Fidelity National Information Services Inc

NYSE:FIS

Earnings Call Transcript 2023-Q2

[Operator]

Good day and welcome to the FIS Second Quarter 2023 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. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker Mr. George Mihalos, Head of Investor Relations. Please go ahead.

[George Mihalos, Head, Investor Relations]

Thank you, Sherin. Good morning, everyone. Thank you for joining us today for the FIS second quarter 2023 earnings conference call. This call is being webcasted. Today's news release, corresponding presentation, updated investor facts and webcast are all available on our website at fisglobal.com.

With me on the call this morning are Stephanie Ferris, our CEO and President; and Erik Hoag, our CFO. Stephanie will lead the call with a strategic and operational update, followed by Eric reviewing our financial results and providing forward guidance.

Turning to slide three, 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 the GAAP financial information is presented in our earnings release.

With that I'll turn the call over to Stephanie.

[Stephanie Ferris, Chief Executive Officer and President]

Thank you, George, and thank you everyone for joining us this morning. We continue to move with speed and a sense of urgency, accelerating our path forward, and we're making strong progress, delivering on our financial and strategic commitments to drive change across the enterprise for all of our stakeholders.

On July 6th, we announced a landmark transaction with GTCR, positioning both FIS and Worldpay for long-term success and accelerating us on the path to unlock shareholder value from the planned separation.

Our Future Forward initiatives are simplifying our business and driving increased client-centricity, while improving efficiency and financial outcomes across the company. And our second quarter results show the impact of this effort, exceeding expectations and our guidance.

While we have more work to do, I'm very proud of our team and I'm more optimistic than ever as we bring the company Future Forward.

Turning to slide six. I'm pleased to report FIS delivered another quarter of solid financial results. Second quarter revenue, adjusted EBITDA and adjusted EPS all exceeded the high end of our guidance range. Solid execution across all three of our business segments and a continued focus on expense discipline drove the outperformance relative to our outlook.

On a combined basis, the Banking and Capital Markets businesses posted healthy recurring revenue growth of 4%. This represents a more normalized rate of growth within our 3% to 5% cycle range. Building on the profitability improvements we delivered in the second quarter, we are confident in our ability to deliver sequential adjusted EBITDA margin improvement over the course of 2023, led by improvement in the Banking Solutions segment.

We are on track to deliver on our greater than 80% free cash flow conversion commitment for 2023, with year-to-date conversion an impressive 94%. Post the closing of the Worldpay transaction, we would expect free cash flow to further align even more closely with net earnings. Reflecting the first half outperformance and current business trends, today we are again raising our revenue and adjusted EBITDA guidance for 2023.

Turning to slide seven. As we announced in early July, we signed a definitive agreement to sell a 55% stake in the Worldpay Merchant Solutions business to GTCR, a leading private equity firm with deep expertise in the payment space.

We believe the transaction represents a superior outcome for FIS shareholders relative to pursuing a spin-off of Worldpay into the public markets. It accelerates our path forward to create two highly focused and independent companies, infusing new capital quickly into Worldpay for investment, while generating substantial upfront proceeds to transform FIS' balance sheet, pay down debt, and return capital to shareholders.

First, the $18.5 billion transaction immediately establishes an attractive, market-aligned value for the Worldpay business, representing over 10 times Worldpay's 2023 adjusted EBITDA. This represents a premium to FIS' trading multiple of approximately eight times prior to deal announcement. As we continue to execute on our strategy and deliver on our financial commitments, we believe FIS is well-positioned to expand our valuation multiple further.

Second, the upfront proceeds of at least $11.7 billion will allow us to de-lever the balance sheet quickly, while simultaneously accelerating capital returns to shareholders at unique, attractive valuation levels. Erik will elaborate on our capital allocation priorities during his discussion of our financial results. However, we see significant value in the shares at current levels and are eager to rapidly capitalize on the valuation dislocation for the benefit of our shareholders.

Lastly, we believe this transaction best positions FIS and Worldpay to better focus on their respective markets, clients and colleagues, while promoting a continued close relationship between the two companies, crystallized by commercial partnerships.

Going forward, Worldpay will remain an important partner and distribution channel for FIS, while Worldpay will continue to benefit from access to FIS' array of bank tech solutions and services. I look forward to working closely with Charles Drucker and the Worldpay management team for many years to come.

The partnership with GTCR also ensures that Worldpay will have ample access to capital to pursue near-term inorganic growth opportunities while maintaining a healthy balance sheet. We're excited about the transaction and the prospect of generating meaningful returns for our shareholders and we look forward to updating you on developments as we approach closing by first quarter 2024.

Turning to slide eight for an update on trends we're seeing across our Banking and Capital Markets businesses and the key drivers of growth within our existing base of clients. In May, we held our annual flagship industry conference, Emerald, with 4,000 clients and influencers in attendance.

The overarching takeaway from the conference was that clients are excited about our path forward and are looking for their trusted technology partners like FIS to better help them navigate the evolving landscape. FIS is well-positioned to serve our clients on several market trends that are top of mind across their C-suites.

First, the secular shift towards digital that has permeated money movement broadly defined across Banking and Capital Markets and supports our normalized rate of growth as more and more financial transactions take place across a variety of banking channels. The need to embrace next-generation cloud-native technology with modernized digital user interfaces has never been greater. The competitive lines are blurring as upstart fintechs, global technology companies and even retailers encroach on the traditional banking landscape with digital-first offerings.

FIS was early in embracing the promise of cloud technology, with over 85% of current compute in the cloud and the launch of several digital-native solutions, including Digital One, Payments One, and Modern Banking Platform, which was just recognized for several industry awards. While prior investments position FIS with an early-mover advantage, we are not standing still and continue to prioritize spend to further leverage the cloud, improve the end-user experience and ensure we enable all types of digital money movement.

Second, the rapidly rising interest rate environment is creating greater competition for deposits. Financial institutions and asset managers are relying on digital-only high-yield savings accounts and online access to money market accounts, ultimately increasing the number of total accounts across the banking system.

Account growth, which continued sequentially from the first quarter and transactional growth across our platforms are the primary drivers of recurring organic revenue growth across both the FIS Banking and Capital Markets segments. FIS has partnered with a number of blue chip banks and fintechs powering their digital-only account offerings.

Also, post the SVB fallout, financial institutions are proactively preparing for increased regulatory oversight with a greater focus on managing interest rate risk and profitability. The situation is fluid with new regulations still being discussed by regulators and legislators, but the need for best-in-class Reg tech offerings is mission-critical to banks' operations.

We're seeing consistent demand for balance sheet and treasury management solutions and expect that momentum to continue. And lastly, we've recently seen increased consolidation across the financial industry and acquiring institutions requiring the expertise of a trusted core provider to assist in quickly and seamlessly onboarding new accounts at scale. We believe FIS is a relative beneficiary of industry consolidation, given the company's skew towards larger financial institutions.

Turning to slide nine. FIS offers a wide range of software-led solutions that are resonating across a diverse range of end markets, with our product reach increasingly extending beyond traditional financial institutions. I'm pleased to report we've closed several notable wins this quarter across a host of solutions.

Beginning with enterprise core platforms, we saw solid momentum across our product set. Notable wins include the sale of our Digital One platform as well as an expansion of services provided to a large global fintech provider.

Next, our Payments & Networks offerings, underpinned by our loyalty solutions, including Premium Payback and our proprietary debit network, NYCE, continue to see tailwinds. We signed several new Premium Payback engagements in the second quarter, including a leading retailer and a major US financial institution. We continue to be excited about the prospects of our NYCE debit network going forward and expect the offering to be a beneficiary of the recently implemented Reg II rules.

In our Capital Markets business, demand for our institutional solutions continues to be robust, sales of our treasury and risk management solutions remain particularly strong. And we're seeing solid traction across the board, with increased penetration across non-traditional verticals such as large corporates, including insurance and auto finance companies.

Finally, I'm delighted with the progress we're making across our Amplify initiative, which was designed to accelerate cross-sells across the enterprise. We had a solid quarter of Amplify-driven sales, particularly the selling of Acquiring Services into multiple Banking and Capital Markets clients. Amplify remains a core part of our sales strategy going forward post the Worldpay transaction. Supported by commercial partnerships, we expect Worldpay will remain a key distribution channel for Banking and Capital Market services for years to come.

Turning to slide 10, we're making continued progress across our enterprise-wide transformation program, Future Forward. We're well on our way to delivering on our previously communicated cash expense savings and shifting those savings into client-centered outcomes. We continue to prioritize investments focused on modernizing our technology stack, leveraging the cloud, simplifying our user interface and improving the digital experience for end users of our products.

We recently welcomed a new Chief Technology Officer at FIS with an extensive background in the consumer digital technology space. Our CTO is entrusted with ensuring FIS continues to embrace a developer-focused, innovation-driven culture with the appropriate personnel in place to lead FIS forward and stay ahead of the curve.

We're excited about the prospects AI presents for our business and our clients. AI holds the promise of improving employee and client productivity, accelerating development and implementation timelines, reducing costs, and improving product quality and customer care. We have several ongoing AI-driven initiatives across the company and we expect to materially increase the number of programs over the coming months. The early results from these initiatives are encouraging.

With that I will turn the call over to Erik. Erik?

[Erik Hoag, Chief Financial Officer]

Thanks, Stephanie, and thank you all for joining us this morning. I'll begin on slide 12 with an overview of our second quarter financial results.

Overall, we delivered effectively against our commitments, exceeding the high end of our outlook for the quarter. On a consolidated basis, revenue increased 2% organically to $3.7 billion with adjusted EBITDA margin of 41.4%, and adjusted earnings per share of $1.55.

Revenue outperformance in the quarter was driven by our Capital Markets segment exceeding the high end of our outlook, with Banking and Merchant both in line with the high end. As we anticipated, each of our three operating segments saw sequential improvement in their adjusted EBITDA margins, with merchant returning to expansion in the quarter. Adjusted EPS exceeded the high end of our outlook by $0.05, driven by outperformance in EBITDA and some below the line favorability in the quarter.

Moving to cash flow and our balance sheet, we continued to see improvements across multiple vectors. Our capital expenditures decreased 13% year-over-year to $267 million, or 7% of revenue, reflecting continued benefit from our Future Forward initiatives. We generated free cash flow of $953 million in the second quarter, resulting in a year-to-date free cash flow conversion of 94%, well above our full-year commitment of greater than 80% conversion.

Lastly, we reduced our total debt by approximately $500 million to $19.5 billion, yielding a leverage ratio of 3.2 times at a weighted average interest rate of 3.4% and we returned over $300 million to shareholders through dividends. The team continues to focus on both our operational strengths, cash flow fundamentals as long-term drivers to sustainable shareholder value creation.

Turning to our Banking and Capital Markets results on slide 13. On a combined basis, the segments delivered organic revenue growth of 3% in the quarter, driven by 4% recurring revenue growth. Our large and stable backlog held steady in line with our expectations, exiting the quarter at $23 billion, reflecting flat year-over-year growth and sequential growth of 1% as we recognize revenue while replenishing with new sales.

This backlog metric includes contracted yet unrecognized sales with varying contract durations and times to implementation, making it one of many inputs to our underlying growth.

Looking back, outsized backlog growth over the past few years was largely driven by a handful of large and unique transactions. Excluding these outsized transactions, backlog growth has been stable. While recurring revenue, excluding these transactions, posted growth within our cycle guidance. And more recently, while our year-over-year backlog growth has ranged between flat to 2%, we've seen healthy recurring revenue growth in the first half of 2023 for Banking and Capital Markets.

As we noted previously, our sales teams continue to transition to higher-quality new sales, which will drive sustainable high-margin long-term growth. This change in sales initiatives is incorporated into our outlook for the year and while still early in the transition, we're seeing some early indications of success with improvement in the contribution margin on new sales.

At the segment level, Banking increased 2% organically in the quarter, with recurring revenue growth of 3%. Adjusted EBITDA margin contracted 200 basis points to 42.5%, an improvement from the down 250 basis points we saw in the first quarter. Margin contraction was primarily driven by revenue mix, as we saw a 10% reduction in high-margin one-time revenue. We continue to anticipate margin expansion in the back half of the year for the Banking segment as Future Forward continues to ramp.

Shifting to the Capital Markets segment, which continues to perform exceptionally well. Capital Markets increased 7% organically in the quarter, with recurring revenue growth of 10%. Revenue growth was driven by the strength of our modernized solution suite, strong sales execution and the multi-year shift from a license to SaaS-based go-to-market strategy.

Adjusted EBITDA margins expanded 100 basis points to 50.2%. Margin expansion in the quarter was driven by high contributions on recurring revenue, growth in high-margin license revenue and a reduction in low-margin professional services. Overall, we're pleased with the progress in the first half of the year as we continue to position FIS for sustainable growth in revenue, profit and earnings for years to come.

Turning to slide 14. Worldpay revenue increased 1% organically, with similar sub-segment trends as seen in the first quarter. Adjusted EBITDA margins expanded 120 basis points year-over-year or 480 basis points sequentially, as we grew our high-margin revenue streams across the operating segment and delivered on cost management. Global volumes grew 6% in the quarter, driven by both consumer spending and strong execution, while our revenue yield improved by two points compared to our first quarter results.

Turning to slide 15 for a financial update on Future Forward. As previously messaged, we remain committed to rightsizing our expense base, while ensuring an appropriate level of investment in the initiatives outlined in Stephanie's comments. Our Future Forward program centers around this goal, with a focus on improving the ways we work and go-to market as a company.

On a Holdco basis, we continue to make significant progress in our cash savings achievement. Exiting the quarter, we achieved over $175 million in annual run-rate operational expense reduction, resulting in over a $35 million benefit to the quarter. We also increased our capital expenditure achievement to over $140 million as we continue to trend to our $200 million commitment in 2023.

In summary, the Future Forward program continues to provide a tangible benefit to our financial P&L and operational health, while enhancing the ways we work. In a moment, I'll provide some estimates on the operational expense targeted to FIS moving forward.

Turning to slide 16 for a recap of our capital allocation priorities for FIS. Throughout 2023 and following the transaction close, FIS will remain focused on reducing debt, paying an appropriate dividend and using excess capital for share repurchase or tuck-in M&A. Our first priority remains a strong balance sheet and investment-grade ratings. Given our free cash flow generation and highly recurring revenue streams, we're comfortable with a long-term gross leverage range of 2.5 times to 3 times adjusted EBITDA.

Next, we remain committed to paying our dividend, and we are reiterating a 35% payout ratio based off FIS' adjusted net earnings. We intend to grow this dividend in line with adjusted net earnings going forward consistent with our historical practice.

Lastly, our default use of excess capital will be share repurchases, inclusive of at least $2.5 billion tied to transaction proceeds, with potential upside to this number, given the attractive valuation of our stock.

Longer term, we intend to consistently return excess capital to our shareholders through share repurchases, while leveraging our advantages of scale and distribution to supplement growth in strategic verticals with complementary tuck-in M&A. This capital allocation strategy provides a robust value proposition for long-term shareholder value creation over a multiyear period.

Turning to slide 17 for an overview of our revised outlook. On a Holdco basis, our second quarter results lead us to confidently increase our guidance to $14.5 billion to $14.63 billion in revenue and $6.03 billion to $6.15 billion in adjusted EBITDA. Consistent with our first quarter revision, this increase aligns with the high end of our guidance to our second quarter beat, in addition to a change in FX assumptions while significantly increasing the low end of our ranges.

Beginning in the third quarter, the Worldpay business will be transitioned to discontinued operations and we will be restating our first half 2023 financials to reflect this. At that time, we will look to provide an updated outlook for FIS' continuing operations.

Our adjusted EPS metric will now be less meaningful given the impending transition of the Worldpay business into discontinued operations. And because of this, we're focusing investors on revenue and adjusted EBITDA until we provide an updated outlook for FIS' continuing operations.

On a consolidated basis, we now anticipate organic revenue growth of approximately 1%. This reflects an increase to the low end of both Banking and Capital Markets organic growth outlook to 1% to 2% and 5% to 6%, respectively.

Given the impending transition to discontinued operations, we are not updating our Merchant segment outlook from our previously issued full year guidance at this time. That said, we're pleased with the segment's performance over the first half of 2023 and we remain confident in the underlying strength of the Worldpay business.

We continue to anticipate margin improvement in Banking and Capital Markets as we ramp the benefits associated with Future Forward. And we are reiterating our outlook for free cash flow conversion of over 80%. As seen in our year-to-date results, we remain confident in delivering on our commitments.

I'll conclude on slide number 18 with some considerations for FIS in 2024. Following the close of the transaction, FIS will retain a 45% equity stake in the Worldpay business in partnership with GTCR. This equity stake was valued at over $4 billion, accounting for approximately $7 per share at our current share count.

We anticipate an effective tax rate for FIS of approximately 19% to 21%. This increase from our current effective tax rate is primarily due to the reduction of the TRA benefit and accounts for increases in the corporate tax rate in certain regions. As previously stated, we would anticipate $10 billion of total gross debt after the transaction closed. We expect this debt will carry a weighted average interest rate of approximately 3.25% to 3.75%.

As noted in the announcement of the transaction, we would anticipate deleveraging to approximately 2.5 times, translating to an adjusted EBITDA of approximately $3.9 billion to $4 billion, inclusive of our estimated RemainCo corporate expense.

With regards to our Future Forward program, we expect substantial cost savings of approximately $1 billion for FIS post the Worldpay separation, retaining 80% of the original program. We previously anticipated a year-over-year benefit of approximately $300 million to adjusted EBITDA in 2024. Following the close of the transaction, this $300 million will become approximately $215 million, with an annual run rate of approximately $425 million exiting 2024.

We also anticipate adjusted EBITDA dis-synergies for FIS of approximately $200 million, including $100 million of revenue dis-synergies and $100 million of incremental operational expense dis-synergies. We will look to minimize these dis-synergies with our Future Forward program.

While we've made significant progress, we're still working diligently to disentangle both allocated infrastructure expense and depreciation and amortization expense between the two entities. When appropriate, we'll provide further commentary on both of these items.

I'll conclude by saying that the team and I are excited about the progress that we've made to continue to move FIS forward and the underlying fundamentals of the business for years to come.

I'd like to thank everyone for their time this morning. Operator, will you please open the line for questions?

[Operator]

Thank you. [Operator Instructions] And our first question will come from the line of Rayna Kumar with UBS. Your line is open.

[Rayna Kumar, UBS]

Good morning, Stephanie and Erik. You both gave some helpful detail on changes you're making to your Banking salesforce. Can you talk a little bit about how some of your recent conversations have been with banking clients as they navigate the uncertain macroenvironment and are you starting to see any improvement in the sales cycle?

[Stephanie Ferris, Chief Executive Officer and President]

Sure, Rayna. Thanks for the question. So as I discussed in my prepared remarks, banks are really focused, as you would expect, on deposits. And so as part of those conversations, they're looking in terms of how did they gather deposits, can they continue to do it digitally through their branch network or would they like to set up digital banks that will enable them to further gather deposits. That's a big conversation we're having with them. And we think our D1 product and our MBP product are perfect products for those conversations, and we're having those. In addition to that, as part of the deposit-gathering, and I mentioned this as well, we're seeing a lot of accounts getting opened across the banking system. And so I think I mentioned, since the first quarter, overall net-new banking accounts are up since March and continued to be up across the banking system. And as we mentioned, both deposit growth, net-new deposit growth as well as transactions is what drives the organic recurring revenue growth in both the Banking and Capital Markets segments. I'd say the final thing we're talking to them about is profitability, as you might expect, given deposits, they're focused on deposits as well as impending increased regulatory challenges. They're looking at their profitability across the board. And having conversations with us around outsourcing more of their activities, moving more products to digital, which are all conversation starters for us as we look at our product set across the board. With respect to the sales piece, I think, Erik mentioned a couple of things in his prepared remarks. We continue to see backlog being flat. We expected that. We're seeing sales -- as the sales pipelines get repopulated with higher-margin products, we are seeing the closed sales having higher-margin products across the board, so that's exactly the intent that we expected. But as we had predicted, we expected sales backlog to remain flat. It's a fairly complicated measure. And we feel really confident about our guide even with the flat backlog. So seeing some green shoots in terms of the margin profile of the new sales that we're bringing on and feel pretty positively in terms of repopulating the backlog with those types of products and product margins.

[Rayna Kumar, UBS]

That's very helpful. And then I just wanted to touch on the transaction. What feedback have you received from Worldpay clients since the GTCR announcement? Are you hearing of any concerns regarding the impact on the existing commercial relationships or the sale of the business to private equity?

[Stephanie Ferris, Chief Executive Officer and President]

Yeah, great question, and we are always very focused on this. Every time we do a transaction, we obviously go out and talk to all of our clients. No. So, as you know, Worldpay has been owned by private equity before. That experience for all of our clients that were with us then was positive. There was no disruption. And in fact typically led to more investment, more M&A activity, more products being brought to bear for those clients to be able to utilize. So we're not hearing any concerns, primarily because of the couple of transactions we've done with this asset before. We have a proven track record that we can do these types of transactions and have little to no impact on clients and actually have it be value-enhancing.

[Operator]

Thank you. One moment for our next question. And that will come from the line of David Togut with Evercore ISI. Your line is open.

[David Togut, Evercore ISI]

Thank you, good morning. Looking at slide eight, what are your plans to introduce new cloud-native componentized core bank solutions offerings within MBP? Is there a specific rollout timeline for each of these new offerings?

[Stephanie Ferris, Chief Executive Officer and President]

Yeah, thanks for the question, David. So MBP, as you know, is a best-in-class next-gen componentized architecture for core. I think we were first to market, and it did most recently win a couple of pretty unique awards. So we are up and live with consumer deposits. We have quite a few of our banks have fully rolled out consumer deposits. We went live in second quarter with consumer lending, so that product is up and running. And then I would say as we look at the roadmap over 2024, we obviously -- next step would be commercial deposits. So we're feeling really good about where we are with MBP. We have, as you know, signed over the last 24 months a significant amount of our large financial institutions, they are in the conversion timeline here. We would expect to see several of them become live in the first quarter or second quarter of next year with some of these big key products and are really excited about it, feel good about launching those guys, and then getting the rest of the pipeline live as we move throughout 2024.

[David Togut, Evercore ISI]

Got it. And just a quick follow-up. You referenced NYCE network's preparation for Reg II. Can you talk about the pipeline of opportunity you're seeing to pick up online processing away from Visa and Mastercard?

[Stephanie Ferris, Chief Executive Officer and President]

Yeah, no, so as you know, NYCE is a great asset for FIS. It's one of -- there's only so many networks out there. We continue to see -- Reg II is obviously an opportunity for all of us in the network space and we have a very significant pipeline there. There's a lot of interest as Reg II comes online. It's obviously very competitive, but we're feeling really good about it.

[Operator]

Thank you. One moment for our next question. That will come from the line of Jason Kupferberg with Bank of America. Your line is open.

[Jason Kupferberg, Bank of America]

Good morning, guys. Just wanted to start on the backlog. When do you think we get back to positive year-over-year backlog growth? It sounds like maybe you're still thinking flattish for Q3, specifically. And then will we get a medium-term organic revenue growth target, specifically for the Banking segment, next quarter when Merchant moves into discontinued Ops?

[Stephanie Ferris, Chief Executive Officer and President]

Yeah, I think, so on backlog, I think Erik gave some remarks that he can repeat for you. But tough to predict, but our guidance right now assumes backlog remains flat to slightly down over the next three to four quarters. And I'll remind that was the plan as we thought about coming into 2024 and trying to change the margin profile of the products there. I think the thing to understand about the new sales and the backlog and that's why we keep talking about recurring revenue growth is really, obviously, there's a new sales component to it, but there is also the net-new deposit, our net-new account growth plus transaction activity going across the platform that gives us some organic growth while we remix the Banking backlogs. I think with respect to cycle guidance, little bit soon to be giving cycle guidance. I think what we've said around our cycle guide for FIS is a mid-term cycle guide of 3% to 5%. I wouldn't expect us to be giving segment cycle guidance or overall cycle guidance for 2024 until we get closer to the guide for 2024. We're just not ready yet.

[Jason Kupferberg, Bank of America]

Understood. And just as a follow-up. So the $4 billion of pro-forma adjusted EBITDA for RemainCo next year, is that inclusive of the $200 million of dis-synergies that you mentioned?

[Erik Hoag, Chief Financial Officer]

Yeah. Hey, Jason. Good morning. So let me try to do a quick summary of the material call-outs from the column. I'm just going to walk the whole thing. So in the prepared remarks, I referenced an adjusted EBITDA range of 3.9% to 4%, post-transaction. This includes a revised corporate expense estimate for FIS moving forward. It also includes the disclosed $200 million of adjusted EBITDA dis-synergies, split $100 million of revenue dis-synergies, and $100 million of incremental operating expense. The Future Forward program, admittedly, will offset a lot of these dis-synergies. Keep in mind that we have reduced the Future Forward in year '24 impact from $300 million to $215 million. And then beyond that, I talked about an effective tax rate of 19% to 21% and a weighted average interest rate of 325 basis points to 375 basis points.

[Stephanie Ferris, Chief Executive Officer and President]

One bit of clarification there. The reduction of the Future Forward is just aligning how much is related to Worldpay with respect to the Future Forward versus RemainCo FIS. We thought that was an important clarification.

[Operator]

Thank you. And one moment for our next question. And that will come from the line of Tien-Tsin Huang with JPMorgan. Your line is open.

[Tien-Tsin Huang, JPMorgan]

Hey, thanks. Some encouraging results, especially in Capital Markets. I was just curious, this double-digit recurring growth in Capital Markets that we've seen in the first half, any call-outs for the second half? Just curious here on sustainability. And maybe if it's possible, can you just review the outlook for recurring versus non-recurring for both the Banking and Capital Markets segments? Thanks.

[Erik Hoag, Chief Financial Officer]

Yeah. So from a Banking perspective, I would think about recurring revenue growth as steady through the balance of the year. Capital Markets has seen some elevated recurring revenue through the first half of the year. We specifically called out some anomalous transaction growth in the first quarter associated with some of the bank -- the mini bank crisis. However, we feel good about the raise of the Capital Markets guide from 4% to 6% to 5% to 6% on a full-year basis.

[Stephanie Ferris, Chief Executive Officer and President]

Tien-Tsin, the other thing I would add and thank you for pointing it out is how strong the product set there is in the Capital Markets business and the demand being really high and we continue to be really excited about it. As we think about FIS moving into post the Worldpay transaction, you would look to see us expect to continue to grow this business very significantly. The demand is very high, the products are resonating really well, the transition from non-recurring to recurring is going extremely well, margins look good. So you can expect as we look at capital broadly across the board and investments, we'll continue to make significant investments in this space, given the strength of the product set and how well it resonates with clients.

[Tien-Tsin Huang, JPMorgan]

Okay. Perfect. And then a quick follow-up, and thanks for the time, just on the backlog. I heard, loud and clear, pretty consistent, flat to slightly down next two to three quarters. How about the conversion? Any update in what you're hearing from clients are looking to convert or get projects started or finished? I know with -- across IT services and outsourcing, we're hearing a little bit of delays or pushouts. What are you guys seeing?

[Stephanie Ferris, Chief Executive Officer and President]

Yeah, I saw that too. Interesting. So we have -- it's a robust backlog. So what we hear from our clients is, can you get us live faster? We're actually not hearing anything about slowing what we have in the backlog. In fact, part of the reason we're really focused on Future Forward, one of the big component pieces of it is, how do we drive implementations faster? It's one of the things that I've asked the team to look at AI. Can we use AI? Can we get our product in development machine there along with our implementations team to move faster? And it's one of the upsides, I think, we can have as Kelly Beatty, who drives our Future Forward program, really pushes that flywheel faster. So I'm not hearing anything from clients in terms of wanting to slow. Actually, what they want to do is get their products out faster for them because they have either savings or growth banked on the back of that.

[Operator]

Thank you. One moment for our next question. And that will come from the line of Dave Koning with Baird. Your line is open.

[Dave Koning, Baird]

Yeah, hey, thanks so much. Great job.

[Stephanie Ferris, Chief Executive Officer and President]

Thanks.

[Erik Hoag, Chief Financial Officer]

Thank you.

[Dave Koning, Baird]

Yeah, and I guess, first of all, free cash flow conversion was really good this quarter. And I guess I'm wondering, is the rest of the year supposed to remain strong, and then post the spin, would it actually convert better than it has the last couple of years, simply because Worldpay was probably a drag on cash flow conversion?

[Erik Hoag, Chief Financial Officer]

Hey, David, good to hear from you. Cash flow conversion was strong. So first quarter conversion was 84%, second quarter conversion is 104%. Year-to-date 94%, we've guided to 80%. We feel good about the rest of year forecast in free cash flow conversion, number one. And then question number two, yes, we would expect it to further improve post separation. In regarding free cash flow conversion, we've had a couple of notable drivers here and they generally align with some of the success that we've had with Future Forward. We are collecting faster, we're spending slower. We've introduced some spend governor processes. As I mentioned in my prepared remarks, CapEx is down materially year-over-year. Our deferred contract costs are down materially year-over-year. We're sitting in a very nice spot with free cash flow conversion through six months of the year.

[Dave Koning, Baird]

Great. Thanks. And I guess as a follow-up, just on the post-spin basis, a couple of little things. The equities, there is the minority interest stake, will you recognize that on a non-GAAP basis? And then what would a dis-synergy, the $100 million of revenue dis-synergies, like what would that be?

[Stephanie Ferris, Chief Executive Officer and President]

Hey, Dave, it's Stephanie. So, yeah, I would think so, yes. Our minority interest stake, we would probably expect to non-GAAP that. But we're working through that, obviously, with our Chief Accounting Officer because that one would be a tough one to actually predict, given that it becomes a part of the company. And then with respect to the revenue dis-synergies, the way we thought about that is broadly across the board, as we think about ecosystem agreements in terms of untangling those, as well as we think about potential, we feel good about keeping the majority of them. And we have the commercial partnerships set up to do that. But we do anticipate some of those partnerships having to be renegotiated across the board and anticipate some of that to get -- to come away from what we had booked originally.

[Operator]

And one moment for our next question. And that will come from the line of Darrin Peller with Wolfe Research. Your line is open.

[Darrin Peller, Wolfe Research]

Hey, thanks, guys. If we look at the Banking segment recurring revenue growth rate, I think, as I recall, there were other, let's call them one-time or just tough comps. So above and beyond just the non-recurring items you called out here, like license fees, term fees, can you just remind us of maybe when you start to see the anniversary of, for example, T. Rowe, grow-over or other factors? And then more importantly, Stephanie, this is more of a cultural question, just the company was very focused on the larger banks for some time. And so the transition back to the mid-size, can you just talk about how that transition is going, especially culturally, and do you have the right people for that, have you lost or gained anyone that you need in the transition on the Banking segment? Thanks.

[Stephanie Ferris, Chief Executive Officer and President]

Sure. Maybe I'll start with the second, and then Erik can lean into the first one. I think as we think about Banking, it's really our flagship business, and we serve both the largest financial institutions in the world as well as our -- through the regionals down into the community banks standpoint. So I think that we still have all the people in place that serve those clients well. Obviously, those clients have different focus areas, priorities, product set needs. So if you're a large SIFI bank, you obviously have a different set of products you're trying to consume for us. You have a very large tech stack, so you consume those products and then you run your own middleware and your own core deposit system. As you think about you go down market into regional space, the regionals are -- we serve all of those. Those are a lot of the Modern Banking Platform business from us. And are really focused on transforming their businesses, not only with new cores, but are really looking at global money movement across the board as they think about their franchises and making sure that they take share there. And we have a lot of products sets there. Then as you move down into the community bank space. As you know, we primarily are the IT and Ops shop for those folks. We run everything, soup to nuts. And what I've heard from them is, look, we want and need FIS to provide the best-in-class products and services because if not, if we're forced to go out, it just becomes very challenging for them in terms of both price, but also adding more vendors in their back office given the tech teams they have. So I would say, we serve all three of those segments very well. They have much different needs and product sets. I think we feel really good about the new talents we brought in, John Durrant leading our Banking Solutions segment and the team that he's putting around him, that's complemented with a lot of the key leaders that we already have here today. And I would also say, for our Capital Markets business, those Nasser Khodri, our President there, those are also serving the largest financial institutions globally. So I think we sit in a really nice spot in terms of having a nice book of business across the board. As you know, we don't serve the smallest community banks or credit unions. We never have. So I think that's a space that you wouldn't look -- see us enter in a significant way. But I think we feel really good about where we are and making sure that our products, that continues to be best-in-class for those banks depending upon what they need. Erik, I'll turn it over to you.

[Erik Hoag, Chief Financial Officer]

Yeah. And also, Darrin, Banking from a recurring revenue perspective, I would think about the back half as steady. Recurring revenue in the first was 4%, second quarter, 3%. I would think about the back half as steady. We've got T. Rowe Price's implementation behind us, so we don't have any customer-specific volatility that we'd expect in the back half.

[Darrin Peller, Wolfe Research]

Okay. I was just wondering if there was a grow-over, I guess, where you -- the headwind that was there may not recur, but all right. I mean, at the end of the day, then the recurring steady at 4%, or 3% to 4%, it sounds like that's kind of the new norm, assuming what you're doing right now is already delivering what you need, unless there's more to go on that front.

[Stephanie Ferris, Chief Executive Officer and President]

I think that's fair. I think it's steady for recurring. I think the grow-overs were largely through those big transactions. The grow-overs now sit in non-recurring for us in the back half of this year, which is what's keeping the overall revenue growth guide down. We still have some lumpiness to go, but it's not in recurring.

