Fidelity National Information Services Inc (FIS) 2016 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the FIS third-quarter 2016 earnings call.

(Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to turn the conference over to Peter Gunnlaugsson. Please go ahead.

Thank you, Lea. Good morning, everyone, and welcome to FIS's third-quarter 2016 earnings conference call. Turning to slide 2, Gary Norcross, President and Chief Executive Officer, will begin with a business summary. Woody Woodall, Chief Financial Officer, will continue with the financial results for the third quarter.

Today's news release and supplemental slide presentation are available on our website at FISglobal.com. 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 on the slide. Today's remarks will also include references to non-GAAP financial measures in order to provide more meaningful comparisons between the periods presented.

Reconciliations between the GAAP and non-GAAP results are provided in the attachments to the press release and in the appendix of the supplemental slide presentation. Turning to slide 4, I will now turn the call over to Gary to discuss the business highlights in the quarter. Gary?

Thank you, Pete. Good morning, and thank you for joining us today. I am pleased to open the call affirming another strong quarter of execution for FIS. We saw expected growth across all operating segments.

Our Q3 results continued the positive momentum we built in the first half of the year, delivering profitable growth and outstanding cash flow. This is the third consecutive strong quarter, which speaks to the fundamental strength of our underlying business and the success of our focused execution.

Now, turning to the remainder of the year, we are pleased that our outlook remains positive. Despite continuing macro economic pressures, our sales teams continue converting opportunities to new wins, and cross-selling and upselling to existing clients.

Market and client demand for our solution continues, with an emphasis on creating operational efficiencies to run and grow their business. These results and trends underscore our confidence in a strong finish to 2016. As a result of our solid performance year-to-date, and remaining outlook, we will be increasing our current guidance for the second time this year, which Woody will outline later in the call.

Turning to Slide 5, as expected in the quarter, adjusted revenue increased 4% organically compared to the prior-year quarter. Our adjusted EBITDA grew more than twice as fast as revenue, at 8%, and adjusted earnings per share rose 11%. We are very pleased with these results, given the difficult comparisons of the prior-year quarter.

As you will recall, last year was a very good quarter for license fees, especially with regards to the former SunGard business. Also, Q3 2015 marked the quarter where we reversed short-term incentives due to the year-to-date results. With less than 90 days until year-end, we remain ahead of schedule with our SunGard integration.

We are very pleased to report that we are on track to exceed our run rate synergy commitments and have line-of-sight to exit the year with $200 million in run rate synergies for 2016. This milestone is a full 12 months ahead of schedule from originally targeted dates.

We are confident that we will also exceed our long-term target and deliver more than $250 million in run rate synergies by year-end 2017, continuing our positive track record of exceeding our synergy commitments. More importantly, our intense focus on the integration is continuing to yield result in new and existing client sales.

On all accounts, we are pleased with our strong performance through the first three quarters of the year. We are on track to exceed our full-year 2016 goals, and are well-positioned to achieve our longer-term growth objectives, which are to grow our base business, unlock enterprise value through strategic investments, expand our solution portfolio within our existing client base, and remain focused on strong financial discipline.

Turn to slide 6 to review segment highlights. Our Integrated Financial Solutions business continues to grow, driving top-line organic revenue growth of more than 4% this quarter. We saw solid growth in our retail banking, wealth, and payment businesses, entering into several strategic long-term agreements with North American community and regional banks, syncing the benefits of our fully integrated solution suite.

In the third quarter, we signed several new competitive take-aways encompassing our core banking, digital, and payment solution offerings. For example, as have you seen in our recent press release, a multi-state community bank with approximately $10 billion in assets selected FIS to provide a complete suite of banking and payment solutions spanning our core processing, digital payments, EFT, card personalization, and fully managed IP outsourcing to help drive its digital and commercial growth through the next-generation technologies.

In another example, a fast-growing community bank in the Pacific-Northwest will be implementing FIS core banking, bill pay, lending, and item processing solutions to support its growth and efficiency goals. Our payments business had another strong quarter, with nearly 6% organic growth, driven by continued growth in debit processing volumes and our card production business, especially from our EMV card deployments.

