Fidelity National Information Services, Inc. (FIS) Q4 2022 Earnings Call Transcript

Fidelity National Information Services, Inc. (NYSE:FIS) Q4 2022 Earnings Conference Call February 13, 2023 8:30 AM ET

Company Participants

George Mihalos – Head, Investor Relations

Stephanie Ferris – Chief Executive Officer and President

Erik Hoag – Chief Financial Officer

Conference Call Participants

Tien-Tsin Huang – JP Morgan

Rayna Kumar – UBS

Lisa Ellis – MoffettNathanson

Dave Koning – Baird

Jason Kupferberg – Bank of America

Darrin Peller – Wolfe Research

John Davis – Raymond James

David Togut – Evercore ISI

Ashwin Shirvaikar – Citi

Ramsey El-Assal – Barclays

Dan Dolev – Mizuho

Operator

Good day and welcome to the FIS Fourth Quarter 2022 Earnings Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker, Mr. George Mihalos, Head of Investor Relations. Please go ahead.

George Mihalos

Thank you, operator. Good morning, everyone. Thank you for joining us today for the FIS fourth quarter 2022 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.

With me on the call this morning are Stephanie Ferris, our CEO and President; and Erik Hoag, our CFO. Stephanie will lead the call with a strategic and operational update, followed by Erik reviewing our financial results and providing forward guidance.

Turning to Slide 3, today’s remarks will contain forward-looking statements. These statements are subject to 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. Reconciliation of our non-GAAP information to the GAAP financial information is presented in our earnings release.

With that, I will turn the call over to Stephanie.

Stephanie Ferris

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 am 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 are 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 have 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 have 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 launched Future Forward, we are targeting to deliver cash savings across the company of $500 million by year end 2024. I am happy to share that we now expect to exceed our $500 million original target by the end of this year and I am 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 have continued to reshape our Board of Directors for independent governance. I am proud of what we have 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 standalone 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-synergy. It should also simplify our operations and give each management team additional flexibility to operate the business in the 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. By separate entities, FIS remains the number one global FinTech provider and Worldpay remains the number one global acquirer by transactions. 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 standalone 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 altogether, 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 spend, 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 will 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 an organic investment, the team is taking aggressive steps to repivot the business back towards growth. This includes the investment in the Worldpay for platform 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 up-sell with existing clients as well as better penetrate smaller sized financial institutions.

The second challenge is a growth headwind tied to non-recurring revenue, largely one-time licenses and deconversion fees from bank consolidations. We anticipate this to be another 1% headwind in 2023. We do not expect one-time 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 altogether, 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 have 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. Driving 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 am pleased with the progress we have made in such a short period of time. I am confident that we are on the right path forward.

And with that, I will turn it over to Erik to discuss our fourth quarter results and 2023 outlook. Erik?

Erik Hoag

Thanks, Stephanie. I’d like to start today by outlining some of our priorities as a new management team before touching on our financial results. As I stated last call, a priority of ours is to be transparent about our future expectations and we delivered results in line with that revised outlook. Today, I’d like to lay out a few more priorities for 2023 and beyond.

First, we will manage FIS as a high-quality compounder with predictable and consistent earnings growth. Our operational structure and long-term capital allocation strategy will prioritize delivering double-digit total shareholder return. This is the core tenet of a compounder investment thesis, which FIS is operationally and financially positioned to achieve.

Next, as Stephanie mentioned, we are focused on enhancing the cash flow characteristics of FIS. In 2023, despite an anticipated reduction in EBITDA and earnings, we are taking actionable steps to increase our cash flow on a year-over-year basis. This increase in cash will be primarily driven by decreasing our capital expenditures by approximately $200 million. We are also taking conscious actions to reduce one-time spend associated with transformation and integration programs. I am confident we are taking the correct actions to deliver strong shareholder returns over the longer term.

With that as the backdrop, let’s quickly touch on our fourth quarter results. On a consolidated basis, revenue increased 4% organically to $3.7 billion, with an adjusted EBITDA margin of 43.2%, yielding an adjusted EPS of $1.71. At the segment level, banking grew 4% organically in the quarter. Banking margins were pressured due to unfavorable revenue mix and inflationary cost pressures.

We had an exceptionally strong quarter in capital markets with 10% organic revenue growth and 220 basis points of margin expansion. Fourth quarter revenue growth included a 4 point benefit associated with the timing of license renewals which drove a 22% increase in non-recurring revenue. As I look to proactively message any one-off tailwinds or headwinds, this license benefit in the quarter should be flagged as a potential headwind in the fourth quarter of 2023. Excluding this tailwind, capital markets increased 6% organically, well ahead of historical trends.

