James Kehoe
Chief Financial Officer at Fidelity National Information Services
Thank you, Stephanie, and good morning. I'm delighted to be here, and I look forward to meeting with all of you in the near future.
As noted in our earnings release, as of the third quarter, we have transitioned the Worldpay business into discontinued operations. Going forward, our ongoing FIS financials will be presented on a continuing operations basis. However, for this quarter, we will also present some of our metrics on a total Company basis. And this will allow you to compare to our prior total Company outlook. Continuing operations now reflects two principal operating segments, Banking and Capital Markets as well as the Corporate and Other segment. As you review the split between continuing operations and discontinued operations, I would note that the continuing operations income statement understates the true earnings power of FIS. For example, the continuing operations financial results do not yet include the EPS contribution from our 45% equity stake in Worldpay nor does it include the significant EPS upside from the deployment of the Worldpay net cash proceeds, including the planned debt reduction of approximately $9 billion and share repurchases of at least $3.5 billion through 2024. Taken together, these items will have a meaningful impact on the EPS and we estimate like-for-like earnings power of around $4.40 to $4.55 for 2023.
Let's now move to our third quarter results. As Stephanie mentioned in her prepared remarks, we are pleased with our performance in the third quarter, and it is the third consecutive quarter of meeting or exceeding the high-end of our outlook. Including Worldpay, total Company revenue increased 2% on an organic basis to $3.7 billion, with an adjusted EBITDA margin of 44.2% and adjusted EPS of $1.65. The adjusted EBITDA margin expanded 50 basis points year-over-year, 20 basis points above the high-end of our expectations, driven by strong incremental margins on our recurring revenue and continued benefits from Future Forward. This marks the first year-over-year EBITDA margin improvement since the fourth quarter of 2021 and we expect continued year-over-year margin improvement in the fourth quarter.
On a continuing operations basis, revenue increased 4% organically to $2.5 billion, led by strong growth in recurring revenue across both Banking and Capital Markets. Adjusted EBITDA margin expanded 70 basis points year-over-year to 43%, led by strong margin gains in Banking. Adjusted EPS for continuing operations was $0.94 in the quarter, a decline of 7% compared to the prior year, and this was entirely due to higher interest costs.
For discontinued operations, which reflects our Merchant segment, revenue decreased 1% organically to $1.2 billion and this was broadly in line with our expectations for the quarter. Adjusted EBITDA margin expanded 30 basis points to 46.8%, reflecting continued Future Forward efficiencies, and adjusted EPS came in at $0.71.
Moving now to cash flow and balance sheet metrics, and we continue to drive improvements across multiple vectors. Capital expenditures were reduced 5% year-over-year to $298 million or 8% of revenue as we continue to optimize and prioritize investments. We generated strong free cash flow of $907 million, resulting in a free cash flow conversion of 92% for the quarter and 94% year-to-date. This compares very favorably to our prior target of greater than 80% free cash flow conversion. Lastly, we reduced our total debt by approximately $800 million to $18.7 billion, yielding a leverage ratio of 3 times, while also returning over $300 million to shareholders.
Turning now to our segment results on Slide 15. Recurring revenue increased 7% with strength across both Banking and Capital Markets and this led to organic revenue growth of 4% for the quarter. Backlog was $22.5 billion, increasing 2% compared to the prior year, reflecting improved sales execution. Banking revenue grew 3% organically in the quarter and recurring revenue grew 7%, including the benefit of approximately 4 percentage points as a result of an outsized contribution from servicing federally funded pandemic relief programs. Pandemic relief had little impact on the Banking growth rates in the first half of 2023, but the third quarter results did exceed our expectations. As anticipated, we saw declines in professional services and other non-recurring revenue of 18% and 11% respectively. These declines reflect a difficult year-over-year comparison in license revenue and lower customization projects in professional services. Banking EBITDA margin expanded 120 basis points to 44.6%, primarily driven by Future Forward cost initiatives.
Capital Markets revenue increased 6% organically, led by continued strong recurring revenue growth of 8%. Consistent with our year-to-date trends, professional services revenue decreased 8% as we continued to shift to recurring revenue engagements, while other non-recurring revenue increased 13% due to higher license revenue. Capital Markets adjusted EBITDA margin contracted 80 basis points to 49%, mostly reflecting the timing of operating expenses.
Turning now to the outlook of -- for 2023 on Slide 16. This chart provides an outlook for the total enterprise prior to implementing accounting for discontinued operations. We are raising our revenue and adjusted EBITDA outlook ranges to reflect continued strong operational results and good visibility around fourth quarter trends. Total Company revenue is now projected at $14.6 billion to $14.65 billion, including an adverse currency impact of $25 million. On a constant currency basis, we are increasing the lower-end of the range by $125 million, on the higher-end of the range by $44 million.