In addition, our innovation investments are showing early promise with the successful rollout of a new mobile-based fraud prevention solution, driving demand as institutions look to help their customers better combat fraud. Importantly, these new wins characterize the strength of FIS's growth profile, which is long-term, mission-critical software applications deployed in our one-to-many model that creates significant and predictable reoccurring revenues.

Turning next to our Global Financial Solutions business, we delivered another strong quarter, with top-line organic growth of 4.5%. Opportunities in this segment were driven by client demand for our transformational and next-generation institutional and wholesale and banking and payments capabilities.

Demand for our banking payment solutions outside of North America remains strong, driving organic revenue growth of 11% this quarter. While Asia continues to be a high growth market, we were pleased to see steady growth in EMEA, with continued progress in Brazil. In late September, Sainsbury's Bank went live on its new FIS-hosted banking platform, enabling the bank to support its customers with next-generation capabilities and technology.

This delivery milestone moves the FIS and Sainsbury's Bank relationship into an exciting new phase, as we begin the long-term decade-plus operating agreement where we are focused on running the daily operations of the bank. With this successful implementation, we are proud to be the fintech partner of choice for two of the UK's most innovative services providers, Sainsbury's Bank and Atom Bank, both having gone live on FIS solutions in the last few months.

In Asia, we continue to build on our already strong market presence, signing significant multi-year deals with two de novo institutions in India this quarter. In addition, we entered into an agreement to provide new payment capabilities to one of India's largest government-owned banks, showcasing our ability to service clients of all sizes in this fast-growing market.

Within our institutional and wholesale business, Credit Suisse became the second major client to go live on the FIS Derivatives Utility, approximately four months after choosing to join this highly scalable consumption-based solution. We are also pleased to have renewed a significant post-trade agreement with one of the world's largest global institutions.

While the IMW business brings more quarterly volatility due to the timing of license fees, we are extremely pleased with the overall year-to-date growth of 4%, which is more than what was originally modeled during the SunGard due diligence. Finally, while the implications of Brexit are still unknown in these early stages, demand for our consulting services are in line with our expectation, as we work with institutions to help them prepare for future scenarios.

Turning next to slide 7. Before I turn the call over to Woody for the financial review, I would like to summarize today by reemphasizing that we are very pleased with our third-quarter and year-to-date results. Our performance, combined with a strong pipeline and clear line-of-sight for the remainder of the year, gives us confidence in our full-year results.

To meet our goals, we will continue to focus on our integration efforts with high intensity, driving profitable growth through new sales, maintaining a strong balance sheet, and returning cash to shareholders. Woody will now provide additional detail on the financial results for the quarter.

Thanks, Gary. I will begin on slide 9. Adjusted revenue increased 3.8% on an organic basis, and adjusted EBITDA grew to $766 million, a 7.7% increase compared to the prior year on an adjusted combined base, as if SunGard was owned in both periods. Adjusted net earnings from continuing operations was $330 million, and adjusted earnings per share increased 11.1% to $1 per share.

Year-to-date adjusted revenue increased 4.5% on an organic basis, and adjusted EBITDA grew to $2.1 billion, a 9.5% increase compared to the prior-year period on an adjusted combined basis. The EBITDA margin expanded 180 basis points to 30.1%, and adjusted earnings per share grew 17.5% to $2.69 per share. As Gary said, we are pleased with the quarter and year-to-date results.

Moving to slide 10, in the third quarter, IFS revenue grew on an organic basis by 4.1%, while adjusted EBITDA grew 1% on an adjusted combined basis. As Gary mentioned, in the third quarter of 2015, we reversed incentive accrual due to business performance. In 2016, we are performing ahead of plan, and have booked incentive accruals accordingly.

This has created a difficult comparison in the third quarter 2016. Absent this difficult comparable, IFS EBITDA would have grown 4.4%, or expanded margins by approximately 10 basis points. For the first nine months, revenue increased 5.9% on an organic basis, and adjusted EBITDA grew 3.9% compared to the prior-year period on an adjusted combined basis.

