Fidelity National Information Services Q1 2022 Earnings Call Transcript

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Provided by Quartr
May 3, 2022

Key Takeaways

  • Revenue Up 9%: Organic revenue rose 9% to $3.5 B in Q1 with adjusted EPS up 13% to $1.47, surpassing guidance and growing backlog by 8% to $22.5 B.
  • Banking organic growth of 7% outpaced targets, driven by Payments 1 issuer processing wins, wealth platform contracts and loyalty network expansion including AT &T.
  • Merchant segment delivered 15% organic growth led by e-commerce, a 200 bp gain in U.S. market share to 20%, strong enterprise volume and travel rebound above 2019 levels.
  • Capital Markets grew 6% organically and recurring SaaS revenue up 8%, highlighted by landmark wins including a $1 T AUM client, record private markets deal, and Robinhood expansion.
  • Free cash flow jumped 41% to $786 M, net debt cut to 3× EBITDA ahead of plan, dividend up 21%, and $3 B–$6 B of share repurchases planned for 2022–23 representing ~15% of market cap.
AI Generated. May Contain Errors.
Earnings Conference Call
Fidelity National Information Services Q1 2022
00:00 / 00:00

There are 14 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the FIS First Quarter 2022 Earnings Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Mr.

Operator

Nate Rosoff, Head of Investor Relations. Please go ahead, sir.

Speaker 1

Thanks, Sherry. Good morning and thank you all for joining us today for the FIS 1st Quarter 2022 Earnings Conference Call. The call is being webcasted. Today's news release, corresponding presentation and webcast are all available on our website atfisglobal.com. Gary Norcross, our Chairman and CEO, will provide a business and strategy update Company.

Speaker 1

Stephanie Farris, our President will discuss our operating performance. Woody Woodall, our Chief Financial Officer will then review our financial results and provide forward guidance. Call. And finally, Eric Hoag, our Deputy CFO will also be joining the call for the Q and A portion. Turning to Slide 3.

Speaker 1

Call. 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. Call. The company undertakes no obligation to update any forward looking statements whether as a result of new information, future events or otherwise, except as required by law.

Speaker 1

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 and adjusted net earnings per share and free cash flow. These are important financial performance measures for the company, but are not financial measures as defined by GAAP. Reconciliation of our non GAAP information to the GAAP financial information are presented in our earnings release. Call.

Speaker 1

With that, I'll turn the call over

Speaker 2

to Gary. Thanks, Nate, and thank you for joining us today. Starting on Slide 5, Call. We had a strong start to the year, significantly exceeding our revenue expectations and achieving the high end of our EPS guidance. Revenue increased 9% organically to $3,500,000,000 and adjusted EPS increased 13% to $1.47 per share.

Speaker 2

All of our segments beat our organic growth expectations in the quarter. Banking grew 7%, exceeding our 6% expectation. Merchant grew 15% versus our low double digit expectation and capital markets grew 6% with 8% growth in reoccurring revenue. New sales increased our backlog 8% organically to $22,500,000,000 This consistent strength in backlog aligns with our mid term outlook for 7% to 9% organic growth and our sales pipelines remain strong. I'd like to thank the team for their sharp focus on serving our clients and for their continued execution.

Speaker 2

Turning to Slide 6. The pace of change in our industry is very exciting. We've invested ahead of this change and throughout the pandemic to position FIS for success. We moved our technology Infrastructure and Application Architecture to the cloud, and we continue to bring new or significantly upgraded solution suites to market. And Banking, our multi year investment strategy has positioned us with the best in class capabilities across core and digital banking, Issuer Processing and Wealth Management.

Speaker 2

We further expanded the modern banking platform geographic reach this quarter by enabling public cloud deployments with create and deploy new embedded finance offerings for their customers. We recently formed a partnership with Circle to enable our merchants to receive settlement in USD Point and crypto.com will be our 1st pilot customer. In addition to our ability to quickly deploy advanced technologies, International reach is also a true differentiator for us. Our merchant business added 7 new countries in 2021 and plans to add 15 more by the end of 2023. In keeping with the crypto theme, capital markets recently announced a new partnership with Fireblocks to enable our clients to store and issue digital assets, as well as to gain access to decentralized finance.

Speaker 2

Across multiple verticals, industries and client types, we continue to develop mission critical systems at global scale that empower our clients to innovate and grow. Call. The power of FIS doesn't stop with our ability to deliver unique solutions. The true value unlocked is leapfrogging from leading solutions for individual client types Conference Call to offer expansive embedded finance experiences that can bring all of our capabilities to bear for every client. We have technology Call.

Speaker 2

More and more clients are asking for access to solutions from all three of our operating segments to enable robust transformations across their enterprise. Call. These initiatives will speed access for them and open up rich new revenue streams for us. We are also evolving our go to market strategy by aligning our sales organizations to directly target these new opportunities. Despite market fears about disruption, Call.

Speaker 2

At FIS, we think we are the disruptor and we will help our clients win now and into the future. With that, I'll turn the call over to Stephanie describe how this vision is translating to our operating segments and to review their Q1 performance.

Speaker 3

Thanks, Gary, and good morning, everyone. Call. This was an exciting quarter with momentum building for our new solutions as Gary discussed. Starting with Banking on Slide 8. Call.

Speaker 3

We continue to see elevated organic growth posting our 6th consecutive 5% plus revenue growth quarter, which is well above the historical trend. Call. Clearly, our multiyear investment strategy is paying dividends. To bring our vision to life, I'd like to highlight a few strategic new wins, which are a direct result of our technology investments. Payments 1 is the most advanced scaled issuer processing platform in the market.

Speaker 3

Call. We've migrated approximately 1500 of our existing clients to this platform and we continue to leverage its unique end to end capabilities to win new clients. Call. In the quarter, a top 20 U. S.

Speaker 3

Financial institution selected Payments 1 for debit processing and card production. Call. We remain differentiated with our issuer processing capabilities and believe we have significant TAM to capture with this innovative platform. Call. In addition, we're making significant investments in our wealth management platform, gaining a second landmark win with Mutual of America, following our T.

