. Finally, I’d like to address a couple of executive announcements that we made this quarter. First, Bruce Lowthers decided to leave FIS to pursue a role outside the company. Over the past 15 years, Bruce has been a champion of our transformation, and the result of his focus and contributions has been a significant acceleration in growth at FIS. Thank you for your service to FIS, Bruce. We wish you all the best in your next role. Second, I’m pleased to announce that I promoted Stephanie Ferris to be President of FIS. Stephanie returned to the company in September of last year as Chief Administration Officer after originally joining FIS from the acquisition of Worldpay in 2019. She is a seasoned global executive with over 25 years of experience leading payments and technology platform businesses. She also has impressive experience driving digital transformation, frontline customer engagement, and inclusive growth. This is a tremendous achievement, and we are excited to have Stephanie step into this new role. Congratulations, Stephanie. She joins us today and will continue to participate on future earnings calls. Stephanie, welcome. I’ll turn the call to you.

Thanks Gary, and good morning everyone. I’m excited to be here and to share a little bit more about our vision to unlock the power of FIS. FIS is uniquely positioned with the best and broadest set of assets delivered at scale and with global reach. All the start-ups that are coming to market are trying to create what we already have. They want to offer embedded finance solutions and are trying to build those capabilities one by one. We already have leading deposit, lending, issuing, and B2B solutions, and we have a large network of financial institutions, capital markets, and merchant participants to drive adoption at a global scale. Our clients compete effectively within their traditional segments, but the market post-pandemic has shifted and the lines between traditional segments are blurring. By bringing all of our capabilities together to deliver embedded finance solutions, we have the unique opportunity to help our clients compete and win in this new reality. I’ll build on this by providing an example of how we are translating our leading crypto capabilities within ecommerce to drive innovation across all of FIS. Beginning with Slide 10, we see merchant’s ecommerce opportunity as centered around three segments: enterprise, platform, and small to medium-sized businesses. Today, our expertise is in the enterprise space. Multi-national enterprises and leading global brands choose us because of our global reach, best-in-class authorization and fraud rates, and white-glove service. We consistently win landmark clients who need our help to expand into new countries or solve their challenges using our payments expertise. The clients in these segments have unique needs. Serving millions of small businesses directly or through a platform requires specialized capabilities like automated underwriting and onboarding. Payrix will modernize our client experience through their next-generation product suite and enable us to deliver differentiated embedded finance and payments experiences for platforms that primarily serve SMBs, speeding our entry into this high-growth segment of ecommerce. Their team is extremely talented and we are excited to welcome them into the FIS family. Following the Payrix acquisition, we expect to formally launch our entry into platforms later this year, and I will be back again next quarter to share an update with you about this, but first on Slide 11, I’d like to give you a little more color about how we operate in enterprise ecommerce and provide a case study about why we win in the crypto vertical. We serve four of the top five exchanges and have a 100% client retention rate. Our success reflects a combination of both our product and innovation leadership. FIS was the first to offer Apple Pay for cryptocurrencies and now we are launching direct settlement in crypto. We offer 14 payment methods across 46 markets and were named Crypto Payment Service Provider of the Year by Crypto AM in 2021. We were able to quickly expand into this emerging vertical because we have the technology and the expertise to enter new markets faster than our peers. We also have sophisticated solutions that we developed by serving other complex verticals, like travel and airlines, that allow us to assess and properly underwrite new clients that other players may not understand. Here’s where it gets interesting. We are expanding our expertise in crypto from merchant to both banking and capital markets. Our clients in all of our segments want access to this high-growth vertical. We’re enabling banks to open cryptocurrency accounts for their customers and enabling them to buy, sell, and hold crypto in partnership with NYDIG. By integrating Digital One, our clients can offer these accounts to their customers through their mobile apps, displaying crypto and traditional checking and saving accounts side by side. We are also blazing the trail for crypto card issuing within our banking segment. FIS will handle all aspects of card management and processing for CEX.IO. This crypto exchange is offering a new line of crypto-based consumer cards across Europe and the U.K. by leveraging our innovative capabilities. Additionally, our capital markets segment developed software that powers exchanges, traders, and asset managers. These solutions are in demand by our crypto exchange clients and we are quickly deploying our expertise there. In summary, we are expanding the reach of our crypto expertise from merchant to banking and capital markets in order to enable all of our clients to participate in this high-growth vertical. With that, I’ll now turn the call over to Woody to discuss our financial results and provide 2022 guidance. Woody?

