Erik Hoag
Chief Financial Officer at Fidelity National Information Services
Thanks, Stephanie, and thank you all for joining us this morning. I'll begin on Slide 14 with some additional detail on our financial results before moving into our increased guidance, future forward achievement and capital allocation priorities for Heritage FIS.
Our first quarter results exceeded our expectations across all financial metrics. Revenue increased 3% organically to $3.5 billion, with an adjusted EBITDA margin of 38.7% and adjusted EPS of $1.29. Revenue growth came in 2 points above the high end of our outlook.
As Stephanie mentioned, this outperformance was driven by a combination of both stronger operating performance, as well as better-than-anticipated macroeconomic impacts, including consumer spending and higher levels of deposit account and transaction growth across the financial services sector. Adjusted EBITDA and adjusted EPS exceeded expectations through both operational strength and the benefit in net interest expense.
Moving to cash flow on our balance sheet. Capital expenditures decreased 32% year-over-year to $279 million or 8% of revenue, reflecting the benefits of our Future Forward initiatives. We generated free cash flow of $641 million or 84% conversion, and returned over $300 million to our shareholders through dividends. Lastly, we exited the quarter with $20 billion in total debt, yielding a leverage ratio of 3.2 times at a weighted average interest rate of 3%.
Turning to our Heritage FIS results on Slide 15. We're pleased to report organic revenue growth of 4%, driven by 6% recurring revenue growth. Our backlog continues to be strong and durable, exiting the quarter with $22.5 billion. As previously mentioned, our sales teams are transitioning to target higher quality, more profitable new sales which will drive sustainable high-margin growth. Because of this, we would anticipate some softness in backlog over the short term as the team aligns to these initiatives. This change in sales initiatives is fully incorporated into the increased outlook for the year.
Ultimately, the result of this will be higher quality new sales, laying the foundation for sustainable growth in revenue, EBITDA and cash flow, while providing best-in-class capabilities for our clients, as well as emphasizing our high-margin, sticky recurring revenue offerings. Overall, this is a very strong start to the year for Heritage FIS segments as we saw stronger than anticipated operating performance, driving results above our expectations.
At the segment level, banking increased 2% organically in the quarter, which was 2 points above the high end of our outlook. This outlook was underpinned by recurring revenue growth of 4%, which exceeded our expectations. Strength in recurring revenue was driven by strong execution from our business in conjunction with elevated account and transaction growth during the quarter. As expected, adjusted EBITDA margins contracted 250 basis points to 40.1%, primarily driven by a 23% reduction in termination fees and one-time license revenue.
This performance in margin improved compared to our fourth quarter results, and we continue to anticipate sequential margin improvement through 2023, leading to expansion in the back half of the year. For the second quarter, we are anticipating banking organic revenue growth of 0% to 2%, which incorporates a continued reduction in non-recurring revenue, and we remain confident in meeting or exceeding our organic growth outlook for the year.
Turning to our capital markets results and outlook on Slide 17. Capital markets increased 7% organically in the quarter, exceeding the high end of our outlook by 2 points. The overperformance in the quarter was underpinned by 11% recurring revenue growth, with a 4-point tailwind associated with elevated activity in the financial services industry. Adjusted EBITDA margin expanded 30 basis points to 48.2%. Margin expansion in the quarter was driven by high contribution margins on our revenue growth as well as the underlying strength of the one-to-many operating model.
We continue to see resilient strength in the operating performance of capital markets, and believe our multiyear transition to SaaS-based engagements has laid the foundation for resilient growth. For the second quarter, we anticipate organic revenue growth of 4% to 6%, primarily associated with an assumption of recurring revenue normalizing off the elevated growth seen in the first quarter. For the year, we're reiterating our outlook of 4% to 6%, inclusive of a tough license compare in the fourth quarter.
Turning to Slide 18. Our Merchant segment increased 2% organically, exceeding the high end of our outlook by 2 points as we saw better-than-expected consumer spending and accelerated growth in e-commerce. Broadly speaking, we're seeing continued strength in our e-commerce subsegment, accelerating to 15% in the quarter with strong sales and exceptional growth in our Worldpay for Platforms offering. Worldpay for platforms continues to benefit from our ongoing investments and renewed leadership structure, and we continue to see a significant opportunity in this attractive vertical.
Our SMB and enterprise subsegments saw trends similar to our fourth quarter 2022 results. Consistent with our guide, margins contracted 350 basis points to 43.5%, primarily due to unfavorable revenue mix. Global volume increased 9% on a constant currency basis to $551 billion. This acceleration was a result of stronger consumer spend across our enterprise and e-commerce subsegments.
In the quarter, volume growth outpaced revenue growth as a result of higher spend in non-discretionary verticals, for example, grocery and drugstore, and market share gains within the PayFac vertical.
Turning to Slide 19 for a further review of Heritage Worldpay's outlook for the year. As we entered the year, we had anticipated organic revenue decline of 2% to 4%. The guide reflected a 300 basis point headwind associated with attrition in the SMB subsegment, and further macro deterioration impacting growth by an additional 500 basis points. Our first quarter results outperformed our expectations by 2 points compared to the high end of our outlook.
While the business continues to be impacted by the headwinds in the SMB subsegment, consumer spending performed better than expected in the U.S. and the U.K. As a result, we're updating our second quarter and full year guidance to reflect relatively consistent trends from the first quarter to the second quarter, and improved consumer spend in the back half of the year.
Because of this, we now anticipate second quarter organic revenue growth of negative 1% to plus 1%, and full year organic revenue growth of down 2% to 1%, a material improvement compared to initial expectations. This outlook for the second quarter assumes relatively similar trends across our subsegments compared to the first quarter. On the margin front, we will continue to see improvements through the year consistent with normal seasonality and further aided by our Future Forward initiatives.
Turning to Slide 20, for a review of our increased 2023 guidance. Given our strong start to the year, we're confidently increasing our full-year 2023 outlook to incorporate the overperformance seen in the first quarter. Specifically, we're increasing our revenue and EBITDA ranges by $85 million and $35 million, respectively, accounting for a $0.06 increase in our adjusted earnings per share outlook for the year. This increase is aligned directly to our first quarter results compared to the high end of our prior guide.
Our increased outlook over the remainder of the year has strengthened relative to the outlook we provided in February, based on the current trends in our businesses. With that in mind, for the year, we now anticipate consolidated organic revenue growth of 0% to 1%, adjusted EBITDA margins of 41.5% to 42.2% and adjusted earnings per share of $5.76 to $6.06.
As I stated in our last earnings call, our philosophy continues to remain conservative in our forward projections as we continue to build credibility and deliver on our commitments. This increased outlook continues to account for risk associated with macroeconomic impact in our Merchant segment, and we would anticipate further upside if macro trends remain stable.
As previously mentioned, we continue to anticipate margin improvement over the course of 2023 as we ramp the benefits associated with Future Forward, and we're reiterating our outlook for free cash flow conversion of over 80%. Lastly, we provided additional assumptions on our forward guidance in the appendix, as well as a revised 2022 organic base to account for some small shifts in our operating segment rollouts.
Turning to Slide 21, for a financial update on Future Forward. We remain committed to rightsizing our expense base while ensuring minimal impact to our clients or colleagues. Aligned to this commitment, Future Forward centers around investing in sales and support, automating and improving processes and improving the ways we work.
As Stephanie mentioned, we're reiterating our targets for operational expense savings of $300 million exiting 2023 and $600 million exiting 2024. We had a strong start to the year with annual run rate savings of over $100 million exiting the quarter, with an in-quarter benefit of over $15 million. We continue to target a $200 million reduction in capital expenditures during 2023, with an incremental $100 million reduction in 2024.
In the quarter, we achieved annualized CapEx savings of over $110 million as we executed rapidly on the Future Forward initiative. We're extremely pleased with our early progress, and we'll continue to provide quarterly updates on achievement throughout the program.
I'll conclude with a recap of our capital allocation priorities for Heritage FIS on Slide 22. Following the successful execution of the spin, Heritage FIS will remain focused on reducing debt, increasing our dividend and utilizing excess capital for share repurchase or tuck-in M&A. First, we continue to target a long-term leverage ratio of approximately 2.8 times. To achieve this, we would anticipate reducing total debt, while also benefiting from adjusted EBITDA growth over a multiyear period.
Next, we remain committed to a 35% dividend payout ratio for Heritage FIS. Following these two pillars, we will utilize excess cash or debt capacity for share repurchase or optionality around tuck-in M&A opportunities. Our default use of excess capital will prioritize share repurchase at current valuations while we assess M&A opportunities in their risk-adjusted returns. This capital allocation strategy is conservative in nature, while providing a robust value proposition for long-term shareholder value over a multiyear period.
I'd like to thank everyone for their time this morning. Operator, would you please open the line for questions?