Additionally, recurring revenue grew 11%, marking the fifth consecutive quarter of recurring revenue growth greater than 8%. Our strategy to transition to durable SaaS deployments continues to resonate in the market. Merchant grew 2% on a constant currency basis in the fourth quarter, including a point of headwind associated with Russia and Ukraine. E-commerce revenue growth remained strong, increasing 16% on a constant currency basis. Our card present channel and SMB experienced softness as lower sales did not outpace attrition and compression trends. These trends in SMB reflect a lack of new product investment, which we believe the spin will best enable us to remedy. And in enterprise, we saw economic weakness in the UK and anticipate further deterioration this year.

Touching quickly on cash flow and balance sheet, we generated roughly $3 billion of free cash flow in 2022, which was lower than originally expected, primarily due to negative working capital more specifically the timing of receivables within the Merchant segment. Total debt as of 12/31 was approximately $20 billion with a weighted average interest rate of 2.6% and leverage was approximately 3.2x.

Turning to Slide 16 for our 2023 guidance. Our philosophy remains conservative in our forward projections as we look to build credibility and deliver on our commitments. With that in mind, for the year, we anticipate consolidated organic revenue growth of negative 1% to positive 1% or $14.2 billion to $14.45 billion of revenue, adjusted EBITDA of $5.9 billion to $6.1 billion or margins of 41.5% to 42.2% and adjusted earnings per share of $5.70 to $6. This outlook assumes further macro deterioration, including a global recession impacting our Merchant segment. To be clear, our guidance assumes macroeconomic trends continue to deteriorate throughout the year.

We expect total company margins to improve over the course of 2023 as we ramp the benefits associated with Future Forward. At the segment level, we expect banking organic revenue growth of 0% to 2%, which includes lapping difficult compares associated with non-recurring revenue cycles, non-recurring revenues as well as the near-term impact of elongated sales cycles. Banking margins will improve throughout the year, with a return to margin expansion in the second half. In Capital Markets, we expect 4% to 6% organic revenue growth coupled with continued margin expansion. This segment continues to benefit over our multi-year shift of sustainable SaaS deployment over license revenue.

In merchant, we’re anticipating organic revenue decline of 2% to 4%. This guide reflects a 300 basis point headwind associated with attrition and compression in the SMB sub-segment, and further macro deterioration impacting growth by an additional 500 basis points. We expect Worldpay to reaccelerate post spin as it leverages its scale with both organic and inorganic investments to once again differentiate itself in the market. Lastly, we’re focused on our cash flow fundamentals and anticipate expanding our free cash flow conversion to over 80% in 2023.

Turning to Slide 17. As Stephanie mentioned, we have two temporary headwinds impacting these segments this year and empirically believe the underlying growth rate is 3% to 5%. We’re undertaking various strategic priorities for these segments, which we believe will improve our fundamentals moving forward. First, we’ve hired a new Chief Revenue Officer to focus on higher quality and sustainable sales growth. Specifically, while we still pursue large transactions where FIS is clearly differentiated, we want to ensure that our cross-selling to existing clients remains a priority. The breadth of solutions we have between banking and capital markets will continue to take market share as we expand our lasting relationships with our valued clients. We also see the benefits of Future Forward ramping through 2023 and 2024 to support an already expanding margin profile. Lastly, as Stephanie mentioned, we believe the spin of our Merchant segment will help simplify our operating model and focus our investments on the most pressing needs of our clients.

With that, I’ll turn to an overview of the merchant growth profile on Slide #18. Accounting for two known headwinds, we believe Merchant normalized growth is 4% to 6%. The first of these headwinds has been a lack of new product investment, driving compression and attrition in our SMB sub-segment, accounting for approximately 3 points of headwind in our merchant guide. We’re confident this is near-term in nature and will be directly addressed with the successful spin of Worldpay as it transitions to a growth-oriented capital structure and investment philosophy.

Second is the macroeconomic impact we anticipate this year. Our guidance assumes further macro deterioration in the UK and a recession in the U.S. This recessionary assumption accounts for approximately 5 points of headwind in our merchant guide. Similar to our strategic priorities in banking and capital markets, we’re taking actions to accelerate off this 4% to 6% normalized growth rate. The merchant segment will benefit from new product investments to enhance its competitive profile and growth profile. Additionally, Future Forward will help support increasing profitability later in 2023 and beyond.

