Go ahead. I'm sorry.
Good day, and thank you for standing by. Welcome to the FIS third quarter 2021 earnings call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question- and- answer session. To ask a question during the session, you will need to press * and then the number 1 on your telephone. Please be advised that today's conference call is being recorded. If you require assistance during the conference, please press * and then the number 0. I would now like to hand the conference over to Nate Rozof, Head of Investor Relations. Please go ahead, sir.
Oh, thank you. Good morning, and thanks to everyone for joining the call today for the FIS third quarter 2021 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. Gary Norcross, our Chairman and CEO, will discuss our performance and review our strategy to continue accelerating revenue growth and maximizing shareholder value. Woody Woodall, our Chief Financial Officer, will then re-review our financial results and guidance, then take you through some additional disclosures in our merchant segment. Stephanie Ferris, Chief Administrative Officer, and Bruce Lowthers, President of FIS, will also be joining the call for the Q&A portion. Turning to slide 3. Today's remarks will contain forward-looking statements. These statements are subject to numerous 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 free cash flow. These are important financial performance measures for the company, but are not financial measures as defined by GAAP. Reconciliations of our non-GAAP information to the GAAP financial information are presented in our earnings release. With that, I'll turn the call over to Gary, who will begin his remarks on slide 5.
Thanks, Nate, and thank you for joining us. Our third quarter results demonstrate continued strength of execution across the company, with revenue growing 10% to reach $3.5 billion. Margins expanded 270 basis points to exceed 45%, and adjusted EPS increased 22% to $1.73 per share. We continue to see elevated demand across our solution portfolio, with sales execution driving a 7% organic increase in our $22 billion backlog across banking and capital markets. Revenue synergies related to our Worldpay integration increased to $150 million in the quarter, bringing the total to $600 million on an annual run rate basis. We remain on schedule to exceed $700 million exiting this year, beating our original target by 40% while accomplishing this feat a year early.
Our cost synergies tell a similar story, increasing to $875 million in the quarter and on schedule to exit the year around $900 million. This is inclusive of approximately $500 million in operating expenses as we look to conclude our Worldpay integration well ahead of schedule. In the quarter, new wins across a wide range of clients illustrate that our strategy is working and gives us confidence in our growth. In banking, these include another two Modern Banking Platform wins, including one with PayPal. PayPal will utilize the Modern Banking Platform to enable their new high-yield savings account. These new wins continue to demonstrate the versatility of our new cloud-native software. Turning to our merchant segment, we continue to build on its differentiated global e-commerce offering. Our extensive global reach is a significant differentiator for us.
We operate in 146 countries, accounting for 126 different currencies, and support more than 300 alternative payment methods. This allows us to remove complexity and cost while increasing authorization rates for multinational enterprises like Microsoft, who recently expanded our relationship from a single region to now span the globe. Our ability to offer sophisticated capabilities and rapidly expand into emerging new verticals also differentiates FIS. For example, we continue to build a strong foundation in crypto, signing Crypto.com this quarter. We won this business by demonstrating authorization rates that are far superior to their incumbent provider. We also expanded our global travel and airlines market share, winning Allegiant as an impressive new domestic carrier.
In capital markets, Citi is the latest example of a client transitioning from legacy in-house to a fully outsourced solution with FIS, while another innovative technology company will leverage seven of our capabilities to help power their digital-registered investment advisory solution. We could not be happier with the significant growth the team is driving out of our capital markets segment. Our solutions are highly differentiated and proven throughout the industry. It's important to note that our new wins across all our segments include financial institutions, domestic and multinational merchants, as well as leading technology companies and innovative fintechs. Few other companies can provide such a complementary set of solutions. I am proud of our team for their ongoing dedication to our clients and for delivering another strong performance this quarter. Turning to slide six.
While our team continues to execute at a very high level, our share price is clearly not performing well. Over the last few months, our management team engaged in open and constructive dialogue with the investment community about areas where we can improve the messaging and transparency of our business. We believe in the strength and value of our company, and on today's call, we will directly address the three most common questions we heard. I'll begin by providing an update on our leading competitive position, as well as our capital allocation strategy to sustain and accelerate growth. Woody will then provide a deep dive into the merchant segment after he recaps the quarter's financial performance. The bear case assumes that FIS is standing still or unable to compete, and this is definitely not the case.
We anticipated the changing competitive landscape and invested heavily in technology and innovation over the last 5 years. Ours is a durable business model, and FIS will remain a global leader with sustainable competitive advantages now and into the future. Therefore, we will continue to provide additional clarity as needed to ensure that our shareholders properly understand our business, strategy, and the true value of FIS. Turning to slide 7. FIS has the best collection of assets in the industry. Banking and Capital Markets generate approximately 2/3 of our revenue mix, with exclusive long-term contracts and deep client relationships covering mission-critical applications needed to operate our clients' businesses. These segments grew through the pandemic, demonstrating the durability of their revenue streams and are growing faster than ever. Our ongoing investment in new technologies and software suites within these segments generates increased recurring revenue and accelerated organic growth.
Through three quarters, our year-to-date new sales already exceed that of the entire year in 2020, which was also a record year for FIS. This historical success has now created $22 billion in backlog of signed revenue, which I referenced earlier. Given our year-to-date success, 2021 is going to be another record-setting year for sales, and that will drive continued strong growth across these segments into 2022 and beyond. Our merchant segment currently accounts for about a third of our revenue mix. It boasts deep client relationships with exceptionally high retention rates that are supported by sophisticated vertical expertise and 5-Star client service. Our expert professionals are on the ground in every geography to meet any need. Our clients depend on us to support their global ambitions by opening every sales channel to them with innovative software-led and omni-channel capabilities.
