FIS
#I'll begin on slide 10. In the second quarter, revenue increased to $2.3 billion, or 2.3% on an organic basis, and adjusted EBITDA grew to $746 million, a 7.2% increase compared to the prior-year quarter
Adjusted EBITDA margin expanded 240 basis points to 31.8%
Adjusted net earnings from continuing operations was $342 million, and adjusted earnings per share increased 13.3% to $1.02 per share compared to $0.90 per share in the prior-year quarter
For the first half of the year, revenue increased 2% on an organic basis, and adjusted EBITDA grew to $1.4 billion, a 7.1% increase compared to the prior-year period
Adjusted EBITDA margin expanded 220 basis points to 31%
Adjusted earnings per share grew 11.2% to $1.88 per share
Consistent with last quarter, a detailed bridge of revenue growth from GAAP to organic is included in the appendix material
Moving to slide 11. In the second quarter, Integrated Financial Solutions organic revenue grew 2.6% to $1.2 billion
Adjusted EBITDA increased to $469 million, an increase of 4.8% compared to the prior year
EBITDA margins improved 90 basis points to 39.7%, driven primarily by favorable revenue mix and continued cost management
Excluding the consulting divestiture from both periods, which includes a small consulting group within IFS, this segment would've grown 4.3% on a pro forma basis, and EBITDA margins expanded 110 basis points to 40% for the second quarter
For the first half of the year, revenue increased 2.1% on an organic basis and adjusted EBITDA grew to $911 million, a 4.6% increase compared to the prior year period
Turning to slide 12, Banking and Wealth grew 2.5%, in line with our expectations
Payments grew 1.1% for the quarter, reflecting difficult EMV card production comparables that we have previously discussed
Corporate and Digital grew 6.1%, driven primarily by new client signings for our small business solution, coupled with increasing transaction volumes from existing users and consistent demand for our digital solutions
Turning to slide 13, in the second quarter, Global Financial Solutions organic revenue grew 3.9% to $1.1 billion
Adjusted EBITDA increased to $331 million, an increase of 15.5% compared to the prior year
EBITDA margins improved 340 basis points to 30.8%
Excluding the consulting divestiture from both periods, GFS would've grown 3.5% on a pro forma basis, and EBITDA margins would've expanded 420 basis points to 34.3%
These results are consistent with prior commentary on our strategy of growing higher-margin IP-led solutions and ongoing synergy efforts
For the first half of the year, revenue increased 3.5% organically
Adjusted EBITDA grew to $614 million, a 14.2% increase compared to the prior-year period
This represents 290 basis points of margin expansion
Moving to slide 14, our Institutional and Wholesale business increased 1.4%, driven primarily by our derivatives utility
Growth was partially offset by the timing of implementation work
We remain confident in our second-half growth expectations for this business
Banking and Payments grew 6.2%, driven primarily by steady performance in processing volumes in Asia-Pacific and Brazil, while Consulting grew 6.7%
Moving to slide 15, the revenue from our non-strategic assets in Corporate and Other declined 17.8% on an organic basis, consistent with our previous guidance
Corporate expenses were $75 million, a 4.5% decline from the prior year, driven by continued focus on cost management initiatives
Moving to slide 16, for the quarter, free cash flow was $275 million and $637 million for the first half of the year
For the first six months of the year, cash conversion was 102%
We expect cash flow conversion to be between 105% and 115% for the full year
As of June 30, our debt outstanding was $9.7 billion
In the second quarter, we returned $97 million to shareholders through dividends and have returned $192 million in dividends year-to-date
We ended the quarter with weighted average shares outstanding of 334 million on a fully diluted basis
Our non-GAAP effective tax rate decreased to 29.5% for the quarter, resulting in a $0.03 benefit for the second-quarter earnings compared to original expectations
The decrease in our effective tax rate is primarily driven by a year-to-date combination of tax benefits related to stock-based compensation and from higher international profits
We now expect our full-year rate to be about 30% to 31%, versus our original guidance of 32%
Moving to slide 17, since our last call, we executed two significant transactions that create long-term benefits to shareholders
On May 23, we announced the sale of a majority stake in our consulting assets, which consisted of Capco and a small consulting group from the IFS segment
The transaction closed on July 31 and produced $469 million of upfront cash proceeds, or $441 million net of taxes and deal-related expenses, and included a retention of a 40% equity interest in the business
The transaction initially values our retained equity interest at about $175 million
In 2017, these businesses were expected to contribute $630 million of revenue, $75 million of EBITDA and approximately $0.15 to $0.17 of earnings per share for the full year
The majority of the earnings per share contribution, $0.11 to $0.12, was expected to come in the second half of the year
We expect $0.01 to $0.02 of earnings per share contribution from the ongoing minority interest in the interest, resulting in net dilution of $0.10 per share in 2017. On June 26, we successfully priced our inaugural European debt offering of €1 billion and £300 million at a weighted average coupon of approximately 1%
Simultaneously, we launched a tender offering on $2 billion of outstanding debt, with a weighted average coupon of approximately 4%
The tender was funded on July 25 with proceeds from the European bond issuance and borrowings from our revolving credit facility
On July 31, all the proceeds from the divestiture of the consulting assets were used to pay the revolving credit facility
This transaction highlights additional value from our global footprint, by utilizing our assets and cash flows in Europe to optimize our capital structure, allowing us to issue debt in favorable market conditions
