All right, great. Welcome, everyone. We're getting through the day here. This is our third presentation of the day. We're very fortunate to have with us today the management team from FIS. Joining us here in Arizona, we have Stephanie Ferris, President and CEO. James Kehoe, who is CFO. And of course, we want to say a special thanks to George Mihalos, the Head of investor relations, who also made the trip here to Arizona. First, thank you to all three of you for being such a big part of our conference.
You bet. Thanks for having us.
All right. We've got a great agenda of topics to go through today. I'm just gonna kinda run through what we're gonna attempt to cover. We're gonna start a little bit just looking at the various growth of the two segments and how things have been comparing to the 2025 and 2026 guide, given that the investor day. We'll dig a little bit more into the banking segment. We'll dig a little bit more into the capital markets segment. We'll spend a little bit of time on margins, the TSYS deal, free cash flow, tax rates, and more so on the financial topics a little bit later in the discussion. With that, we're gonna start out with a question, I believe, here for Stephanie. We're gonna talk about segment-level comparisons.
To set the table, the midpoints of the two-year guide that was set at the investor day suggested that the banking adjusted revenue growth on an organic basis would be just north of 3%, and for capital markets, just north of 6%. It looks like banking is playing out a little bit better than expected. Capital markets may be a hair slower. Maybe you could just give a little bit of context around how things are tracking here, you know, about halfway into that period.
Yeah. Thanks for the question. Exactly as you mentioned, we're feeling really good about both segments. Let's start with banking. Really pleased with the banking growth. You know, a couple of years ago, we started focusing on what we called commercial excellence and really refocusing the company on our existing clients, new sales, and cross-sells, both in terms of the quality of the products we were selling, focusing on digital, focusing on payments, focusing on lending, which are really higher margin recurring revenue products. We've been, the last couple of years, refocusing the company there, the sales efforts there, the commercial efforts there. You're seeing the benefits of that as you see overall banking revenue step up, but slightly better than our expectations.
What's even more important is the recurring revenue really starts to step up and have great recurring, organic growth as we finish out 2025 and feeling good about it into 2026. On a capital markets basis, consistently also feeling really good there. We did take a little bit of an impact this year, as tariffs came in second quarter and impacted the loan syndication market across our financial institutions. That has since recovered in third quarter, and it's going well in fourth quarter. Do not expect that to have any other kind of impact. That did impact us about a point there as you think about between five, five and a half, and six. We will not recover for that loan syndication in terms of the lost revenue in the second quarter, but the volumes are back up in third and fourth quarter.
All right. Excellent. Thank you. Way to kick it off, Stephanie. Let's go a little bit more into the banking segment. We're gonna first start with, with, roughly 40% of that segment, which is cores. It's a big topic in the industry now. Maybe you could just give a little bit of context around how many of these are actually up for grabs each year. Often this topic of market share changes within cores comes up, and the reality is there's not a ton of switching, right, across the banks. That's one of the attractive parts of this business. Maybe just talk a little bit about core banking conversions, why they're so sticky, and what that annual jump ball is.
Yeah. I think when you think about that part of the segment, it's really around core and digital, and all the value-added services around those, excluding payments. Tim, you're aware that we serve the larger side of the market. Think about $5 billion banks and above. There's really been some nice tailwinds happening in those markets. We tend to serve the larger banks. They tend to be on the acquiring side of the equation. In fact, in the third quarter, I think we saw the largest amount of bank consolidation we've seen in a number of years. While we'll win some and lose some there, we tend to be in a favorable position there because we generally serve the bank that's bigger, which means the core typically has to have a lot of complexity around serving that larger financial institution.
We have an opportunity, and I think this is true probably across the industry when you think about core banking. You sell a core bank, and then you sell all of the ancillary surrounds, typically between 30 and 35 products. You're right, there's not a ton of switching cost over time. The way you keep that revenue growing is really around continuing to add products and services to those existing core clients. You actually grow more that way than you do in terms of new sales every year because, as you mentioned, there's just not a lot of new banks up for grabs in the upper sides of the market. I think when you look across the industry, the majority of the core conversions are down market, which are a little bit less complex.