Thanks Stephanie, and thank you all for joining us. I will begin with our fourth quarter and full year results, then touch on our balance sheet, cash flow, and 2022 guidance before taking you through our enhanced merchant disclosures. Starting with the fourth quarter on Slide 13, on a consolidated basis, revenue grew 11% and adjusted EBITDA margins expanded 120 basis points, generating adjusted EPS of $1.92 per share. Both banking and capital markets revenue grew 8% while merchant revenue growth accelerated by 500 basis points sequentially to 19%. Banking’s adjusted EBITDA margin expanded 30 basis points to 45% primarily due to continued operating leverage. Merchant’s adjusted EBITDA margin expanded 140 basis points to 52% primarily due to revenue and cost synergies associated with the Worldpay acquisition. Capital markets adjusted EBITDA margin remained constant at 52%, primarily reflecting higher bonus expense related to strong revenue growth which offset operating leverage from new wins. Turning to full year results on Slide 14, on a consolidated basis revenue grew 11%. Adjusted EBITDA margins were 44% and adjusted EPS was $6.55 per share. Adjusted EBITDA margins expanded 220 basis points, primarily due to operating leverage and strong execution of revenue and cost synergies associated with the Worldpay acquisition. In banking, revenue growth accelerated to 8% primarily due to strong new sales execution. Based on our large and growing backlog as well as our expanding pipeline of new opportunities, we expect banking to continue to grow high single digits in the midterm. In 2022, banking will grow 6% or more due to approximately 200 basis points in growth-over. This is primarily due to lapping pandemic-related stimulus and expected lower termination fees. Merchant revenue grew 19%. While new variants of COVID-19 are affecting near-term results, our strong new sales give us confidence that merchant will grow low double digits in 2022 and beyond. Capital markets also continues to execute well with revenue growth of 8%. This segment is well positioned to accelerate revenue growth to the mid to upper single digits in 2022, driven by another strong year of new sales, cross-sell opportunities, and recurring revenue growth. Turning to Slide 15, I’ll touch on the strength of our balance sheet and free cash flow. We generated $3.6 billion of free cash flow for the full year, which we used to buy back 15 million shares, and we paid nearly $1 billion in dividends during 2021. During the fourth quarter, we generated approximately $850 million in free cash flow, which we primarily used to acquire Payrix. In addition, our board of directors recently increased our quarterly dividend by 21% to $0.47 per share. We intend to increase our dividend by approximately 20% per year. This will allow us to gradually grow our dividend payout ratio to approximately 35% of adjusted net income. Turning to our guidance on Slide 16, in the first quarter we expect organic revenue growth of 7% to 8%. We expect our adjusted EBITDA margin to increase by approximately 50 basis points to 41%, and lastly, we expect to generate adjusted EPS of $1.44 to $1.47 per share. For the full year, we expect organic revenue growth of 7% to 9%. We expect our adjusted EBITDA margin to increase by 50 to 100 basis points to approximately 45%. We expect to generate 150 to 200 basis points of margin expansion from operating leverage and annualization of synergies. This will be partially offset by higher labor costs, resulting in our guidance of 50 to 100 basis points of margin expansion for the full year. As a result of our accelerating revenue growth and expanding margins, we expect adjusted EPS to grow 11% to 13% to a range of $7.25 to $7.37 per share for the full year 2022. We expect to generate free cash flow growth of approximately 15% and improve conversion of about 27% of revenue, which is approaching 95% of earnings for the full year. To start the year, we’ll repay debt and reduce our leverage below three turns before we resume share repurchase. Our guidance then assumes share repurchase of approximately $3 billion mostly during the back half of 2022. Please note that we have provided our detailed assumptions for depreciation and amortization, tax rate and share counts within the