We're able to designate this new debt as a net investment hedge against the equity in our European operations, eliminating currency risk
This transaction is a continued evolution of our capital structure to align with global operations and gives us access to a broader investor base and new sources of capital
These refinancing activities will reduce our interest expense by approximately $25 million for the remainder of the year and about $60 million in 2018. Overall, this transaction will provide $400 million of total interest expense savings over the next eight years
Finally, our weighted average interest rate declined 60 basis points from approximately 3.9% to 3.3%
Turning to slide 18, for 2017, we are reiterating our organic revenue growth rates and revising consolidated and segment revenue dollar ranges due to the divestiture
Full-year consolidated organic revenue growth is expected to be 2% to 3%, resulting in a range of $9.1 billion to $9.2 billion
IFS organic revenue growth is expected to be 3% to 4%, resulting in a range of $4.62 billion to $4.67 billion
And GFS organic revenue growth is expected to be 4% to 5%, resulting in a range of $4.15 billion to $4.2 billion
Despite our relatively slow start to the year on a top-line basis, which we expected, we remain confident in the full-year growth rates we provided at the beginning of the year and the underlying strength of the core operating segments
Turning to slide 19, based on the results of these transactions, operating performance and our lower tax rate, we are increasing our full-year adjusted EPS guidance
Our increased range includes $0.10 of dilution from divestitures, which is more than offset by a combination of a $0.05 benefit from the impact of the debt refinance and a $0.07 to $0.12 benefit from year-to-date performance, outlook for the remainder of the year and a lower tax rate
The net impact to full-year 2017 adjusted earnings per share guidance is an increase to $4.22 to $4.32 per share or 10% to 13% growth compared to prior-year period
I also wanted to give some insight into our expectations of the quarterly earnings spread for the second half of the year to help with modeling
In light of the timing of these changes noted above, we expect our third quarter earnings results to be between $1.04 to $1.06 per share
Adjusted for the timing of the consulting and public sector divestitures, and the refinancing activity this summer, normalized EPS growth would be approximately 10% in the third quarter
Finally, we are announcing the authorization of a $4 billion share repurchase program, which will expire at the end of 2020. While we remain focused on deleveraging our balance sheet, we are anticipating generating excess cash flow in the fourth quarter and throughout 2018. Our revised 2017 EPS guidance does not anticipate any share repurchase impact
We are pleased with the execution in the first half of the year, which allows us to increase our full-year EPS guidance, even with the divestitures
We continue to focus on consistently improving cash flow generation, deleveraging our balance sheet, investing for growth, and returning cash to shareholders
That concludes our prepared remarks
Operator, you may now open the line for questions
Question-and-Answer Session
Morning, <UNK>
I'll start and let <UNK> add some color
With regard to the leverage itself, we had talked about being in the 2.6, 2.7 range by the end of 2017, targeting getting back to around 2.5 times
That said, based on the refinancing activity we've done, we'll repay all our pre-payable or maturing debt by the fourth quarter, so we'll have some excess cash then
We certainly anticipate having some excess cash flow, significant excess cash flow, in 2018 that we could apply across a number of different ways, but we wanted to make sure we had some flexibility to do share repurchase
I think we're always looking to add strategic capabilities and expand our market capabilities, but we always do that in a disciplined way, looking at financial strategic value and relative valuation
Right now, we think on a relative basis, we're a very good buy
So we wanted to make sure we had access to buy some of our shares back
Thanks, Dave
Yeah, I'll hit your FX first
As you know, our organic calculation excludes FX and it excludes the impact of acquisitions or divestitures
With regard to FX, you're right
We had a very minor impact in the second quarter
And right now, based on FX rates, we are modeling a very insignificant impact for the full year
Neither one of those would impact organic growth in the way we calculate it
With regard to Capco, we are removing Capco from the organic base and the consulting businesses from the organic base, so they would be out of the number
But the 4% to 5%, again, removes any divestitures and removes any FX
<UNK>, with regard to your first one, we've done some calcs, and we tried to give some color in the prepared remarks around what organic growth would look without the consulting business
We haven't pulled out what the impact of, specifically, of the risk-based project and some of the compares are, particularly on the EMV, because that's just ordinary business, difficult compares, and we've got to grow through it
But it'll certainly help both IFS and, we believe, GFS for full year in terms of organic growth
Probably, more importantly, it helps both their margin profiles
IFS would be up to about a 40% margin with it and GFS would be in the 34%-type, which is a significant improvement from a few years ago from a structural improvement
So it'll definitely help organic revenue growth
It'll help margins, but we haven't specifically carved out all the moving pieces there that you just mentioned
Well, we certainly think once you move compares out, the original guides that we had, which was around 3% to 6% on IFS and 3% to 8% on GFS, still hold together
You certainly should see some improvement in acceleration in the back half of the year, particularly in the strategic segments
As you know, we were looking at about a 1 point consolidated headwind from Corporate and Other, but feel very good about the strategic segments, about the growth rates we outline, and about where they can go long-term in those sustained rates we mentioned back in May of 2016.
