Save the best for last. So for our final presentation here, we're very pleased to have FIS CFO James Kehoe. James took over as the CFO in August of last year. He has over 25 years of experience in finance-related positions, including CFO positions at several public companies before. James, thanks for joining us. Pleasure to have you.
Thank you, Rosa.
So now you've been at FIS for slightly over a year, and the company has gone through some transitions, including the Worldpay Divestiture. Can you talk a little bit about the key areas of progress that have been made at the company in strengthening the business?
Yeah. OK, well, it feels way longer than a year, if I can be very, very honest. No, I think when Stephanie joined two years ago, and then she brought me in after about a year, she focused, I think, the number one thing she had this simplicity, innovation, but the number one was client centricity. And I think that's where the most progress has been made. And I think you can see it playing out in the results. She came in and refocused the company, maybe launching less products and fixing defects in the existing ones, improving the experience of the customer, and actually improving NPS scores. And we've kind of seen that play out. The revenue growth of the company has gone from 3% last year. It's going to be above 4% this year, and the guide is to accelerate that in the coming two years.
If you look at the second half of this year versus first half, we're accelerating banking by over 100 basis points on both recurring and non-recurring. So a lot of our focus has been on this client centricity, improving the basic product that's out there, and a lot of blocking and tackling. The other part was simplicity, the whole cost agenda. She set up the Future Forward Program. And we've taken out a lot of costs. The cost reduction in the current year is $280 million, and the margins will be up 50 basis points. And to put it in perspective, the margin was down 40 basis points in 2023. So there's a marked difference in both revenue generation and margin generation between the two years. So that's kind of the proof points. The place I take most credit for was capital allocation.
I think when I joined, the guidance in the market was that the company post-Worldpay would do a buyback of $2.5 billion. And we are still on track to do $4 billion. So that's a major change in the capital allocation strategy. What was the dividend payout policy? 35%. A lot of heart tugging on this within the company. I'd seen it in the past. It became a relatively easy decision. I think the one that was harder to convince the market on was up to $1 billion in M&A with the rest going to buybacks. We still had some activist shareholders, and we still have some activist shareholders, and they obviously would have preferred to see more buybacks and less M&A.
So there was a delicate balance here between long-term growth in the business to drive terminal value on the recurring revenue and the short-term build in EPS because we just divested a third of the business. So it was quite complex. I think the market is quite pleased that we are buying back $4 billion, and we've taken a strong commitment going forward as well on capital returns to shareholders. So I think a lot was achieved. And on top of that, we sold Worldpay, right? And don't underestimate how much work and heartache it generates. You're selling the company, but then you have all these TSAs you need to provide. And then you need to eliminate cost structure to offset the TSAs when it disappears. So these divestitures for you guys probably look like, hey, it's three months of work.
It's actually three years of work when you sell a large part of the company, so.
So it's reflected in the stock price, obviously, a lot of great work.
Yeah, and I think it is. And I think it just, sorry to interrupt. A lot of it came from probably increased transparency to shareholders and to the sell-side. I think when I joined, my observation was, and I'm not blaming necessarily George, but he had something to do with it. And what I mean by that is the market wasn't quite sure on what money the company would make going forward. What was the pro forma adjusted? How much capital are you giving to shareholders? Why are you only giving $2.5? My math says $3.5. And I think everyone in the room probably had a lot more questions a year ago than they have right now. So I spent a lot of time with George thinking about how do we communicate better with investors? How do we make it more transparent?
Because the absence of doubt makes a better investor, right?
Absolutely.
So we spent a bunch of time on that.
One of the key focus areas when you joined was also reinvigorating the new sales growth to drive better growth. And we've seen some really strong progress on that front. Maybe provide us some color on the growth trends and the product areas where you're seeing really good traction in both sides of the business?
Yeah. And I think it was Stephanie really drove a change in sales mentality, implementing the new sales force at the beginning of 2023, which was basically combined. Why? It was to capture one of the biggest opportunities we have as a company, is the synergies between banking and capital markets. In Investor Day, we quantified that as $400 million of potential cross-sell. We also said there's cross-sell within capital markets and within banking. So there's an enormous opportunity for the company coming from that. Two is the change in direction on what you sell. The incentive schemes were pretty kind of standard. You got compensated the same amount for professional services as you did for a new contract, as you did for renewal of a contract.