I’ll finish by noting that as revenue accelerates in the segment, it carries a very high contribution margin, which will drive underlying margin expansion beyond the Future Forward benefit. All in, we view the segment as accelerating off the 4% to 6% normalized revenue growth in 2023 with margin expansion incorporated in the model.

Moving to a breakdown of EBITDA expectations on Slide #20. Both our Banking and Capital Markets businesses are expected to increase adjusted EBITDA and expand margins in 2023. In Banking, we would anticipate margin expansion of over 50 basis points and Capital Markets to expand margins by 50 to 100 basis. This significant margin expansion in Banking and Capital Markets reflects both underlying strength in the contribution margins as well as Future Forward. These segments are positioned for durable and profitable growth over the longer term, leveraging a one-to-many operating model with high concentrations of recurring revenue.

Conversely, we anticipate a weaker performance in our Merchant segment, coupled with higher corporate costs. In Merchant, we anticipate a reduction in EBITDA associated with lower revenue and increased expense associated with residual payments. In our Corporate segment, we’re seeing the impact from divested businesses in 2022 and a temporary headwind associated with a tough comparable on incentive compensation.

Looking beyond 2023, we’re confident that we’re moving the company to the appropriate path of margin expansion. There are two key tenants underpinning this confidence. First, we expect to benefit from our Future Forward initiatives to continue to ramp with incremental benefit in 2024. Second, we will continue to benefit from our newly implemented sales and commission structure, which emphasizes higher margin revenue growth. Both of these initiatives will support consistent and ongoing margin expansion at FIS moving forward.

Turning to Slide 21 for an overview of how Future Forward will continue to rightsize our expense base and further support profitability and cash. We expect to generate approximately $150 million of in-year operating expense reduction. These savings will ramp to approximately $600 million on a run rate basis exiting 2024. In addition to these OpEx savings, Future Forward will support our priority to improve our cash flow through a reduction in capital expenditures and one-time program spend. We’re targeting a $200 million reduction in CapEx during 2023, and we intend to reduce CapEx by another $100 million in 2024. We’re also aggressively ramping down spend associated with transformation and integration projects, such as platform consolidation resulting in a benefit to cash.

Taking all of this into account, we’re pleased to increase our expected net cash savings associated with future forward to approximately $1.25 billion exiting 2024. We will continue to provide quarterly updates on achievement of those targets throughout the life of the program. These initiatives are the bedrock for improving the operational performance of FIS and aligned directly with our priorities outlined today.

I’ll conclude with our current capital allocation priorities on Slide 22. In 2022 – in 2023, we’re focused on paying down debt, increasing our dividend and decreasing CapEx. First, we utilize excess free cash flow to reduce debt in support of our investment-grade credit ratings, which is a key pillar to FIS’ long-term capital and operating strategy.

Next, we recently announced an increase to our core quarterly dividend of more than 10%, and we anticipate to exit the year approximating our 35% target payout ratio. Moving forward, we intend to continue increasing our dividend roughly in line with earnings growth. As mentioned throughout my prepared remarks, Stephanie and I are also prioritizing a reduction in capital expenditures this year. We’re putting a heightened focus on ROIC to ensure an appropriate return on investment and are making targeted investments aligned to client needs.

Finally, in conjunction with the spin, we will conduct a comprehensive review of our capital structure to reduce future volatility in our net interest expense. We’re moving with a high sense of urgency to drive these outcomes. While we face challenges, we remain confident that this is the right path forward to improve the company’s performance, free cash flow and earnings.

I’d like to thank everyone for their time this morning. Please note additional guidance, assumptions and next steps on the spin in our appendix. Operator, would you please open the line for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Today’s first question will come from Tien-Tsin Huang with JP Morgan. Your line is open.

Tien-Tsin Huang

Hi, thanks so much. Stephanie, a lot of thought and hard work went into the spin decision. So I wanted to ask on that. And what changed to move away from project Amplify, which I know we’ve talked about as well and the promise of cross-selling, etcetera, versus fluctuating here the spin and simplifying and management focus, that kind of thing? And then I have a follow-up.

