Thank you. All right, welcome, everyone. My name is Tim Chiodo. I'm the lead payments processors and fintech analyst here at UBS. And we're very glad to be joined by the team from FIS. Here with us on stage, we have James Kehoe, who is the CFO. But we also have George and Kenny from the IR team also here. And I just want to thank George, Kenny, and James all for making the trip to be here and be a big part of our conference here in Arizona. So thank you to the full team. And James, thanks for being up here with us.
Thanks, Tim. Good.
All right. We have a great list of topics that we're going to go through today, just to kind of run down what we're going to try and tackle. We're going to talk a little bit about the Worldpay divestiture one year later and what it's meant to the company in terms of focus on the core business. We'll talk about banking revenue growth. We'll talk about some of the pricing within the banking segment. We'll talk a little bit about the Capital Markets revenue growth guidance and just the broader guidance approach in terms of inclusion of M&A, when it's included, when it's not. We'll talk about the Transition Services Agreement and what that means for margins and timing. Then we'll wrap up the conversation with a little bit around CapEx and free cash flow conversion and a little bit on buybacks.
So a lot to get through. Why don't we get started? Worldpay. So finalized that divestiture about a year ago. And part of the point was to allow the management team to be more focused on the core banking capital markets business. And that's part of what's given you the confidence to guide to a reacceleration in revenue growth next year. Maybe you could expand upon that, sort of a one-year-later look back.
Yeah. There were three goals or the rationale for the deal: management focus. The other one was operational simplification. The company had become too complex, and execution had suffered. And then finally, capital allocation. The company was in a position where it was constrained in terms of how investments, what investments could be made. So let's fast forward. Management focus. Revenue grew 3% last year, looking at about 4% this year. And the guide in the medium term is further acceleration. Both businesses accelerating. But you'll tell us every time revenue without margin is meaningless. So in 2023, margins were flat to down 10 basis points. We're projecting up 50. Some coming from the simplification, but Future Forward was a large cost program. So in the current year, we're taking out $280 million of cost. Big number, but it's covering the dyssynergy that comes from selling a third of the business.
How do we feel about the current call-up focus? We're looking at some good news in the most recent quarter. Digital sales have almost doubled. The number of cores signed have basically exceeded the entire number signed last year. Cross-sell is up 20%. What does this say? The focus is there. You're actually seeing a play out in the operations. Simplistically put, over even a one-month period, the products are better and the customers are more satisfied. That's what it all comes down to. I think if there's one singular thing Stephanie has highlighted in the company, customer centricity. You could say that to some extent, especially in the community banks, we got our mojo back. Now we're winning cores in community, which is something that wasn't happening 12 months ago.
Capital allocation, I like to think I brought some personal value to that. The guide that was in the market when I joined was $2.5 billion of repurchases. We're repurchasing $4 billion this year. We repatriated more cash. We raised our leverage target to 2.8. And we got the message loud and clear. Don't do stupid acquisitions. $1 billion is more than enough. Return the rest to shareholders. And it was a clear message. And we stand by our message. And we're incredibly confident on the $4 billion of return of capital. So I think it's played out largely as we laid out at the time. I think Investor Day was a watershed both for the company and for investors. It allowed people to stand back and take a deeper look at the company. The share price has played out nicely over the last 12 months.
We think there's a lot more upside. But this is an execution story. It is, are we executing well in the core markets that we operate in?
Excellent. Thank you, James. I think that was a great way to start off the discussion. Let's move to the next topic, which is banking revenue growth. I think this is worth just clarifying, given we get a lot of investor questions around it, meaning what was the true underlying banking revenue growth in Q3? And as we frame for this discussion, we think there's kind of three buckets. The first is the incremental Worldpay revenue that's disclosed in the 10-Q. The second is any revenue dyssynergy associated with Worldpay. And the third is the fact that we're lapping some of the pandemic relief-related programs. So maybe you could help us bridge down to the true kind of go-forward underlying growth rate.
Yeah, it is the number one point one question we're getting in every single meeting. And it's kind of unfortunate. I think we dropped the ball a little bit. We put this disclosure out in the second quarter. And we thought it was done. And then we put it out in the third quarter. And suddenly, the world is on fire. The disclosure is only intended to show related party revenue between the two parties, not the impact year on year. And with the benefit of hindsight, maybe we should have explained it better to investors on the conference call. And we will do it going forward. So then we tried to clarify. You got the related party revenue. You got dyssynergies, which roughly $50 million on the full year. But then this related party revenue, some of it is new, some of it existed in the prior year.