Here too, we are generating record new sales, and revenue growth is accelerating as high-growth channels account for an increasing proportion of the segment's growth. Given the market dynamics in these high-growth channels, we expect to consistently win new clients and expand our share of wallet. Another key advantage is our extensive global distribution and enviable client portfolio, which enable us to quickly and effectively drive adoption of new technologies. There's a reason why incumbents, innovators, and disruptors consistently choose FIS as their partner of choice. These durable revenue streams, combined with our scaled delivery, allow us to aggressively invest in differentiated solutions and capabilities. Turning to slide eight. I'd like to directly address the strength of our competitive position and why this company will continue to lead the way powering the global digital economy. FIS powers the intersection of software, payments, and embedded finance.
Our core competency is commerce enablement, whether that's the electronification of banking, enabling electronic transactions online or at the point of sale, or automating treasury, B2B, and wealth and retirement. We have multiple competitive advantages, including breadth of capability, global reach, extensive distribution, and an enviable client portfolio. With our infrastructure migration to the cloud now complete and the Worldpay integration coming to a close, I'd like to share our strategy to further enhance our competitive position and generate shareholder value. Our strategy is to unlock the true value of FIS by weaving together our extensive digital assets into a global platform that facilitates the rapid adoption of new technology and speeds innovation. By componentizing our capabilities, we will expose our unique set of financial assets to the market, as well as continue to push new product through this emerging platform.
It expands our TAM by positioning FIS as the destination for innovators and developers, where they can get everything they need to create exciting new customer experiences. It helps them to do it faster by providing pre-configured capabilities, low-code and no-code technology, third-party integration, as well as sandboxes for experimentation and rapid prototyping, complete with a developer forum. Importantly for our shareholders, it will speed time to revenue for FIS through automation and self-service, while simultaneously creating additional scale benefits by eliminating technology debt. This strategy supports our midterm outlook for 7%-9% revenue growth, 50-100 basis points of annual adjusted EBITDA margin expansion, and superior free cash flow. Our past success demonstrates that we execute major programs very well, and our team will keep FIS at the forefront of the industry by executing the next phase of our enterprise technology transformation.
As we do this over the next three years, you'll hear us talk less and less about segments as traditional silos and old ways of thinking fade to the background. Instead, we'll begin sharing exciting examples of a new class of super users who combine technology across the breadth of FIS in new and exciting ways. Each of these super users is buying capabilities from all three of our traditional segments, demonstrating the powerful value unlock for FIS. Amazon is a great example of the power that our portfolio brings to clients. They started their journey with us by leveraging our NYCE debit network capabilities a decade ago. Today, they utilize our enterprise acquiring capability for Whole Foods, our global e-commerce capability to enter new online markets, and our treasury cash management solution out of capital markets.
We've expanded the relationship by leveraging our omni-channel capability to empower their new Amazon 4-Star in-store concept internationally, opening its first location in the U.K. At FIS, we embrace being a scaled technology leader and look forward to continuing to advance the industry by enabling the next generation of innovative client experiences. I'll conclude my prepared remarks by reviewing our capital allocation strategy on slide nine. Our priority is to deliver long-term growth by investing internally to improve the value we bring to our clients while expanding our TAM. In parallel, we continue to actively pursue M&A to add innovative new capabilities as well as to enter high-growth adjacencies. Our team has a well-established track record of successfully integrating the businesses we acquire, consistently outperforming our synergy targets and driving shareholder value.
Through this combination of investments in organic and inorganic opportunities, we have successfully accelerated revenue growth by positioning FIS to deliver innovative solutions in attractive markets where our technology and expertise are highly differentiated. The scale and profitability of our business puts us in the enviable position of being able to both invest for growth while simultaneously returning capital to our shareholders. Year to date, we have repurchased $2 billion in shares, reflecting our view that FIS currently represents a generational buying opportunity. We still maintain significant headroom for accelerated share repurchase with 85 million shares of authorization remaining, and we will buy back stock aggressively. We are committed to consistent dividend growth and are increasing our expected annual dividend growth rate to 20% in 2022 and beyond.
This will enable us to expand our dividend payout ratio over several years without affecting our ability to invest in growth. Our capital allocation strategy is underpinned by a strong balance sheet and investment-grade credit ratings. This strategy has been consistent for many years, and we will continue to allocate capital to drive robust shareholder returns. In conclusion, while competition is intense across our industry, FIS is built for purpose as the leading commerce enablement company. At FIS, we're doing what no one else can, bringing together a unique breadth of capability and global reach to enable our clients to innovate at speed. With that, I'll now turn the call over to Woody to discuss our financial results and to provide a deep dive into the merchant segment. Woody?
Thanks, Gary, and thank you all for joining us today. Starting on slide 11, I will begin with our third quarter results and touch on our balance sheet, cash flow, and guidance before taking you through our additional merchant disclosures. Both reported and organic revenue growth were 10%. Adjusted EBITDA margins expanded 270 basis points, reflecting high contribution margins and ongoing synergy benefit. Banking revenue growth accelerated to 8%, reflecting continued new sales execution. The banking segment's adjusted EBITDA margin expanded 250 basis points to 46%, primarily due to ramping revenues from recent large bank wins as well as continued recurring revenue growth. Capital markets revenue growth also accelerated to 11% this quarter, primarily due to strong recurring revenue growth as well as two points of tailwind created by the timing of client renewals.
Capital markets' adjusted EBITDA margin expanded 330 basis points to 48%, again reflecting high contribution margins and operating leverage. I'll leave merchant for now and discuss its quarterly performance with its deep dive later. Turning to slide 12, we generated free cash flow in excess of $1.1 billion in the quarter, representing 33% of revenue or 107% of adjusted net earnings. We tripled the pace of our share buybacks during the quarter, repurchasing 9 million shares for approximately $1.2 billion. While we are aggressively buying stock back right now, we remain active in the M&A market. As Gary mentioned, we are increasing our dividend growth rate in 2022 from 10% to 20% per year. We're going to continue to invest for growth, and this will have no impact on our ability or intention to do so.