Speaker 3

Rowe price win last year. And in a third example, our premium payback loyalty network is a truly unique solution that combines our strengths in issuing and acquiring to enable consumers to pay with points in store at the point of sale. Call. This quarter AT and T decided to join our loyalty network and consumers will be able to use points from participating issuers to pay in AT and T stores. Call.

Speaker 3

As retailers and issuers continue to join, we expect a powerful network effect. Capital Markets grew revenue 6 percent organically as shown on Slide 9. Our team continues to transition the business to SaaS based revenue models, which drove recurring revenue up 8% in the quarter. Transitioning to SaaS not only increases the predictability and resiliency of growth, Call. As for Agency solution to create an as a service offering that drives efficiency and automation.

Speaker 3

Similar to banking, We had a second landmark win this quarter with a leading financial institution with more than $1,000,000,000,000 in AUM, Continuing the momentum from our Franklin Templeton win last year. This win builds on a long standing core processing relationship and we were thrilled to enhance our value proposition by bringing them even more breadth of capabilities. We also saw strength with privately held investment firms. Our Investment Operations Suite drove Capital Markets' largest ever private markets deal with a premier high net worth multifamily office that will leverage our technology suite to transform their operations. Finally, we expanded our relationship with Robinhood in the quarter to empower their new stock loan income program.

Speaker 3

This expanded relationship helps cement our long term vendor of choice partnership with Robinhood, where we continue to expand our value proposition across digital and digital assets for this client. Overall, our end to end SaaS solutions are differentiated in the market and will continue to drive strong growth for capital markets. Call. On Slide 10, our merchant segment generated 15% organic growth this quarter. And our Parex acquisition is already paying off by signing with several SaaS based platforms in the quarter.

Speaker 3

PayRx more than doubled their client count as compared to last year and we highlight a few recent wins with platforms spanning the education, commercial and marketplace verticals on the slide. We also continued our success as a leading acquirer for crypto. Currency.com signed with us this quarter after witnessing our capabilities and client service for another crypto exchange. Report recently published their 2021 U. S.

Speaker 3

Merchant Acquirer ranking, which highlighted the strength of our e commerce and software led strategy. Call. Our share of total U. S. Volume increased by approximately 200 basis points to 20% in 2021 from 18% the year before.

Speaker 3

Call. I couldn't be prouder of our team. The pandemic put them to the test and they continue to put our clients first and execute at the highest levels. 23% growth on a constant currency basis. As anticipated, travel rebounded strongly in the quarter, exceeding 2019 levels.

Speaker 3

Call. Our large enterprise business grew 14% organically and continues to be a differentiated source of scale. Lastly, software led SMB SMB grew 13% organically with restaurant and retail both growing double digits. With that, I'll now turn the call over to Woody to discuss our financial results. Woody?

Speaker 4

Call. Thanks, Stephanie, and thank you all for joining us today. I will begin with our financial results on Slide 13, then I'll touch on our balance sheet and cash flow before taking you through our guidance. We're very pleased with our 9% organic revenue performance and the strong results achieved across all of our operating segments. We maintained consistent margins year over year as we were able to successfully offset wage inflation and difficult comparisons, including last year's stimulus related revenue.

Speaker 4

This translated to 13% adjusted EPS growth, which is consistent with the high end of our full year guidance range. Turning to our segments. Banking revenue grew 7% on an organic basis, primarily due to continued client demand. Adjusted EBITDA margins contracted 90 basis points to 42%. Segment.

Speaker 4

The banking segment is where we experienced the majority of our margin headwind as it directly benefited from the Paycheck Protection Program or PPP revenue in the prior year and was impacted by higher labor costs. Merchant revenue grew 15% on an organic basis, reflecting strong results across all three sub segments, as Stephanie mentioned. Merchant adjusted EBITDA margin expanded 30 basis points to 47%, primarily due to high contribution margins on new revenue growth. Capital Markets revenue grew 6% on an organic basis, primarily due to continued strong new sales and the transition to SaaS driving higher recurring revenue. Capital Markets adjusted EBITDA margin expanded 60 basis points to 47%, primarily due to its continued operating leverage.

Speaker 4

Turning to slide 14. We generated $786,000,000 of free cash flow during the Q1. Free cash flow increased by 41% year over year. We have invested heavily in innovation over the past 5 years spending over $5,000,000,000 and CapEx over that time. We believe that this investment has peaked as a percentage of revenue and expect it to come down gradually over the next several years to 6% to 7% of revenue.

Speaker 4

As a result, we expect free cash flow conversion to expand in subsequent quarters and we remain on track to expand our free cash flow conversion toward 95% of adjusted net earnings for the full year. We increased our quarterly dividend by 21 percent to $0.47 per share and we returned a total of $287,000,000 in dividends to shareholders this quarter. Call. As a reminder, we plan to increase our dividend by approximately 20% per year in order to gradually grow our dividend payout ratio over the next several years to approximately 35 percent of adjusted net income. In addition, we reduced debt by $1,200,000,000 including repayment and foreign exchange benefit, ending the Q1 at 3 times leverage, which was a full 90 days ahead of schedule.

Speaker 4

We expect to maintain our leverage below 3 times and we'll resume share repurchase in the 2nd quarter. At current valuation levels, we believe share repurchase is the best use of excess Free Cash Flow. We expect to buy back approximately $3,000,000,000 in shares during 2022. We also anticipate utilizing excess free cash flow and 2023 to buy back shares. At current course and speed, this would be approximately $6,000,000,000 in share repurchases during 2023.

Speaker 4

Combined this represents approximately 15% of our current market cap. Turning to Slide 15 to review our guidance. Call. There is no change to our full year outlook. We achieved a strong start to the year and remain on track to deliver 7% to 9% organic revenue growth, 50 to 100 basis points of adjusted EBITDA margin expansion and 11% to 13% adjusted EPS growth for a range of $7.25 to $7.37 per share.