Turning to slide 11, banking and wealth grew 3.9% organically for the quarter. This was partially driven by a large risk and compliance project and strengthened our IT and print solutions. Payments continued its strong growth, posting 5.8% this quarter.

EMV card production, debit, and fraud processing, all contributed to this growth. As we've previously discussed, EMV growth comparables become more difficult in the coming quarters. Corporate and digital grew about 1% for the quarter.

Mobile banking continued to grow double-digits. The strong growth in mobile was partially offset by timing of license fees and corporate liquidity and the [grow-over] of a termination fee, creating a difficult comparable to the prior-year period.

As discussed on last quarter's call, we did not expect results for IFS in the second half of the year to replicate the exceptional growth in the first half. We remain confident in IFS producing full-year organic growth, exceeding the midpoint of our long-term guidance, and are pleased with the year-to-date performance of this segment.

Turning to slide 12, in the third quarter, GFS revenue grew 4.5% organically, while adjusted EBITDA grew 13.3%, on a adjusted combined basis for the quarter. This represents 290 basis points of margin expansion to 32.1%. Year-to-date, revenue increased 3.9% organically.

Adjusted EBITDA grew 11.5% compared to the prior-year period on an adjusted combined basis, reflecting 250 basis points of margin expansion, for the first nine months of 2016. As we have discussed in the last few quarters, the addition of SunGard to the GFS segment is driving a long-term structural improvement to the segment.

EBITDA margins for this segment have increased by 630 basis points over the prior-year reported margin of 25.8%. The inclusion of the SunGard assets increases revenue contribution from intellectual property-led sales of mission-critical applications and enhances the profit margin profile of the segment.

The combination of revenue growth in higher-margin solutions and execution on synergies has driven three quarters of meaningful margin expansion. In fact, we now expect to deliver approximately 30% margins in this segment for the full year, ahead of our initial expectations.

Moving to slide 13, our institutional and wholesale business grew approximately 1% for the quarter. As we discussed in the second-quarter commentary, we expected lower growth in institutional and wholesale for the third quarter and expect higher growth in Q4, related to the timing of license signings and including renewals.

As we look forward, we are seeing a longer-term trend developing in this market, where clients are demanding processing solutions versus a traditional license model. This will be a long-term positive for recurring revenue, but we will have some quarter lumpiness as these contract renewals and sales move to processing solutions.

Banking and payments grew 11% organically. Growth was led by a one-time fee related to the successful conversion of Sainsbury's and continued strength in Brazil and Asia-Pac against both retail banking and payment processing. Gary highlighted the continued sales wins and momentum driving long-term growth for the business, creating recurring high-margin revenues.

As we have previously discussed, while our consulting business continues to provide value to our clients, it is becoming a smaller part of the overall business. Results for the quarter were in line with our expectations, and we continue to see softness in discretionary spending.

We do anticipate higher growth in the fourth quarter, due primarily to an easier comparison to the prior-year period. We continue to project a revenue headwind from foreign currency translation of approximately $100 million for the full year with no adverse impact to EPS guidance.

Moving to slide 14, Corporate and Other adjusted revenue in the third quarter was $154 million, with adjusted EBITDA loss of $34 million on an adjusted combined basis. The Corporate and Other segment results include $75 million of corporate expenses for the quarter, compared to $80 million in the prior-year period.

This reduction in corporate expense reflects ongoing cost management efforts and synergies. As you are aware, the businesses in this segment are non-strategic and not in line with our long-term strategy of serving clients in the financial services market.

While our public sector and education business again posted very strong organic growth of 6.2%, retail check processing and global commercial services was and will continue to be a headwind for the segment. Despite these headwinds within the Corporate and Other, these do not impact our consolidated three-year outlook, and our IFS and GFS segments continue to perform well and in line with our expectations.

Moving to slide 15, our business model continues to generate significant cash flow. Free cash flow was $426 million for the quarter, and over $1 billion for the first nine months. In the third quarter, our free cash flow conversion to adjusted net earnings exceeded 100%.