In fact, it will only consume about $100 million of incremental cash during 2022, which is insignificant as compared to our annual free cash flow. To be clear, if our adjusted EPS grows mid-teens and our dividend grows by 20%, we will reach the 35% payout ratio towards the end of this decade. On slide 13, you'll see that we're keeping our full year guidance mostly unchanged after raising it earlier this year. We're increasing the lower end of our adjusted EPS range to $6.50 from $6.45 per share. We brought up the lower end of our EPS guide due to our operating results and share repurchase during the third quarter. To add further color on fourth quarter, consensus revenue and EPS are in line with our expectations.
I'm expecting some incremental pressure on margins due to rising labor costs and for this to be offset by lower share count. As it pertains to the platform initiatives Gary mentioned, this does not represent incremental investment but continues the enterprise transformation that we've been executing on for the past 5 years. This is included in our midterm outlook of 7%-9% revenue growth and 50-100 basis points of margin expansion. As usual, we will provide detailed guidance assumptions in the appendix. With that, let's begin the merchant deep dive on slide 15. As Gary mentioned, we heard your feedback and are striving to further increase transparency into the merchant business. I will provide an additional layer of revenue detail and outlook for the business in the next several slides.
Starting with our third quarter results, Merchant revenue grew 18%, excluding about four points of headwind created by the unusual timing of the U.S. tax filing deadline in 2020. Merchant's adjusted EBITDA margin expanded 380 basis points to approximately 52%, which reflects the segment's high contribution margins and ongoing synergy benefit. Many of our shareholders told us they are evaluating Merchant's growth rates versus the comparable period in 2019. Therefore, I will describe growth rates through the rest of this deep dive on that basis as compared to 2019 and pro forma for the Worldpay acquisition. It's clear that our business is rebounding, with revenue growth accelerating from 3% in the first quarter to 9% in the second quarter to 16% in the third quarter.
On slide 16, we show how closely our volumes continue to track with the networks. Clearly, the three of us don't grow exactly the same every quarter, or in every country, but the consistency of FIS's performance relative to the networks throughout the pandemic challenges the bear case in my mind. In addition, we included quarterly volume and transaction data within our earnings release going back to the first quarter of 2019. We provide this extra level of transparency to create easy comparisons so that shareholders can better evaluate any concerns about share loss. We provide additional revenue detail by client type on slide 17. Our global e-commerce business serves web-only merchants and excludes omni-channel merchant revenue, which is included in enterprise. Global e-commerce is our fastest-growing client type and creates a key strategic advantage.
Enterprise includes North American merchants with more than $5 million in annual sales volume in the U.K. This is a scale business with meaningful cross-selling opportunities. We have powerful distribution channels and serve marquee brands across both global e-commerce and enterprise, making us the go-to choice for new technology partners striving for adoption. Finally, software-led SMB is comprised of U.S. small merchants with less than $5 million in annual sales volume. We service these merchants primarily through software-led or technology-enabled partners who are attracted to our world-class scale and leading enterprise capabilities. Moving down the slide, the pie charts show merchants' revenue mix by these three client types. The text below the pies defines each client type and summarizes our respective strategies for each.
Along the bottom of the slide, we show the quarterly revenue growth progression on a pro forma basis as compared to 2019, where the clear takeaway is the recovery thus far. The next three slides dive deeper, including TAM growth for each client type based on total merchant acquiring TAM from BCG's Global Payments 2021 report. Beginning on slide 18, our global e-commerce business is differentiated by its global reach. We have the unique ability to help leading multinational companies and global brands seamlessly transact around the world. Unlike most of our peers who gateway domestic card not present transactions within various countries, we enable multinational transactions with local licensing to support our clients' global expansion. In the upper right-hand corner, we show global e-commerce's estimated TAM growth of 13%-15% on a revenue basis.
Our e-com mix is split roughly 50/50 between the U.S. and international. As you can see, domestic e-com TAM is growing upper single digits, while cross-border TAM is growing 25%-30%. This is why our global reach is so important. It provides a distinct advantage in the fastest-growing area of the market. Lastly, SMB e-com TAM is growing 12%-14%. We don't currently play in this portion of the market and see it as a strategic expansion opportunity. As you can see by the elevated growth rates in the lower right corner, FIS is benefiting from the accelerating shift online. Our mix of fast-growing e-com revenue continues to increase, creating the opportunity for us to continue to outpace global merchant acquiring TAM as a whole. Turning to slide 19 to discuss enterprise.
Many of our enterprise relationships are decades long and built on sophisticated vertical expertise, such as our unique debit routing, SNAP, and WIC capabilities within the grocery vertical. Serving global enterprise clients requires significant scale economies to compete at low price points while quickly and nimbly integrating new technologies. Enterprise TAM is growing 4%-7%, split between the U.S. and international. Within enterprise, we see the greatest potential for future growth through continued geographic expansion enabled by our global footprint and international banking relationships. Our software-led SMB business is shown on slide 20. U.S. SMB TAM is growing 7%-9%. We have experienced significant recovery each quarter this year, with most of our verticals growing 20%+ during the quarter. Restaurant is the notable exception. While it's also demonstrating a strong recovery trend, its growth is slower than other verticals.