Stephanie Ferris

Yes, Tien-Tsin, thank you. So yes, as you might imagine, very excited about what we’ve been able to accomplish in a very short time period. It really came down to capital allocation and our ability to allocate capital, both M&A and organic to what is looking like to be two separate end markets. So the payments market, as you know, needs a lot more M&A associated with it, that the Banking and the Capital Markets piece. So as we came in and we looked at that really need to set those two separately from each other. And so that was the primary driver. I think secondly and thirdly, obviously, operational simplification and management focus is always important as you think about simplifying operating models and breaking things apart. I would say, finally, on the Amplify piece, we’re actually full speed ahead on that in terms of cross-selling across all three of our divisions, and it will become very important. We will establish commercial partnerships between us both Worldpay and FIS to facilitate that cross-sell. So we still view that as a big opportunity. We will just set those up as commercial partnerships with the respective revenue shares to make sure that we don’t lose the dis-synergy and opportunity there.

Tien-Tsin Huang

Right. Okay. And that’s perfect. So I understand the M&A piece. I guess that will happen post spin between now and the actual spin. Are we going to learn a little bit more about the commercial agreement between reminder co-FIS and Worldpay? And is there going to be a cross-selling component built into that? That’s my final question. Thank you.

Stephanie Ferris

Yes, yes, yes. So we are working at high speed. You can see from a high sense of urgency. So we will be – Charles and I will be working out the commercial partnership specifically. And as soon as we have those worked out, we will get them back out to you. You can expect us to give an update on the spin every quarter. But you would expect to see those relationships work out specifically. And so that we have incentives on both sides to continue to cross-sell each other’s products and mitigate the dis-synergy.

Operator

Thank you. [Operator Instructions] Come from the line of Rayna Kumar with UBS. Your line is open.

Rayna Kumar

Good morning, guys. Thanks for taking my question. As you mentioned, your guidance assumes a recession in the U.S. and the UK. I’m just curious how your overall growth would look at economic conditions persist as they are today?

Erik Hoag

So the existing guide does include a recession. There is a couple of underlying drivers to that. First, as you said, we’ve got the UK macro. The second piece is in the U.S., we’re seeing a shift from goods to services predominantly in our enterprise sub-segment. We are seeing some elongation in the sales cycle that we’ve spoken about for the last several quarters in our banking business. And as we – as you saw in the deck, roughly, we’ve incorporated roughly 500 basis points of headwind in our merchant guide associated with macro.

Rayna Kumar

Got it. Thank you.

Operator

Thank you. [Operator Instructions] From the line of Lisa Ellis with MoffettNathanson. Your line is open.

Lisa Ellis

Hi, there. Thanks for taking my question. A lot of good stuff, good detail here, guys. Thank you. I wanted to talk – I know it’s early days. I know we will get more detail, but just any commentary you can give on your expected – how you’re going to handle, I guess, the unwinding of the cost synergies that you saw from the FIS Worldpay acquisition, that merger together? Like how are you thinking about kind of managing through the separation or the re-separation of the businesses? Should we be assuming that a lot of those costs have to come back in? Or are there ways to mitigate that? Thank you.

Stephanie Ferris

Yes. Thanks, Lisa. So we – so Charles and I feel very confident, given this will be the third time we will have spun it out, sold it and spun it back out. So we’re really familiar with the cost structures and the benefits that come with putting it in and taking it out. I think the way to think about it is we did realize a lot of cost synergies bringing it in. I think we know what those are, we would enter into as many commercial relationships as we can to not have as many dis-synergies. We think the dis-synergies are fairly manageable. So we think through the combination of commercial partnerships as well as continuing to lean in to Future Forward. Future Forward will continue for both Worldpay and FIS. So, to the extent that we continue to push that lever forward, we think that as well will offset the dis-synergies. But look, we’re not going to stop at that. They are there, and we had the benefit of them coming in, but we will tightly manage them on both sides as we come out.

Lisa Ellis

Got it. Okay. Okay. And then just as my follow-up, can you just elaborate a little bit on the capital allocation point that you made? You said that ultimately, it really – it came down to that. So what’s – I guess what have you been unable to do as a combined entity on the capital allocation side that would change being separated?

Stephanie Ferris

Yes, great question, Lisa. So from an FIS standpoint, as you know, we’re very committed to our investment-grade rating which underpins our ability to drive growth, we haven’t been able to allocate any capital historically or as we move forward into M&A. And that’s really been a big weakness for us in the payments business. I think if you look at our peers, they have been doing M&A over the last couple of years. Unfortunately, for us, we just haven’t been able to do that historically, allocating towards share repurchase which is fine. But the payments business itself, given that it is a scale platform with global distribution and the end market moved so quickly. We do believe having a different capital allocation for that business will enable M&A that we just cannot give it inside the parent.

