Fidelity National Information Services, Inc. Q3 FY2024 earnings call

• Adjusted revenue grew 4% in the third quarter with strong acceleration in recurring revenue growth. Adjusted EBITDA margin of 41.3% exceeded outlook. Adjusted EPS of $1.40 increased 13% year-over-year on a normalized basis and $700 million of capital was returned to shareholders. - Secured strategic partnerships like with South Shore, EverBank, Commerce Bank, Apple, etc. - Strong execution across money lifecycle with solid demand in core banking, accelerating digital sales momentum, strong payment offerings in money in motion, and strong double-digit growth in commercial lending in money at work. - Recognized as one of the world's best companies by Time Magazine and solutions received accolades from expert advisory firms.

Adjusted revenue grew 4% in the third quarter. Banking revenue growth was 3%, with recurring revenue accelerating to 6%, other non-recurring revenue declined 24%, and professional services revenue increased 10%. Capital markets adjusted revenue growth was 7%, led by recurring revenue growth of 6%, other non-recurring revenue increased 20%, professional services increased 4%, and adjusted EBITDA margin expanded 90 basis points. Banking adjusted EBITDA margin expanded 10 basis points reflecting cost saving initiatives and operating leverage.

• Raised the low-end of revenue range by $20 million and low-end of EBITDA range by $10 million. - EBITDA margin of approximately 40.7% with year-over-year margin expansion of 50 basis points. - Raised full-year EPS outlook by $0.09 to $5.15 to $5.20, driven by operational outperformance and favorable below the line items. - Capital markets expected to achieve high-end of 6.5% to 7% revenue growth target. - Banking anticipated to come in closer to lower to midpoint of range after adjusting for higher revenue base in 2023. - Increased adjusted EBITDA range low-end reflecting outperformance in third quarter. - Meaningfully increased EPS outlook due to operational outperformance and improvements in interest expense and Worldpay EMI.

• Technology suppliers have dramatically ramped up prices, putting pressure on capital spend. - International tax changes with Pillar 2, but no risk to the 12 to 13 tax rate guide for next couple of years as circumstances are well under control.

Q: Can you help us think through the puts and takes for capital markets growth in Q4?

A: As we said on the prepared remarks, we expect capital markets to be basically on the high-end of the 6.5% to 7% and it will result in strong both recurring and total adjusted revenue growth in the quarter as we had relatively weak adjusted revenue in the prior year quarter.

Q: 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?

A: 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 is probably dilutive to company margins in the initial 12 months but sees strong synergy opportunity both revenue and on the cost side, but principally on revenue.

Q: Any changes across recurring, non-recurring in both the segments going into the fourth quarter? And any other color on that specifically?

A: We don't see any particular concern. 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. See strong outlook for margins in the fourth quarter. On capital, took select decisions to invest in the business to stimulate and continue to drive revenue growth, but some technology suppliers have dramatically ramped up prices putting pressure on capital spend over the finish of the year but it's manageable within free cash flow conversion.

Q: 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?

A: This was relatively immaterial. It was a non-cash adjustment. We've completely worked through this. We've resolved the issue which was about a small output solutions business. It has no impact on future operations and we have good confidence in the future as well.

Q: Can you maybe give us some color on how you're tracking versus different customer types in banking and how you're doing really well in the down market versus the incumbent?

A: We feel confident on banking. We're driving some higher growth. We're pleased with the progress we're making in terms of competitively around core and digital in particular. We span the large FI market and then the community bank. We were pleased with selling cores in all three of our strategic cores. We've been really successful with fortifying existing customer base and going after banks we think we can win.

Q: 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 markets. So just as we start to tune the models for 2025, what should we be considering in terms of factors that maybe land you more at the lower end versus the higher end?

A: 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 we can see that Banking Solutions is accelerating, Capital Markets is accelerating in the second-half. We'll be back to you in early first quarter with the full-year guide for 2025.

Q: Just to quickly touch on M&A for a minute, I think you had talked about doing about a $1 billion for the year, and if you didn't get stuff done, you would be focused on returning capital to shareholders? And so, you know, with having done a 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?

A: The strategy is looking at small tuck-in acquisitions that can advance our growth verticals, so digital payments, commercial lending, treasury, et cetera, risk. 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. 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.

Q: Just to quickly touch on 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?

A: We're pretty much in the direction of travel of the margin guide we gave for the medium term. We have a lot of activity ongoing on cost programs. The TSAs are not within our control but there's a strong working relationship between the two parties. This will be a manageable and orderly transition with no surprises for the market.

Q: I want to talk a little bit about bank M&A, both recent, what you've been seeing and also expectations ahead, really in 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?

A: The bank M&A market is still fairly suppressed. More active in the smaller environment. From a regulatory standpoint, still a challenge in the larger space. 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 it's a bank that has a commercial set of customers that's combining with a smaller bank. We welcome and are a net beneficiary as we tend to be the acquirer in larger sized banks.

Q: 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 years was pretty flat sequentially. Was that -- was there macro or pricing or maybe just new revenues coming out from new signings? Like what was so different this year and then into Q4? Will Q4 be different? Was there anything in Q3 that was a little elevated, because of this that comes out in Q4?

A: I think it's more of a seasonality thing. Last year recurring revenue was high in the fourth quarter, this year it's higher in the third quarter. It generally normalizes itself out over a full-year basis. There's a strong roughly a 100 basis point deceleration between first-half recurring growth and second-half recurring growth and similarly on total adjusted in banking first-half is about a 100 bps lower than the second, so we need to accelerate off the 2024 guide next year.

Q: I want to talk about the core banking pipeline. Could you just talk about the implementation pipeline for next year? It sounds like that's, you know, a better tailwind than we've seen the prior years? And then on the sales pipeline separately, could you talk about, and you mentioned expansion of pipeline, what you're seeing there? Whether that supports a higher bookings number for 2025?

A: We are filling up our core banking pipeline. Can't really comment yet in terms of how that all lays out in ‘25 and ‘26. Core banking conversions tend to take time. In terms of the sales pipeline, continue to feel very good there with demand in high growth verticals like payments, digital, capital market side in treasury and risk and commercial lending. 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.