The level of sophistication on how to drive more profitable, more recurring revenue, and how to become, call it, the sustainability of the long-term profit trajectory of the company, that's way more sophisticated than even a year ago. And we're still not finished. I think now we're in phase number two, which should boost even future performance, which is, OK, we got a single sales force, but have we lost something on specialization? So we are adding more people to sell payments. We realized our call it our go-to market in sales. We've brought in somebody senior from the outside, an expert on payments. And why? Because in Investor Day, we said the core banking business is 3% growth on transactions, faster growing as payments business, and digital. So we're increasing the specific sales people. We're bringing in specialists to drive specialist categories.
The same a little bit on capital markets, where we've created what we call Office of the CFO. So this is a sales function that doesn't talk to a capital markets company CIO, per se. They go and have a discussion and try and sell products to the CFO of the company. So what kind of products? We sell risk products, treasury products. We have Automated Finance, which is accounts payable, accounts receivable products. So we want to sell a full suite of products to a specific individual. So this level, there's an increased level of sophistication in sales. And we continue to look at comp plans to make sure we're driving the right behavior in terms of more revenue growth that is recurring and more profitable.
Right. I know you just reported 3Q results. And there was some confusion in the market, it seems, about the underlying banking revenue growth. There was some contribution from Worldpay. Can you clarify for us what the normalized growth rate is and how we should be thinking about growth beyond this year on a normalized basis?
It was kind of unfortunate because the disclosure in the 10-Q had been out there in the second quarter, so we probably didn't think about it enough. An analyst took the number of $98 million year to date, and I think $43 and a quarter, and basically insinuated core banking is not growing. The problem is he was missing a couple of pieces of the puzzle. In Worldpay, you do have related parties' revenue, but some of that revenue existed in the prior year. That's about a little over $30 million. Then, two, we told the market at Investor Day we have dis-synergy of $50 million due to the sale of Worldpay. You got to net the three buckets together, OK. If you take the full year adjusted revenue growth at the low end of the guide for banking, that's 3%.
If you take out all of the Worldpay pieces, the 3% is 2%. But even then, and I think you'll recall this, to get a true normalized growth, you got to adjust for the pandemic revenue that was in 2023. And this is in our external disclosures. We had $150 million of business associated with one-time pandemic relief, right? So that $150 million disappears in 2024. It's zero. It's literally zero from $151 million. If you adjust for Worldpay and pandemic, it's about a 4%. So you can argue we don't think there's a quality of revenue issue. We actually think, on the contrary, if you take out Worldpay and take out pandemic, you're roughly at a 4% instead of a reported 3%. The other one I will clean up as well is there was kind of we get a question.
We got some questions in the breakouts. What happens in 2025? There is no carryover of any materiality in 2025. We will not be coming back and saying Worldpay is now a problem. Why? Worldpay is a strategic long-term distribution channel and partner for us. And the revenue is sustainable into the future. Now, there's different pieces in there. Some of it is nice revenue, premium payback revenue. One item, which is more short-term, one-time, is they're developing an embedded finance platform for launch with their customers. And we've actually developed the platform for them. That's in the number. We charge them for the development. So maybe that doesn't repeat next year, but maybe they come and ask us to do something else, right? So we're pretty confident that this is a sustainable long-term partnership. And the relationship between the two companies is just superb.
If we think about the contribution, I think you said about $43 million in the quarter.
In the quarter.
If we just annualize that about $170 million and then grow it from that level as we think about next year, is that a good way to think about it?
It's a little trickier because I'd advise you to take the $98 million year to date. It's only there for eight months of the year because we only started reporting as of February. So call it $12 million a month. So I'm thinking it's more around a $140 million on an annualized basis.
At what level should we think it's growing? Is it growing faster than the banking?
It's probably similar or slightly slower than the overall banking.
Got it.
We think core banking will be stronger next year, yeah.
Then on capital markets, I think the medium-term targets you have laid out is for an acceleration in growth from, I think, 6.5%- 7% this year. Do I think you're saying 7.5%- 8.5% next year?
Yeah.
Is that all M&A driven, or are you also expecting the underlying recurring revenue growth drivers to drive some improvement there?