Operator

Thank you. [Operator Instructions] And that will come from the line of Dave Koning with Baird. Your line is open.

Dave Koning

Yes. Hey, guys. Thank you. And I guess my first question on merchant, I think in the first quarter, it’s going to be down slightly, but the full year is down a little more. Could you give a little context on when that might bottom? And then kind of how do you see the longer term and even Payrix, I think it’s been pretty stable through the year. I think it was expected to grow a lot. And just how maybe that’s transpiring as well?

Stephanie Ferris

Yes, I might qualitatively take it, Dave. And if Erik thinks we need more fine points on the numbers that will be good. I think broadly, we would say we have seen in the fourth quarter, obviously continued deterioration from a recession standpoint in the UK. And in the U.S., consistent with what Visa Mastercard talked about a shift from goods to services. And so we have baked in our guide throughout the year, that continued shift. I think Erik just talked about the overall economic impact in merchant to be about 500 basis points. On a positive note, we are seeing a positive January, but we wouldn’t expect to flow that through. So from a broad-based recession standpoint, that’s how we’re thinking about the business. I think that we just have that continuing throughout 2023. We do think as those recessionary ties reside or come back and with the allocation of more M&A capital, this business can really get back to a mid-single-digit grower and be back in a growth trajectory.

Dave Koning

Alright. Alright. And then – and I guess my follow-up kind of along Lisa’s question. The corporate expense of merchant, is there any way just for us to think about what percent of revenue maybe we have to add like 3% of revenue or something when we think of kind of our sum of the parts and everything?

Stephanie Ferris

Yes, not yet, Dave. We will be back out to you on that. I think we have to be thoughtful. I’m not sure we could just come right back into what it was before. And so we will be back to you on that.

Operator

Thank you. [Operator Instructions] And that will come from the line of Jason Kupferberg with Bank of America. Your line is open.

Jason Kupferberg

Good morning, guys. I wanted to start on the Banking side since that obviously the biggest part of the RemainCo. You grew 6% organic down in 2022 and you’re expecting, I guess, about 500 bps of deceleration at the midpoint in 2023. Can you just unpack that a bit? I mean, just considering you’ve got 80% recurring revenue there, somewhat surprising. Thank you.

Erik Hoag

Yes. Hey, good morning. Thanks for the question. So a couple of things – hey, good morning. In walking the 22 to 23 number, there is two predominant drivers here. One is the lapping of large deals. So we spent some time in the second quarter, third quarter calls talking about some of the very large deals, total contract value in excess of $50 million. Those deals have elongated, which is driving roughly half of the step down from 22 to 23. And the second is a reduction in non-recurring revenues. Non-recurring revenues predominantly license fees and termination fees, which over the longer term will drive higher recurring revenue and improve the overall health of the banking segment.

Jason Kupferberg

Okay. For my second question, I wanted to go to Merchant for a minute. So if we look at the down 2% to 4% for 2023, can you give us a sense of what you are assuming for enterprise versus e-com versus SMB? Thank you.

Erik Hoag

Yes, sure. So the enterprise sub-segment, which is roughly half the book, down mid single-digits, this is where the UK sits, the SMB sub-segment, down low double-digits. And our e-commerce book continues to perform well, up double-digits.

Operator

Thank you. [Operator Instructions] That will come from the line of Darrin Peller with Wolfe Research. Your line is open.

Darrin Peller

Hi. Thanks guys. If I want to just – if we could just follow-up for a minute on the Banking segment and for – and frankly, the Cap Markets segment as well, Cap Markets showed strong or Banking. Your guidance is, as you talked about, has some items in it, but help us just touch on the balance between your cost-saving initiatives and the investments you need in that business to really sustain the growth you want it to be in term. I mean I know you have some good assets, whether it’s Modern Banking or PaymentsOne or Digital One or others. But anything you can give us on your conviction level in that business returning to that mid-single digit rate of growth despite where the costs are coming out of will not affect the growth profile?