Speaker 4

The primary risk and opportunities to our forward guidance include the impact of foreign exchange rates, Geopolitical Risk and the Pace of Pandemic Recovery. Combined with the upside we delivered in the Q1, we believe that this supports maintaining our outlook for the full year. Call. For the Q2, we expect organic revenue growth of 6% to 7%, consistent with revenue of 3.65 to $3,685,000,000 We expect adjusted EBITDA margins of approximately 44%, Resulting in adjusted EPS of $1.72 to $1.75 per share. Given the unusual puts and takes that are affecting organic growth rates from Banking and Merchant, I would like to provide you with some more color on our segment assumptions for the Q2.

Speaker 4

In Banking, we currently expect organic revenue growth to be in the mid single digit range for the Q2. This is primarily due to difficult compares created by the termination fees and pandemic related revenue that we generated last year. We anticipate a similar growth profile of mid single digits for our capital markets segment in the 2nd quarter. For merchant, we currently expect organic revenue growth of approximately 9% to 10% in the 2nd quarter. This equates to strong sequential growth of approximately 15% for merchant.

Speaker 4

In addition, we expect adjusted EBITDA margins to step up each quarter throughout the year. Call. Lastly, we include assumptions for FX, corporate and other and several below the line items within the opinion section of our earnings presentation. Call. In conclusion, I would like to thank our colleagues for their continued efforts and perseverance through the pandemic.

Speaker 4

You continue to Execute at a high level and generate strong financial results. Operator, would you please open the line for questions?

Operator

Thank you. Our first question will come from George Myhillos with Cowen. Please go ahead.

Speaker 5

Great. Thank you. Good morning, everyone. Thanks for taking my Call and congrats on the results. Call.

Speaker 5

Just to kick things off, on the merchant side, the yield was strong. It was somewhat stronger than what we expected. Any reason why that should not continue throughout the course of the year as some of these verticals like travel come back. And then Stephanie, you talked about crypto and obviously your strong exposure there. How is that vertical performing and how are you thinking about that over the remainder of the year?

Speaker 4

Stephanie, I'll take the yield question and you can work on the crypto. George, we do anticipate yields to be a positive benefit to revenue over the course of the year. As we highlighted really over the past 18 to 24 months as certain verticals came off, the yields came off heavily. We saw yield benefit as those verticals coming back online. Travel and airlines is a perfect example that we've been highlighting.

Speaker 4

Again, we do anticipate travel and airline to be a tailwind over the course of the year And we anticipate yield benefit throughout 2022.

Speaker 3

Yes. And then in terms of crypto, George, as you know, we've been talking about this for a while. We process for the The top 4 out of 5 largest crypto exchanges. They come to us because of the level of authorizations and Fraud rates that we can provide for them in terms of being benefits, but also because we're a large scale provider for them. And so you're continuing to see us take share in the crypto vertical.

Speaker 3

We really like the crypto vertical. You saw a sign of partnership this quarter with Circle, which is going to We will be the 1st provider of USDC crypto capabilities. So this is a really exciting vertical for us in in our global e commerce business that continues to demonstrate the strength and differentiation of our e commerce business and we continue to be really excited about

Speaker 6

it. Call.

Speaker 5

Appreciate the color. And just as a quick follow-up, obviously, there's a lot of attention on e comm nowadays With some of your peers reporting and what might be happening with the grow over in that market, how, Stephanie, are you thinking about the opportunity for e comm Both for 2022 and longer term, do you feel any differently about the growth trajectory within that subvertical?

Speaker 3

No, I think we this is obviously a very differentiated asset for us across the company. And given the size of the TAM and the growth of the TAM in e commerce, this has been a strategic imperative for us and will continue to be. We Think about this business in terms of continuing to expand geographically as well as adding APMs. As you know, we are one of the 2 largest providers in the space and it's growing significantly. We continue to take significant share.

Speaker 3

We really like what's going on in the global e commerce space. We bought the PayRx asset so we could start to access SMB because we really have been up in Global Space Only, Global Multinational. And so this is a place you're going to continue to see us double and triple down in terms of investments and focus. So we continue to be really excited about it.

Speaker 2

Yeah, the only thing I would add to that George, I mean, we did expand into geographically by 7 countries. We've got another 11 countries on target through 2023. That continue to also accelerate the growth. So we feel very good about guide we've given on overall merchant and e comm is going to be continue to be the fastest growing segment within it.

Speaker 7

Thank you.

Operator

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

Speaker 8

Hey guys, thanks and nice job. I want to touch on the banking segment just because again I see it as still the largest category of your business. When we look at the sustainability to growth, obviously, it's been strong and it came in a little better than our estimate this quarter. Call. If you could remind us on the confidence level and why the conviction is there for that elevated growth rate and maybe it's call.

Speaker 8

The pipeline you're seeing or the backlog to sustain itself for the next couple of years. Gary, I know we've touched on this, but more color on that now would be great. Call. And then if you could also remind us on breaking down that it's not just core banking or even bank pay. There's also issuer processing in there.

Speaker 8

The other pieces would be helpful to understand also. Thanks again.

Speaker 2

Yes. Look, Darren, we appreciate first, we appreciate the non merchant question. That's great. Call. Obviously, we couldn't be more bullish on the banking business and how it's performed over the years.

Speaker 2

If you look, You've seen consistently strong execution in the sales pipeline. You've consistently seen strong building of the pipeline as well to replace the signings throughout the quarter and we've seen strength over that over the last 4 plus years. The backlog grew about 8% this year, which should give everybody confidence of the future opportunity in banking and capital markets, because predominantly those are the 2 businesses that contribute contributed to that backlog number. We are seeing strength across all of our categories. Our issuer business has just done a really, really great job.