All right. Perfect. On a recent call that we had, I thought that you did a really great job of running through the three main cores, and I thought it would be a good use of time to do that for the broader investment community: Horizon, IBS, and MVP.
Yeah. Happy to. First of all, I'll start off by saying we aren't doing core migrations. I know that's been a hot topic, and we get asked a lot of questions on that. We already modernized our cores and moved all of our clients to these three strategic cores. No one needs to move from the existing core that they're on. We'll modernize in place with them. In terms of thinking about how those cores stratify across the market that we serve, starting from the smallest types of banks and credit unions we serve, which is really $5 billion, say $5 billion-$20 billion in asset size, typically, if you're a retail bank in that size, Horizon is gonna be a great core for you because it's a fully integrated suite of solutions. Everything's integrated all the way into the ledger.
That is gonna be a very competitive core serving your consumer and retail bank and small business customers for a smaller bank. When you start to get into a commercial bank where they're serving commercial customers and have needs that are much more sophisticated, thinking about money movement capabilities, thinking about commercial lending origination capabilities, our IBS core will serve the $20 billion and above. We can serve the retail with the IBS, and we can also serve those more sophisticated core IBS clients. That is the industry workhorse. It is absolutely a hands-down winner in terms of commercial bank customer. It is a hands-down winner if you're a consolidating bank and you wanna add things onto the core. Same thing with Horizon. Very easy for us to consolidate and convert banks.
We have a proven history of doing that because that's generally where our banks play and win. Now, when you start to get above $100 billion, and those are banks that are very, very sophisticated, and they're doing their own modernization journey, and you're starting to talk to them about really how they wanna run and modernize the bank, they will start talking to you about a thin ledger from a core standpoint. They'll start talking to you about digital capabilities, account opening capabilities, payment capabilities, and they want all of these capabilities configurable and that they can pick and choose not just from our existing core, but best in class. That's where our modern banking platform serves the largest of the large, where they have very sophisticated technology people inside their bank, and they are running a best of breed and are modernizing their entire bank.
That's what—so that's where the MVP would serve there.
All right. I think it was really helpful. Thank you for doing that. We're gonna move into payments a little bit. At the investor day, you talked about a greater than $500 million additional adopt opportunity that you had from switching some of your existing FIS core clients, switching some of their processing business over. I think you were mainly talking about debit processing at the time. We could talk a little bit about that opportunity, but then adding on to that, the credit issuer processing opportunity with TSYS coming into the fold in early next year.
Yeah. At investor day, we talked about really focusing on growing payments. It's highly recurring revenue. It's a very important critical capability for our end financial institutions. When we talk about payments, there's a couple of different things. There's the debit card, which is tightly linked to the core. There's the credit card, which has a different sophistication level if you're a very large issuer versus if you're a small issuer. Then there's money movement capabilities. We have been focused on the debit side and the money movement capabilities and have been very excited about how those sales have been going for us and the products that we've delivered into market. I think in the last earnings call, we talked about how many money movement capabilities we have been selling. I think you were talking about the credit capability.
Our existing credit capability prior to the potential close of TSYS is really a credit card processing capability for small financial institutions. It does not have the level of sophistication that serves the largest of financial institutions. I think, as you all probably know, 80% of U.S. credit cards are the largest financial institutions in the U.S., and it is just not been a place we have been able to play at all in terms of credit. However, almost all of those are our customers on the banking and the capital market side. It has been a significant product gap for us for quite a while. We were really excited about the TSYS transaction. I think James is probably going to get into the ultimate cash flow it generates for us and ultimately how we flip the Worldpay asset.
From a product standpoint, it's been really—it will be really strategic because those clients exist for us today. We serve them in terms of money movement and debit, and we'd really like the opportunity to bring a best in class credit card processing capability into those banks where they don't exist today. Same thing vice versa. When TSYS has been selling to their existing banks, they go up against competitors who can bundle debit, credit, and core. That all said, it's a very competitive market. Those are very sophisticated financial institutions typically, but we're really excited about the capabilities. It also allows us to bring to life our loyalty capabilities, which is very unique. We just brought Smart Basket to the market. We think the loyalty plus the prepaid and the credit card altogether really expand out that product suite for us.