appendix of this presentation on Slides 26 and 27. Turning now to our enhanced merchant disclosures on Slide 18, our volume trends continue to track closely with the networks. As compared to 2020, global volume growth remains stable at 17%. As a reminder, the networks also experienced stable volume growth between the third and fourth quarters. Our U.S. volume growth accelerated about 200 basis points to 19%. This trend is again consistent with the networks. On Slide 19, we show volume growth trends as compared to 2019. Our global volume growth remained consistent at 23% while the networks’ volumes accelerated modestly. This is due to our larger U.K. exposure, where the omicron variant had a significant impact, as I will show you in a few minutes. In the U.S., our volume accelerated by 100 basis points to 26%. We do not currently serve SMB ecomm or platforms, which helped the networks to accelerate slightly more than us this quarter. We are looking to use Payrix as a first step to close this gap, as Stephanie mentioned earlier. As we began 2022, our volume trends continued to be consistent with the networks in January. International volumes began to improve in January as new omicron cases started to slow in the U.K. In the U.S., volume growth slowed modestly in January as we lapped last year’s stimulus. As the omicron variant recedes, we expect our volumes to continue to track closely with the networks. Turning to Slide 20, we updated the detailed sub-segment data that we showed last quarter to include our fourth quarter results as compared to 2019. While all our sub-segments continue to grow well above 2019 levels, the omicron variant impacted the fourth quarter. Omicron primarily affected revenue yield as compared to 2019 by reducing the mix of SMB, travel, and international volumes for the quarter. On a more positive note, as compared to 2020, merchant yield improved both sequentially and on a year-over-year basis, demonstrating our future revenue growth potential as high-yielding segments recover from the pandemic. Over the next few slides, I will talk you through the results of each sub-segment and how they contributed to our merchant revenue growth. Global ecommerce generated $1.2 billion in revenue during 2021, as shown on Slide 21. During the fourth quarter, global ecomm revenue grew 31% as compared to 2019, excluding travel and airlines. Even with these strong results, we saw the effects of omicron on travel and airlines. The chart on the right shows our monthly travel volumes versus 2019. Travel accelerated through November but then pulled back to May levels in December. The difference between same-store sales and our total volume growth is due to new client wins. As travel comes back and exciting new verticals like crypto continue to emerge, we see significant opportunity for future growth. Turning to Slide 22, enterprise generated $2 billion in revenue during 2021. During the fourth quarter, revenue grew 16% year-over-year and 8% over 2019. In the upper right-hand corner, the impacts of omicron on the U.K. are obvious, where growth dropped to zero in December from mid-teen levels previously. Our U.S. enterprise business also saw some pullback in December but was not nearly as severe as in the U.K. SMB revenue growth over 2019 decelerated to 11% in the fourth quarter, as shown on Slide 23. This is clearly due to omicron as the deceleration occurred in all verticals. As this variant recedes, we expect growth to re-accelerate; however, we are more excited by the opportunity to push into SMBs with ecommerce. In summary, while we continue to see impacts from the pandemic in the short term, merchant TAM is expected to grow 8% to 10% through the midterm, as shown on Slide 24. Further, as we continue to grow ecommerce as a larger and larger portion of our overall revenue mix, we’re confident in our ability to outpace TAM growth and to generate low double-digit merchant revenue growth in 2022 and beyond. The combination of merchant growth with our continued strength in banking and capital markets gives us confidence in our 2022 outlook and in the future of FIS. I would like to thank our colleagues for their continued efforts in serving our clients and driving our business forward. With that, I’d like to open the line for Q&A. Operator?