It's difficult to discern whether this is due to slower reopenings, staffing challenges, or the performance of some of our partners. However, our win rates continue to improve on leads given to us by our ISV partners, and we continue to sign new ISV partners, making it clear that there is not a problem with our service. Further, our software-led strategy provides significant advantages across the SMB space by providing deep vertical expertise. As I mentioned earlier, we believe that expanding SMB e-com is a significant opportunity for us, especially following the launch of Access Worldpay. In any event, as you can see on slide 21, it's 2% of our consolidated revenue. I'd like to leave you with two thoughts before we open the line to Q&A. First, we continue to enjoy significant competitive advantages across the breadth of our business.
65% of our revenue is driven from banking and capital markets with long-term contracts and sticky client relationships. Within the 32% of our revenue mix in merchant, we are differentiated by our global e-com, enterprise, and software-led capabilities. While the market appears to be focused on U.S. SMB, which represents a sliver of our revenue, our strategy is about driving growth across the enterprise by enabling digital commerce in every segment and in every vertical as Gary described. Second, on slide 22, we believe that 8%-10% TAM growth for the total acquiring market reinforces our outlook for sustained double-digit revenue growth within merchant. We have a strong e-commerce business that continues to grow as a portion of our overall revenue mix. The international expansion opportunity in enterprise creates additional upside, and we have a really unique opportunity to drive our e-com capabilities downstream into SMB.
We are confident in the future of FIS, and I would like to thank our colleagues for their continued efforts in serving our clients and driving our business forward. Operator, would you open the line for questions?
Thank you. As a reminder to ask a question, you will need to press * and the number 1 on your telephone. To withdraw your question, press the pound key. Our first question comes from the line of Tien-Tsin Huang with JP Morgan. Please go ahead.
Thank you, and good morning to all of you guys. It's been busy going through all this data, so thanks so much for sharing it. It is really, really useful. I'll start with that, and I had a bigger picture question for Gary, if you don't mind, as my follow-up. Just on the merchant volume and transaction data, you've given us a lot of good stuff here. The lines clearly show you're tracking very well with the network data. I guess the revenue side, you do derive revenue both from volume and transactions. If we want to benchmark revenue against some of those metrics, how would you guide us there?
I think ultimately we all want to get a better sense of pricing like for like and that, how that's evolving because mix clearly plays a role. Thanks.
Yeah. It certainly plays a role, Tien-Tsin. You know, we tried to outline both volume growth and transaction growth within the detailed materials in the press release. I think we also gave growth back to 2019, as many of us have been trying to effectively forget 2020, in some levels and ways. We have seen volume growth compared to 2019 track very closely to the networks. We've also seen transaction growth slow a little bit in terms of its growth rate, ultimately providing us incremental yield on that volume, which is what we expected and where we expected to continue to track.
If you look at Q2 2019 growth of revenue versus the global volume, compared to the third quarter, we had about 9 points of incremental yield benefit, and that really takes out kind of the noise between both 2020 and the mix shift of the tax movement. That's the one we've been very focused on. We tried to be extremely transparent today to give you every piece of data that we look at in thinking about our revenue growth trajectory.
No, thank you for that. We'll definitely be studying it. As my follow-up, if you don't mind, just bigger picture for you, Gary. I really want to hone in on your super user comment because I thought that was really interesting. A lot of things to think about there, but I'll summarize it, I guess. You know, does this mean you'll, you envision FIS servicing larger, diversified clients that I would imagine have some buying power, but are you also suggesting that there's a shift from maybe point solutions or best of breed consumption versus bundled buying? Just trying to think about all of this because, you know, you have different peers and, of course, you have a lot of scale across all these different businesses. What's the vision here longer term?
Yeah, no, I mean, absolutely. I would tell you, Tien-Tsin, we're already seeing it, right? I mean, I think a lot of people want to put us in a point world. What we've seen across all markets, all industries is really what we've talked about is more around solutioning and being able to leverage a platform in a way to drive very dynamic outcomes for our customers, and that's what we're all about. As you think about FIS, all large companies are going to have to go through a massive transformation. We started that journey five years ago. You know, we've now completely completed our transition to cloud. We've made that migration, and we're getting all the benefits of the cloud platforms that are available.
We then leaned in with next generation application stacks, and we've talked a lot about that through componentization, whether it's Modern Banking Platform, whether it's Payments One, whether it's Digital One, whether it's NAP, the list goes on and on. Now the next phase is how do you bring that together and weave that together to a one-stop place for innovators, large conglomerates, anybody looking to take advantage of various capabilities in the open market. We see it as a huge opportunity. We highlighted just a very small subset of clients already leveraging our next generation capabilities across all three segments. You're going to see that grow very dramatically over the next three years. You'll also continue to see our level of technology debt get displaced as our existing clients migrate to this framework as well. We're real excited about the future.
You know, we highlighted another two wins on Modern Banking Platform today. One of those wins was the first customer that has signed up for an existing core banking system of FIS to start transitioning to MBP. As we've talked a lot, we're really at the forefront of this transformation, and this is just the next step in FIS's journey. We'll continue. While we're so confident in our long-term guide of 7%-9% and mid-teens EPS, you'll continue to see that resonate in the coming years.
Good stuff. Thanks for your thoughts.
Thank you.
Next question comes to the line of Jason Kupferberg with Bank of America. Your line is now open.
On margins, I know you're targeting 50-100 basis points a year, on average of expansion there. Certainly we understand there's natural economies of scale in the business. Just wanted to make sure, do you feel this type of margin expansion still gives you enough flexibility to invest in the business to the extent that is contemplated by the updated capital allocation strategy, just given the dynamics in your various end markets are obviously changing faster than ever? Maybe just as an extension to that, just what's your current thought process around where consensus sits for 2022? I think it's kinda exactly in line with your multi-year guide, but just wanted to see how you're feeling about that.