Stephanie Ferris

Yes. Darrin, happy to take that a little bit. So, in terms of making sure that we have the right amount of investment associated with the revenue, I think the business has benefited over the last 3 years to 5 years from a significant amount of capital investment to deliver some of the best-in-class products you see out there, Modern Banking platform, as you mentioned, PaymentsOne, Digital One, etcetera. All that investment has really played out nicely for us in terms of being in market, driving real recurring revenue growth as we move forward. So, we feel very comfortable around reducing the investments associated with that to what we consider more normal run rate. So, a lot of our reductions and expenses are around capital – around one-time. And then on the operating expense side, as you would expect, we are definitely protecting the business to ensure that we can deliver on the recurring revenue growth, so focused on more infrastructure costs or costs in the functional side of things. We believe very strongly in the ability for this business to have underlying margin expansion. As you know, it has high margin of new business coming on. We believe and are committed to the 3% to 5%. We believe it will reaccelerate in 2024, as Erik said, in terms of the two items really impacting it. So, we feel very good about the underlying revenue growth as well as our ability to continue to expand margins. And our Future Forward initiatives, as we laid out really aren’t about kind of cost cutting or cost cutting sake. You can see that we are really focused on faster time to market, faster implementations speed, agility, etcetera, and making the engine go faster versus just a flat out reduction of expenses.

Darrin Peller

Okay. Stephanie thanks. Just a quick follow-up on the merchant side of the business. When we think about the growth profile, you are talking about that getting back to, I guess maybe just to revisit the strategy on the SMB side for a moment. And is that an area that you foresee being able to really show an acceleration and/or is it just basically e-com still getting – what’s the strategy of the segment?

Stephanie Ferris

Of the overall segment? Yes. So, I think – look, the strategy is consistent. I think the challenge for us is because of our lack of M&A, we haven’t really been able to feed it enough product, as the pandemic created some real structural challenges in some of our key segments. So, I would say broadly, we are really focused on continuing to drive more e-commerce into the segment. As you know, we are the largest global acquirer in the world. I think we are the largest e-commerce provider as well. That’s primarily been in the large space. And with the acquisition of Payrix, we now have the ability to move down market and bring not only embedded payments, but also be focused on platforms. So, it’s accessing for us not only large e-commerce clients, but also the small. So, that continues to be our strategic imperative. As you know, we have some historical businesses in our SMB space that are ISO primarily card-present or the pieces of our ISV book that are structurally impaired in terms of consolidation in retail restaurant software. And so those are pieces of our business that we continue to process for those software providers, but now they would become more like very large enterprises. So, I would say strategically, the payment strategy going forward continues to be focused on e-commerce and omnichannel capabilities, using the global platform and the global distribution capabilities to deliver best-in-class products. I think the challenge for us over the last couple of years is our inability to use M&A, to make sure that we get the best products we need to put across the platform as the end market moves.

Operator

Thank you. [Operator Instructions] Next will come from the line of John Davis with Raymond James. Your line is open.

John Davis

Hey. Good morning guys. Stephanie, I just wanted to talk a little bit about the RemainCo and how we should think about the EPS growth algo on a go-forward basis? So, you said 3% to 5% top line going to expand 50 basis points this year. Is that a good way to think about going forward? Could you get more margin expansion? And then on the capital allocation front, I assume buybacks maybe we get high-single digit kind of EPS growth going forward in the RemainCo, any comments there?

Stephanie Ferris

Yes. Thanks John. So, look, we are focused on kind of going back to the future, returning to our roots around becoming a compounder. I think what you should look for is really us to focus on double-digit TSR through, obviously, margin expansion, but also the focus on free cash flow and pursuing a balanced portfolio of both dividend, share repurchase and then M&A to the extent that makes sense for us going forward.

John Davis

Okay. Thanks. And then Erik, it looks like merchant margins are implied down like another 350 basis points, 400 basis points this year. How much of it is from the weaker top line versus kind of investments that you are making in the merchant business? Just any color there would be helpful.

Erik Hoag

Yes. Hey John. A couple of things going on in the margin side. Number one, you are right. We are down on – we have got lower-high margin revenue. So, I think UK, I think crypto, I think Russia-Ukraine to the extent that, that annualizes. We – to your point, we are investing in sales and product. And the third thing I would note is, we are also seeing some higher residuals and compression in the SMB book.

Operator

Thank you. [Operator Instructions] And that will come from the line of David Togut with Evercore ISI. Your line is open.

David Togut

Thank you. Good morning. Could you flesh out a little bit your commentary that demand remains strong in Banking Solutions, but you continue to elongated sales cycles. What are your assumptions in other words for closing some of these deals in the pipeline in the year ahead?