Our first question will come from Rayna Kumar with UBS. Please go ahead.

Good morning Gary and team, and congratulations Stephanie. Can you comment on the banking solution demand environment and where you expect your financial institutional client to focus IT spend this year?

Yes Rayna, thanks for the question. We’re not seeing much change in demand; it remains very strong and continues to grow into 2022. We just completed a record year in banking sales, following another record year in 2020 and 2019, so our signings have consistently increased. The banking industry is undergoing a significant transformation due to the shift away from legacy technologies, and we are ahead of this trend. We began our cloud migration over five years ago, initiated our cloud-native development applications market three years ago, and recently introduced modern banking. We have a robust pipeline around these initiatives as financial institutions worldwide need to adapt to more modular, agile systems that foster innovation against emerging disruptors. Regarding interest rates, the recent increase is beneficial for our financial institutions, encouraging them to continue investing and increasing demand in these areas. We feel very well positioned heading into 2022, coming off a successful year in banking that should persist next year.

Got it, that’s very helpful. Payrix, that’s a very interesting acquisition. If you could talk about what the acquisition brings to the table for FIS in regards to vertical exposure and new ecommerce capabilities, and then for the purposes of modeling, what impacts should we anticipate from Payrix on your revenue and earnings this year? Thank you.

Yes, I’m happy to talk about that. Payrix is a small but really highly strategic acquisition for us. First of all, it brings our leading global ecommerce capabilities downstream to SMBs through platforms, similar to Stripe Connect. Specifically, it brings capabilities around automated underwriting and onboarding, which are really critical for us to be able to access that marketplace. Secondly and even more strategically, it enables us to add our unique card-present capabilities to create an omnichannel experience, along with our embedded finance capabilities, whether it’s deposit taking, issuing, banking as a service capability, so we think about this acquisition as being very strategic, both in terms of accessing an ecommerce market we haven’t been in before but also really unlocking the value of FIS as we start to be able to deliver embedded financial services out to this marketplace.

In terms of its financial impact, I would tell you it’s immaterial to the top line organic growth rate and probably a few pennies dilutive, to modestly dilutive to EPS.

Got it, thank you.

Thank you. Our next question will come from Jason Kupferberg from Bank of America. Please go ahead.

Morning guys, thanks for taking the question. I just wanted to go back to the slides where you outlined the volume growth versus the networks. Like you said, the trajectory is quite similar, but just the absolute level of growth, obviously the spread there widened out a bit in the quarter. Do you attribute all of that to omicron? I’m just trying to get a sense of how investors’ expectations should maybe be calibrated during 2022. Do you think there could actually be some convergence in the absolute level of volume growth for FIS merchant versus the networks, and is there any way to perhaps suggest what merchant volume or revenue growth in the quarter would have been if not for omicron? Thank you.

Yes, I think it definitely was omicron-related. I think it’s very clear as you look at the U.K. and our exposure to the U.K. compared to others potentially, 13% or so of our revenue comes out of the U.K. from the merchant segment and obviously it dropped to zero in December, so you’re clearly seeing the impacts. As that comes back, we certainly anticipate volumes to come back around it as well, so we feel like it was definitely omicron-related. We saw some improvement in volumes in January, particularly in the U.K. as we started to see cases reduce there and some of the reopening come back there, and obviously it’s having a little bit of impact on our guide for the first quarter, but it’s omicron related.

Okay, understood. Then just a follow-up on the SMB ecomm strategy - it sounds like there will be more formal announcements over the next quarter or so, but how long do you think this takes to move the needle on overall merchant segment revenue growth once the strategy is implemented and you start to execute out in the market?

Why don’t I start and then I’ll let Stephanie add. As we’re guiding for the merchant business, we really see the merchant business growing in low double digits this coming year. If you look at historically based on where the merchant business grew prior to COVID, this is certainly a substantial acceleration given our exposure into ecommerce at the enterprise level. We touted ecomm growing at greater than 30% minus travel and airlines, so we’ve got a really strong business. This actually in 2022 in the short term is going to be very low tailwind for us, but we do think it’s very strategic to move into this new market that we talked about on prior calls, that we are not traditionally in, so that’s why we think this acquisition is going to be very important for our future expansion in this end market. I’ll let Stephanie add to that.

I believe Gary provided the right response to that. Additionally, as we examine the merchant segment and consider ecommerce, we are recognized as one of the industry leaders, and gaining access to a previously untapped market is extremely strategic for us. This development allows us to introduce the embedded finance capabilities from our banking and capital markets divisions to this new customer base, which could significantly enhance our overall value. We are genuinely enthusiastic about this opportunity. While it may take some time, as Gary mentioned, this asset is essential for us as it opens up the ecommerce segment and allows us to deliver the embedded finance capabilities we already possess. We are very excited about this prospect.

All right, well thank you for the comments.

Thank you. Our next question will come from John Davis with Raymond James. Please go ahead.

Hey, good morning guys. First, just wanted to touch on banking. Woody, you called out about 200 basis points growth over headwinds stimulus and term fees, so first, maybe a breakout there - is that basically 100 basis points each? Also, do you have anything in the guide for any of the CPI inflators that are in the contracts in the banking segment, or is that just outside that 6% number?

Yes, the impact on stimulus is about 150 basis points - think primarily Paycheck Protection Program and the lending capabilities that we rolled out last year. The term fees are roughly 50 basis points, and our expectation is just lower term fees this year. We do have CPI within our contracts - they roll over in terms of how the contracts roll in terms of annualization, so that will come on over the course of the year. It’s really how we think about the shape of the year too, where we expect a little higher growth in the back half of the year as those contracts kick in with CPI.

Okay, thanks. Then just a quick follow-up on free cash flow, you talked to 95% conversion but 15% free cash flow growth, which is a little bit faster than EPS growth. I guess how do we think about that 95% going forward, and when do you expect the EPS growth to catch the cash flow growth once the capex rolls through to D&A?