Yeah, with regard to the 50-100 basis points of margin expansion, we do think that's sustainable through our midterm outlook, as we've talked about numerous times. There's tremendous operating leverage within the business, as we continue to drive automation and drive efficiencies through normal operations of the business. Incremental revenues have high contribution margins that help with that margin expansion as well. With regard to the investment side of it, we've baked in our expectations of investment into that 50-100 basis points of margin expansion. We feel good about our ability to continue to invest and drive and sustain that accelerated growth profile that we've built out. Yeah, Jason, those are the two comments I really would think about margin.
If you think about 2022, we're not updating our formal 2022 guide until February. That said, we're not changing anything in terms of our midterm outlook around 2022 of, you know, 7%-9% revenue growth and 50-100 basis points of margin expansion. Continuing to keep that as a longer term outlook consistent with what we've been saying for a number of quarters.
Okay, understood. Just for my follow-up, I wanted to ask on M&A. It sounds like a little bit more emphasis there as part of the updated capital allocation strategy. I know Stephanie's spending a lot of time in that area. Can you help us understand just, you know, where are you in terms of M&A pipeline build? It certainly sounds like the tilt there will be towards some higher growth assets. Could you be considering deals that might be dilutive initially?
Yeah. Look, let me start, Jason, and then we'll let others add on. Certainly, Stephanie's return focusing on strategy and helping drive and continue to focus on M&A is important. I would say our strategy's not shifted there. We've been very focused on M&A throughout the years, as you know. We've also been very consistent about getting other large M&A opportunities behind us before we typically move on into other areas. We've talked on prior calls, you know, the market's pricing on certain things, but we're definitely gonna continue to lean in on M&A. We're gonna be a buyer in the market on things that fit our strategy, that expand our TAM, that drive us new product or new capabilities, that drive us into adjacent market. Anything we do, we will look for things that will accelerate our growth.
you know, that's gonna continue throughout 2021 and 2022 and beyond. It'll always be an important part of our strategy.
You probably also saw some emphasis there as we round out and complete the Worldpay integration.
Right.
We are very focused on completing each integration before we move to the next, so we feel good about where we're at on that integration. Secondly, on your accretion dilution comment around whether we would do something that's dilutive, we don't look at accretion dilution as the only value metric. In fact, we think it's probably just one of many. Value creation long term is much more in how we think about M&A, whether it's enhancing our growth profile or filling out gaps strategically into our product portfolio that we can push through our distribution channel. Yes, we would think about something potentially dilutive from an accretion dilution analysis, but never that doesn't drive incremental value to shareholders long term.
Thank you.
Our next question comes from the line of Darrin Peller with Wolfe Research. Your line is now open.
Thanks, guys. Thanks for all the disclosure on the merchant side. For this though, I really wanna focus on the banking and the capital market side for a minute, just given obviously it's still the majority of your revenues. Very strong growth with 8% on the banking side, 10% organic on cap markets. I know there were some items pulled forward. But can you just touch on especially the pipeline on the banking side when you think about how well Modern Banking Platform's been doing and, you know, the demand we're hearing about from just end markets and financial services for tech in general. You know, what kind of growth do you see that potentially being able to generate over the next several years when you see that kind of demand on the banking and the products you offer?
Maybe just quickly touch on the strength in cap markets for a minute.
Yeah, Darrin, I'll start. We'll let Bruce add on to this. I mean, we couldn't be more excited about what we see going on in banking and capital markets both. I'll remind you, we started this journey over almost 5 years ago as we started really embracing cloud computing, and then we started really leaning in on next generation capabilities that I mentioned when I was talking to Tien-Tsin Huang about and all the investments we've made. You're now seeing the results of that. Our pipeline is the fullest, you know, continues to grow. You're also seeing record quarters being put up by the sales team and record years year after year.
If you'll remember in banking especially, this journey started well over three years ago, and you've seen that growth rate move from low single digits to mid single digits, and now it's performing consistently in the upper single digits. We feel great about the business. We feel great about our solution set. The TAM is very broad because obviously we're not just a domestic player in the U.S. We can expand out into international markets, as well, and global markets. We've got a really bright future with this group, and frankly, it's where the industry's moving. More importantly, capital markets, as I said in my prepared remarks, couldn't be prouder of the team of what they've done. You go back to 2015, you had a business that was growing negative, about -2%.
Yeah.
We repositioned the portfolio. We invested heavily in product and solutioning. We started and we expanded outside of traditional customers because what we found is there was a lot of market that needed those kind of capabilities, and you're now seeing the results. You know, that's a very clean quarter for capital markets. I mean, there was a 2 percentage point tailwind on license renewals. Once again, what a great part of that business is those licenses are term in nature, and so you get those bumps.
Mm-hmm.
Even if you adjust that out, just really, really strong results. Bruce.
Yeah. I'd just add onto Gary a little bit here. I think, again, we started this several years ago. We really had a strategy around how we were gonna accelerate growth in those verticals, obviously before Worldpay became part of the organization. You know, even to the question earlier, we focused on how do we cross-sell? We have this big, broad set of assets that we wanted to be able to cross-sell into our client bases, and our teams have really rallied around that. They've done an excellent job of building out the product sets, of building out how people consume them and put us in a very good position. As Gary mentioned, our pipeline has been excellent. Sales execution has been at an all-time high, yet again, after an all-time high last year.
Capital markets, same thing. A lot of creativity. Probably the other comment I would add is, as we've gone through these projects over the last several years, while our capital was originally on data center consolidation and some of those things, as we've come to a close of those, we're taking that capital and redeploying it in new products and accelerating our new products to meet the challenges of our customers. We stand today, you know, very excited about the opportunities to continue to grow, to continue to cross-sell. We see lots of TAM expansion as we're moving into these markets. We feel very comfortable that we can continue to grow this business at a very healthy clip.