I'd say first point I'd make is the 6.5%-7% of this year. On the most recent call, we actually said we expect to be at the high end. The fourth quarter was looking ultra-conservative. So we were kind of forced to call it up. The business is doing really well. It's going to have a great fourth quarter. It is just got great momentum. So the way I think about that business is the TAM on traditional asset management is growing at about $5. The customers that we call alternative customers, corporates, insurance companies, car companies, that's what we call alternatives, they're growing low double digit. So that's adding about a point of revenue growth, actually more one to two points of growth. And then the M&A comes on top. Are we totally dependent on M&A to hit the target next year? No.
But we did get the question in a breakout: you haven't bought anything in capital markets. We actually did. We made an acquisition in Europe at the beginning of the year. We actually have one that's pretty imminent. We're looking at a couple right now in capital markets. It's a huge interest area for us on M&A. Huge.
Yeah. So we'll come back to M&A in a little bit. Maybe just rounding out some other questions on stuff that came about in the earnings call. I know one of the comments was that you're now expecting CapEx to run a little bit higher, running above the 7%-8% that you talked about at the Investor Day. Can you maybe just remind us what's driving the increase and how we should think about that going forward?
Yeah. Two pieces. We've seen an escalation and aggressive price actions by select providers of critical infrastructure products that we need, and we don't have a plan B, so we've seen like 50%, 60% increases in the contracts, so that put one step of pressure on it. The other one, which I think is good pressure, is we're investing more in digital and payments. We believe the opportunity is as big, if not bigger, on the sales side next year, and we're actually accelerating some investments in both digital and payments, so as I look at my current spend on capital, they're the one or two areas that we're spending considerably more than budget, and that's mostly to actually align ourselves even more tightly with the long-term strategy.
I'm thinking this price pressure from the third parties. It's probably going to continue for 12-18 months and give us a problem. We're probably going to stay at current year levels for 12-18 months. Then it will ramp back down. I'm pretty comfortable we can get below 8% again. I don't want to say it's that big a problem. We're quite annoyed with the suppliers. We will take action. We will come up with alternatives. This won't happen again.
How should we think about free cash flow conversion long-term?
Yeah. I have a very high degree of comfort on the free cash. We did say we're going to be at the lower end, so $85-$90. I have fairly good visibility over the longer term that we can get back up closer, probably even in excess of the $90 guide that we gave before. I do want to assure everybody there's more than one mechanism to get to free cash flow conversion. So we have OK, we have a short-term issue on capital. I have payment terms. We pay our suppliers far too quickly. We give sometimes overly generous terms to our clients. We're going to be pulling way more levers going forward to drive free cash flow. So I think there's plenty of long-term opportunity. The other one I'd say is on capital returns. It's more likely that we will exceed what we said before.
Because where we're sitting right now, it's kind of obvious we won't spend the $1 billion this year on M&A. So let's say we do $600 million or $700 million this year and not the full $1 billion. When we announce next year, we will probably return incremental capital to shareholders. So that's our commitment to shareholders. We're not going to hold the cash back and do way more acquisition activity next year. We're going to return some of the cash back to shareholders in the form of a buyback. So we have no issue with visibility to our share repurchase next year.
Can you remind us of the timing of the Worldpay TSA rolloffs and how you plan to address that? And are you still comfortable with the margin expansion guide of 40-60 basis points, I think is what you gave at the Investor Day?
Well, super comfortable. Firstly, we're doing 50 basis points this year of margin expansion. The guide is 40 to 60. The Worldpay rolloff is over two years, basically 2025 and 2026. The average over the period is 95 basis points a year. So you can figure out what the total is. It's $95 million. So it's roughly $190 million. So we've got to tackle that over a two-year period and tackle inflation because you have inflation in the business. I think you'll recall that when we gave the guide at Investor Day, we put a chart in there showing the cost programs by year. And the cost savings from Future Forward this year were $280 million. Next year, the target from a different set of programs, more back office related, is $190 million. So these are big cost programs. And in 2026, $165 million. So the question is, why are they so big?
We're actually the biggest dyssynergy as a company we have is finance, HR, legal, risk, compliance. Why? We've lost 30% of the revenue. And now we need to resize the capital, sorry, the call it the corporate functions to realign with $10 billion of revenue instead of $13 or $14 billion of revenue. So it's challenging. But we are probably my guess is we're probably two months, three months ahead of the game. That's my guess. I'm co-leading a program, which we call Corporate Reinvention. And what we do at every function, we say, how much of your function can be outsourced, and how much is already, and what's the incremental opportunity? How are you applying GenAI to reset all of your processes and take out work? How many layers do you have in your organization? And I'll talk personally.