Yes, it’s a great point, John. We’re trying to highlight it as well. We’ve been spending heavier than many in the capex world for the past several years. We actually anticipate capex of about 8% to 9% this year, but I could see it rolling towards the lower end of that outlook. As we see that, you’ll see cash flow outpace earnings per share potentially for the next few years and then it will normalize out, where you’ve seen it go the other direction for the last several years, where we were expanding capex and then the D&A is catching up right now. The D&A right now is one of the headwinds that we’re seeing in terms of higher teens EPS growth, but you’re seeing it convert into free cash flow at that 15% growth level.

Okay, appreciate it. Thanks guys.

Thank you. Our next question will come from Darrin Peller with Wolfe Research. Please go ahead.

Thanks guys. Let’s shift gears to the banking segment for a minute. I know a lot of talk about merchant, but just given the magnitude of the growth there and the size, along with maybe just touch on cap markets too. Gary, can you just tell us if you think you have all the right assets now? There’s been a lot of smaller companies moving up the value chain in terms of trying to get bigger and work on bigger banks, but in terms of what you can offer from a cloud-based offering for both core and some of the ancillary products, do you have enough to see yourself growing in that segment in that 7% to 9% range, call it medium term, medium to long term for banking? And then, look - I mean, cap markets has been strong, but just remind us what’s really driving that and if that’s sustainable in your mind.

Yes, Darrin, that's a great question. The short answer is definitely - we believe these will easily grow by 7% to 9% in the near term as we move past some of the challenges in banking. In terms of our asset pool, I think we are currently best in class. Woody just pointed out that our free cash flow is increasing because our large program expenditures are decreasing as these projects are completing, which we anticipated. From a banking perspective, our Digital One capabilities provide a truly omni-channel digital experience, built from the ground up in the cloud. We are now integrated with hundreds of institutions that have implemented various components of that platform. Similarly, with Code Connect, we have a comparable situation. Our modern banking platform has achieved significant successes. Additionally, some competitors have recently announced their entry into this space, which we believe validates the strategy we initiated over three years ago. Today, we lead in cloud deployment, with unmatched availability and total cost of ownership delivered via our private cloud and our ability to engage with the public cloud. Our application stack is the most advanced in the market today, and we are effectively driving further results through our back office-type services, among others. The situation in capital markets is quite similar. We indicated that we would start focusing on software as a service, deploying our leading capabilities in a one-to-many model after enhancing our applications through a comprehensive end-to-end solution stack. The progress seen in 2021 and what we observe in 2022 suggest that this acceleration will continue. The only challenge in that market is related to our license fee growth, which we have consistently communicated has been decreasing as a percentage of revenue. However, we still face some volatility in license fees due to their term nature. Recurring revenue in capital markets has demonstrated robust growth over recent years, continuing into 2021, so both business segments are performing exceptionally well, and our timing is advantageous. All financial institutions, large investment houses, and private equity firms are now embarking on modernization strategies that require resilient outsourced solutions. We are very optimistic about these two businesses, with some headwinds in the banking sector this year as Woody mentioned, but we believe both can easily exceed 7% growth in the coming years and we feel confident about that.

Thank you, Gary, that was helpful. I have a quick follow-up regarding capital allocation. Considering what you've shared, the stock should ideally move positively. Can you remind us about your available capital and liquidity, particularly in terms of free cash flow and debt capacity, that you could allocate towards buybacks or potential mergers and acquisitions? Additionally, there seems to be a tightening of bid-ask spreads for some smaller fintech growth companies. What are your thoughts on this, especially in light of current market conditions and private valuations for these growth assets? Thanks, everyone.

Yes Darrin, it’s interesting - I talked about we had a couple of things going there. One, we’re going to pay debt down below three turns. In a rising interest rate environment, we think our credit rating is extraordinarily important. The pandemic put us behind probably two years in terms of reducing our debt back to below three turns, so we’re going to focus on that first. At that point in time, call it midyear this year, we’ll look to either buy back shares or do additional M&A. As you’ve heard us consistently talk about, we would rather do M&A, but we look at share buybacks for default purposes. Your other point is also very interesting, where there are some interesting assets that are in the marketplace, valuations look a lot differently than they did, say six months ago, so it maybe resets a bit of chessboard for other assets that are out there that we might be able to consolidate or bring into our distribution channel.