We have reduced our debt by more than $650 million since December 31, and have approximately $10.8 billion of debt outstanding as of September 30. We remain highly focused on cash flow generation to delever the balance sheet, which continues to be a top priority for us.

In August, we successfully completed a debt refinancing, including a two-year extension out to 2021 of our $3 billion credit facility, and a $2.5 billion bond issuance. These activities reduced our near-term exposure to market uncertainty, increased our liquidity, extended the tenor of our debt by about 2.5 years, and locked in attractive rates.

These benefits are substantial, although they do create additional interest expense. We are very pleased with the results of these activities, and the strong support from fixed income investors.

In the third quarter, we returned $84 million to shareholders through dividends and have returned $225 million in dividends year-to-date. We ended the quarter with weighted average shares outstanding of 330 million on a fully diluted basis. In line with our previous guidance, the effective tax rate was 35% for the quarter.

Before I conclude my remarks, I would like to provide some final thoughts as we finish the year. As Gary mentioned, we continue to execute on synergies, and expect to exceed our revised 2016 target of $150 million. We now have line-of-sight to $200 million in run rate synergies exiting 2016.

The teams continue to work diligently on accelerating activities, in addition to identifying new cost take-out opportunities and anticipate exiting 2017 with a cost synergy run rate of more than $250 million. We will continue to provide you updates on our progress.

These higher-than-originally anticipated synergy benefits will be partially offset by two factors from the earnings perspective. As discussed, we recently completed a debt refinance and are incurring additional interest expense. Our original full-year guidance for 2016 outlined in February, we forecasted interest expense of $370 million.

We now expect net interest expense for the full year 2016 to be $12 million higher, primarily impacting Q4. Earlier this year, we also provided guidance on depreciation and amortization cost, excluding purchase accounting, of $570 million. Due to accelerated integration efforts, including but not limited to data center consolidation, implementing enterprise corporate systems, we have increased our short-term capital spend to drive future cost benefits.

In addition, we continue to invest in our products for future growth, highlighted this quarter by the example Gary provided in his remarks. Based on these continued activities and investing to reduce ongoing costs and investing for growth, we now expect depreciation and amortization expense to exceed our original guidance by $10 million to $15 million. We also anticipate our capital expenditures to grow at approximately 6.5% of revenue versus our previous guidance of 6% of revenue for 2016.

In May of this year, we provided you with a three-year outlook on revenue growth and profitability, and remain comfortable with those views. While I know you want me to discuss 2017 in more detail, we will limit our commentary regarding 2017 at this time, and as usual, will provide you full guidance in February.

Given our performance to date, we are tightening our full-year organic revenue growth to the midpoint of our previous guidance range, or approximately 4.5% for the year. We also expect our full-year adjusted EPS to be $3.80 to $3.85 per share, which increases the low end of our previous range of $3.75 to $3.85 per share.

As you will recall, in the first quarter, we raised our synergy targets for the year. In the second quarter, we raised our revenue and EPS guidance. Today, we are again increasing our synergy targets and tightening our EPS expectations for the year.

These increases speak to the fundamental strength of our underlying business, and the focused execution of our teams. We remain very pleased with our results for the first nine months of 2016, despite a continued difficult macro environment.

Our business model generates consistent earnings per share growth, creates strong cash flow, and allows us to return cash to shareholders. We believe the strength of our business model and our Company will continue to drive long-term value for our shareholders. That concludes our prepared remarks. Operator, you may now open the line for questions.

(Operator Instructions)

Our first question is from the line of Darrin Peller with Barclays. Please go ahead.

Thanks, guys. Nice job on the margin front in the quarter.

Thanks, Darrin.

I just want to start off -- if you could just start off by highlighting perhaps the run rate of what we should be seeing into the fourth quarter, which is implied by your guidance. I know you guys had some items in the quarter, like a licensing timing in SunGard, and some of the payment revenues, and maybe you could just distill exactly the one-time things or the benefits and the headwinds and the tailwinds in the quarter that will allow to you reaccelerate back to what it looks like is around 4.5% growth in Q4.

