Stephanie Ferris
Chief Executive Officer and President at Fidelity National Information Services
Thank you, George, and thank you all for joining us this morning. Today marks my first earnings call as the CEO of FIS. Let me begin by saying I feel incredibly privileged by the opportunity to reflect on our past, restart our future and recommit to our clients, colleagues and investors.
FIS is a tremendous company with world-class assets and a marquee set of clients. We are an industry leader with more than five decades of history, positioning where change, challenge and opportunity intersect. Today, I will present to you the next chapter.
We have a lot of ground to cover, including our fourth quarter financial results, 2023 guidance and specific outcomes of our strategic review, which includes the planned spin-off of our merchant business, Worldpay.
Let me start by sharing that I'm pleased to report that we met our financial goals for the fourth quarter. While this is a good first step, we recognize that we have a lot of work to do to meet our expectations going forward. Today, we will share a number of decisive actions we're taking to better align our business with the needs of our clients and the expectations of our shareholders. Let me take you through our path forward.
Turning to Slide 5, we've set a new agenda to improve the operational performance of the business, sharpen our client focus, and improve both the free cash flow of the Company, as well as the earnings quality. We will do this by following three key principles that will underpin all of our go-forward actions to drive value. First, we will ensure that clients are at the center of everything we do by creating a client-centric culture. Second, we will continue to innovate across our portfolio of solutions to ensure growth for our clients. And third, we will simplify and streamline our operations, decision-making and time to market to improve profitability. Combined, these principles form the foundation of our efforts to drive efficiency, effectiveness and profitable growth.
Turning to Slide 6, over the past 60 days, we've moved with the highest sense of urgency and focus to advance a number of strategically important initiatives.
First, in December, we announced that we initiated with the Board of Directors a comprehensive assessment of the Company's strategy, operations and structure with the goal of positioning FIS to drive stronger results, increase shareholder value and enhance client experience. As an outcome of this ongoing assessment, we announced today, we are pursuing a spin-off of our merchant business, creating two world-class public companies, FIS and Worldpay. It is my pleasure to also announce that Charles Drucker, Worldpay's former CEO, has agreed to return as a strategic adviser to me. Charles, who is my close friend and colleague, will lead the preparedness phase of the planned spin-off and is expected to become Worldpay's CEO upon the closing of the transaction.
Second, we announced in November that we are launching an enterprise transformation program. This program, which we have branded Future Forward, is moving ahead with speed to improve the operational performance of the Company by driving efficiency, effectiveness and profitable growth across every facet of the enterprise. When we launch Future Forward, we are targeting to deliver cash savings across the Company of $500 million by year-end 2024. I'm happy to share that we now expect to exceed our $500 million original target by the end of this year, and I'm increasing our target to $1.25 billion in net savings prior to the effect of the spin-off exiting 2024. As I mentioned earlier, we are and will continue to be intensely focused on cost management, cash generation and earnings quality.
Third, we are realigning our incentive programs to be tied to shareholder value creation, Company performance and client satisfaction scores. In order for us to deliver on our commitments, this realignment is critical.
And fourth, consistent with our December announcement, we've continued to reshape our Board of Directors for independent governance. I'm proud of what we've been able to do in the first 60 days. This is just the beginning for us.
Slide 7 describes our rationale for separating the two businesses. The pace of disruption in payments is rapidly accelerating, requiring increased investment for growth and a different capital allocation strategy for our merchant business. The separation of Worldpay from FIS will result in the creation of two stand-alone market leaders, each well positioned to capitalize on the significant value-creation opportunities ahead in their respective markets. It is expected that FIS and Worldpay will maintain a close commercial partnership to deliver critical capabilities like embedded finance and loyalty through premium payback, preserving a key value proposition for clients of both businesses and limiting potential dis-synergies.
It should also simplify our operations and give each management team additional flexibility to operate the business in a way that best delivers value for all clients and shareholders alike. Specifically, it will enable FIS to pursue a strong investment-grade credit rating, while enabling Worldpay to invest more aggressively in growth. A separation also enables FIS and Worldpay to implement different capital allocation strategies, which align to their growth targets and underlying market needs.
Turning to Slide 8, both companies serve a blue-chip set of clients. FIS serves the technology needs of global financial institutions, regional community banks and marquee set of asset managers across the spectrum. Worldpay serves the payment needs of the world's global technology, Internet and retail companies. Both companies boast unrivaled global distribution and operating scale. As separate entities, FIS remains the Number 1 global fintech provider and Worldpay remains the Number 1 global acquirer by transaction. Both companies will be market leaders in their own right, and by forging a commercial relationship together, we can affect a superior outcome as compared to keeping them together.
Let me provide some additional context for what this transaction means for the stand-alone FIS business on Slide 9. FIS is returning to its roots. This focus will allow the Company to maintain its competitive advantage in delivering innovative next-generation technology solutions to the most complex financial institutions. Additionally, FIS will be in a better position to balance return of capital to shareholders with organic investment and complementary M&A.