Yes Darrin, the only thing I would add to that is, look - Woody’s kind of hitting on it, the aperture gets more open, right, as some of these pull-backs occur in valuations. We’ve always talked about it, when we look at M&A, we’ve got to find capabilities that drive a new product or service to an existing market we serve, or break us into an adjacency. Financials matter, right - obviously we’ve got to make a strong investment for our shareholders and that return’s important, culture’s important, but we can have a pretty wide aperture when it comes to things that we look at now, given the scope of our business. M&A will continue to play an important role once we get our balance sheet reloaded, and we’ll continue to look for strategic ways to accelerate our growth from here. We’re not looking to do turnaround deals and we’ve been very clear about that. We’ve gone through a tremendous transformation at FIS. You can go across any one of our businesses and you look at this modernization effort that is starting to become behind us, right, with our capabilities end market, even when you look at Access Worldpay and the new acquiring platform on the merchant side, so really it’s going to be all about things that can accelerate our growth from these current levels. Last year was a record growth year for us, so just really strong operating performance, so we’ll continue to evaluate that lens on M&A.

Thanks guys.

Thank you. Our next question will come from Ramsey El-Assal with Barclays. Please go ahead.

Hi, thanks so much for taking my question this morning. I was wondering if I could ask you about revenue yield and the trend for the rest of the year, whether we should continue to expect to see expansion in fiscal ’22, I guess due primarily to travel, recovery in travel volumes and other mix-related factors, but any commentary on the revenue yield trend and expectations in ’22 would be appreciated.

Yes, thanks Ramsey. Yes, we anticipate revenue yields to continue to improve. As you compare to 2020, revenue yields were a minus-3 in the third quarter and a plus-2 in the fourth quarter, so you’re starting to see that. You compare back to 2019 - you know, we saw a little bit of a step back for omicron, but over the course of the year and versus 2019, you saw a minus-14 and minus-16, then you saw a minus-7, so an improvement, and then minus-10 really impacted by omicron in the fourth quarter, but obviously we expect those yields to continue to come forward and trying to highlight that, really looking at the sequential and year-over-year in 2020 yields.

Got it, all right. A follow-up from me, I wanted to ask about Slide 7 and the componentized cross-segment solutions that you discussed. What type of internal work needs to be done technologically or organizationally, what type of integration needs to be done in order to really execute on that strategy? Also, if you could comment on whether share repurchase is contemplated in the EPS guide.

Yes, let me address cross-segment sales. The team has done a fantastic job increasing cross-sales through the Worldpay acquisition, surpassing $700 million, significantly exceeding our initial expectations. This success has opened up substantial cross-sell opportunities across our entire client base. From a product perspective, we must continue investing in modernization platforms and componentization. We will keep working on this throughout the year, with completion of these programs anticipated soon. We’ve laid the groundwork through our cloud initiatives, now with over 83% of our computing done in the cloud, so many technical aspects are already in place. Organizationally, we are restructuring our go-to-market strategy. Traditionally, our sales approach has been enterprise-focused within segments. We are now aligning our sales teams to operate as a unified enterprise across the company, starting with our top 200 clients, which are responsible for the majority of our revenue. We aim to enhance engagement in this client base, fully leveraging FIS's capabilities. Currently, just over 20 of these top clients are utilizing services across all three segments, and we expect that number to grow significantly with this new approach. We have experienced success in the past by elevating our sales strategy from product to customer and then segment levels, and we’re now extending this to the enterprise level, which we find very promising. We believe this shift could potentially boost our growth rate beyond our current targets of 7% to 9%. We will keep our investors informed as this develops. We just implemented the changes last week during our sales kickoff meetings, and we are eager for what the future holds.

To answer the second part of your question around share buyback, we do anticipate and have modeled about $3 billion in share repurchase, and that’s mostly in the back half of the year, Ramsey.

Thank you very much, appreciate it.

Thank you. Our next question will come from Dave Koning with Baird. Please go ahead.

Yes, hey guys. Thank you. Maybe to ask the yield question another way, I think yield this year is about 89% of 2019. Is there any reason that the mix has permanently shifted or do you think it could back to a normal economy, and if so, if we get back to 100%, you could have a volume year of normal 10%, let’s say plus-10% extra from yield, like could you have a 20% merchant yield just because merchant gets back to normal mix of business?

Yes, as we’ve talked about, as recovery occurs particularly in the high-yielding verticals, we certainly would anticipate that to invert the other way, as we’ve talked about for the last several quarters, actually. That said, we don’t see travel coming back 100% in 2022. We do continue to expect it to increase over the course of the year, but not to be at 100% of pre-pandemic levels. But you’re right - we do anticipate seeing yields being a net benefit as those higher yielding verticals return back to more normalized levels.