Speaker 2

Our leader there who's running our issuer business has done a phenomenal job. You continue to see it take share. Stephanie highlighted a really significant win on the issuer side, all around our Payments 1 category, which we launched Payments 1 almost 3 years ago, it's most advanced issuer platform in market. If you look also what's contributing to that growth, you're seeing a lot of acceleration in our Digital One offering, which is really the 3rd generation of digital variance. It's a true omni channel deployment that we're now rolling full end market.

Speaker 2

We've seen a lot of growth in that over the last 18 months. Of course, this all started with our Code Connect offering, which is the most open microservices API layer in industry. So, and then you culminate that with what we're seeing in modern banking platform. We've seen some really strong wins in MVP. We have now a number of those customers live in production and more coming in and the pipeline is very call on that.

Speaker 2

And as we highlighted, we've now enabled that on Microsoft Azure, which allows us to push out of the U. S. More effectively. So all of that should give everybody confidence that banking has truly been structurally transformed since its days are growing in low single digits, and it will continue to perform very strong given the backlog signings and the future pipeline. So we feel great about the business.

Speaker 8

All right. Thanks, Gary. It's great to see the transition. Just very quick follow-up, Woody, on margins. I mean, we had thought you guys would be looking at more like a 43% margin for Q2.

Speaker 8

It looks a little better. Maybe just if we could touch on the components of the confidence on margins from here through the rest of the year? And

Speaker 4

thanks again guys. Yes, thanks. It's a good question. We do anticipate it will be about 44% in the second quarter. I think you are seeing some difficult comps in banking as we highlighted between term fees As well as some of the stimulus related revenue from the prior year.

Speaker 4

That said, we are seeing good yields across merchant in the Q1 and we as we lap those difficult comps in the first half of the year in banking primarily. Got it. Thanks segment.

Operator

Thank you. Our next question will come from Rayna Kumar with UBS. Please go ahead.

Speaker 3

Good morning. Thanks for taking my question. Just starting with the bank technology business, are you seeing any change in competitive environment there, having any international players trying to enter the U. S? And secondly, could you just help us understand the pricing trends for some of your largest FI clients over the next 6 to 12 months?

Speaker 2

Yes, Rayna, it's a great question. I'll start and Stephanie can add to it, if she would like. Look, banking has always been a highly competitive marketplace for us. We've had a number of Non U. S.

Speaker 2

Companies tried to break into the U. S. For years. Frankly, the sophistication about The regulatory requirements have always been a deep mode to entry. But also, Raina, we absolutely participate really in the upmarket.

Speaker 2

So the larger the financial institution, the better. And then you just get differentiated, highly differentiated by scale. Our ability to square off against some of the largest banks in the country, right, with the complexity of solutions, it's more than just core banking, you had to bring robust issuer processing, You have to bring openness, you have to bring a robust professional services grouping. So we feel very good about our competitive position. Are we seeing it more competitive than we have in the past, the answer is no.

Speaker 2

It's always been competitive and we've always done very well against that competition. When you think about pricing, all of our contracts are long term in nature. Most of them have consumer price index adjusters in them. So As you start seeing CPI increase and inflation, you'll see that translate through our pricing models around per account, per transaction. So we do get coverage there as well, but we're not seeing an increased price competitive front.

Speaker 2

It's always been As I said, it's always been competitive and we're not seeing any more increase in competition than we normally do. We will say the demand continues to go up. I've talked a lot about this on multiple calls. We're really at an inflection point where a lot of financial institutions have really held on too long with their legacy technology. And so people are now pressed up against a timeline where they're going to have to start making some decisions.

Speaker 2

They're going to have to embrace cloud computing. They're going to have to embrace omni channel. They're going to embrace openness. Call. And that really plays in to the significant investment we've made over the last 5 years that Woody highlighted in his prepared remarks.

Speaker 2

So All of that compounds that we really feel good about our position in the banking business.

Speaker 3

Yes, I think I might add, we just had our client conference a couple of weeks ago and two points that I think are really relevant here. One is the financial institutions, at least within the United States are very strong coming out of the pandemic. I also think To Gary's point, the pandemic has driven home from them the need to be digital and omnichannel because folks are struggling to come back into the banking centers. And so that is really contributing to Gary's point around demand. Demand is very high in terms of needing to be omnichannel digital and driving the next gen technology that's absolutely being recognized out there given the post pandemic situation.

Speaker 3

That's very helpful. And then just a quick one on merchant. Given the recent reduction by Visa on U. S. Interchange for SMEs, Do you expect a benefit to your merchant margin going forward?

Speaker 3

Yes. I mean, we always get a slight benefit there. We don't call. I think it's going to be material, but there is a benefit whenever there is pricing changes, obviously, we look and make sure we pass and then take an opportunity if we can, but we don't believe it to be material.

Speaker 6

Great. Thank you.

Operator

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

Speaker 9

Call. Good morning, guys. Thanks. I just wanted to start on U. S.

Speaker 9

Merchant volumes. I think they were up 10% year over year and down 10% quarter over quarter if I'm not mistaken. So somewhat below the industry I suppose and just wondering if crypto is perhaps a call out there or is it just kind of a function of your debit mix has always been pretty high and I know industry comps were just tougher on debit relative to credit. We just love some perspective there.

Speaker 4

Yes, I'll start and then Stephanie can add on. Our volumes grew 10%, which At the end of the day, it really reflects the underlying mix in our business. We are under indexed in SMB. We've got a heavy enterprise based business. If you look at that compared to the Q4, you have holiday spending in those big box, you have holiday spending at grocery, which we saw in the Q4 that coming down a little bit.

Speaker 4

Obviously, we saw travel as a benefit in the Q1, so there are puts and takes in there. Call. At the end of the day, we always get the question around are you losing share. We tried to highlight it very specifically. The Nielsen report showed that we gained 2 points of market share by volume for full year 2021, which is probably the best objective evidence or piece of evidence we can have that we're not losing share here.

Speaker 4

This is just seasonal movements where we see the Q1 always a little lower than the Q4. And at the end of the day, it's resulting in positive yields as well where we saw double digit growth in every segment and 5 points of yield during the first quarter.