I'm taking out in the next 12 months three layers from finance. And I'm outsourcing well over half of the structure to one of the well-known providers globally. So we've actually signed the contract. So we're not just sitting waiting for the problem to happen on TSA. We're getting out in front of it. Each of the function heads has a goal in terms of cost reduction by year. And all of the levers are being driven by the corporate program.
And since you brought up GenAI, is that a big area of focus to drive out cost? And then anything on the revenue side also that you guys are considering there?
Yeah. I was actually on a call yesterday for 90 minutes with Microsoft. I want to be personally trained on how to take out cost in finance with GenAI. I'm getting a little frustrated with the team that we're not pushing it quickly enough, and the power of this thing is just incredible, and we have some very smart folks internally who can get it done. I think it's actually a bigger play. I think customer experience is the number one, I think, for us right now. Number two is different, more sales coming from the application of GenAI and building it within our products, and then the third one is operational efficiency. I would say the customer experience is probably the number one for us right now, but we are looking at GenAI within our risk products and other areas.
More will follow as we launch the products.
So I guess going back to the M&A question now, what does the pipeline look like? What types of assets are sort of on your wish list? And then I also wanted to ask, I know you sort of have this allocation of $1 billion. But if there were assets present in the market that were probably a little bit larger, is there appetite to do those types of deals as well?
Maybe I'll start on the targets. We're very excited when we look at payments. And it can be payments in the U.S. and payments internationally. Our international payments business is growing quite quickly. Digital. And you just saw we did an acquisition in digital. In capital markets, we're highly interested in lending regulatory risk-type assets. Lending is probably the biggest one. It's the fastest growing by a long shot. And it gets back to your question on capital markets growth. The lending category as a category is growing low double digit. And we are sorry, high double digit. George is going like this. And we're looking at an asset now that's growing faster than this. So we will buy something in lending. Big market for us already because we have asset leasing, sorry, car leasing software. We have private lending software.
So this is our. We're not taking the risk. We don't take the risk. We sell the software. And we hope the clients. They take on the risk. So those areas are the key ones. Dragonfly is a great example. Strategic. It's in line with one of the growth vectors that we have, which is digital. It's growing high single-digit. It filled a weakness in our portfolio. This actually, strangely, is not coming at the low end of the portfolio. It's coming at the absolute highest end. And we have our D1 product, which is already quite sophisticated for both, call it retail and commercial customers. This even goes to the highest end, the biggest of the biggest banks. And it's a big synergy opportunity because they have I don't know. I'll get this wrong, 40, 50 customers globally.
We have 300 banks that they could sell into that we already have contracts with. And their product is. It's for the most sophisticated clients of the biggest banks, advanced payment technology, cash flow management. And it's quite customized as well. So it's quite an interesting business. And we got it for a decent price.
And then just appetite for doing larger deals.
I'm trying to avoid that. I don't want to answer it. No comment. No, no. I don't think the market has yet given us the right to do bigger acquisitions. Just to be frank, we get the question quite a bit. I think in the second half of next year, maybe we've earned a better right to do something slightly bigger. We ain't going out to do a $15 billion or $20 billion acquisition like Worldpay before. That's not on the cards. I just want to be clear on this. Could there be something highly strategic in $1 billion or $2 billion? Yeah, there could. But that's not what we're doing right now, so I want to stay in the present. What we would have to be very careful on is the commitment we took with shareholders on shareholder returns, and there's always this balance.
It's what I said at the beginning on capital allocation. You've got to have the right balance between returning capital to shareholders and actually doing acquisitions. Because the risk profile of each of those is not the same, not the same for the investors. And we have to listen to what they're saying.
So when you provide us with guidance for 2025 on your 4Q earnings call, will you be incorporating any unannounced M&A? Because you've sort of.
No. No, we wouldn't. We just build in what we've already announced.
Got it, and so as you announce the deals, you'll probably.
Yeah. In theory, as we announce, in theory, we should be beating the guide that we put out there. But these are not huge acquisitions that we're doing. So they don't really Dragonfly. I think we said it on the call. It's less than $10 million in the quarter. It's $50 million on the year. So we're not buying something that transforms the long-term growth rate. It's strategic. And the bigger benefit is coming from the synergies afterwards. So typically, we never pay more than the standalone DCF value. And on the synergies, we retain 100% of synergies. That's our logic for small acquisitions. And of the three we did in the last 12 months, the lowest internal rate of return is 25%. So we set a fairly high 20% internal rate of return.