Simply stated, Dave, we’re seeing no difference in yields as they decline due to the pandemic. As they come back after the pandemic, the yields return, so we’re seeing zero evidence of anything impacting our yields from that viewpoint.

Thank you for your response. As a follow-up, I recall that when you announced Worldpay, you projected mid-teens EPS growth in the future. However, you are now guiding for 11% to 13% this year despite strong revenue growth and recovery. Could you explain the difference in expectations, and do you believe we can return to mid-teens growth or better going forward?

Yes, I think we can. I think you’ve got a couple of things in terms of the yields here. We’ve got some labor costs that are a bit of a headwind, about 100 basis points of headwind in that 50 to 100 basis point margin expansion guide. When we pulled that together originally, I don’t think we anticipated this level of labor costs, and then you’re seeing some of the D&A being a little bit of a headwind in the short term, and as we normalize that over the next few years, we think you’ll see that mid-teens growth again in EPS.

Got you, thanks guys.

Thank you. Our next question will come from Timothy Chiodo with Credit Suisse. Please go ahead.

Great, thank you. Good morning. Thanks for taking this question. It’s on the embedded finance opportunity. You talked a lot about addressing this with new platforms and expansion into SMB and ecommerce. Maybe you could talk a little bit about the opportunity for embedded finance with your existing book of software partners through the traditional integrated payments business, and as a follow-up, maybe you could just give us an update on the number of software companies that you’re already working with through that business - I understand it’s a pretty large absolute number and a good starting point.

Yes, it’s a great question, happy to chat. Our existing ISV business, we have about a thousand partners there. In order for us to really enable embedded finance, we needed automated onboarding and underwriting capabilities because you don’t do that as a one-off, you do that really automated, so that’s what the Payrix acquisition brings to us, is those capabilities. We’ve been partnered with them, they’ve been integrated to us using our best-in-class acquiring payment capabilities since they started in 2015, so they bring that automated on-boarding and underwriting and so you’re exactly right, we can offer out now that capability to our existing ISV base to the extent it’s relevant to them, because as you know, it’s vertical specific in terms of if this capability works for you. But it is an opportunity to go through our existing base. As you know, our strategy has been software-led - the current term for that is platforms, but our strategy within SMB has always been software-led, dating way back to when we bought Mercury. The acquisition of Payrix really starts to strategically pivot us, continuing our software-led strategy but now getting us to access our ecommerce capabilities and our embedded finance capabilities. We’re pretty excited about it, both in terms of being able to access the platforms that sit in market we can’t serve today because we didn’t have the C&P capabilities, but also to go back to our existing ISV base and offer out these capabilities as well, including not just payments but also embedded finance, so really excited about it.

Great, thank you.

Thank you. Our next question will come from Lisa Ellis with MoffettNathanson. Please go ahead.

Hi, thanks for taking my question. I wanted to follow up on the announcement you made around Authmax Preferred. You had highlighted this capability, I recall, at the time of the Worldpay acquisition, the ability to connect the issuer processing side and the acquiring side together to offer the differentiated solution. Can you just maybe dimension a bit how we should think about from what portion of either the TAM or your existing customer base this type of capability is applicable to, and what opportunity that could drive for FIS?

Yes Lisa, that's a great question. I'll start and let Stephanie add to this. Ultimately, this is a fantastic product that is beneficial for all our merchants, but our ecommerce merchants will particularly appreciate this solution. As you mentioned, we saw a unique opportunity when we integrated the companies. The team has done an excellent job bringing these two data streams together effectively. We launched this in very late Q4, and we highlighted Netflix as an early adopter. We've observed significant improvements in decline rates, which are critical to manage in the ecommerce space to foster onboarding growth. I expect to see strong demand from our ecommerce merchants, and this capability will enhance our offerings for all merchants, helping to differentiate FIS moving forward. We’re very excited about the potential of this new initiative.

Yes, I think it’s very relevant for our global ecommerce clients. The benefit of having both issuing and acquiring data together is significant. Additionally, I believe it is crucial for platforms that serve small and medium-sized businesses or marketplaces because they focus on enhancing those businesses' revenue. Being able to authorize transactions effectively is important for them, as it increases revenue for the end business. Therefore, we believe this capability is not only essential for our global ecommerce base but also for any software-as-a-service platform or marketplace that aims to help small and medium-sized businesses increase revenue for their customers.