Okay. That's really helpful. Just a quick follow-up. I mean, when you look at the growth profile of these two segments, I mean, these higher, more elevated rates, is that somewhat of a new norm for you guys in some regard in terms of, especially on the capital markets side versus what it used to be? Like you mentioned, 2015 was obviously negative. You know, hopefully, we won't be there again, but just curious if you think there's a demand for that. Thanks, guys.
Yeah. I think, you know, DARRIN, I think at the end of the day, you got to back up a little bit and really look at these businesses and look at the customers they serve. These customers have traditionally been on, you know, older, more legacy technologies. I've shared for the last several quarters, we're at an inflection point where our clients and our prospects are gonna have to start moving and lower their overall total cost of ownership, increase their openness in the way they deliver, increase their speed, which is what Bruce likes to always talk about, the speed at which they serve their customers. You just can't do that on your historical point-to-point solutions. You know, at FIS, we've made the investments to time this shift.
Now you're seeing the benefits of what that timing is starting to produce. You know, these are very long-term contracts. They're high recurring. You know, we're averaging 9-12 months sales cycle. We're averaging about 9 months now on an onboarding cycle. Bruce and his team has done a nice job of pulling that back, and that'll get faster over time. You're seeing a very different businesses and very different segments positioned very well for a unique inflection point in the industry. You will continue to see these segments maintain and grow not only mid-single digits, but upper-single digits, given the nature of what's going on in the markets.
I would just add, reiterating, there's a lot of our clients that have the need for all of the products that we have.
That's right.
It's running their business. One of the things that we've been able to do in the financial services vertical over the years is be able to help those institutions run their business. We're taking that same model, capital markets, treasury management. Those things are really applicable across all of our client base.
Mm-hmm.
We talked about it in prior quarters as well. One of the things that happens even in our e-commerce clients is they're looking for a partner that can offer a broad set of solutions that handle everything they need to do. That trend is continuing, and we're positioned exceptionally well to capitalize on that.
Very helpful, guys. Thank you.
Our next question is from the line of David Togut from Evercore ISI. Your line is now open.
Thank you, and good morning. I also appreciate the expanded disclosure on merchant KPIs. Looking at slide 17, you highlight a 12 percentage point headwind to global e-commerce revenue growth, looking at the two-year stack versus 2019. As you look to 2022, Merchant Solutions revenue growth, how do you expect the Travel and Airlines or, like, global travel recovery to progress in terms of thinking through what your growth rate could be next year in Merchant Solutions?
Thanks, David. Yeah. We continue to see travel improve.
Mm-hmm.
From a few quarters ago, it's probably improved slower than we originally anticipated. We do anticipate travel to continue to improve over the course of 2022.
I would tell you, I don't know that we believe it's gonna be back at 100% by the end of 2022, but it's certainly gonna be better than where it is today, which is at about 65% or 70% of what we saw in 2019. It will help in terms of 2022 and just help support that outlook for a low double-digit growth in the merchant business through 2022.
Yeah, I'd just add, I mean, it's gonna be a good tailwind for us going into 2022 and into 2023. The reality is, given the nature of our e-commerce business and how rapidly it's growing, you know, you see the disclosure there almost mid-30%, the last several quarters and trending up. You know, T&A will become a smaller and smaller segment of our overall business. That's what we're really thrilled about our positioning in the merchant space. As you look at that business, we are best positioned in the market area that's growing the fastest, and we've got industry-leading capabilities there.
As long as we continue to execute on it, like Woody said, we've seen a little slowing in the recovery in T&A, but the good news is the other side of the business is actually accelerates a little faster in some of the verticals. All in all, we've got a great business model, and we've got one that's gonna continue to perform in the double digits going forward in 2022 and beyond.
Appreciate that. Just as my follow-up, Woody, could you expand upon your commentary for 2022 free cash flow outlook? Fiserv cut their free cash flow outlook for this year by 10% last week. Just wanna make sure I understand your comment on free cash flow conversion for 2022 versus 2021.
Yeah. Haven't given you free cash flow conversion for 2022 yet. That said, we don't anticipate any reduction in our conversion metrics or ratios.
Not at all.
You know, this quarter, we did 33% in terms of revenue conversion and 107% in terms of earnings, adjusted earnings conversion. I feel very good going into 2022 that we'll continue to be generating those levels of free cash flow conversion, as we previously guided. You know, high 20s being the revenue item and roughly 90%+ on adjusted net earnings going forward. No, we're not having to pull back any cash flow conversion for investment or anything else. I feel very good about how we're positioned going into 2022.
Understood. Thank you very much.
Thank you.
Our next question is from Dave Koning from Baird. Please go ahead.
Start off the, you know, it's such a hot button topic with just every metric, you know, as it pertains to 2019, and I think your U.S. numbers, I think, were 125%, Mastercard and Visa, maybe high 120s%. The bears are would just say, well, that signals that you're losing share. Is there really a bullish argument to say it's just a mix issue, and if anything, as you catch up, that means there's outsized growth coming? Like, do you think it's just a mix issue that causes that little bit of gap?
Absolutely. We believe it's just a mix issue, Dave, and that we have outside growth coming. It continues to show recovery from the pandemic. Volumes are coming back, yields are coming back, travel's coming back. Everything that we've talked about over the course of the last year is portraying or laying out the way we thought. Yeah, I think that's the only thing you got there.
Given this level of granularity we provided you today, I mean, I think as you guys really start digesting all this, you'll see the same thing. I mean, it's just various verticals have come back at different rates, so it's absolutely a mix, but we feel very good about the business.