We remain committed to our investment-grade ratings, conservative capital structure and growing dividends. Putting it all together, we are returning FIS to its historical quality compounder model, which is more closely aligned with the way that FIS operated before the Worldpay acquisition. As a quality compounder, FIS will emphasize steady recurring revenue growth, consistent margin expansion and disciplined capital return to shareholders. Importantly, we will prioritize maximizing free cash flow and profitable revenue growth. Consequently, I would expect our free cash flow conversion to move permanently higher post the spin, reflecting less working capital volatility and lower capital expenditures.
Lastly, we are committed to improving the quality of our reported earnings. This includes narrowing the delta between adjusted earnings and GAAP earnings and presenting free cash flow measures that better align with the cash we have available to deploy. Erik will provide additional color during his discussion of our financials.
Now I'll touch on the Worldpay strategy to drive enhanced shareholder value. Worldpay operates in a more dynamic and disruptive end market relative to heritage FIS with more of a growth focus. The separation from FIS will allow Worldpay to pursue a more growth-oriented strategy, which we believe the company is better suited for and aligns more closely with investor expectations.
Central to the growth strategy is a return to more consistent M&A and a capital structure that does not require an investment grade rating. Beyond inorganic investment, the team is taking aggressive steps to re-pivot the business back towards growth. This includes the investment in the Worldpay for Platforms strategy to strengthen the company's value proposition with ISVs and a continued push toward increasing its total percent of e-commerce revenue. While near-term investments are impacting profitability, we are confident the business can return to growth and deliver value for shareholders as an independent entity.
Turning to Slide 11, I'd like to provide some additional insight into the durability of our Banking and Capital Markets businesses and why I am so confident that they are poised to deliver accelerating revenue growth and margin expansion.
We are reorienting FIS toward a path of more sustainable, higher-quality recurring revenue growth. There are two challenges specific to 2023, which are masking the underlying performance of our business, particularly in the Banking segment. The first is our previously discussed elongation in sales cycles for very large transactions. To be clear, our pipeline of opportunities remains robust and our win rate on transactions is stable. We are confident, as economic conditions stabilize, sales will accelerate. We also hired a Chief Revenue Officer to focus on driving highly profitable recurring revenue growth regardless of deal size. We believe this hire will help us cross-sell and upsell with existing clients, as well as better penetrate smaller sized financial institutions.
The second challenge is the growth headwind tied to nonrecurring revenue, largely onetime licenses and deconversion fees from bank consolidation. We anticipate this to be another 1% headwind in 2023. We do not expect onetime license and deconversion fee revenue to remain a similar headwind in 2024.
While the above trends are creating a short-term headwind for us, we believe our normalized growth rate for these segments is approximately 3% to 5%, which demonstrates the underlying strength of our Banking and Capital Markets businesses. With a refocus on high-quality recurring revenue growth and the benefit from our Future Forward initiative, we are expecting margin expansion in Banking and Capital Markets for 2023.
As a result of the timing around our actions, we are confident that these businesses have hit the low point of their margin contraction and will return to margin expansion in the back half of the year, on the back of all the future forward actions we have taken are now planning to take.
Tying it all together, FIS is on a trajectory to create shareholder value as a quality compounder that generates consistent mid-single digit recurring revenue growth, margin expansion and robust free cash flow.
Turning to Slide 12, we will provide you with regular updates on Future Forward. I've already described our progress toward achieving $500 million in net cash savings by the end of this year, and prior to the effect of the spin-off, $1.25 billion by the end of 2024. I'd like to take a moment to describe how we will achieve these targets.
Future Forward is a multifaceted initiative designed to permanently improve the performance of the Company by delivering improved outcomes for clients, while driving operational efficiencies internally, free cash flow generation and earnings quality. We are focused on more effectively meeting the needs of our clients by continuing to accelerate the development of next-generation technology solutions and anticipating their future needs; striving toward a more efficient operating structure by prioritizing human and capital resources that best align with the needs of our clients and the returns expected by our shareholders; and lastly, driving improved growth outcomes through sales productivity, reduced complexity and a continued focus on clients. These important initiatives will continue at FIS and Worldpay post spin.
I will cover our next steps on Slide 13 before turning the call over to Erik for his financial review. 2023 will be a year of recommitment for FIS, as we work to reposition the business to return to sustainable growth, profitability and value creation in 2024 and beyond. First, we are focused on executing the spin-off of Worldpay, which we expect to complete within the next 12 months. Second, we are sharpening our operational focus to continue to promote a client-centric culture and to deliver on our commitments to all of our stakeholders. Third, Future Forward initiatives will continue within both FIS and Worldpay to maximize our cash flow and earnings quality. And finally, we are laser focused on creating shareholder value with action and improved performance.
I'm pleased with the progress we've made in such a short period of time. I'm confident that we're on the right path forward.
And with that, I'll turn it over to Erik to discuss our fourth quarter results and 2023 outlook. Erik?