The prior year revenue was more than $30 million. It still was a net benefit. Worldpay is a net benefit. If you take the, I'll give you full year numbers because they're ones that are top of mind. If you take the low end of the banking guide at 3%, if you took out all the Worldpay stuff, the core growth would be 2%. Then we sold revenue in 2023 of $150 million, which was basically federally funded pandemic revenue. It's something that just we had it one time and it disappears. That $150 million, if you adjust also for that, the actual banking growth instead of being 3% is more like a 4%. We strongly believe that if you take out Worldpay and pandemic, there is strong, high-quality growth across the banking business.
Some miscommunication over the last couple of weeks. We're kind of trying to sweep this up and clarify it for the market. But we're confident that banking has, first of all, got the products. Two, and I said earlier, we kind of got our mojo back in community banking. We were always good in the larger banks above 10 billion. We have a 56%, 58% share in large banks. Now in community, call it from a billion to 10 billion, we are winning share. Full stop. So now that's not playing out in the current revenue. But as you look forward into 2025, and especially 2026, these digital wins and these core wins in the ACV that we're currently seeing should give the market large confidence on the future banking guide for 25-26.
Excellent. Thank you, James. I think you did a great job clarifying that for investors, and we would agree. It's a question we get a lot. Let's move on to pricing within banking, so in the past, you've talked about really a net-zero pricing benefit for the banking segment. You've talked about how some of the larger clients, when they renew, there's a little bit of pricing pressure there that might offset what otherwise would be some of the CPI-based escalators that maybe some of the other clients have. Recently, coming out of this last earnings season, you talked about potentially adding back or going after adding that CPI-based escalator clause to some of your contracts. Maybe you could just talk about the portion of revenue that might receive that CPI-based escalator clause within banking.
Yeah, I'm not sure I want to get that explicit. But your facts are generally right. We typically, if you look back over three years, you kind of have CPI-driven pricing of 100-150 basis points. And it's mostly offset by compression. So you kind of, and that's what we said at Investor Day. Looking forward, we've built no net pricing into the projections looking forward. Now, one year could be +50 basis points. Another year could be -50 basis points if you look back in the past. I think the comment we intended to say was we're going to do a better job on pricing. And I think it's less about CPI escalators. I think they will continue to exist. Would we reinforce them? Probably yes. The bigger drivers are coming from reduction and compression. So why do I say that?
You're going to get compression if your main product in community is not up to scratch. Now that we've fixed defects over the last year in the core Horizon products, there's less reason to call it be aggressive on pricing. So compression, we think, will come down. The other part that the company has done less good job on is selling, and some of our competitors do a better job, selling a bundle of products at the same time. That's where I think the bigger upside is. Because if you look at how clients, banks think about pricing is the core banking platform is a cost for the banks. That's how they run the bank. It doesn't really generate customer business. They look at digital and they say, this is my key interaction tool with my customers. This has got to be good, and actually, I'm less price sensitive.
I want the better product. And then the same goes for some of the payment products that are attached. So I think we'll be paying more attention that when we go to a bank, we're not selling in core. We're selling in core, which is more price sensitive, digital, which is much less price sensitive. But the quality of the product is immensely important. And the same goes for payment products. We believe once we finish our digital investments over the next 12 months, we will have at least market parity products and will make significant inroads into community. With that, I think we're going to see, we believe that by bundling our pricing and maybe looking at new pricing mechanisms, which we lose less right now, credits in the future as opposed to taking compression at the time. I think we'll get more sophisticated.
It's more driven by, call it corporate. We've invested more resources in pricing people. We're much more focused on it when we're in the negotiation process within sales and the checks and balances that exist. This is not something you wake up overnight and you flick a switch and then suddenly you get more pricing. Is there a pricing opportunity in the banking business that more than what we've delivered in the past? The answer is clearly, and the question is how much and how quickly. Do I personally think we will see more positive pricing in 2025 compared to 2024 and 2023 and 2022? The answer is yes. I just think we are learning quickly how to do a better job on selling in a bundle of products to sophisticated customers.
Great. Thank you. I think there was great context on pricing across the board, number of levers there. Why don't we move on to capital markets? So this is kind of a two-part item. One, let's talk about the guide specifically for capital markets. But two, let's talk about the mechanics of the guidance. So first, you guided capital markets to be in the kind of up to 8.5% growth in 2025 and 2026. But that guidance included about two points of acquisition benefit at the high end. So a point and a half to two points stated at the Investor Day. So with that context, I think it's important just to clarify the guidance approach that you've been giving. And I believe it is that the medium-term guidance includes an assumption of the inorganic contributions. However, any given year's guidance only includes the completed acquisitions.
Could you just clarify that for the audience?