My follow-up question is about the SMB e-commerce strategy mentioned on Slide 10. You noted an attractive new TAM opportunity at the bottom, and I understand that FIS has not historically focused heavily on SMBs. Could you provide more details on how you plan to differentiate FIS in this area compared to other more specialized players, such as Payfax, especially given the competitive nature of the market, particularly at the smaller end? Thank you.

We truly believe that payments will be integrated into software. Software will be the primary way payments are made, whether through a platform or a marketplace. That's why we acquired the Payrix asset. Our initial focus is on platforms and the software-driven aspect, while also considering opportunities in the direct SMB space. Our strategy is geared towards empowering software-as-a-service platforms to support their SMBs in the long run. We recognize the importance of vertical-specific strategies. Historically, we haven't invested in software, as we believe our best approach is to be the embedded finance and payments provider for software-as-a-service companies. There is a growing number of niche players offering various as-a-service options to these platforms, including payments, checkout, and risk as a service. We believe we are well-positioned to provide such services in the midterm. We are starting with our in-house capabilities, specifically payments and banking as a service, but we don’t envision these platforms wanting to engage with multiple vendors and complicate their back office in the long run.

Yes, super helpful. Thank you.

Thank you, and we do have time for one last question. That will come from Tien-Tsin Huang with JP Morgan. Please go ahead.

Hey, thanks so much. Good morning. I just wanted to follow up on Tim and Lisa’s question here and what you said there, Steph - and by the way, congrats on the title and the change, I’m happy for you. Just on the integrated versus embedded payments strategy change, just thinking about the back book and now the front book of how you’re describing it, what are the implications there for revenue, and do those two co-exist? I’m just trying to understand how that transition plays out here.

Yes, great question, Tien-Tsin. I think the world started with integrated. I think as software pushed down market and became much more competitive, the world has moved and evolved to embedded, so those platforms. The integrated solution will always be available, but it’s a bit of an evolution, which is now we need an embedded with payments capability, and then I think you’re even, the next-gen as well is embedded fintech. I don’t envision embedded payments living by itself very long either. I do think you’re seeing the world converge on embedded fintech. I think the nice thing about the Payrix acquisition for us is it enables us to give any model people want. Some people might be really happy with their integrated solution and that model. We now have the embedded payments solution in that model, and as you know, we have a Payfax solution in that model. We do have a pretty significant back book of card present ISVs, and we’re pretty excited about it because we think that we can now offer out embedded capabilities. Remember, along with these embedded capabilities beyond on-boarding and underwriting, there is also all kinds of other a-la-carte services we can offer, like KYC, credit risk monitoring, and a lot of capabilities that these platforms have been looking for. We do have to keep a close eye out on the financials around that, but we think we’re pretty good at that, and we’re excited about the opportunity both for front book and back book.

Got you. It’s good to have a wide range of options since there isn’t a one-size-fits-all solution. I appreciate that. I know we’ve been talking for about an hour, but I’d like to ask a question about margins, if that’s alright. You’re forecasting a bit more expansion than we expected. Do you have sufficient capacity to invest and push for growth in both the platform side and the back book, especially considering the bookings have been strong? I’m curious about how you’re balancing investment and integration with the usual margin expansion. Thank you.

Yes, thanks Tien-Tsin, it’s a great question. We always try to balance margin expansion versus investment. We haven’t pulled back on our capital as well. The synergies and the level of synergies that we’ve been able to push through and the operating leverage within the business allows us to continue to invest but to still drive that margin expansion, even in light of higher labor costs this year, so we feel good about having enough money to invest and having enough resources focused towards that investment. When we talked about capex maybe not being quite as high as it has been in the past, we still have a good bit of capex, call it 8% of revenue outlined to build out some of those capabilities Stephanie’s talking about as well, so we think we’re properly resourced and feel good about being able to deliver these capabilities that will help drive revenue growth in ’23 and ’24 and beyond.

Great, thank you.

Ladies and gentlemen, thank you for participating in today’s question and answer session. I would now like to turn the call back over to Mr. Gary Norcross for any closing remarks.

Thank you again for joining us this morning, and thank you to our dedicated colleagues who continue to show their commitment to providing world-class technology solutions for our clients so that they can stay ahead of the curve. This commitment will lay the foundation for our growth in 2022 and beyond. If you have any further questions that were not addressed on this call, please reach out to our Investor Relations team. Thank you, and I hope you enjoy the rest of your day. Goodbye.

Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect.