Fidelity National Information Services Inc

NYSE:FIS

Earnings Call Analysis

FIS Reports Strong Q3 Results with Raised Outlook and Strategic Growth

FIS had a solid Q3 with adjusted revenue growing by 4%, driven by a 6% rise in recurring revenue. The adjusted EBITDA margin reached 41.3%, exceeding expectations. Adjusted EPS increased 13% year-over-year to $1.40. FIS returned $700 million to shareholders and executed a strategic acquisition of Dragonfly Technologies. The company raised its 2024 outlook, forecasting a revenue increase of $20 million and adjusted EPS of $5.15 to $5.20, reflecting a 16%-17% normalized growth. FIS noted a strengthening pipeline in core banking and digital solutions, with a focus on capitalizing on sales momentum and cross-sell opportunities.

Strong Financial Performance in Q3 2024

FIS reported solid results for the third quarter of 2024, achieving an adjusted revenue growth of 4%. This growth was primarily driven by a notable surge in recurring revenue, which increased by 6%. The adjusted EBITDA margin stood at 41.3%, showing year-over-year expansion and exceeding market expectations. Notably, adjusted earnings per share (EPS) rose to $1.40, reflecting a normalized increase of 13% year-over-year, showcasing robust operational efficiency and effective cost management.

Capital Return Strategies

In Q3, FIS returned $700 million to shareholders through a combination of share repurchases and dividends. Specifically, the company repurchased $500 million worth of shares, aligning with their commitment to return $4 billion in total for the year. This demonstrates FIS's disciplined capital allocation strategy, driving shareholder value while maintaining liquidity.

Acquisition and Strategic Partnerships

FIS made progress in expanding its digital capabilities by acquiring Dragonfly Technologies, aiming to enhance its offerings in the financial technology space. Though the acquisition may have a marginal revenue contribution of less than $10 million in the short term, it presents significant long-term synergies, especially in enhancing digital solutions for regional banks and large financial institutions.

Sales Momentum Across Banking and Digital Solutions

The company witnessed sustained sales momentum across various sectors, particularly in core banking and digital solutions. FIS signed more core engagements in the first three quarters of 2024 than in all of 2023, highlighting strong market demand in core banking services. Additionally, new sales in the digital segment nearly doubled year-over-year, supported by a robust pipeline of engagements, including partnerships with major brands like Apple.

Raised Guidance for 2024

As a result of strong year-to-date performance, FIS raised its full-year guidance for 2024. The company increased the low end of its revenue range by $20 million and the EBITDA range by $10 million, projecting an EBITDA margin of approximately 40.7% for the year. Adjusted EPS guidance was also raised to a range of $5.15 to $5.20, indicating a normalized growth forecast of 16% to 17%. This bullish outlook reflects confidence in ongoing operational improvements and favorable market conditions.

Margins and Free Cash Flow

FIS reported free cash flow of $530 million with a cash conversion rate of 85%. However, they noted an increase in capital expenditures expected to account for approximately 9% of revenue due to heightened growth investments. Despite elevated CapEx, FIS remains confident in sustaining strong free cash flow and meeting capital return commitments.

Future Outlook and Segment Performance

The company anticipates continued momentum in the fourth quarter, particularly within its Capital Markets segment, which is projected to achieve the high end of the 6.5% to 7% revenue growth target. The Banking segment is expected to stabilize after an easier comparison due to prior growth periods. Overall, FIS's business strategies emphasize enhancing recurring revenue streams and leveraging synergies from recent acquisitions to solidify market positioning.

Earnings Call Transcript 2024-Q3

[Operator]

Good day, and welcome to the FIS Third Quarter 2024 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Mr. George Mihalos, Head of Investor Relations. Please go ahead, sir.

[Georgios Mihalos, executive]

Thank you, Shari. Good morning, everyone. Thank you for joining us today for the FIS Third Quarter 2024 Earnings Conference Call. This call is being webcasted. Today's news release, corresponding presentation and webcast are all available on our website at fisglobal.com.

Joining me on the call this morning are Stephanie Ferris, our CEO and President; and James Kehoe, our CFO. Stephanie will lead the call with a strategic and operational update followed by James, who will review our financial results.

Turning to Slide 3. Today's remarks will contain forward-looking statements. These statements are subject to risks and uncertainties as described in the press release and other filings with the SEC. The company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise except as required by law. Please refer to the safe harbor language.

Also, throughout this conference call, we will be presenting non-GAAP information, including adjusted EBITDA, adjusted net earnings, adjusted net earnings per share and adjusted free cash flow. These are important financial performance measures for the company but are not financial measures as defined by GAAP. Reconciliation of our non-GAAP information to the GAAP financial information is presented in our earnings release.

And now I'll turn the call over to Stephanie.

[Stephanie Ferris, executive]

Thank you, George, and thank you, everyone, for joining us this morning. FIS delivered another quarter of strong results with broad-based outperformance against our financial targets, sales momentum across the enterprise and success securing a number of strategic partnerships, strengthening our leading position across the money life cycle.

As our third quarter performance demonstrates, we are executing on our strategy to drive greater shareholder value. Let me share some key financial results and operational highlights with you.

Adjusted revenue grew 4% in the third quarter, fueled by a strong acceleration in recurring revenue growth. Adjusted EBITDA margin of 41.3% exceeded our outlook, with both operating segments posting year-over-year margin expansion. We also continue to focus on driving high-quality recurring sales with cross-sell activity across the enterprise up over 20% year-to-date.

Adjusted EPS of $1.40 increased 13% year-over-year on a normalized basis. And we returned a total of $700 million of capital to shareholders in the third quarter across both buybacks and dividends.

We also recently closed a small acquisition in the digital space, Dragonfly Technologies as we make progress against our M&A goals. Our strong operational performance and disciplined capital allocation allow us to once again raise our outlook for 2024.

Now turning to Slide 6. The sales momentum we saw over the first half of the year continued through the third quarter with strong execution across the entire money life cycle. Within money at rest, we continue to see solid demand across core banking and digital solutions.

In core banking, we've already signed more core engagements through the first 3 quarters of 2024 than we did in all of 2023. During the quarter, we signed new deals across all 3 of our core platforms: IBS, Horizon and Modern Banking Platform. And our pipeline of core opportunities continues to expand with strength in the community bank space.

Our digital business continues to see accelerating sales momentum with new sales nearly doubling year-over-year. We look forward to further capitalizing on this momentum with our recent acquisition of Dragonfly. Dragonfly complements our Digital One portfolio, expanding our digital offerings across large financial institutions, including some of the largest regional banks for which we already have significant relationships.

The company provides banks with a full suite of solutions to meet the needs of large, complex commercial customers, including managing liquidity, combating fraud and handling payments. Dragonfly also services a number of banks not currently using an FIS core, creating attractive cross-sell opportunities for us.

Within money in motion, our differentiated payment offerings, particularly our loyalty solutions, had a strong sales quarter as we signed several new marquee partners. We meaningfully expanded our premium payback ecosystem with key new partnerships across a number of sectors, including leading technology companies, retailers and financial institutions.

Our ability to partner with these market-leading companies underscores FIS' unique ability to unlock financial technology to the world. We continue to execute across treasury and risk with solid sales and risk management and continued product innovation, including soon-to-launch next-generation treasury solutions in partnership with market-leading AI companies.

Across money at work, we recently launched our digital trading storefront, and we continue to see very strong double-digit growth in commercial lending. In summary, we're executing strongly across all growth vectors and are seeing continued new sales momentum across the enterprise.

Now turning to Slide 7. As discussed, we signed a number of marquee client wins and secured several high-profile new partnerships during the quarter. Beginning with money at rest. We continue to see traction with banks below $10 billion in assets with a competitive win of a leading mutual bank, [indiscernible] he will be migrating to our IBS core.

Additionally, we signed a license agreement with a leading global commercial bank in the APAC region for Modern Banking Platform. Digital had another strong sales quarter with a number of new engagements.

One example is our expanded relationship with EverBank, a growing Southeast-based bank with nationwide deposit and lending capabilities with over $35 billion in assets that opted for our Digital One solution. EverBank, as I will discuss shortly, is a leading example of our cross-sell flywheel at work as the bank is both a Banking Solutions and Capital Markets customer, opting for new solutions across both segments this past quarter.

Turning to money in motion. Our Premium Payback loyalty offering had a standout quarter as we entered into new engagements with a number of leading companies across a wide spectrum of industries. Commerce Bank, a leading regional bank in the Midwest, has selected FIS to provide it with an end-to-end loyalty management platform, including leveraging our Premium Payback loyalty offering. We're excited Commerce Bank has selected FIS to help them differentiate their customer value proposition.

We're also working with Apple to bring additional payment options to Apple Pay users. In the future, U.S. users checking out with Apple Pay online and in apps on iPhone and iPad will be able to redeem rewards for purchases across eligible participating Apple Pay issuers with FIS.

In Capital Markets, our treasury and risk solutions continue to resonate globally. In the quarter, we renewed and expanded our relationship with one of South Africa's largest financial services provider that relies on FIS' enterprise risk suite to manage the risk exposure.

Within money at work, we continue to see strong demand for our commercial lending solutions. As I mentioned earlier, EverBank, a banking solutions client, selected FIS for their commercial loan origination needs, expanding our relationship across the bank.

And similarly, [indiscernible] Bank, a large U.S.-based financial institution and banking solutions client, opted for Capital Markets commercial loan servicing and compliance solutions. This demonstrates the unique value proposition of One FIS, servicing the most complex clients across both our Banking and Capital Markets segments.

I'm also pleased to report that FIS has once again recognized as one of the world's best companies by TIME Magazine. Also, a number of our solutions received accolades from leading expert advisory firms in prestigious industry journals, including IDC naming Modern Banking Platform as a leader in its recent North American digital core banking platforms report.

In Charters Research, a leading risk technology research firm, recognizing FIS in its inaugural [ AI 50 ] report, highlighting AI adoption in the financial industry. These awards reaffirm our leadership position across the money life cycle.

And before I turn it over to James, I want to thank all of our colleagues here at FIS for all of their hard work and welcome our new Dragonfly colleagues to the team. I also want to welcome our 2 newest board members, Nicole Anasenes and Kourtney Gibson to the Board.

And with that, James?

[James Kehoe, executive]

Thank you, Stephanie, and good morning. We are very pleased with our performance in the third quarter as we once again exceeded our financial outlook and raised our full year 2024 projection.

Adjusted revenue growth was steady at 4% in the quarter driven by an acceleration in recurring revenue growth. Adjusted EBITDA margin exceeded our expectations at 41.3% with margin expansion across both operating segments, offset by a tough year-over-year comparison in corporate expenses. Adjusted EPS was $1.40 in the quarter, up 49% compared to the prior year and increasing 13% on a normalized basis.

As described in our earnings release, we made some noncash adjustments to our previously reported financial statements, primarily reflecting an increase in the cost of revenue in the output solutions business within our Banking segment. These revisions had an immaterial net impact, reducing 2022 adjusted EPS by $0.06 and 2023 adjusted EPS by $0.03. For 2024, our adjusted EPS decreased by $0.01 in each of the first 2 quarters.

Free cash flow was not impacted by these revisions. We have provided a full set of revised financial statements in our earnings materials, and we are confident that the issue has been resolved and there is no impact on the business going forward. In fact, we are raising our full year outlook.

Moving now to our balance sheet and cash flow metrics. Total debt at the end of the quarter was $10.9 billion with a leverage ratio of 2.6x. We returned $700 million of capital to shareholders, including share repurchases of $500 million. Year-to-date, we have repurchased $3 billion of shares and are well on track to deliver our $4 billion full year target.

Free cash flow was $530 million with a cash conversion rate of 85%. Cash conversion was impacted by an increase in capital expenditures to 9% in the quarter. We have increased our growth investments and now expect CapEx to be closer to 9% of revenue for the full year. Given the higher growth investments, we now expect free cash flow conversion of approximately 85% for the year. We remain confident on meeting all of our capital return commitments for 2024 and over the medium term.

Turning now to our segment results on Slide 10. Adjusted revenue growth was 4% with recurring revenue accelerating to 6%. Banking revenue growth of 3% came in at the higher end of our outlook. Recurring revenue accelerated to 6%, in line with our expectations. Other nonrecurring revenue declined 24%, reflecting a tough comparison related to pandemic relief revenue in the prior year.

Lastly, professional services revenue increased 10% year-over-year, in line with our prior commentary around stabilization and second half acceleration. Adjusted EBITDA margin expanded 10 basis points, reflecting cost-saving initiatives and operating leverage.

Turning now to Capital Markets. Adjusted revenue growth was 7%, led by recurring revenue growth of 6%. Excluding acquisitions, adjusted revenue grew 6%, consistent with the second quarter. Other nonrecurring revenue increased 20% with strength in license sales, and professional services increased 4%.

Adjusted EBITDA margin expanded 90 basis points, reflecting operating leverage and favorable revenue mix. Consistent with prior messaging, we continue to expect full year margin expansion across both segments.

Turning now to our full year outlook on Slide 11. We are increasing the low end of our revenue range by $20 million and the low end of our EBITDA range by $10 million to reflect our year-to-date performance and confidence in the fourth quarter outlook. This leads to an EBITDA margin of approximately 40.7%, reflecting year-over-year margin expansion of 50 basis points.

We are raising our full year EPS outlook by $0.09 to $0.12 to $5.15 to $5.20, reflecting normalized growth of 16% to 17%. This increase is driven by operational outperformance and continued favorability in below-the-line items.

Turning now to Slide 12. Our $20 million increase to the low end of the revenue range reflects confidence in our Capital Markets achieving the high end of a 6.5% to 7% revenue growth target. For Banking, we anticipate coming in closer to the lower to midpoint of the range after adjusting for the higher revenue base in 2023.

We are raising the low end of our adjusted EBITDA range, reflecting our outperformance in the third quarter. And we remain confident in achieving our increased full year EBITDA range. We are meaningfully increasing our EPS outlook driven by our operational outperformance and improvements across interest expense and Worldpay EMI. The interest expense favorability primarily reflects lower levels of debt outstanding, given a slower-than-anticipated level of M&A activity.

With that said, our acquisition pipeline remains robust, and we expect to close additional deals in the near future. We are once again increasing our EMI outlook by $35 million to $480 million to $495 million, primarily reflecting a delay in planned operating expense increases.

In summary, we are raising our full year adjusted EPS to $5.15 to $5.20, a 10% increase from the outlook we provided at the beginning of the year.

Let's now wrap up on Slide 13. We have delivered another strong quarter, accelerating our recurring revenue growth and projecting 50 basis points of margin expansion for the year. We are once again raising our 2024 EPS outlook. And we returned $700 million to shareholders and are on track to meet our $4 billion of share repurchase commitment for the year. Lastly, we are confident in delivering strong returns to our shareholders over the foreseeable future.

With that, operator, could you please open the line for questions?

[Operator]

[Operator Instructions] And our first question will come from the line of Ramsey El-Assal with Barclays.

[Ramsey El-Assal, analyst]

Can you help us think through the puts and takes for Capital Markets growth in Q4, the implied expectations in Q4? The year-over-year comparison gets easier. I'm just trying to back into how we get to your implied guide.

[James Kehoe, executive]

Yes. As we said on the prepared remarks, as we took a look at the business more recently, it had a strong Q3. And then looking out, we recognize that our 6.5% to 7% full year guide was, call it, a little on the conservative side. So that's why in the verbal commentary, I said we expect to be basically on the high end of the 6.5% to 7%.

And that will result in a pretty strong -- if you do the implied growth rate, that will result in a strong both recurring and total adjusted revenue growth in the quarter. And as a reminder, it's kind of in the bag because you recall in both businesses, we had a relatively weak adjusted revenue in the prior year quarter.

The total company was close to 0, and I think Capital Markets was up 1%. So we're very, very confident on this Capital Markets number touching 7% on the full year.

[Ramsey El-Assal, analyst]

Got it. Okay. And one more for me. On the Dragonfly acquisition, can you comment on the contribution you're expecting as we close out the year here in the fourth quarter from that deal?

[James Kehoe, executive]

Yes, it's really pretty small because the deal is basically closing as we speak. I think that number is less than $10 million of revenue in the quarter. The acquisition, just in general, at least in the initial 12 months is probably -- it's dilutive to company margins. But we see strong synergy opportunity, both revenue and on the cost side, but principally on revenue. This is a great acquisition and highly strategic.

[Operator]

[Operator Instructions] And that will come from the line of Tien-Tsin Huang with JPMorgan.

[Tien-Tsin Huang, analyst]

I just wanted to ask on visibility going into the fourth quarter in general. Any changes across recurring, nonrecurring in both the segments? And it looks like just higher CapEx investments is really the only change. And any other color on that specifically?

[Stephanie Ferris, executive]

Tien-Tsin, maybe I'll start in terms of trends. I mean we continue to see very stable economic trends across Banking and Capital Markets. As James talked about, our confidence in the fourth quarter guide, but generally see very consistent trend. Banks continue to spend. Technology continues to be one of their largest spend areas.

We're not overly exposed to consumer spend, and that continues to be stable. So nothing causing us concern as we think about the fourth quarter, and then maybe I'll turn it over to James for the second half of your question.

[James Kehoe, executive]

Yes. No, there's -- we don't see any particular concern. I'll just add on to that on margins as well, we see a strong outlook for margins in the fourth quarter. And as you saw from our preprepared remarks, the total year margin expansion is now 50 basis points. So we're seeing strong benefits from our cost programs and operating leverage.

On capital, yes, we -- 2 big drivers here as we were working through it over the last couple of months. One is we took select decisions to invest in the business to stimulate and continue to drive revenue growth.

But then there's another factor that we have some technology suppliers who have been dramatically ramping up their price list. And these are pretty exorbitant increases, 50%, 60%, 70%. And essentially, these companies are owned by private equity. And they're facing us in a position where we're facing high levels of inflation across some of our capital programs.

We're working through this, and you can be sure we will take action against it. But it's put some pressure on our capital spend over the finish of the year.

But I do want to emphasize, this is all incredibly manageable within the cash flow conversion. As we look forward into next year, we're fairly comfortable on cash conversion.

Capital will probably remain at current levels. But we're very, very confident on any guide we gave in the past concerning return of capital to shareholders. I just want to emphasize that.

So think of this as temporary. Some suppliers have ratcheted up prices higher than we would think are acceptable. And we just got to manage through this over the coming months.

[Tien-Tsin Huang, analyst]

Okay. No, very clear. Just quickly, what's driving the prior period accounting revision again? And given the new baseline, should we consider any adjustments to the longer-term outlook as well?

[James Kehoe, executive]

Yes. Good question. This was -- first of all, I would say it's relatively immaterial and we -- I gave you some of the numbers on the call. If you think about it, it was $0.01 in each of the first 2 quarters of this year. That's the first thing. It was pretty immaterial to EPS.

Two is it didn't have an impact on cash. So it was basically a noncash adjustment. And we've completely worked through this. We've resolved the issue, which was about a small -- it was around a small output solutions business, which essentially is card production in print and mail. So a very, very small business.

And then final comment is it has no impact on future operations. And you've seen from the quarter we had a solid beat in EBITDA. And we're calling up the full year on EPS, and we have good confidence in the future as well. So this is very much behind us, and we're very encouraged by current business results.

[Operator]

[Operator Instructions] And that will come from the line of Dan Dolev with Mizuho.

[Dan Dolev, analyst]

Great results again. Quick question on Banking. It looks like growth is expected to accelerate organically in the fourth quarter. Can you maybe give us some color on how you're tracking versus different customer types? And we're hearing some chatter that you're doing really well in the down market versus the incumbent. So maybe Stephanie, if you can elaborate on that, that would be great.

[Stephanie Ferris, executive]

Yes. Thanks, Dan. Appreciate your comments. So as James mentioned, we feel confident on Banking. As you know, we're coming off a fairly easy comp from last year when driving some higher growth. We are pleased with the progress we're making in terms of competitively around core and digital in particular.

As you know, we span the large FI market and then the community bank. We don't really go below the $2 billion mark. So we're focusing where we think our sweet spot is. We were pleased with selling cores in all 3 of our strategic cores: Modern Banking Platform, IBS and Horizon.

We've obviously made a big push as I've come into the chair to ensure that we fortify our existing customer base and then go after the banks that we think we can win. And we've been really successful with that. So continuing to keep our heads down and be very competitive there.

As you know, we think we have the best-in-class product suite across the board. And so we leverage that as well as the scale of the distribution channel and are feeling really good about where we're going. Still have work to do, and we'll continue to focus, but feel good about the progress we've made thus far.

[Operator]

[Operator Instructions] And that will come from the line of Jason Kupferberg with Bank of America.

[Jason Kupferberg, analyst]

I wanted to start on the Banking segment. I think you said you expect to be in the lower to middle part of the full year guidance range. So I know last quarter, you had talked about doing at least 5% growth in the fourth quarter for Banking. So maybe if you can clarify if you're down ticking a little bit there and just put a finer point on what you do now expect for Q4 in Banking and maybe what changed around the margin in the last 3 months?

[James Kehoe, executive]

And then maybe I'll ask Stephanie to weigh in. As we looked at the Banking guide, just to be clear, we're confirming the total company guide, and we're very comfortable with that.

We called up Capital Markets. We were doing some cleanup of the forecast because Capital Markets was overly conservative for the fourth quarter. And looking into Banking, we had 2 things, and this is kind of unusual, hard to explain.

When we did the accounting revision, it increased the revenue last year. There was a slight revenue impact. So the fourth quarter has an impact, call it, you're lapping a higher number. And this pulled down our overall growth expectation by 15 basis points -- 15 to 20 basis points. So as we look at the full year guide, we said just to be conservative, let's pull that back because it actually changed the base on us. So that's, call it, a noncomparability adjustment of 15 to 20 bps.

The other piece was we've signed a bunch of -- you've seen we're getting a lot of traction on new signings. We signed a lot of activity recently. We've just seen a couple of conversions, just the physical conversion, not the contract. The physical conversion has slipped into the first half of next year.

So this is purely a shift, and it's no impact on business as usual. The contracts are actually signed here in the bank. They're just -- it's getting the work programmed out there. So I would think of this adjustment to Banking the guide as housekeeping. One is correcting this accounting revision, and the other one is just some housekeeping around timing of executions.

[Stephanie Ferris, executive]

Yes. The only thing I would add is the -- on the timing, it's client requested. So we have the resources available and are ready to go. It's more being client requested and when they're ready to go. And as we get closer to the end of the year, as you know, people do freezes, and so they weren't quite ready, so pushing into the first half of next year.

[Jason Kupferberg, analyst]

Okay. It's actually a good segue to my second question. I know at the Investor Day earlier this year, you talked about Banking growing 3.5 to 4.5 next year and in 2026 and then 7.5 to 8.5 on cap market. So just as we start to tune the models for 2025, what should we be considering in terms of factors that maybe will land you more at the lower end versus the higher end? I mean both imply that there will be a little bit of acceleration versus 2024.

[Stephanie Ferris, executive]

Yes. So Jason, I think what we would say is we haven't changed anything with respect to the commitments we made at Investor Day, but we're not quite ready to give a guide in 2025. But you can see that Banking Solutions is accelerating. Capital Markets is accelerating in the second half. So those are good data points, but not yet ready to call 2025. We'll be back to you in early first quarter.

[James Kehoe, executive]

Yes. And Jason, the only thing I would add is for the call, maybe take a look at first half versus second half on Banking. And there's quite an acceleration, both in recurring and in the adjusted revenue.

And I think we would feel very comfortable with the second half growth. And then we'll get back to you guys early February with the full year guide. But we're very comfortable as we look out in the growth drivers on Banking business.

[Operator]

[Operator Instructions] And that will come from the line of Darrin Peller with Wolfe Research.

[Darrin Peller, analyst]

Just to quickly touch on M&A for a minute. I think you had talked about doing about $1 billion for the year. And if you didn't get stuff done, you would be focused on returning capital to shareholders. And so having done relatively small amount so far, maybe just give us a quick update on thoughts around what you foresee doing maybe even the next couple of quarters that you'd save capital for versus buybacks or if it can be expected to be share repurchase? And then really just remind us the strategy of what you're looking for to add on to the business?

[Stephanie Ferris, executive]

Yes. Thanks, Darrin. So maybe I'll start with strategy. I think the strategy is consistent. We're looking at small tuck-in acquisitions that can advance our growth verticals, so digital payments, commercial lending, treasury, et cetera, [indiscernible]. So the areas that have higher growth, higher margin for us.

So looking at tuck-in activities across that universe. The universe continues to be fairly robust, and we think valuations are fair. We're really focused as we look at those in terms of returns and return on invested capital.

You're right, we've been fairly light as we've been looking. I'm very excited about the Dragonfly acquisition. That's about $300 million we'll spend this year and excited about that in the digital space right in line with being accretive to revenue.

As James mentioned, I do think these will be margin dilutive in the first year or 2 as we put the synergies into them, but we'll be back to you more on that. Obviously, if we do not spend through the end of this year the $1 billion, we would look to return it to you in 2025 in the form of share repurchase. But -- and we'll be happy to talk more about it [indiscernible] in 2025, but we wouldn't be looking to keep the cash on our balance sheet if we can't successfully find the M&A transaction that we like.

[Darrin Peller, analyst]

All right. That's really helpful, Stephanie. Just to reiterate again, the acceleration in the recurring Banking growth, I know comps were easy, but the trends do sound like there's some strength being seen by the -- on the core side. So can you just remind us sort of rank order the top 3 drivers that are really giving you confidence in the recurring revenue on the Banking side having accelerated in the second half and probably into the first half a little bit?

[Stephanie Ferris, executive]

Yes. On recurring, I think as you think about it, as we've talked about, generally, organic growth in Banking is driven by transactions across debit and all of our issuer capabilities as well as accounts. And we've talked to you about in Investor Day in terms of thinking about that in a 3% range.

And then as we look to add new cores and add new sales, net new sales, you would expect that to go up. So you can see us having a better second half than first half as that equation starts to work out for us and as we put on a bit of more new sales than we had historically, and we grow over some of the nonrecurring. I know you asked about recurring, but we grow over some of the nonrecurring headwind trends.

[Operator]

[Operator Instructions] And that will come from the line of John Davis with Raymond James.

[John Davis, analyst]

I just want to circle back to CapEx. I think you said 9% this year. The medium-term value is 7% to 8%. Is that more near term? Or how should we think about CapEx going in the next couple of years?

[James Kehoe, executive]

Yes. I think our -- if you think about it longer term, we're still pretty confident that the run rate of the business is 7%, 8%, probably closer to 8%, which is pretty much where the competitor set is sitting.

There might be, as I said, this temporary, we're getting a lot of pressure just driven by some aggressive positions by technology providers plus some scale-up in investments. And our investments in general are very consistent with the strategy. It is we're spending -- probably entering the year, we're spending more on the digital business. Most of it was in the plan. We're continuing to spend there. And that's probably one of our most strategic category.

And now for that, you got cards and money management. Again, that's like -- it's a significant increase versus the budgeted spend as we drive the growth factors more aggressively. So it is -- we're spending it in the right places.

That being said, we don't want to get into giving guidance now, but we expect that this 9% pressure is like a 12-month kind of thing as we work through it 12 to 18 months. If you look out longer, there's no reason why we should be trending higher than [indiscernible], no reason.

So we'll have to work through this. As I said, some of this came in the last 6 to 8 weeks with the supplier pressure and we just for an abundance of caution called up the short-term CapEx outlook. But we'll give you a longer guidance.

So one thing I'm more comfortable on, we have a lot of levers on cash conversion that traditionally we haven't pulled. And that's one piece. I want to reaffirm what we were saying previously that we have good line of sight to return of capital to shareholders, either through dividends or through share repurchase.

And we have ample capacity on balance sheet. And I'm sure you saw, we're at 2.6x. That's because we're not doing acquisitions, and our stated leverage target is [indiscernible]. So we have large degrees of comfort here. So I hope that helps.

[John Davis, analyst]

Yes. That's helpful. And then just there's a lot of chatter recently on international tax changes with Pillar 2. You guys are obviously guiding to tax rate to step down next year. Any impact for you guys? Anything to call out with the tax changes?

[James Kehoe, executive]

No. Based on current legislation, we see absolutely no risk to the 12 to 13 guide that we gave for the next couple of years. We have all the elements in place or are actively working on them. So the only potential risk we see on horizon is something that would impact the entire -- in all industries in the U.S., but our specific circumstances are well under control and strong visibility.

[Operator]

[Operator Instructions] And that will come from the line of Vasu Govil with KBW.

[Vasundhara Govil, analyst]

Maybe first one for Stephanie. Core signing seem to be picking up with banks below $10 billion, and that's really great to see. I was just curious what your discussions are looking like with larger banks and if there's a pipeline there and if there's any catalyst on the horizon you think that could drive more momentum with larger banks.

[Stephanie Ferris, executive]

Yes. Thanks, Vasu. So I think there's 2 different things. One is we've been having a lot of success with our IBS core, which is really focused on banks $20 billion in assets above. It's a marquee core, and it's a winning core.

We talked about it with respect to a couple of wins today because it has specialization for commercial customers. So as you become bigger, you obviously have more than just a retail bank, you have a commercial bank, and it has those commercial banking capabilities that's needed. So that continues to be a very strategic core for us that we win with.

I think as you get above that and you get into the regional, super regional and above, we have our Modern Banking Platform. That continues to be a very large operating platform.

I'm pretty sure it has the largest amount of bank account transactions going across it. We are very focused in various stages of implementation with several large super regionals. They're all in market with different parts of the offering.

And then as you heard us, we signed a pretty large Modern Banking Platform, a customer in the Asia Pac region. We're seeing a lot of demand for MBP outside the U.S. And so we will continue to focus there and drive growth there. So feeling good about where we are with core.

Again, a lot of work to do, and these core conversions tend to take a bit of time in terms of getting them up and running, but feel really good about our strategic cores and the pillars there. And as you know, once you get the core, you get all the surround. So feeling good about the progress we're making.

[Vasundhara Govil, analyst]

And just a quick follow-up on the Worldpay. The equity income there continues to outperform. Just any color on what's driving that outperformance. And then as we look at the base is much higher for 2024, but is the 7.5 to 9.5 growth outlook in outer years still the right algorithm for us to think about?

[Stephanie Ferris, executive]

The first one, and then I'll let James talk about the out. So I think that Worldpay, you can see from our results is performing better under the direction of Charles Drucker and the GTCR team in terms of revenue growth being stronger than we had it kind of underpinning the thesis as far as separating it. We continue to see positive outperformance of their forecast, quite frankly, as they have better revenue growth, but also as they're looking to stand up their operations going a bit slower than they expected, not because there's any problems, but they're just realistic in reality as to how many people you can hire in any particular point in time.

So a lot of the benefits we've seen throughout the year around that as well as they successfully refinanced their debt, which is also delivering some nice EMI savings for them. So it's been a, what I would say, some of the benefit or a large portion of the benefit is just them not necessarily hiring and standing up everything they need to stand up. As far as coming into next year and thinking about the growth rate, I'll turn it over to James.

[James Kehoe, executive]

Okay. No, I think it's far too early to start developing hypothesis on this. As Stephanie said, if you look back to the beginning of the year, they had large beats across EBITDA, some of it from revenue, some of it from OpEx.

Some of this OpEx was coming off. It was setting up a standalone structure. They had benefits across -- a large benefits across interest expense. So to me, a bunch of this will carry forward into the future. There might be some timing differences on OpEx. So we see no reason to be massively concerned about the 7.5 to 9.5.

But we've got to work through this with our Worldpay compatriots. And as you know, we have to agree the long-term forecast with them. So they basically committed to the 7.5%, 9.5% target.

[Operator]

[Operator Instructions] And that will come from the line of Will Nance with Goldman Sachs.

[William Nance, analyst]

Nice job today. Maybe just dovetailing off that last question a little bit. I was wondering if you had any thoughts on just margin cadence next year and particularly as it relates to the TSA with Worldpay. Just how are you thinking about kind of the cadence of that rolling off as well as any associated kind of cost efficiency actions that you might take to offset that? I know you've kind of spoken about feeling good about finding the offsets to that. But is there anything we should be considering from a cadence perspective next year?

[James Kehoe, executive]

No. I think we're pretty much in the direction of travel of the margin guide we gave for the medium term. That was 40 to 60 bps. And I think at the time, we said that we would be at the lower end because of TSA roll-offs. So we're not seeing anything that places this at any risk.

And as you've seen from our full year guide for this year, we're delivering 50 bps. So yes, we got to work through a headwind, which is the, call it, the TSA dissynergy.

Remember, in Investor Day, we said that was 95 bps a year. But conversely, we also said that savings are 165 to 175 bps, so a large number. The good news on that is we have a lot of activity ongoing. We're probably well within -- well, I would say, ahead to well on track on the cost program.

So we have no -- we have very good visibility on cost programs. The TSAs are not within our control. It is Worldpay that ultimately needs to take the decision.

There's a strong working relationship between the 2 parties. The good news [indiscernible], we won't get surprised by anything because we talk regularly, and everybody is aligned. So this will be a manageable and orderly transition with no surprises for the market on the overhead side.

[William Nance, analyst]

Got it. That's super helpful. And just maybe a little bit more strategically. You had the MBP win in APAC and also the South African sale that you mentioned in the prepared remarks. We've heard some chatter that you guys have just been very active recently in international, so would love to hear about kind of where -- what you're most excited about and where you're seeing the most momentum across the business in international markets.

[Stephanie Ferris, executive]

Yes. So from an international standpoint, you're right, we're seeing a lot of success across the Capital Markets business and Banking. In terms of Capital Markets, seeing a lot of our products resonate across Europe and Asia Pac with respect to the treasury risk security, even the training and processing. So really, really strong demand outside the U.S. for those products.

And then with respect to Banking, we did announce the MBP win. We also see strong demand from international payments. So continue to see that as a very healthy growth area for us outside the U.S. and are going to continue -- you'll see us continue to push there, especially as we look at again, M&A, whereby we can look at verticals possibly better outside the U.S. that we could bring inside the U.S. or vice versa. So feel very positive about the momentum we're seeing there and the Capital Markets team leading the way for us.

[Operator]

[Operator Instructions] And that will come from the line of Timothy Chiodo with UBS.

[Timothy Chiodo, analyst]

Great. I want to talk a little bit about bank M&A, both recent what you've been seeing and also expectations ahead really and highlighting that mean benefit that you get around the -- basically the acquisition of more accounts on file, more transactions, support your growth with the larger bank customers that you serve.

And then it's a minor benefit, literally maybe it's going to be less impactful to you guys, but the term fees that you receive and some of your smaller customers are also acquired. So I was hoping you could touch around bank M&A in general and the impact to your P&L.

[Stephanie Ferris, executive]

Happy to. So I think the bank M&A market, I would say, is still fairly suppressed. It's been more active in the smaller environment. I think from a regulatory standpoint, it's still a challenge in the larger space. I mean other than some of the activity we saw last year with respect to some of the large banks getting put together with other banks.

So we're not seeing a ton in the larger space, to be honest. We continue to see activity in the smaller space. We win there and lose there. We're very focused in terms of where we win is around when, again, it's a bank that has a commercial set of customers that's combining with a smaller bank.

That's where we have just a much better value prop in terms of being able to serve both the commercial bank and the retail bank, but generally seeing a lot of the M&A activity being much further down market than upmarket.

[James Kehoe, executive]

Yes. We welcome [indiscernible]. We are a net beneficiary. Because of our market position, market share in larger-sized banks who tend to be the acquirer, we get more of the consolidation benefit over time. That's generally a positive. So we welcome it.

[Operator]

[Operator Instructions] And that will come from the line of Dave Koning with Baird.

[David Koning, analyst]

Nice job. And maybe, first of all, I know you answered a lot of questions about Banking recurring revenue, but one other way to look at it, sequentially, it was up $50 million this Q3. The last couple of years was pretty flat sequentially. Was that -- was there a macro or pricing or maybe just new revenues coming out from new signs? Like what was so different this year?

And then into -- will Q4 be different? Was there anything in Q3 that was a little elevated because of this that comes out in Q4? Maybe you can just go through the sequentials.

[Stephanie Ferris, executive]

I think I'll take the broad-based and then see if James feels like he needs to add on. I think, Dave, if you look across the years, we have a transaction processing business that has some seasonality to it. If you look last year, recurring revenue was high in the fourth quarter.

That's when a lot of that transaction processing went through. This year, it's higher in the third quarter. Again, that's where that transaction processing is going through.

So it's more a notion of when that transaction processing is having its big push. It generally is pretty consistent on a full year basis, but it does have seasonality driven by the end client in terms of when they're going to put out the cards and the transaction processing.

So I think it's just -- it's more of a seasonality thing. Last year, it was in the fourth quarter. This year, it's in the third quarter. But overall, it really normalizes itself out.

[James Kehoe, executive]

Yes. We did guide to this when -- on the previous calls. We did say we would expect a strong recurring in the third quarter. And then we pointed out to the fact that Q4 of last year was up, I think, 7% in Banking.

So it will be lower this year, year-on-year because you're lapping a strong number. But we will have much stronger nonrecurring in professional services this year because you're lapping a weak number.

I know I'm confusing you probably, but it's all -- literally shifts between the 2 quarters in terms of seasonality. The one thing I would point out, though, if you take first half versus second half, there is a strong roughly 100 basis point acceleration between first half recurring growth and second half recurring growth.

And similarly on total adjusted in Banking, first half is about 100 bps lower than the second. So this is essentially the commitment we took in during the year that we would see accelerating growth as we went through the year. And next year, that's the job at hand. We need to accelerate off the 2024 guide.

[David Koning, analyst]

Got you. Yes. And just quick follow-up on interest expense. I think net interest expense Q4 implied is about $100 million. Is that about how to think about the quarters of 2025 as well, just about 100 a quarter?

[James Kehoe, executive]

I'm not sure. We'll have to wait until the guide on this. It's starting to normalize in the fourth quarter because we are making some assumption on M&A. So this is a little bit tricky because most of the beats that came out of interest expense over the first 9 months was we plan conservatively that we would buy acquisitions every quarter and probably too conservative.

So it's not that -- so it's essentially every saving year-to-date, it's just coming from the fact we didn't do an acquisition. Fourth quarter, we are assuming a step-up in acquisitions, but we're already in the fourth quarter, right?

So I don't think it's a true run rate. So it would be -- I would mislead you if I told you to use it as a run rate. We'll give a guide for this and -- when we get into February of next year.

[Operator]

[Operator Instructions] And that will come from the line of Andrew Schmidt with Citigroup.

[Andrew Schmidt, analyst]

Can we go back to just the core Banking pipeline? Can you just talk about the implementation pipeline for next year? It sounds like that's a better tailwind than we've seen in the prior years.

And then on the sales pipeline separately, could you talk about -- I know you mentioned expansion of the pipeline what you're seeing there and whether that supports a higher bookings number for 2025?

[Stephanie Ferris, executive]

Sure. I think we are filling up our core Banking pipeline. That's our goal. I can't really comment yet in terms of how that all lays out in '25 and '26.

As you might expect, the core Banking conversions, we tend to take time on those. And we don't typically do those in a fourth quarter or first quarter big window because we were all frozen for that period of time.

So as you think about this set of core Banking wins, I would expect for them to come online primarily in the back half of next year in 2025, but those are all in the process of being populated now.

In terms of the sales pipeline, continue to feel very good there, in particularly as I mentioned in the prepared remarks around our loyalty, our Premium Payback product, our digital products that continue to take -- there's a lot of demand for in the marketplace and then in addition to our core.

So seeing those pipelines still up. We, obviously, are very focused on those high-growth verticals in the payments, digital on the Capital Markets side, in treasury and risk and commercial lending. So get very excited when we see those sales pipelines fill up.

They have differing close rates and differing implementation cycles. So we'll be back to you more in terms of as we think about laying those in as 2025, but feel very good about where the pipeline is.

[Operator]

Thank you. That does conclude today's program. Thank you all for participating. You may now disconnect.