[Operator]

One moment for our next question. And that will come from the line of Ashwin Shirvaikar with Citi. Your line is open.

[Ashwin Shirvaikar, Citi]

Hi, thanks. I just wanted to go back to sort of the improvement in sequential growth in EBITDA margins that you mentioned in your early scripted remarks. Could you maybe break down what goes into that in terms of Future Forward benefit versus is the improved mix already flowing through? If you could just break down what goes into that.

[Erik Hoag, Chief Financial Officer]

Hey, Ashwin, it's good to hear from you. Maybe just I'll start with taking a step back on some of the margin improvements that we've made. In the fourth quarter '22, margins were down 320 basis points year-over-year. The first quarter, they were down 190 basis points. The second quarter, they were down 160 basis points. Our third quarter sort of RemainCo at the midpoint, down 50 basis points. So we continued to make progress in margin improvement through the course of the year. I would say predominantly on the back of Future Forward success. I think some of the green shoots that we're seeing on the sales side will take a little bit of time for us to get those customers installed.

[Ashwin Shirvaikar, Citi]

Understood. And then just wanted to go back one more time, if I can, to sort of the backlog being flat to down. And I get it, you've been remixing for better future profitability. But does the same principle apply to existing revenue that you're taking a look at contracts that exist and trying to figure out how to remix that, and what's the process for that if that's a consideration? How should we think about future modeling perspective about the impact of that?

[Stephanie Ferris, Chief Executive Officer and President]

Yeah, Ashwin, great question. I think the way to think about that is we've looked at the products in the mix and really took an approach around, can we improve the either variable cost or fixed cost to make those product margins better. As you know, we have long-term client contracts, so it's a little tough to go in and renegotiate those until they're up for their natural renewal. And we have them covered -- the revenue covers the base. So I think about it more in terms of through Future Forward, how do we continue to improve either the variable cost or the overall fixed cost of the product to improve the margin mix broadly.

[Operator]

One moment for our next question. And that will come from the line of James Faucette with Morgan Stanley. Your line is open.

[James Faucette, Morgan Stanley]

Thanks very much. I wanted to just quickly go back to backlog and its development and how that may overlap with changes that you've made in salesforce and their focus. I'm just wondering if as the salesforce focuses on more profitable potential business in their Banking segment, et cetera, is there a change in the mix of products at all that could affect how we should think about the evolution of backlog and how that flows through, ultimately, to revenue, or not really?

[Stephanie Ferris, Chief Executive Officer and President]

Great question. I think, not really, because what you're seeing in backlog -- the challenge with the mix was really around the large strategic transformative deals that we signed. And by the way, it's not that we wouldn't be interested in those deals. We're just not relying on them in terms of how to drive kind of core organic recurring revenue growth. So if and when we have those, we'll let you know. I wouldn't necessarily think that there'd be a material impact to the change in the backlog through the modeling. I just think it will take too long given the tenure of the contracts.

[James Faucette, Morgan Stanley]

Got it. Got it. Okay. That's helpful. Thank you. And then I guess just related to the change in outlook more generally, especially that you're looking at, have there been any changes in the macro assumptions that you're looking at? And how are you feeling about what you're seeing in the environment more generally? Just thinking about how that may be impacting the formulation of your comments, if at all.

[Erik Hoag, Chief Financial Officer]

So good to hear from you, James. So taking a step further back. We feel good about the consolidated guide that's gone up broadly. With the results that we have had year-to-date in both Banking and Capital Markets, we feel confident in pulling up the low end of the guide and taking into consideration that we feel the macro is steady.

[Operator]

And one moment for our next question. That will come from the line of Lisa Ellis with MoffettNathanson. Your line is open.

[Lisa Ellis, MoffettNathanson]

Hey, good morning. Thanks for taking my question. I was hoping to dig in and understand a little bit better the ongoing commercial arrangements between RemainCo, FIS and Worldpay after the partial sale to GTCR. You commented on this a couple of times, Stephanie. Can you just maybe walk through in a little bit more detail what -- how we should think about what commercial arrangements are either already negotiated? In the process of being negotiated? Like what will that arrangement look like on an ongoing basis between the two entities?

[Stephanie Ferris, Chief Executive Officer and President]

Yes, sure. So happy to. So I think, think about Amplify, which is our cross-sell initiative, where we're trying -- where we're selling, acquiring into Banking and Capital Markets clients. And then on the flip side, where we're selling either issuing NYCE loyalty, a lot of those products into our Worldpay clients, so think about the corporate clients there. To-date, that has been very successful since the acquisition. However, there hasn't been any revenue share between the segments because we're one company. So I think as we go into two companies, the way to think about it is a very normal commercial agreement, where whichever distribution channel is selling the other's product, you would expect to get a revenue share to compensate that channel for that product sale on a go-forward basis. We're not going to go back and look at what's been sold and create a revenue share on the historical. It would be a pro forma go-forward only. And we think that's really required for two reasons. One, it will preserve the go-forward synergies between the two companies and partnerships, but also really fair in terms of making sure that we are compensating, just like you would in a normal arm's length arrangement, the distribution channel for the product and the product for the distribution channel. So that's how we think about it most simplistically.

[Lisa Ellis, MoffettNathanson]

Got it. Okay. And then just maybe as a follow-up related to FedNow. So FIS has been really active in account-to-account networks broadly, globally as well as here in the US. Can you just talk a little bit about what you're seeing in terms of opportunities for FIS, either from FedNow or just more broadly across the account-to-account landscape? Thank you.