I would just add, just operationally, we're seeing a lot of sales acceleration as well. You go back from last year to this year, you're seeing an increase in close rate on deals, so a lot of positive momentum in the merchant space for us, across the board, actually.
That's right.
Gotcha. Well, thanks for that. Just secondly, as we look at just sequential trends in merchant, I know in 2019, I think merchant was up 9% sequentially. That seemed to be more normal. Last year was actually down sequentially. Is this year just back to that more normalized pace? Maybe what was so different about last year?
Yeah. Comparing 2019, we think it's a more normalized pace going forward. You know, we'll even give you some color that we think the fourth quarter continues to accelerate sequentially and compared to the 2019 two-year stack. We think we're just headed back in the right direction, Dave.
Okay. Well, thanks, guys. Nice job.
Thank you.
Our next question is from George Mihalos from Cowen. Your line is now open.
Thank you for all the improved disclosure and all the data out there. I guess first question from me, if we look at slide 22, just talking about the double-digit growth that you're expecting for merchant going forward, is the right way to think about it for global e-commerce that business should be able to sustain growth rates call it kind of in the high teens? As that increases as a percent of revenue, I would think that would be accretive to your revenue yield, right? You should be able to increase that and that there's no reason you shouldn't get back to where you were in 2019, if not higher going forward. Is that the correct assumption?
Yeah. I think a couple of things in there. First, you know, we've tried to give some color that we think on a normalized basis, global e-com will grow 20% plus for us.
Mm-hmm.
That certainly helps as we get to a larger and larger portion of our revenue mix. You know, I think there's been at least some skepticism that we won't be able to support double-digit merchant growth for the long term, and we really tried to highlight that we do not believe that is the case, with global e-com really helping us drive that accelerated growth longer term and/or to sustain that accelerated growth longer term. I think you're right. You know, we continue to see yields coming back, as we thought. We think over time, as everything normalizes out, call it end of 2022, you'll see those yields where they were pre- with continued double-digit revenue growth within the merchant business.
Okay. That's great. Really appreciate the 20%. I think that's really important to get out there. Just as a quick follow-up, just kind of going back to the capital allocation priorities, maybe a little bit on the spend and the M&A side. Woody, it sounds like, again, we shouldn't really expect any sort of a change from a CapEx perspective, a percent of revenue or anything like that going forward. On the M&A side, is that predominantly gonna be focused on M&A within Merchant, or is it sort of a broader strike zone that you guys are targeting? Thank you.
Let me touch on the CapEx side, and then I'll let Gary give you a point of view on the M&A. You're correct. Our expectation's around, you know, call it 8.5%, which I think is where we're at year to date on CapEx to revenue. We would probably continue to drive about that level of CapEx going forward into 2022 and beyond. The discussion today does not anticipate any incremental CapEx, which I think is supported by my continued free cash flow yield discussion, and that we're not changing anything around key free cash flow yields or expectations there. No incremental CapEx over what we've historically been doing. Gary, you could touch on the-
Yeah. Yeah. Look, I mean, George, on our M&A strategy, it really hadn't changed. We have an opportunity to have a wide aperture. We're looking for things that can accelerate our growth and continue to drive our growth from here. You know, I appreciate you pointing out, really, our capital allocation strategy has not changed other than we are raising our dividend starting next year by 20%. Woody talked through all the financials of that. It's really immaterial in the overall use of cash. We've got a very open lens of our free cash flow to either buy companies or continue to buy back our shares. As you saw, we think it's a generational buying opportunity for FIS at the moment. We really leaned in in Q3.
You know, we'll continue to look for things that we think can accelerate our growth rate from where we are, keeping in mind that really all three of our segments are really operating at some of the highest levels in their history. I mean, Q3 was the biggest quarter for capital markets and banking, I think, in its history of this company. You see merchant, every trend we'll give you shows that merchant's heading in the right direction at an accelerated rate over where it was pre-pandemic. It's a very durable business all three are very durable business models.
If we can find M&A that complements that from a strategy standpoint, that it expands that market, drives new TAM, grows us faster, then we absolutely are gonna continue to be in the M&A business.
That's great. Thank you.
Our next question is from Dan Dolev from Mizuho. Please go ahead.
Thank you. Great results, guys. Great quarter.
Thank you, Dan.
I have a question, and then I have a quick follow-up. I'm sorry if I missed it. I mean, you did 16%, right, in this quarter over 2019. It sounds like you're very bullish into the fourth quarter. Are we talking about, you know, high teens, or are we talking about potentially having a two handle on this in terms of the comparison versus 2019? Kind of where you're seeing October trends. I've got a quick follow-up.
Yeah. Consistent with how we described it last quarter, we expect mid- to high-teens growth compared to 2019 in both the third and the fourth quarter. We did 16% on that comparison in the third quarter. I actually anticipate a bit of sequential growth into the fourth quarter, but still keeping with the mid- to high-teens comparison to 2019.
Got it. Makes sense. You know, regarding restaurants, I know this was like if I look through the release, I mean, this seems to be maybe the only thing that's not as good there. I know, I think, Gary, you mentioned at the beginning that you're still seeing wins there. Does it make sense to keep, I guess, operating in that space? Or is there at some point where you're saying, "Well, I'm better off focusing on, you know, where my forte is, like e-commerce, et cetera," kind of from a long-term strategy perspective?
Well, yeah, Dan, look, obviously, we'll continue to lead in e-com. We're gonna continue to lean in on that. Our software-led strategy in SMB, though, has been very sound since the start. Woody did a great, I think, a very good job of describing what's going on in our software-led initiatives in SMB specifically. You know, you have seen restaurants starting to recover. I mean, it's a very small overall percentage of our company. It's really a bit of immaterial at this point in time, but you have seen it starting to recover.