As we close-out the year, we are narrowing our ranges for segment growth. In Banking, we are narrowing our outlook to 1.3% to 1.7%, in line with our prior expectations. For Capital Markets, we now anticipate organic revenue growth of approximately 5% to 5.5%, primarily due to an expected shift in license fees into 2024. And lastly, we've improved our Merchant segment outlook to account for recent performance. As expected, this implies a slight deceleration in organic revenue growth in the fourth quarter for both Banking and Capital Markets, reflecting difficult year-over-year comparisons related to non-recurring revenue headwinds. As a reminder, in the fourth quarter, we anticipate a 5-point headwind in Capital Markets as we lap a very strong year-ago quarter for license revenue. However, consistent with the trends we have seen all year, we do anticipate another solid quarter of recurring revenue growth, with approximately 3% growth in Banking and 7% growth in Capital Markets. We are also increasing our adjusted EBITDA range to $6.1 billion to $6.15 billion, reflecting higher revenues and improved EBITDA margin. In summary, we are raising our full-year outlook to reflect continued outperformance and a favorable future outlook.
Turning now to Slide 17, where we are providing updated assumptions regarding the Worldpay transaction. We now anticipate net proceeds of more than $12 billion, an increase of approximately $300 million compared to our prior estimate. Obviously, we will provide a final net proceeds number once the transaction closes. As previously disclosed, the proceeds will be used to transform our capital structure by significantly de-levering the balance sheet, while simultaneously returning capital to shareholders. Overall, we anticipate reducing gross debt to approximately $10 billion, leading to a significant reduction in interest cost post-transaction. As we get more visibility into net cash proceeds and continue to deliver strong cash conversion, we are now comfortable reinstituting share repurchases of approximately $500 million by year-end. Today, we are increasing the targeted share repurchases from $2.5 billion to at least $3.5 billion by the end of 2024, and we will continue to assess additional capacity throughout the year. We will accomplish this share repurchase goal while still remaining comfortably within our targeted leverage ratios.
We expect full year 2023 D&A of approximately $1 billion on a continuing operations basis. And you should assume growth of 8% to 10% in 2024 as past capital investments flow through the income statement. Some good news on tax rate. We now anticipate an effective tax rate of 17% to 18%, down 200 basis points to 300 basis points compared to the 19% to 21% we communicated previously. We continue to expect incremental Future Forward savings of $215 million in 2024. And our forecast for adjusted EBITDA dis-synergies remains approximately $200 million in 2024. And finally, we can confirm that we will report the after tax earnings from our 45% stake in Worldpay within our adjusted net earnings and adjusted EPS, and will include this in our 2024 outlook.
Turning now to our outlook for continuing operations on Slide 18. The left-hand side of this chart lays out our 2023 outlook for continuing operations, excluding Worldpay. This results in adjusted EPS of $3.30 to $3.40. However, as I noted earlier, the 2023 continuing operations income statement does not accurately reflect the true earnings power of FIS. A good example is interest expense. The continuing operations interest expense is burdened with the entire interest expense of FIS with no interest expense allocated to discontinued operations. This artificially depresses the earnings of continuing operations.
Shifting to the right-side of the chart, let's discuss the earnings power of FIS. Worldpay NCI adds approximately $0.60 to $0.65 of adjusted EPS on a full-year of 2023 basis. And the deployment of the Worldpay transaction proceeds would add $0.65 as we meaningfully reduce interest expense and share count. These benefits are modestly offset by a higher tax rate. Overall, this leads to a normalized 2023 EPS of $4.40 to $4.55. We will provide our outlook for 2024 revenue and adjusted EBITDA during our fourth quarter earnings call.
Switching gears now to Future Forward. On a continuing operations basis, we delivered approximately $55 million of year-to-date savings. This year, we anticipate $100 million of in-period savings and expect to exit the year with a run -- with run rate benefits of $200 million. This aligns with our expectation of $215 million of year-over-year benefit to 2024 adjusted EBITDA, and we will provide quarterly updates through the life of the program. Overall, we continue to anticipate $1 billion of total cash savings across all three categories of cash optimization.
Moving now to our capital allocation priorities on Slide 20. Post the Worldpay transaction, FIS will be in a very strong position with significant balance sheet flexibility and a balanced set of capital allocation priorities. We will prioritize investments to accelerate revenue and EPS growth, while returning ample capital to shareholders over time. We will target a strong balance sheet and maintain investment-grade credit ratings. Given our strong free cash flow generation and predictable revenue streams, we are reiterating our long-term gross leverage range of 2.5 times to 3 times adjusted EBITDA. We intend to maintain a competitive dividend and we will grow the dividend in line with adjusted net earnings. We will selectively invest in M&A, targeting smaller, complementary but highly synergistic targets, where we can leverage our tremendous scale and distribution to drive faster growth across strategic verticals. As mentioned earlier, we will deploy excess capital for share repurchases. And going forward, we anticipate that share repurchases will be a key element of our value proposition to shareholders. We are convinced that this balanced capital allocation framework provides a robust value proposition for long-term shareholder value-creation.
In closing, let me say again how excited I am to be joining the FIS team during this time of transformation. I believe we are on the right path to unlock meaningful shareholder value as we reposition the enterprise for long-term success. As you have seen, this quarter marks the third consecutive quarter of delivering on our financial commitments with results at or above the high-end of our outlook. As such, we are confident in increasing our total Company outlook for the year. We have also introduced an outlook for 2023 continuing operations in line with our prior expectations. And lastly, given the confidence in how the business is performing, our improved financial flexibility and the attractive valuation of our stock, we are re-instituting share repurchases with approximately $500 million in the fourth quarter, and we are raising the total buyback to at least $3.5 billion through 2024.
With that, operator, would you please open the line for questions.