[Stephanie Ferris, Chief Executive Officer and President]

Sure. Yes. It's absolutely a trend. As you know, we're there. We've been there for a long time. We have a significant amount of banks currently testing and certifying for FedNow. We have over 115 banks in the pipeline. We have the ability to ramp hundreds more in the coming quarters, depending upon demand. We're seeing some early momentum probably a bit more than when the Clearing House launched RTP. As you know, the certification is just the first step, and then it continues on from there. I'd say it's early with these things, Lisa. As you know, there's always a lot of hype and promise. And I think we're right there in terms of enablement. TBD in terms of how fast it ramps, what the overall financial impacts are, but I do think it's a really important trend in the market. And FIS is there to enable whomever would like to use it.

[Operator]

One moment for our next question. And that will come from the line of John Davis with Raymond James. Your line is open.

[John Davis, Raymond James]

Hey, good morning, guys. Hey, Erik, just a quick clarification. The $3.9 billion to $4 billion, does that include the synergies and Future Forward savings?

[Erik Hoag, Chief Financial Officer]

It does not. So let me just walk it again, John. Thank you for the clarifying question. I referenced $3.9 billion to $4 billion for FIS post transaction, and that is inclusive of the corporate expense estimate for FIS moving forward. From there, we disclosed $200 million of total adjusted EBITDA dis-synergies, split $100 million in revenue, $100 million in incremental operating expense. And then we've also got Future Forward benefit, which is down from $300 million to $215 million as we break Future Forward between FIS and Worldpay.

[John Davis, Raymond James]

Okay. Thanks. And just as a quick follow-up. On Banking margins, I think on the 4Q call, you said about 50 basis points of expansion for the full year, which would imply second half margins are kind of up 300 basis points to 400 basis points. Is that still the right way to think about? Any color on the 3Q, 4Q cadence would be helpful.

[Erik Hoag, Chief Financial Officer]

Well, the sequencing through the year for Banking margins would continue to improve. I think we get to flat full year Banking margins under the current forecast based on some of the mix shift that we've seen of high-margin onetime revenues coming down.

[Operator]

Thank you. We do have time for one final question and that will come from the line of Vasu Govil with KBW. Your line is open.

[Vasundhara Govil, KBW]

Hi. Thank you for taking my question. First one for you, Stephanie, on the Banking side. Understanding that you're not relying on for the larger end of the market anymore to sort of get back to your normalized 3% to 5% revenue growth. But what do you think needs to happen to get that going again? Is it mostly a macro issue at this point? Or is there something else that can be done to get signing those deals again?

[Stephanie Ferris, Chief Executive Officer and President]

Okay. So let me make sure I clarify because I've gotten two questions, and I want to make sure. We are not stepping away from the large financial institution market. I think what we've called out historically is there have been some large strategic transactions like a T. Rowe Price, for example, where that is a transformative type deal for the institution. Those are not normal backlog type sales. So we're not stepping away from large financial institutions. What I think we've been trying to say is we're not going to rely on those large strategic transactions as a driver for the underlying medium-term cycle guidance for the company of 3% to 5%. We are still absolutely interested in those and pipelining those. We would call them out more specifically. But those were contributors, if you look back at the last couple of years to a couple of percentage points of growth overall in Banking. And so as you think about those normalizing out, and you're coming down from a mid to upper single-digit number, we would think about, like we said, for FIS RemainCo, the 3% to 5% cycle guide on more of a more normalized backlog that doesn't include those. Now to the extent we continue to absolutely participate in those in terms of sales processes. And as we think about those and those opportunities and should we win one of those, which does come with a different margin profile, most of the time, we'd be very transparent in terms of that and wouldn't expect to have it as part of our normal recurring backlog activity. So hopefully, that clarifies. I apologize if I created any confusion with that.

[Vasundhara Govil, KBW]

No, that's absolutely clear. I guess I was just wondering like what do you think it takes for you to start winning some of those deals again? Because we just haven't -- because I think end of last year, you started to allow an elongation in sales cycle for those large types of deals. And I was just wondering if that's more of a macro issue at that point? That you aren't just making those decisions or there's something that could be done to drive that, I guess.

[Stephanie Ferris, Chief Executive Officer and President]

Yes. No. Yes. Sorry. Sorry. Thanks for clarifying. Those are macro. Those large transformative deals where banks are making strategic decisions, whether they want to be in businesses, whether they want to use an outsourced partner or whether they want to be in a hybrid part of that partnership, we saw those slow down at the end of last year. They're all still looking at them. Those cycles are still elongated, as you can imagine. With the focus on deposits, the banks have really refocused a lot in terms of deposit gathering, although they still have a very keen eye towards profitability. So those types of transactions typically do drive profitability. But broadly, I'd say the banks are really focused on deposits and deposit gathering as their primary activity and are moving into profitability. So I think, again, I think it's more macro. And I think Tien-Tsin mentioned, if you're hearing from IT outsourced providers, a lot of those big transformative deals are slowing down from a macro standpoint.

[Vasundhara Govil, KBW]

That's super helpful. Thank you. And a quick -- if I may ask a quick follow-up to Erik. You've laid out the $200 million of dis-synergies on the FIS side. I just wanted to make sure that we were backing into the right number on the Worldpay side as well as we sort of think about the minority interest that will flow back to Worldpay. And we were backing into something like $250 million on the Worldpay side. Is that sort of in the ballpark? And how would you split that between revenues and costs?

[Erik Hoag, Chief Financial Officer]

Yes. Good question. The Worldpay side, it would be $200 million of OpEx dis-synergies and roughly $100 million of revenue dis-synergies for a total EBITDA impact of $300 million.

[Operator]

Thank you all for participating in today's question-and-answer session. I would now like to turn the call back over to Mr. George Mihalos for any closing remarks.

[George Mihalos, Head, Investor Relations]

Thank you, everyone, for joining us. Please feel free to reach out with any questions on Investor Relations and we'll speak with you soon.

[Operator]

Thank you all for participating. This concludes today's program. You may now disconnect.