Whether that was due to closures, whether that was due to staffing issues, whether that was due to some of our software partners didn't respond to some of the changing needs as quickly as they might should have, during the pandemic, all of that would be open to debate. We feel very good about our software-led strategy within SMB and going to that with partners. The team's done a great job of continuing to sign up partners throughout the pandemic. Bruce just highlighted our sales strength, and that's not just in SMB. I mean, our strength in e-com has been fantastic. What we've seen driving across our e-commerce segment, we've disclosed a lot here on what we're seeing the growth rates going on with and without travel. You can actually see travel's improvement Q2 to Q3, which Woody talked about from a domestic standpoint.
Now we've got to start leaning into international. The business is really solid across all of those fronts. We'll continue to go to the SMB market through our software-led strategy.
Great. Appreciate all the detail. Great quarter. Thank you.
Thank you.
Thank you. Our next question comes from Ashwin Shirvaikar from Citi. Your line is open. Please go ahead.
Thank you, folks. Appreciate the direct addressing of some of these questions from investors. As we digest that, I mean, it's quite clear that you've done a lot on the cost of delivery front between cloud and componentization and so on. Can you speak to ongoing innovation, perhaps the level of intended spend? How do you stay nimble? Do you need a consulting or SI set of relationships as tip of the spear that you need to kind of build out from a channel perspective? Thoughts on that would be great.
Well, let's first start with the last part, which do we need a consulting group? As you know, Ashwin, we owned a consulting
Yeah
Company for a number of years and actually didn't see that fit in our overall strategic narrative. We'll continue to partner with large system integrators out there and other large consulting firms. As you can imagine, given the investment we've made in componentization, we have a lot of people wanting to partner with us on that front, which is great. Given the demand we've had, you'll continue to see those partnerships grow. Us owning another consulting group is not necessary. I think Bruce summed it up on a prior question very well, and Woody just confirmed it. If you look at the amount of CapEx that we're investing back into our existing systems, really right now it's operating about 8.5% of revenue that's trended up a little bit.
Historically, before we started on this journey, as you might remember, it was down in the 4.5% type range. We trended it up years ago because we saw this coming. The reality is, as you think about it, this transformation has come in waves, right? We had to embrace the cloud technology to get our costs down, to get our availability up, to get our speed on delivery up. You're seeing that in the numbers. You then saw us come on our application wave and really building out within our industry verticals, whether that's NAP, Access Worldpay, whether that's Modern Banking Platform, Payments One, Digital One, whether that's all the things we're doing in capital markets around solutioning and really going end-to-end in front, middle, and back office.
You've now heard us talk about, on this call, we're now rolling out the next generation of our platform, which is really taking those components and weaving them together in a really way to embrace new markets that we're not serving today. We're still gonna be taking advantage of all the markets we're in, driving the kind of growth you're seeing. Now as you weave that in through a platform, as you start bringing in low-code and no-code environments, as you start bringing in places for innovators to come and incubate, we see that a whole nother opportunity to expand TAM given the investments we've made. We don't think that's gonna require an increased capital investment at all because as those other programs are closing, that frees up capital to now redeploy. I think it shows a real confidence in execution.
Given where our guide is, it shows a real confidence in the company, and we'll continue to lean in on all those fronts.
Yeah, I would say that I think.
Yeah.
The, uh-
Go ahead.
The team has done a very nice job continuing to focus on innovative products and accelerating the revenue that we're driving from new products. When we track it internally, we look at what our revenue is from new products, and that continues to accelerate. We feel very good about the innovation engine and the ideation of new products in partnership with our customers, trying to solve the challenges that they're facing. Our team's done a nice job delivering new solutions to the market.
Understood. I'm kind of looking at the, you know, chart 22 as well, Global Acquiring TAM, and it's a great chart. I mean, one of the things that sticks out obviously is you are, you know, you're very big in the enterprise segment, and that's kinda how it's been for years. But that also happens to be the slower CAGR, right? In terms of this actively pivoting your mix towards faster growth areas, could you talk a little bit more about that particular strategy? I mean, obviously, we have to stay exposed to enterprise because the dollars are large. How do you pivot faster is the question.
Yeah, Ashwin, it's a great question. I think you've heard us over the last several quarters, and really even pre our acquisition of Worldpay, that the Worldpay team, and we believe it was the right strategy, continues to focus and invest on e-com and to drive e-com growth even faster. If you remember, this 27% of our revenue mix in the highest growing segment was significantly lower, probably four or five points lower than that just a few years ago. Most of our investment in geo expansion, most of our investment in NAP, most of our investment in Access Worldpay continuing to improve speed of onboarding, capabilities in market, and investment in that growth profile, that's absolutely where we've been focusing.
Further, if you go back to the global e-commerce slide where we talk about it specifically, our mix right now is 50/50 between domestic and cross-border. We think you can also grab some incremental e-commerce market share over time in a pretty high-growing SMB market where we really don't play today. Yes, that's where a lot of our focus is to drive this portion of our revenue mix up significantly, you know, hopefully over time, getting it as much as 50% of our total revenue mix in these high-growth markets. We think that's an excellent way for us to continue to sustain very strong growth in the merchant segment.
Thank you. Thank you all for the effort here.
Okay.
Thank you. At this time, I would like to turn the call back over to Gary Norcross for any closing remarks.
Thank you again for joining us this morning, and thank you to our dedicated colleagues who continue to show their commitment to providing world-class technology solutions for our clients so that they can stay ahead of the curve. This commitment will lay the foundation for our growth in 2022 and beyond. If you have any further questions that were not addressed on this call, please reach out to our investor relations team. Thank you, and I hope you enjoy the rest of your day. Goodbye.
This concludes today's conference call. Thank you for participating. You may now disconnect.