Speaker 2

I mean, look, Jason, if you play in the enterprise space, you're going to have a Q your biggest quarter is going to be Q4, because of the holiday season. So I mean, you're just naturally going to see A drop in transaction volumes going into Q1. To Woody's point, this is nothing more than normal mix that you would see in any Q4 to Q1.

Speaker 3

Yes. I mean, I think as the veteran merchant in the space, seasonality from Q4 to Q1, that's what this is.

Speaker 4

Financial.

Speaker 3

So if you thought about 17% in the 4th quarter, it's really 11% constant currency. We are there's a natural decel from retail and grocery, which is about 6 percentage points, that's very natural for this portfolio. It has nothing to do with share loss. And then we benefited a point from travel and then there's nits and nats. Call.

Speaker 3

So this is a seasonal thing. I know we like to talk about disruption a lot. There's seasonality in our portfolio. If you go back before 2019, you'll clearly see it. And to Woody's point, from a Nielsen standpoint, we're not losing share.

Speaker 3

We picked up share, but we know this is a favorite topic of everybody. So hopefully that helps net that number down.

Speaker 9

Yes. No, that helps a lot. I know you've got the snap back in Q2. I think you at about 15% quarter over quarter growth in merchant. So thanks for that.

Speaker 9

That's right. And just on the revenue growth outlook for the year. I know you're absorbing another, I think, $65,000,000 of FX headwind, but obviously did not change the absolute range for the year. And I'm just wondering if you're also absorbing any headwind from Russia in that number and you just kind of flowing through the out performance from Q1 or it's nice to see that there seems to be some offsets to the headwind or would you point us to The lower part of the range just because of some of these incremental headwinds. Thanks.

Speaker 4

Yes. I tried to highlight in the prepared remarks, we are seeing some potential headwinds from FX. We highlighted at a previous conference that Russia, Ukraine and the impacts of that on the merchant business, we think we're about point of headwind in the merchant business. That said, the over performance in Q1, we're very pleased with the start to the year and adding all those together, We have not changed the full year outlook on any front there.

Speaker 9

Okay, terrific. Thanks.

Operator

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

Speaker 10

Yes. Hey, guys. Thanks. Nice job. And I guess my Yes, yes, sure.

Speaker 10

And first question, just when we think about the merchant mix of enterprise SMB, ecom into the back half, I guess a couple of things. Do you still expect kind of low double digit growth per merchant overall in the back half? And then is the mix going to be pretty similar like as what it was this quarter that e comm is going to be a little better growth and the other 2 are going to be pretty similar?

Speaker 4

Yes, I think e comm will continue to be our highest grower over the course of the year. No doubt about that, Dave. You've got some comparables as we go through the remainder of the years. We I think some of the earlier questions highlighted that. We're talking about 9% to 10% growth in the 2nd quarter and Still looking at double digit growth for the merchant business for the full year.

Speaker 4

So no real change there. There may be some movements as you see again quarter to quarter as these comps kind of settle out and we get into a new norm as we go forward here, but e comm will continue to be our highest growth sub segment.

Speaker 10

Yes. Okay. And then just one kind of nerdy financial question. It looks like in guidance, the back half D and A is lower than the first half. Is that right?

Speaker 10

And does that mean growth into 2023 is not going to be that big? That's a pretty big kind of driver for EPS next year, if we can keep that low.

Speaker 4

Yes, a couple of things there. We're seeing CapEx come down over the course of the year that we highlighted. We anticipate seeing CapEx rolling into 'twenty three and beyond in kind of the 6% to 7% area. So that combined with really you saw some impairment last year of some assets that obviously will benefit D and A going forward into the 2023 zone and going forward. So that's the primary change there Dave.

Speaker 1

Yes, I think if you look at the Q1 number, we're expecting modest growth sequentially from here,

Speaker 4

Consistent with Woody's comments.

Speaker 10

Yes. All right. Thanks guys. Nice job.

Operator

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

Speaker 6

Hi, good morning. Thanks for taking my question. I was going to ask 1 or 2 on the Banking Solutions segment as well. Following up on Darren's earlier questions, can you talk Stepping back post pandemic, one, the demand environment, who are you winning against in that market? Are you primarily still winning guidance in house displacements of legacy systems.

Speaker 6

And then my second question related to that is that Call. That business has historically been a U. S. Business, but with the migration to the cloud and maybe some broader regulatory changes around the world. Is there an opportunity over time for that business to expand internationally?

Speaker 6

Thank you.

Speaker 2

Yes, Lisa, let me start. The competitors differ depending on size of institution. So as you're dealing with large regionals or Large National Financial Institutions. We're competing much more with in house developed, typically with a very old legacy core system at the center of their in house development exercise and that's the predominant competition we would see. You would see people going through an analysis, do we try to build it again like we did 40 or 50 years ago Or do we partner with a company like FIS?

Speaker 2

You'll see certain startups in there, but frankly, The startups don't have near the scale or the technology to be able to deliver for all the answers I gave you. And Darren, as you move down market and as you move into small regionals, large community banks, community banks, call it that $5,000,000,000 and greater, you would see classic competitors of Fiserv and Jack Henry in that space competing there as well. Once again, as you start looking, our market share grows as you get larger and larger end market. So as people combine together, you're still seeing M and A activity a lot in the banking space as they continue to grow through M and A And through just their organic growth efforts and they get larger, we become the more natural landing spot. Once again, back to The sophistication of the solution, the breadth of the capabilities, our ability to allow them to have flexibility to run their business, whereas when you're in smaller community banks, you have a one a much more 1 size fits all approach.

Speaker 2

As we move down in community bank markets, we also have capabilities there. And once again, mark in traditional community banking. We do very well, but that's when you really do just start seeing the traditional competitors. As far as your global question, your non U. S.

Speaker 2

Question, we think it's a great one. We have traditionally Call. We've been outside of the U. S. In our banking business for a number of years, but it has not been a strategic focus given The level of activity we've seen in the U.