Yeah, that's the way we think about it. So when we give a long-term guide, we've built in potentially this 200 basis points. I think we gave a range 150 to 200. So if you take this 7.5%-8.5% overall guide, at the high end, 8.5% less two points of acquisitions is 6.5%. We're kind of doing 6.5% right now. So if you take this year, we recently said that we expect capital markets this year to be at the high end of the guide of 7%. And that includes about a point of acquisitions. So take out acquisitions, we're currently doing a 6% on capital markets. Long-term guide assumes roughly at the high end, 6.5%. You could look at that and say that's eminently doable. When we guide in February for the 2025, we will guide including any acquisitions that have already been signed.
We're not going to build in any hope that you deliver something in the future. We're quite close to a decent-sized acquisition in capital markets, so we will have an acquisition impact next year, year on year. We've got some carryover impact, plus we have an imminent acquisition that I think actually we've signed, so we will go out and guide. We'll be very transparent on how much is coming from acquisition and how much is included in the guide for next year, and obviously, as we progress during the year, Tim, if we acquire something early in 2025, would we call up the guide during the year? The expectation is yes.
Excellent. All right. I'm glad we went over that. Let's move on to the transition services agreement, which has been also an investor topic. So you've guided and provided a great bridge at the Investor Day around the margins. And you talked about this being about a 95 basis points drag to margins as a part of that medium-term guide. Maybe you could just talk about the puts and takes there, including the implied cost savings from Future Forward and other initiatives that will help to offset the runoff of the TSA.
Yeah. So it's 95 basis points each year for two years. So that's $95 million plus $95 million, just rough numbers. So you're talking about $200 million of a headwind. So what that means is right now we receive income, $200 million of income that we book as an offset to OpEx. And it's all booked in corporate. That's what the TSA is. So it's a two-year contract. They, with a certain amount of notice, and it's not very long, can decide, I no longer want this service. So I run the general ledger for them in finance. I know they won't exit that in the next 12 months. But they'll come along a couple of months before and say, we no longer want to use it. And they will stop paying the TSA. So we've got this train coming at us of $200 million.
And we've got cost initiatives, which are actually very well advanced, I'd say, probably ahead of schedule if I was being transparent about it. We said at Investor Day, roughly, we need $190 million of cost reduction in 2025. And we need $165 million in 2026. And we're very much in that zone in terms of the programs we've already set up. Incrementally, to Future Forward, we set up a program, which we call Corporate Reinvention. It is finance, HR, legal, all of those. They were largely untouched by Future Forward. So what we're doing is we're saying, OK, as a function, you've got finance as 1,600 people. So you used to manage a business that was one-third bigger. Now you've got to resize the organization for the smaller economics of the business. And this example I can talk about because we've done it.
But back in September, October, I signed a contract with a leading outsourcer. And they've taken over our Indian shared service center, plus we're transferring more people to them. So roughly 900 out of 1,600-1,700 people will transfer to the outsourcer with a fairly sizable cost reduction over a two-year period. And that's just an example. What we're doing is we're putting every function through, call it a fitness routine. Can you outsource some of your function? Are you applying GenAI? If not, how can you apply it? What about automation? Three is how many spans do you have for each leader? How can you get to the average span of eight-to-nine? How many layers are in your organization? And I can tell you in finance, we had nine levels. In finance, we're going to six. It's quite a large change.
Between outsourcing and taking out excess levels of management, we will streamline all of the functions. Toughest one, Tim, is technology because it's hard to shrink a footprint for transactions. On that one, we're taking an end-to-end approach on how do you do engineering better through value streams, optimizing the boxes, and running GenAI projects through technology as well. It's a tougher one. But we have good line of sight to the $190 million, probably even a little higher for next year. We're feeling fairly comfortable with the margin outlook.
OK, thank you, Jim. So you just broke down a big part of the margin outlook. Maybe just to round it out, we could talk about some of the other building blocks in the 40-60 basis points of annual margin expansion guide.
Yeah, I think the two pieces I didn't mention. So you've got TSAs [that] are 95 basis points a year. The cost reduction, I think I said 165-175. You've got two other pieces, inflation. So you've got to pay people more. And that's roughly 100 basis points negative a year. And then the final one, and that's the one you should look at going forward, what is the average mix and operating leverage of the company? And at Investor Day, we said it's 80-90 basis points. Now it'll vary by year depending on product mix. But when we get the flywheel of revenue running at the range of the 4.5%-5.5%, this is a business with decent management of the cost of the business. You can throw off consistently this 80-90 basis points of margin improvement.
So we're fairly confident that beyond the 2025, 2026 horizon, we should be doing at least 60 basis points a year of margin expansion.
OK, thank you, James. Let's move into CapEx and free cash flow conversion. On the last earnings call, you talked about some elevated pricing from some of your suppliers that was causing CapEx to maybe be more in the 9% of revenue range versus previously we had been modeling sort of in the 7%-8% range, and you talked about how this will be mitigated, but it could take 12-18 months or so. Maybe you could just talk a little bit about what was happening there and the free cash flow conversion outlook?
Yeah, we got hit with two suppliers who were ultra-aggressive. Now some of the impacts are spread over multi-years, but we're talking about very large numbers, and they're infrastructure suppliers, and they're hard to replace, but we will be endeavoring to find different options for the future. Some other companies have been hit by these companies. They're all taking different approaches to this, so it's not going away for the industry anytime soon. The other piece, though, you didn't mention was we actually made a conscious decision to increase investments in digital and payments, so we wanted to speed up the development of digital products, so we already had an increase in the budget. We've just decided to spend more on improving our core digital products. We're looking out. Probably, we have some pressure in 2025.
But I'm confident that beyond 2025, we should be seeing the CapEx trends off back down closer to 8% or below. And then at that same time, there's no reason for this company not to be throwing off a 90% plus cash conversion.
Excellent. Thank you, James. So getting back to that 8% level and 90% plus is within reason.
Yeah.
All right, great. All right, well, related to this topic, and we were just talking about this earlier, but the add-back that goes into your adjusted free cash flow metric has been sort of in the $130 million ballpark for the last two quarters. And investors are certainly interested around the direction of that number over time, i.e., the compression of the or closing of the gap between the reported and the adjusted metrics. Could you speak on that?
Yeah, you know, first of all, what's in there? When you're taking out $250 million of cost this year, $190 million next year, there's a fair amount of severance involved. There's a fair amount of external partners you need to do some heavy lifting for you. So when I worked in different industries, we used to have a rule of thumb. If you're taking out $100 of cost, it's probably going to cost you roughly $100 of one-time cost to implement. So the paybacks are attractive. It's just that nothing in life is free. So the problem with Worldpay is it was the right strategic transaction, but it's forced the company to spend a lot of money to resize the structure to the realities of a much smaller company. So now it's $10 billion instead of $14 billion plus of revenue. And this is costing money. Here's the commitment.
So if the 130, it's roughly in the ballpark. I think we said 450 after-tax cash in 2024. And then we said it would reduce by 15% a year. I'd even go further and say when you're out in 2027 and you're not exiting TSAs and you're back into more of a business as usual and Worldpay is not an issue, there should be a sizable reduction from these kind of levels. And we're not talking about 15%. It'd be a much larger reduction down when you get out into 2027 because we do get this consistent feedback from investors. Well, my pushback as well is, yeah, guys, I got it. But we still managed to pay the best dividend in the sector. So we've committed to the 35% payout, which is going back a year ago, it was a 2% return on 2% yield. It's slightly lower now.
We've still committed to do $1 billion of M&A, and we've committed that post the Worldpay, so talking to 2025 and 2026, buybacks of $800 million-$1.2 billion a year, so we get hyper-focused on this one thing. The company is still prodigious in terms of generation of cash, and even more importantly, our stated goal is to return cash to shareholders absent the ability to spend the $1 billion, and one of your questions could be, what happens if you don't spend the $1 billion this year? It's unlikely at this stage we will. Will we provide incremental buyback next year? Highly likely, so it's our stated intention to the extent we can't make acquisitions that are good financial sense, we will give the funds back to shareholders.
Excellent. You just bought us some time, James, because that was the next question.
Oh, OK, sorry.
No, that's great. We have time to squeeze in one more. But just talk about the Worldpay EMI. Maybe you could just talk about what have been the drivers of the upside there this year and how investors should think about that contribution next year.
Yeah, I get the numbers wrong. I think the guide, when we first gave guidance for EMI, it was like $390 million. So it's a big number. And I think the current guide is somewhere in the region of $480 million-$490 million. So it has actually increased by $100 million. That's a lot of money. I would say 40%-50% is coming from interest. And the rest is coming from operating income. Revenue is coming better in the first half. Opex is coming in lower. They've underspent a bit on building up a standalone structure in the current year. That gave some favorability in the most recent periods. But I would say overall, the business is pretty healthy. What I would point to is they're running at currently about a 5% revenue growth.
When it was under our ownership, it was closer to 1% in the most recent in 2023. They're accelerating the growth in the business. They'll make the right investments for this business. We're very optimistic about it. There are some people in the market who think that our stake is considerably undervalued. The balance sheet value is considerably undervalued.
Excellent. Well, James, and I also want to extend this to both Kenny and to George. I just want to, again, thank on behalf of our team and everyone at UBS. We really appreciate you coming to Arizona and being a big part of our conference.
Thanks. Thanks a lot, Tim.
Good job.