A couple of things. We think IFS will be above the midpoint of our guidance, so above 4.5%. If you look at, individually within the quarter, we had some term fees in the corporate digital area. Instead of 1%, the growth in corporate digital would have been about 4%, ex the term fees.

We are pleased with 4% growth in banking and wealth, and payments will have a little bit more of a difficult comparable in the fourth quarter around EMV as we have been outlining for the last couple of quarters. But we certainly like the growth year-to-date and certainly feel like we are going to be above midpoint, particularly being November 1, with a couple of months to go, Darrin.

All right. That's--

Just to add to that, Darrin, if you look at the license fee comment, typically Q4 is a very large quarter for license fees, historically. As we get more comfortable with the institutional wholesale business, former SunGard, you are going to see more of this lumpiness as license fees flow in various quarters, but we will see a nice quarter in license fees in Q4 for that business, as well.

All right. But overall, it sounds like the sustainability that the 4.5% growth implied in the guidance is pretty real in terms of run rate going forward?

Yes, we feel very good about it.

Absolutely.

Okay. Then I just had a quick follow-up on the margin change. Obviously a lot of it was synergies. Was there anything organic -- in other words, can you give us a little more color as to what surprised to you the upside? What are the actual levers you were able to pull faster to get the GFS margin to reach that level a little more quickly?

Darrin, if you look at what is going on in the synergies, obviously when we originally entered the year, we had thought we would get two full $200 million in run rate synergies out in two years, $100 million by then, this year, and $100 million by next year. What we are seeing, and frankly seeing some of that in the capital needs, we are able to accelerate a lot of our projects that exist in our play-book.

We talk about our integration play-book all the time. And we are just able to accelerate those programs and get to them on a much faster basis. Frankly, the cultural elements of the two companies came together much cleaner than what we have seen in other large acquisitions we have done, the alignment of leadership teams and the focus.

So it has allowed us to accelerate a lot of the programs that are in our existing play-book. It has actually driven our capital a little hotter than what we would typically see, but it all for a good outcome. And so that's why we are very confident of hitting the run rate of $200 million this year, and as Woody said, more than $250 million next year.

But we are not done. We are very focused on continuing to execute the integration, continuing to look for opportunities to drive out synergies. But it has really just been the acceleration of our integration play-book.

Darrin, the other component around that would be the composition of the GFS segment. The growth in institutional and wholesale at 4% for the year, and the growth in banking and payments at 5% for the year, are becoming a larger and larger component of the business, which come with higher margins. That is helping from an organic or ongoing basis, as well, in that segment.

All right. Makes sense, guys. Thanks again.

Thank you.

Next we go to the line David Togut with Evercore ISI. Please go ahead.

Thank you. Good morning.

Good morning, David.

Could you comment on the demand outlook in the post-trade derivatives processing business? You highlighted a second client who went live in the quarter and it seems like the CFTC is cracking down on swap reporting errors by large banks. Are you seeing any increased tendency to outsource in that business?

David, it is a great question. We are very excited about the opportunities when we look at our post-trade processing unit. The team has done an excellent job of not only signing customers up, but also onboarding them.

We've got a very full pipeline with various institutions looking for ways to lower their total cost of ownership, leverage our best practice through our utility-like deployment. So we will continue to see this business be a tailwind for us into the future.

And then on the large bank core processing market, what does the demand outlook appear to be? Any pick-up given the pressure on net interest margin and regulatory and compliance spending?

Well, as you can imagine -- it is a great question -- when you are dealing with these large global institutions, these sales engagements tend to be longer in nature. We highlighted, obviously, the significant implementation of Sainsbury's, which was a very large deal. We do have a number of other key opportunities that are in the pipeline today that the teams are working very focused on.

As you mentioned, given the regulatory compliance arena, given the need to take out cost and lower the total cost of ownership, we do continue to see more opportunities of larger institutions trying to figure out ways to leverage our capabilities to address those two topics. So we see a really good opportunity for us in the future.

The team continues to execute well. But as I have said, these sales engagements take time and they don't move as fast as what we have seen in traditional community and regional banks. But some good opportunities out there for us.