Speaker 2

S. Markets. We've really pivoted that whole banking business and accelerated its growth rate just off U. S. Focus.

Speaker 2

We do think our new technologies, whether it's the modern banking platform, whether it's Payments 1, whether it's Digital 1 And Code Connect do allow us to expand in that. We highlighted this quarter, we just certified Our MVP platform on the Microsoft Cloud, that's going to help us move into a couple of other countries and I do think it will be We do think it will be a contributor to our further accelerate the growth for the banking business going forward. Call.

Speaker 6

Super helpful. Thank you. One quick follow-up just on PayRx. Can you just clarify how that how PayRx is integrating into segment. The U.

Speaker 6

S. SMB Business. I guess I was just looking at Slide 11 and it looks like at least on the slide you've got it grouped with the globalecom business. So but as it operationally integrated into your small business business and sort of cross selling into that existing base?

Speaker 3

Great question, Lisa. So the way we thought about PayRx is enabling us to embed payments and access SMBs and Card Not Present. So it's really a strategy that actually covers both in terms of it accesses the e commerce market for SMBs. It's technically it's going into the e commerce segment. So as you think about ecommerce segment, it's all things both large and small.

Speaker 3

Now strategically, your point is a good one, which is If you said, okay, what are you thinking about your software led business, which is the traditional ISV business, we are taking a look at that and determining which of those clients would want to transition to an embedded payment strategy or stay within an integrated payment strategy. So the way we think about SMBs these days is you can have a traditional integrated payment strategy, now you can have an embedded payment strategy, And so it adds to that SMB capability. But as you know, our SMB our software led SMB strategy today has been card present. And so PayRx really opens up the card not present piece and we are booking that into the e commerce segment to keep it pure.

Speaker 6

Got it. Call. Terrific. Thank you.

Operator

Thank you. Our next question will come from Jamie Friedman with Susquehanna. Please go ahead.

Speaker 11

Hi, Gary, Stephanie, Woody. Compliments on the slide deck. I really like this Slide 6, enterprise use cases. I had a question on the macro. So Gary, I heard in your commentary about bank IT budget from the macro.

Speaker 11

But is there any high level assumption and you're not a crystal ball, but at a high level on management's macro outlook for, say, merchant on the macro side?

Speaker 2

Yes. Look, I think we We feel a real good opportunity in our merchant segment. We are really good about we feel great about our e commerce, our enterprise segment. We feel good about The PayRisk acquisition and helping us in the SMB market with card not present. Clearly, you're seeing mix issues as we come out of the pandemic, but we continue to take share in the enterprise and e commerce.

Speaker 2

The Nielsen ratings substantiate that. So We feel very bullish on the overall merchant business and feel very comfortable with our guide on that, not only this year, but going into the next Several years. So, I think we're very well positioned.

Speaker 11

Okay. And then just so We can harmonize the models, Woody, with your prior commentary about the impact from Russia and FX, because those did seem to deteriorate relative to the prior guidance. I mean, just so I hear you right, you For 2022 are maintaining the guidance despite those incremental headwinds?

Speaker 4

That is correct. That was a very specific call out in my prepared remarks, if you go back and look, we are maintaining the guide as is right now.

Speaker 11

Got it. Thank you. I'll jump back in the queue.

Speaker 2

Call. Thanks, Jamie.

Operator

Thank you. Our next question will come from Ashwin Shirvaikar with Citibank. Please go ahead.

Speaker 7

Call. Thanks. Hey, Gary, Stephanie, Gooding.

Speaker 1

Hi, everybody.

Speaker 7

Hey, good to speak with you guys. Call. I wanted to start with the free cash flow question. I guess in seasonal terms, this was a better quarter. Call.

Speaker 7

But could you maybe talk to the dynamics of getting to 95% conversion. And then from a use of cash perspective, does the I guess over indexing on return to shareholder imply that you're stepping away potentially from M and A or is tuck ins still in the picture.

Speaker 4

Yes, thanks Ashwin. On free cash flow itself, Q1 for us is typically a lower conversion quarter in general. As we think about shape of the year every year, last year and this year, We had some timing around working capital, so you saw very good growth year over year in the Q1 of about 41%. Again, that translated to about 87% conversion of free cash flow to adjusted net earnings. It gives us a high level of confidence in getting to that 95% of adjusted net earnings for the full year as we'll see conversion increase over the course of the year like we normally do.

Speaker 4

You combine that with the commentary around our capital CapEx investment that is peaked as a percentage of revenue and we anticipate it actually to come down a little bit more over the course of the year. We're looking at 23 forward, we're looking at more 6% to 7% CapEx. So those items combined give us a lot of confidence in that 95%. Again with only 87%, just a few points below the 95% even in Q1. So feel very good about that outlook there.

Speaker 4

Gary, if you want to touch on the sort of M and A versus share buyback, that might be great.

Speaker 2

Yes, look, I mean Ashwin, our view on this hadn't changed. I mean, given the current valuations of our stock, given the current dislocation of where we think the share price of trade, the best use of cash on a derisk return is buying back our own shares. With that being said, We have traditionally done M and A as a company. And so it's been a key component of our strategy. And obviously, We want to make sure that we continue to watch what's going on in the market.

Speaker 2

But right now, we feel very good about our competitive position. We feel we're strong across all three of our segments are executing very well. As I said, Nielsen should substantiate this share loss narrative in merchant. You see what we're doing in the banking business and let's not forget about our capital markets business performance, which shows the strength of the overall capability, the strength of our go to market and the strength of our execution. So right now, the best use It is certainly deploying that capital through share repurchase.

Speaker 2

As we get a recovery in our stock price, we would certainly look to at some point in time open up our lens again and start thinking about M and A and what are new markets we could possibly break into, What are new capabilities that we could put through our distribution channel to further accelerate growth from here. But at this point in time, we're very comfortable with share repurchase and obviously returning cash to our shareholders through our dividend, which we increased 21% as well. And as Woody said in his prepared remarks, We're prepared to do that again at the early next year as well. So hopefully that gives you context.