I think if you do something bigger, to get back to your original question, you'd probably be more accepting of a lower internal rate of return. But not with this small stuff. It absorbs a lot of management attention. You really want to be getting a really strong return to make it worth your while.
I have a few more questions. But I wanted to open it up to the audience to see if anyone else had any. Any questions from the audience? Well, I'll keep going then. So just your tax rate. You're guiding to 12%-13%, which is well below, I guess, any company that we covered, well below your peers. How sustainable is that? And why is it so low?
Because of me. No, but joking aside, I think the company had done a fair amount of tax optimization. But there's a lot of stuff that I'll explain first. Why can we get from 14.5% to 12%-13%? In prior lives, I've implemented international structures that FIS had still not implemented, where you put your treasury function, where your loans are sitting globally, where does your intellectual property sit, and where do you generate your profits worldwide. It's all really simple stuff. All companies do it. When we gave the guide, we had a good line of sight. None of it implemented. Right now, probably half of it is implemented, and the rest is decided and in implementation. So nothing is ever guaranteed, but I think the 12%-13% is pretty much in the bag, and it's sustainable. We just did a three-year plan.
It's the same rate over the next three years.
Got it. I also wanted to ask about the EMI contribution from Worldpay. You had a guide out there in your three-year plan, I think 7.5%-9.5%.
Yeah. That's right.
Remember that correctly? And obviously, that's outperformed this year. So you're starting off with a higher base. So how do we think about that growth algorithm going forward?
Kind of the same way we think about it when it happens in our own business. We say you've got to grow off a higher base. They might have some challenges. If you step back to the beginning of the year when we gave the original guide, they're substantially ahead by a very large number. A fair proportion of that repeats next year. Why? One is they refinanced. And that refinancing generated interest savings. That will carry forward to next year. And you could actually argue with rates where they are, they'll probably could refinance again next year. So not worried about that one. At the beginning of the year, they did really well on revenue. They beat substantially. So that EBITDA just sets a higher base. Excuse me.
The only piece we have a slight concern about is just in the most recent quarter, they underspent on OpEx because on the setup of the standalone structure. And that means the cost they should have put in this year, they'll have to put it in next year. It might create a small grow over. But I don't think it's anything to be ultimately massively concerned about. It might mean that you should be, if you're modeling, be at the lower end of the range maybe instead of the higher end. But they give us their forecast. We don't determine it. They took a commitment on 7.5 % -9.5 % . And we will hold them more or less accountable to try and come in at that number. So no reason for any great concern right now. The business is doing really well.
Actually, if you look at revenues in the business, I think they're up 4% or 5% if you take the average of the quarters. It was doing a 1%-2% when it was with us. The management team is quite focused. The only concern you ever have with them is you're never really fully aligned with a private equity owner. Stephanie sits on the board. We have good representation. I think the business is doing well under their ownership. They have a bunch of opportunities on refinancing. Let's see where it goes.
Just the last one from me. With the administration change, there's obviously a lot of expectation around bank M&A potentially. How do you see that impacting FIS? Do you see it as a positive, negative, neutral?
I love it. I love it. I give this all the time. We're a net beneficiary of M&A. So the muted M&A most recently is probably negative for us. But we generally, over a long period, have had more than $50 basis points revenue contribution from consolidation. On the largest banks over $50 billion, we have a 56% market share. The next bigger banks, we have probably high 40s, 50%, maybe around that range. So 250 banks are being purchased every year. The bigger banks are buying them. We have a higher share. It's just pure math. So if there's a big acceleration in M&A, we're probably going to benefit from this. And the other benefit is there was some risk if the alternative had, if the current administration had stayed in place that tax rates could have gone up. That risk is clearly off the table now.
So I think this is generally very positive for us. And there'll probably be less regulation in general. That's just, we're more or less neutral. I think the best way to think about us is irrespective of administrations and irrespective of recession or growth economy. We have 80% recurring revenue, fairly predictable growth rates over a long period of time, rising margins, good cost programs. We're fairly defensive. And we're not very exposed to either economic or political cycles.
Great. I think we'll end right there. Thank you very much, James.
Great. Thanks a lot. Appreciate it. Thanks for having us here.