Stephanie Ferris

Yes. No, happy to. Thanks David. So, if you think about where we sit in terms of what financial services we serve, we serve all sizes, but we are also the premier provider to really large financial institutions. And so what we saw in 2022, quite frankly, was some of the large – very large deals that we have historically won. If you think about historically T. Rowe or Franklin Templeton are examples that have driven a point of growth, where we are really one of the only providers that can serve that size of client. As economic conditions in 2022 just became more uncertain, those financial institutions became more cautious, I mean just simply put. So, those transactions continued to be there. They just continue to push out in the pipeline. So, we feel really good about them, but frankly, until those really large financial institutions feel a little bit better about where the economy is going to go, they are going to continue to be cautious in terms of wanting to sign on the dotted line there. We have high visibility. They still hang out there. But that’s also why we don’t have those significantly closing in 2023. We have them in the pipeline, and we continue to work them. But given economic conditions and our prudent guide, we really don’t want to have a big number and have happened to us in 2022, happened to us again in 2023.

David Togut

Understood. And then as a follow-up, what are your plans to roll out additional modules in Modern Banking platform this year? And what’s incorporated in your guide from that?

Stephanie Ferris

Yes. So, Modern Banking platform continues to be a really strong product demand for us. I mean you saw us over the last couple of years, sign up a significant amount of clients. We are at full swing implementation mode. Each one of them is in a different space, and those all continue to go well. I think for us, not – our focus is more around making sure that we can implement those clients and continuing to sell the existing assets and deployment versus significant incremental new modules. But I do know that our deposit-taking module is good, and we continue to work on our lending modules. But I would expect that the current demand and the current products that they will meet each other.

Operator

Thank you. [Operator Instructions] And that will come from the line of Ashwin Shirvaikar with Citi. Your line is open.

Ashwin Shirvaikar

Thank you, Stephanie and Erik.

Erik Hoag

Good morning.

Ashwin Shirvaikar

Good morning. I guess there was a meaningful set of investors that believe maybe a better or different course of action might have been spinning or selling in Cap Markets, your best performing business currently. Should we assume the strategic review is now concluded, and this is the structure or is it still ongoing? And then one question because you did mention multiple times the M&A needed for the merchant business. Could you talk about the early view on things such as the level of debt or leverage that you are putting on the two pieces. Can you – what do you were doing M&A like the in the current structure. So, I just want to get more clarity on what else is needed here?

Stephanie Ferris

Yes, happy to. So I think, first of all, we announced our strategic review 60 days ago. I am really pleased with how – with the sense of urgency to what we have been able to decide thus far. I think with respect to what we have took in for the next couple of quarters, we are really focused, Ashwin, on making sure we execute on this merchant spend as quickly as possible, given the need to get those guys out and refocus on M&A. We are also really focused obviously on delivering Future Forward. All that being said, no, we will not include a strategic review after 60 days. So, we will continue to evaluate opportunities. The thing that really pressed forward in terms of the merchant separation though, was our inability to allocate a capital and for it to grow properly. On the Capital Markets side, we don’t have that same issue with respect to it continuing to grow well and the capital allocation. So, the merger business became a much bigger burning platform for us, but we will always continue to evaluate. In terms of the second piece on the Newco, I am going to speak in broad terms. I think the way we would think about it, and again, this is going to go to Charles and his team as he takes over. But clearly, given the amount of M&A that they probably will want to do and Worldpay historically did, I don’t think they would go after an investment-grade credit rating. It would probably impede them in terms of delivering the value that they want. So, I suspect they will look at something slightly below that. Historically, as you know, we were high yield, and it worked out – worked out quite well for us. But given all that, the Capital Markets are in a bit of a different position – but I don’t think they will be investment grade, but I also don’t want to speak for them. I think in terms of M&A, we have some strategic partners that we are coupled up with today. I think there is – and given the market and where things sit in terms of valuations coming down, I think the timing of the spin and their ability to get market will be quite fortuitous. And that was ultimately why I moved with such a high sense of urgency because as you can see from kind of the results of this segment, there is a different capital allocation structure that it certainly needs.

Ashwin Shirvaikar

Got it. And I guess the other question is for the normalized growth rates that you are assuming for each segment, what is the normalized margin structure that one should think about?

Stephanie Ferris

I think from a banking and capital market standpoint, we would expect to continue to see margin expansion. I think once the Worldpay returns to growth, you would expect to see margin expansion there. As you know, these businesses are highly margin accretive on the right growth trajectory, highly recurring revenue generative. I can’t speak to exactly how much. You can see from Future Forward in terms of how much cost we are driving into the business. And in the Banking, Capital Markets segment, unlike merchant, there is really nothing structurally wrong there. And so we should continue to be able to expand those segment margins like we have historically.