Speaker 7

Yes. No, that's very useful. Thank you. And if I can maybe ask on Capital Markets, 6% growth, but The part that you want to grow faster is 8% growth. That's good.

Speaker 7

If you could remind us what the SaaS based recurring revenue percent is? Call. And when you highlight some of these notable wins at transfer agency and private markets and so on, Call. If you could talk a little bit about the sort of the proclivity of your client base call. To look at your platform modernization, is that sort of bringing people in?

Speaker 7

Can you give us an update on the platform modernization process?

Speaker 2

Call. Let me start and let's let Woody get to the specific percentage of total revenues of SaaS. I mean, I'll remind you on Capital Markets, guidance. This was a very detailed transformation that we drove through in our capital markets business. It started At the acquisition of SunGard, moving it from a product company to a solution company and then deploying those solutions through a SaaS based model.

Speaker 2

When we bought the company, it was in the low 60% reoccurring revenue and most of that reoccurring revenue was in the form of either a processing fee or in the form of a highly reoccurring maintenance fee. So we wanted to transition that business and really start deploying capital markets once we built all the solutions and modernized them and put them together through a more SaaS deployment. The team has done an excellent job of that. We continue to accelerate Our SaaS based reoccurring sales model, it was up 8% this quarter alone. You've seen that very consistent, Ashwin.

Speaker 2

We've been holding our license fees flat. So what we've been trying to do is we run a little over 300,000,000 license fees a year. We don't want to dig the hole While we're growing through the transformation, this is the exact playbook that we executed in the banking business 2 decades ago. So the customers are very willing to take advantage of our processing environment, our fast deployment in our modernized solution. And the reason why is because as Stephanie commented, when we were at the user conference, what you're seeing Large financial institutions are realizing processing is no longer a differentiator.

Speaker 2

Total cost of ownership, speed to market, resiliency capabilities is where they're going to differentiate and the capital markets business is very well positioned to take advantage of that. So over the last couple of years, we've managed to grow that, Woody, from low 60s to Yes.

Speaker 4

When we bought the asset, it really was about 60 In terms of the recurring or SaaS percentage there, coming out of the Q1, it was a little over 70%, 72% was the actual number, Continuing to see that grow over time. We anticipate that to grow into the 80s and even look closer to banking over time with a reduced license And PS being the only other component of revenue in that group. So very pleased with the enhancement structurally around that, also visibility. And as we've talked about before, it's enhancing the growth profile.

Speaker 2

Yes, I'll remind our investors, this is a business that at some point in time, We will start discontinuing license fees. So right now, we're renewing these term license with existing customers. We're taking on very few new logos through the licensing channel. All of our new logos are coming in through our SaaS based model, which shows the strength of that product and how many actually new customers we're also bringing into the mix. But there will be a point Where we'll start discontinuing the license model and then that will accelerate it to Woody's point of where it will be upper 80s, perhaps even low 90s and you'll have a very, very small percentage of license business going forward.

Speaker 7

Thank you for all the detail. Appreciate it.

Operator

Thank you. Our next question will come from Dan Dolev with Mizuho. Please go ahead.

Speaker 12

Section. So this was actually a really good clean quarter and congrats on this. I do have a question, I think maybe more for Stephanie on the merchant acquiring side. Can you I know it was asked before, but can you help bridge the 200 basis point share gain versus Nielsen and kind of what we're seeing versus the network more from a enterprisedebit mix Because, I feel like the narrative last year was enterprise really strong, debit was very strong. So maybe you can like parse out a little more in terms of like debit versus credit and how much does that affect the Kind of the discrepancy or the apparent discrepancy maybe?

Speaker 3

Yes, so happy to, happy to. So I think, first of all, let's start with Nielsen. So if you peel apart Nielsen, which is really where you can understand share gain and loss because And in fairness, I understand as we all went through the pandemic, we had to try and tie ourselves to Mastercard and Visa, but portfolio mix really does matter here. And so, if you look at the Nielsen report, you can see we gained share. That clearly the share loss is coming from Smaller Non Scaled Acquirers, which isn't surprising, right, in terms of the level of technology, the level of complexity.

Speaker 3

It's somewhat of the same story that's been going on within merchant acquiring for a number of years. But you can clearly see that The share loss is the share gainers are really the large scale players and the share loss is coming from smaller players. Obviously, there's some small players that are doing well, but that's the general trend. Now when you look at our portfolio and you Think about Q4 to Q1. And so I don't really and this is going to be maybe tough to absorb.

Speaker 3

I don't really spend a lot of time thinking about I think about our portfolio makeup and if you think about the merchant book, we're almost 30% globalecommerce, About 45% large enterprise in UK and then 30% SMB. So if you think about the 4th quarter to the Q1. When you think about we grew volumes 17% in the 4th quarter and 11% constant currency or 10% in the Q1. Really that step down to me is normal seasonality based on the mix. Call.

Speaker 3

So if you thought about 45% of our business or and you added in the SMB space, which is brick and mortar, You got to think about the holiday season. So I'll just walk back through it. Like you start at 17%, you had 6 percentage step down 4th quarter to 1st quarter from retail and grocery. That's just holiday spend. That's normal seasonality holiday spend guidance.

Speaker 3

If you go back out of the pandemic, we always have both revenue and volumes trend down in the Q1. Then we got a point of travel benefit, travel and airlines, but we're not nearly as big in travel and airlines as everybody else, but that's obviously been impacting yield. So we did get a point benefit there. And then we had a little bit of NIS to NASS and other places, someone mentioned crypto, but it's just not that big. So if you think about that, to me, it's more around seasonality, Q4 to Q1 and then Nielsen really talks to you about where you see us gaining share and who's losing share.

Speaker 3

The Mastercard volume trend, I just for me, I don't think about our business that way. That is a GDP grower around the world and so they make up the whole world. We make up a certain segment of the call. And so, Tien Tsin, that's how I really think about it.