All right. Covered well. There is one slight additional item I want to add here before we move, which is—and this is something we get questions on often—which is the partnership with Affirm. Maybe you could just give us a little bit of an update on that and also just the mechanics of it.
Yeah. Huge shout out to Max. It's a great product, just kind of revisiting our—how our partnership is working. This is enabling the Affirm capabilities out to our smaller financial institutions, to provide BNPL, off—off hanging off the core that we provide for them and the digital capabilities. Partnership is good. We are doing joint development work in 2026 and hope to bring that to market, in the mid to end of 2026, and let our smaller financial institutions provide a capability out against the larger, credit card and debit card capabilities that already exist in market today. It's a great example where we're trying to make sure that our smaller financial institutions can compete, against not just the large financial institutions, but also next-gen fintechs who are in markets providing these capabilities.
All right. Thank you, Stephanie. We're gonna move on to capital markets. You mentioned earlier, you kinda hit on this. There were some headwinds earlier in the loan syndication business that impacted growth earlier in the year, and that won't come back, you mentioned, for this year. As we look into next year, right, it'll be an easier comp, comping over that. The question from investors really is, should we be expecting the capital market segment revenue growth to get back into that sort of six-7% organic range as we move into next year?
Yeah. It's a great business, and we continue to focus like we are in banking in terms of quality, really focusing on selling that recurring mix. You're seeing us continue to rely less on license and more on recurring as our products take, and we sell them into the market that way. I think we're feeling really good about capital markets. Like I mentioned before, the loan syndication issue is completely gone now as we head into the fourth quarter, so feel very good about it.
All right. Great. We might circle back with a few more, but in the interest of time, I just wanna put one out there. I think it's a quick one, but it kinda cuts across both segments in various ways. Just to clear up any investor questions around any impacts from the recent government shutdown.
Oh, yeah. Great question. The short answer is no. Either on our banking business and our capital markets business, we haven't seen any impact of any government shutdown. I think even in real retail spend for us, debit card transactions tend to be resilient. Our EBT business, we get paid based on accounts, so the accounts are still there. We haven't seen anything go through our capital markets business, so, no impact.
All right. Clears that up. Very clear. All right. James, we're gonna move over to some of the numbers. All right. So when we think about this company, we think about two numbers for next year: 60 and 90. 60 on the margin expansion and 90 on the free cash flow conversion.
Okay.
Let's hit the margin part first. I'll give you a little bit of backdrop. You talked about the 60 basis points margin expansion for next year, and you pointed to this year having about a 50 basis point headwind from M&A activity, and that will reverse to actually a slight tailwind next year. You also talked about thinking about a similar drag of 50 basis points from the TSYS. You talked about some favorable revenue mix heading into next year, and then also, of course, the cost-cutting program this year was a little bit second half weighted. That is a lot of stuff. When investors add that all up, they think that maybe there's some degree of conservatism baked into that margin expansion guide. I was hoping you could expand upon that.
You'd really love to get an answer on this one.
Sure would.
No, I think, joking aside, we still firmly believe we will exceed the 60 basis points. You can take all the drivers you want, and maybe you come out with a bit of conservatism. I'd be careful on the M&A impact. The M&A was the reason why our margins were dragged down this year, and it was about 45-50 basis points. All we're saying is we're super confident on next year's target because we don't have a drag next year, but it doesn't actually contribute to the 60 basis points. The 60 basis points will come from improved mix, and we're already seeing that in the ACV we've already sold. What's been happening this year is we're selling much more recurring and less professional services, and the relative margin on recurring is double the amount it is on professional services.
These contracts will play into revenue next year. We got great visibility to the mix of the revenue that will hit the P&L starting Q1. This is not something we have to do in Q4 or do in Q1. It is stuff that was sold in the first three quarters of the year, and the fourth quarter is turning out pretty good as well. The second big driver, cost programs, we put in place and announced a series of initiatives already this year that will give us large visibility, especially in the first half of next year. I do not think we can be any clearer. We are ultra confident on the 60 plus. We cannot guide it now. That would be like giving a new guide. You could say it is somewhat conservative, but, you know, there is a lot of stuff.
We haven't seen the TSYS plan yet, right? And when we go out and guide, we haven't seen a plan. We gotta get our arms around that. So we got a lot of moving pieces. What we expect—I think you've seen it in the second half of this year. Q3, our margins up 50 basis points, driven by the two segments, bolted them up more than 60 basis points. You're gonna see the same in the fourth quarter in the two segments. Both segments will grow margins. And, you know, this is the disappointing thing. We thought we signaled that when we gave the guide at the beginning of the year that we were back end loaded in the current year. We're now—we've the two businesses firing on both on eight cylinders, getting more favorable mix already in the second half and the cost programs kicking in.
is more of the same next year. The good news for us is we do not have to do a lot of new stuff to hit the goals for next year. Yeah.
All right. Excellent. I think we covered margins well. Heard ultra confident. That sounds good.
Yeah. Okay.
Let's move on to free cash flow conversion. You're now expecting greater than 85% free cash flow conversion this year. For next year, again, that key number of greater than 90% conversion. One of the ques—well, I guess two parts. One is let's talk about what's driving that improvement.
Yep.
Part of it is CapEx. The second piece we get asked is you've talked, many times in public forums around the potential to extend some of your payables and have sort of a working capital benefit. The question is, to what extent is that included or not included in that 90% number for next year?
Yeah. Maybe I'll hit the current year first. The third quarter, we are repivoting the company to GAAP cash flow. Unfortunately, the conversion number is an adjusted number. Our GAAP cash flow in the third quarter doubled, and it was driven primarily by working capital. About $200 million was receivables and $100 million was payables. These are large initiatives that, you know, some of it is a recapture of year to date, and we still have a large amount of opportunity going forward. We're running at a 91% conversion. We called up the goal for the full year to about 85%. Good visibility for that. Next year, to hit a 90%, it's lower capital intensity, as you said, plus it's the phasing of cash taxes. In theory, additional working capital benefits could present an opportunity next year.
I go back again and say we're still in the finalizing of the budget. I'll get back to payables. The opportunity in general was roughly, I think we've said before, around $150 million, of which there's about $100 million this year and $50 million next year. That's all part and parcel of the company moving from—let's just put this in perspective. 2024 was 77%, 2025, 85%, and 2026, the target is 90%. There's a steady progression that requires us pulling all levers here. We're very comfortable on the 90%. We have the drivers, and you can expect that we will come out with a guide of 90% plus when we guide in February.
I think that we're gonna start moving away from cash conversion a little bit and focusing on, are we actually delivering cash, U.S. GAAP cash in the bank that you can return to shareholders through dividends or through share repurchases? To put it in perspective, we are doing roughly $1.5 billion-$1.6 billion of GAAP cash flow in the current year, roughly, if you work out all the math. We estimate that in 2028, our GAAP cash flow will more than double. In fact, even exiting 2027, there is—there are scenarios which suggest we could already be, you know, approaching $3 billion of GAAP cash flow. Now, again, there's a lot of levers behind this. It's core conversion on the core business. It's the addition of the TSYS business. It's working down one-time expenses. We have to pull a lot of levers.
I think the market is missing a little bit that this is a business poised for, if you double your free cash flow over three years, that implies that your GAAP cash flow will be growing by 25-30% every year. I think that's my suggestion is do the reverse math on, like, what exactly is TSYS bringing? What have we said in terms of cash conversion? Our desire to significantly reduce one-time costs, and it adds up to a doubling of cash flow. You get back into, at a minimum, our—and this is not a guide; I gotta be careful. It sounds like a guide, but our cash flow per EPS per share next year will significantly outpace our EPS per share significantly. I don't think we can be any more clearer than this.
We've listened to the participants in the market. We—the both of us are intensely focused on GAAP cash flow. That's the trap of these conversion measures. They're adjusted measures. Ours is, what are we delivering in the bank next year? We haven't decided yet. We need to spend time on this. We're likely to give an absolute cash flow guide, just absolute dollars. None of this conversion stuff. We're actually targeting this number, and it's increasing by this amount versus prior year. That's our commitment to shareholders. We will be, as we have been in the past, ultra clear on the allocation of that capital and how much gets returned to shareholders.
Excellent. Really appreciate that, James. In the time we have remaining, we're gonna talk a little bit about TSYS. We're gonna hit on interest expense. We're gonna do a quick one on tax rate. There's an outside chance we might have time for a question from the audience, so please just be ready if you'd like to ask a question, just raise your hand. Let's move to TSYS. Now expected to close in Q1. You talked about it being slightly accretive to EPS in year one. At the time, the street number was $6.26, and you sort of blessed that number on the earnings call and said that that was a reasonable number to think about.
I think it would just be helpful to the investment community if you could reiterate or maybe give us some more context on what that number, if that still holds. In the interest of time, maybe we could work in the interest expense question and how we should be thinking about modeling that for next year.
I do not think we can really answer your 626. You are asking us to guide. I think what we said on the earnings call is all we can really say there. We cannot give a guide. We have to be very careful here. I do not—you can obviously talk about interest expense. We are not changing any of our commentary, but we definitely do not want to get ourselves into trouble here.
Yeah. As I said, we've given you enough insights on the variables. We're comfortable on the margin. We're comfortable on the performance on revenue on the businesses. The TSYS acquisition, nothing we've seen is any different than our prior assumptions. I think you're kinda getting the answer in a roundabout way, but we're not guiding to EPS every conference we go to. You asked about interest expense. There's no real change. There's probably slight opportunity on interest expense. Rates have not come down as quickly as we would've anticipated when we originally guided it. Nothing we've seen, as I said, we're heavily in looking at. We're gonna issue the debt February-March period, when we're in an open period. We have a preliminary debt structure in place. That's already a public document.
We'll use that from closing up until we plan on issuing debt. We just don't wanna go to the market and have the carrying costs of debt for an extended period. We're gonna manage that quite tightly. No surprise. There won't be any opportunities on interest, but there's no risks. We would've expected interest rates to be slightly lower right now.
That's really helpful. Thank you. Let's go to another one here before we wrap up, which is the tax rate. And James, I think you've gotten a lot of credit from the investment community for what you've been able to do with the tax rate. So 13.5%, I gather that's the number that we should be thinking about for some time. And I was hoping you could just put a little more context on that.
Yeah. We have excellent visibility. We did a three-year plan a couple of months back. Again, we validated that kind of range. The background to that is I think that's our estimate for the next—it's the average tax rate over the next eight years. Eight years is as long as we look at. It's a sustainable rate for the long term. You'll recall we're currently down, you know, when we did investor day, I think it was a 12.5% or 12%-13%. We're actually operating at the low end of that right now. We're at 12%. We continue to squeeze opportunities out of this. You'll recall the movement up to 13.5% is because of TSYS. We're losing some benefits from the Worldpay acquisition and adding less ones from TSYS.
The 13.5 is super, sustainable for an extended period.
Excellent. Thank you, James. All right. It looks like we do have time to squeeze in one question. If anyone would like to raise their hand, we could work that question in. All right. Here we go.
Just, why is the tax rate actually so low? Is that because you're looking at the adjusted number, or is the GAAP tax rate, 21, or?
Yeah. The GAAP tax rate is higher, and this is the adjusted number.
Okay.
Yeah.
It's the fake tax rate, actually.
Our GAAP tax rate is coming down as well because it depends on the mix of domestic, international, and tax choices you take as to where you place certain activities.
Okay. Thank you.
All right. Great. Does anyone else want to ask a question of the FIS team? Okay. I think we've come to the end of our time, and I just wanna, again, say a special thanks to Stephanie, to James, and also to George for making the trip here to Arizona. Thank you for being such a big part of our conference.
Thanks, John.