Operator

Thank you. [Operator Instructions] And that will come from the line of Ramsey El-Assal with Barclays. Your line is open.

Ramsey El-Assal

Hi. Thank you for taking my questions. I wanted to follow-up on Ashwin’s question, his first question and just inquire as to whether you would be open to entertaining possible bids on parts of the merchant business? Would it be conceivable between now and the spin to potentially sell some of the higher growth, more attractive parts of that business or whether we should think about that part of the strategic review and in keeping that business intact over the long run is sort of the final step?

Stephanie Ferris

Yes. I think we are focused on the spin of the whole business. I think the fundamentals of a Merchant business are that they are scaled platform with global distribution. We certainly looked at pieces and parts, but I think the best path for this particular business is to spend the whole thing and let the management team on the other side then determine structurally what they want to do from there. For us, again, the catalyst here is really the need for a different capital allocation structure. So, pieces and parts doesn’t really help that because I, as FIS, I can’t feed at the M&A need.

Ramsey El-Assal

Okay. Terrific. Thank you. And one follow-up for me. More generally, Stephanie, can you talk about your thoughts and your confidence levels around balancing the sort of costs and particularly OpEx reduction, while also investing for growth and potentially accelerating growth as we move forward? How do you gain confidence that you can kind of thread that needle by not – where can you find the sort of excess costs to take out that doesn’t impact your ability to kind of grow on a go-forward basis?

Stephanie Ferris

Yes. Ramsey, it’s a great question, and it’s one that I think about every day, all day. So, I think a couple of things. Look, we are focused in 2023 in returning the Banking and Capital Markets business to 3% to 5% revenue growth going forward. We think the investments that we have made in product have been very significant, and we will continue to develop those, albeit at lower capital expenditure levels. We do have a great set of modernized products and I think with the new Chief Revenue Officer and focus around product and profitability and mix, that that revenue growth will be very attainable as we move into 2024. I think on the cost side, you saw a lot of margin contraction in the banking business over the last couple of quarters. I am happy to report that we will deliver expanding margins in both Banking and Capital Markets, that’s through the benefit of our Future Forward program. And like I said, that program, which is really being led by my President and Kelly Beaty, our Corporate Performance Officer is really focused on not just being a cost-cutting program, but being a speed to market, delivering results faster, lots of things like that versus just being a cost program. And I did that purposely because I wanted to make sure that we could balance appropriately revenue growth and margin expansion.

Operator

Thank you. And we do have time for one final question, that will come from the line of Dan Dolev with Mizuho. Your line is open.

Dan Dolev

Hey. Thanks for squeezing me in, Stephanie, I appreciate it and congrats on the decision. I just want to know, maybe just a housekeeping thing, maybe I missed it, but does the Banking and Capital Markets guidance for ‘23 also assume a recession? And then I have a very short follow-up.

Erik Hoag

Hey. Good morning Dan, that’s right. We have – I would say, broadly speaking, as Stephanie talked about a couple of minutes ago, the elongation of sales cycles is the predominant element that we have included in our guide for Banking and Capital Markets.

Dan Dolev

Got it. So, I get it does. And then just a quick follow-up, just maybe I missed it on Slide 20. Can you maybe just maybe unpack your margin guidance by segment? And again, apologies if I missed it. Thank you.

Erik Hoag

Sure. So, the Banking business, we have margins expanding, roughly 50 basis points. We have got Capital Markets expanding 50 basis points to 100 basis points. And we have got margin headwinds in both corporate – Merchant and the Corporate segment associated with the revenue declines that we are experiencing in those segments.

Operator

Thank you. Thank you all for participating in today’s question-and-answer session. I would now like to turn the call back over to Ms. Stephanie Ferris for any closing remarks.

Stephanie Ferris

Thank you for joining everyone on such short notice. I very much appreciate it. As I noted earlier, 2023 will be a year of recommitment for FIS. And with that in mind, we are making great strides and taking bold actions to move the company forward with a focus on creating incremental value for shareholders and clients alike. I am proud of our FIS colleagues across the globe and the great progress we are making in just a few short months towards delivering on our commitments to our stakeholders. I look forward to keeping you updated on our journey moving FIS into the future. Thank you.

Operator

Thank you all for participating. This concludes today’s program. You may now disconnect.