Speaker 2

So Dan, just kind of to build on that. Call. If you think about our enterprise business, to move 200 basis points, you've got to take a lot of transaction volume to do that. That's where our enterprise play comes in. We've highlighted over throughout the pandemic strength in our sales engine in enterprise, right, and in ecom.

Speaker 2

And so you're just really seeing not only the large enterprise share gainers, right, that Stephanie referenced, but also our success in coming out of the pandemic, reinvigorating our sales engine in enterprise as well. So all those things are playing a contribution to the 200 basis points. The question around debit and credit in our enterprise play specifically, really doesn't have a play. For us, it really doesn't matter. For us, we're there to capture transactions and whether it's presented as a credit or a debit transaction, really our fee structures are very resilient in that.

Speaker 2

So you've got great stickiness in the enterprise because of scale, we had very, very low turnover. So clearly, what you've seen is just us taking share through the sales engine, Our large existing enterprise customers taking share through their scale and then the resiliency of the revenue stream, Credit and debit, really, we're virtually immune to. It's really more transaction based than volume based. Yes.

Speaker 3

Apologies, Dan, I missed the debit credit. I agree with Gary. Because of our large scaled players, we don't have a SKU to debit credit. So it just doesn't matter for

Speaker 2

us. That's right.

Speaker 12

Perfect. Can I squeeze in a very short follow-up? As you look throughout this thank you for the detailed answer. As you look through your portfolio, where do you see the biggest opportunity For price increases in your maybe in your S and B book or anything. Is there any specific vertical or anywhere where you Say, hey, we could actually increase prices were below market.

Speaker 12

Thank you.

Speaker 3

Yes. I think, look, we are up in the large space. So if you're a global e commerce or large enterprise, as everybody knows, those are scaled players who demand the price that they demand. The good news for us there is there's only a couple of us that can play there because you need Scale. I mean historically, I think this industry has looked at SMBs in terms of a place you can increase price.

Speaker 3

I think we We've seen we continue to have that ability. There's no pressure there. I think you probably heard that from other people. But do I think there's a big pricing lever sitting in our book today. I don't.

Speaker 3

I think it's the same amount of opportunity it's always been. I don't see anything significant or new, but it's always there and we always take advantage of it when we can.

Speaker 12

Thank you.

Operator

Thank you. And today's final question will come from James faucet with Morgan Stanley. Please go ahead.

Speaker 13

Thank you very much. Appreciate all the details on the business. My questions are primarily around CapEx and capital allocation. First, did I hear you correctly, you say you expect to Buyback $6,000,000,000 in 2023 or is that across 20222023?

Speaker 4

No, we anticipate buying $3,000,000,000 in 2022 standalone and utilizing all free cash flow in 2023. Excess free cash flow would be buying 6 in 2023. The combination of those 2 would be about $9,000,000,000 or about 15% of our current market cap.

Speaker 13

Got it, got it, got it. Okay. I wanted to make sure I And then when you talked about like being able to bring down CapEx as a percentage of revenue, can you give a little detail as to Like where investments been made that, you can kind of allow the growth and revenue to increase in such a way that you don't need to continue to match that growth in overall capital spending.

Speaker 2

Well, look, James, I mean, we've been in business for a very long time, right? So as you think about it, a lot of technologies in financial services are based on historical legacy platforms. We pivoted the company back in 2015 to really start focusing on the next generation capabilities that we're going to need to be that you're going to need to compete for the next 20, 25 years. And so As you start looking at whether it was in the merchant platform where we invested heavily in the new acquiring platform and Access Worldpay. We've got that fully online now, whether you look in the banking sector and you look at what we've done around modern banking platform, which is the most leading technology for Forum, which is the most leading technology for cloud native core banking system end market.

Speaker 2

You've seen that with our wins, but look at what we did on PaymentsOne, which is a cloud native issuer platform for both debit, credit, prepaid. You then move into our Digital One or our omni channel experience that wraps around those capabilities, once again coming fully online in market and then Our Code Connect platform for our microservices layer, you then move into what we did in Capital Markets where we really leaned in Our solutioning about bringing our capabilities and launching that in the cloud to leverage both buy side and sell side type capital markets capabilities on the SaaS deployment, that all boils down to we're wrapping up those programs. And so we increased our capital starting back in 2015. We were running at about 5% and we ramped that up to, I think, as high as 11% of total revenues. And as those platforms have now come to conclusion, you would expect those investments to come down.

Speaker 2

Now, Woody and we've all talked about, we'll at around 6% to 7%. We think there's an opportunity to continue to lean in and add functionality and continue to grow and expand Our revenue growth and our share, but all programs come to a natural conclusion and we're just on the backside of the modernization of our solutions stack. Now we do have a historical back book that at some point in time we'll start migrating. Stephanie highlighted some of the stuff we're already doing in banking. We've migrated more than 1500 of our clients to Payments 1 as an example, but more to come on that as we up sell and migrate our existing customers to those capabilities.

Speaker 2

But we feel very good about our competitive position. You see all of our segments growing and taking share by various metrics. Call. And so at this point in time, we're just we're wrapping up a lot of these platform transformations.

Speaker 13

Yes. No, that's got to feel great to get past 7 plus years of extra investment. Thanks for that.

Speaker 2

Yes, no, exactly, exactly. We feel great about it. Well, look, I want to thank you for joining us this morning and thank you to our dedicated Call. .:] Thanks for another strong quarter. Before we conclude, I wanted to give a special thanks to our team for hosting a very successful Emerald Klein event.

Speaker 2

Conference Call. We had over 4,000 participants. This live event was a remarkable showcase of our solution suites to industry leaders. Call. We are grateful to be interacting in person where our client centric culture truly shines.

Speaker 2

Feedback from the event has been exceptional. Call. As clients and prospects learned how our innovative capabilities can solve their most pressing business needs, we remain committed to providing world class technology solutions to our clients Call so that we 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.

Speaker 2

Thank you and I hope you enjoy the rest of your day. Goodbye. Call.

Operator

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

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