Yeah, I think you've seen us do exactly that in the past
We feel very comfortable at an aggregate 2.5 times leverage
That says we grow, right? You could even take on some debt to continue to keep that leverage at that level
But you've seen us default to share buyback versus trying to just reduce debt lower than that
So you've seen us do that a number of years, then we did the SunGard acquisition
We're getting our debt and our balance sheet back to where it needs to be, and you could certainly see us moving back into that from a default position while continuing to look at continued (32:29) opportunities
Thanks, <UNK>
Thanks, <UNK>
Yeah, I think it is just working capital movements
You've seen some timing around cash tax payments and some of the divestiture activity that we've had
Q2 is always our lowest cash flow generation item over the last four or five years
So what we try to do is not look as much on the quarter-by-quarter cash flow generation, but look at what the total year's going to do
Through the first six months, we're at 102% and I think again we're going to be at 105% to 115%
Some of that comes through heavier cash flow at the end of the year, with renewals and license maintenance that we've always seen in the past
So feel good about it, have good visibility into it, <UNK>, so
I would tell you we feel very good about what we've laid out to the market, continue to take a conservative stance on the guide to make sure we are delivering our expectations, if not exceeding those expectations
So it seems like every time I put a guide together, some of the broader groups tend to get a little higher than I do in terms of picking a midpoint
But that said, I feel very good about where we're at, what we've guided to and have continued to keep a conservative stance on it
Those are the two biggest chunks
We had a convergency in Q3 of last year that we called out last year
I want to say it was around $15 million, but that's outlined in our view this year, but those are the big chunks, <UNK>
Thanks, George
I'll answer your second question first with regard to it not being $0.04, only being $0.01 to $0.02. The new owners put a little bit more leverage on there in terms of what we would do, and they'll continue to invest heavier as they try to grow that top line within the consulting business
So you're not going to see the same amount of net income that will ultimately pick up our 40% share
That's the biggest delta between just picking up 40% of what we operated it at from a margin profile
The second would be around the discussion point around the revenue growth profile and what it looks like
So, ultimately, we think it'll flow
It'll flow like that
Yeah, I think the tax rate itself, I think this is probably about where it needs to be, George
We had a bit of a catch-up in Q2, which is around a higher stock-based comp, higher international profits
I'll caveat that with as we continue to see margin expansion outside the U.S
in those lowers rate jurisdictions, we'll continue to see a lower relative tax rate than maybe some others in the business
But 30% to 31% is a pretty low effective tax rate
That's really the only thing in the third quarter of last year
What you've got to think about is between the consulting sale and the PS&E sale earlier this year, that's about $0.07 that was in last years' that won't be in this years'
That's partially offset by about $0.02 of debt refi, so you've got about a $0.05 delta just through divestitures this year and the timing associated with those divestitures
That's the biggest issue
As you did mention, last year, we had about $0.03 in the quarter related to a conversion fee in the GFS group
Thank you
Yeah, on that, if you go back prior to the SunGard acquisition, we were in the low 20s in terms of margin profile there
We had outlined that we anticipated our international business continue to grow and gain scale and we would expand margins through that, over time, anyway
You couple that with SunGard and the consulting exit clearly is driving incremental heavier margins
But I would tell you we probably got 300 to 400 basis points of underlying margin improvement before you added synergies and before you got the impact from the SunGard sale
As <UNK> mentioned, that group is up about 1,100 basis points from that timeframe, and that is a blend between synergies, the absence of consulting longer-term, and then just ongoing scale in the existing businesses that we had, even pre-SunGard
Well, I think part of it would be around the structural improvement we've talked about
We're going to see some margin improvement because the consulting business has lower incremental margins
With the removal of that, I would anticipate seeing better margin
And ultimately, that drives better cash flows
So we're not updating our guide around that, feel good about the 105% to 115%, but certainly anticipate EBITDA margins to continue to improve
And if we do what we need to, that should improve cash flows as well Unknown Speaker And, Chris, it's Bill
(50:58) The operating teams have done a very nice job of getting very focused to help lower the DSO as well, right? So we continue to want to make sure that we're collecting our cash and as timely as possible
So I don't know that that's a different aggressive stance
I just think, to Woody's point, as you see the transformation that's occurred and the continued execution on our IP-led businesses, you're naturally seeing our DSO come down
You're seeing our free cash flow conversion trend up, and so we feel good about it
It's probably in the $0.05 range
As you saw, the second quarter true-up was about a $0.03 benefit, so we're actually seeing that slightly lower in the back half, so about $0.05 is a good estimate there