Understood. Just quick final question on EMV card production, what percentage of your customer base do you estimate has completed EMV card production, and could this be a tailwind through 2017?

We talked about 20% to 30% on the second-quarter call, David. I would tell you we are probably a little more than 30% at this point. It is more normal and ordinary course into 2017. We will see the volumes continue to -- at higher levels than earlier in 2015 and 2016, but the volumes will be more in line with normal ordinary course versus a tailwind.

Yes, David, we talked about this on some of the earlier calls. What was interesting about our client base, and maybe some of it was due to some of our larger clients, we had several of our customers reissue 100% of their card base, just wanted to immediately go EMV across the entire card base.

To Woody's point, we are now more in that maintenance rollout phase, where we've got our clients as they are normally coming and their mag stripes are coming up for maintenance replacement tenors, than were replacement. But we still had a very good strong quarter of growth in EMV and that is going to be continue to be an area where we will produce a lot of EMV cards going forward.

Understood. Thank you very much.

Thank you.

Next, we have a question from the line of Brett Huff with Stephens. Please go ahead.

Good morning, guys. Congrats on a nice quarter.

Thanks, Brett.

Can you talk a little bit about consulting? I know that has been a point of focus, obviously last year, and we are just trying to make sure we understand it this year. It looks like the consulting business slowed a little bit. We went from 1.8%, 1.3%, to 90 bps this year, or this quarter.

Can you walk us through what is going there? We thought that 3Q might be a little better only because the comps get easier, and Woody, you mentioned the comps get even easier in 4Q. Give us a sense, and maybe as part of that, talk a little bit about Brexit and if you are seeing any change there?

I will try to give you some of the math and maybe Gary can touch on the broader demand question. If you look at the math, we are about 1% for the quarter. I will tell that was about in line with our expectations. If you go back to the previous commentary, it was easier comps in the second half of the year.

That is still consistent. We would tell you we still look at mid-single-digit growth for the full year and probably sequentially around flat for the fourth quarter, which obviously would drive a significant increase into the fourth quarter, in terms of quarter-over-quarter growth, Brett. So still mid-single-digit for full year.

We've got about a one-to-one type book-to-bill ratio so feel good a bit about our line-of-sight into the fourth quarter. As we have talked about before, we got very good line-of-sight, about three months out and then less visibility as you look further on the calendar. But we feel good about the guide, we feel good about mid-single-digits, and feel good about what we previously described to you guys.

Woody hit it all, Brett. Honestly, our consulting groups are performing exactly where we thought it would. As Woody said, Q4 is a much easier comp. We saw a significant deceleration last year. Given our book-to-bill, and where it is right now, we are very confident going into the quarter.

Frankly, as we have discussed, we have focused now, we have moved Capco back more towards truly transformative consulting engagements. We are seeing the results of that in our margin. Our margins are coming up in that consulting business, which is good.

Lance and his team are doing an outstanding job running that business for us. As we have also talked about, we really are looking for Capco to augment our engagements where we have product involved, in large scale engagements, so that is an important role for us. So intentionally by design, we are not going to be running Capco on the top line as hot as we have in the past.

You can do that, but obviously, it comes with a margin sacrifice. So we are just very focused on the right type of engagements, and having Capco perform the purpose that it was designed when we did the acquisition, but we're pleased where the business is today. We've got a very strong team running that business today and some really good engagements going on.

Okay. And then just the Brexit, could you guys hit on the Brexit thoughts?

We are still early on Brexit. Obviously, Article 50 could be filed into Q1 next year. They've got up to two years. There is still a lot of uncertainty of what this is going to mean. Typically, as we've said in the past, regulatory change has typically been a tailwind for FIS, of significance, but it is still too early to know what the impact is going to be.

But as we start watching for it, our consulting business will be the early indicator, so we will continue to monitor that closely. Given the long-term nature and reoccurring nature, mission-critical nature of our software products, you will see less impact short-term in that area. So we will continue to monitor it very closely, but we still have got some time before we will know the answer to that question.

Okay. Thanks for the time.

Thank you.

And next we go to a question from the line of Dave Koning with Baird. Please go ahead.

Hey, guys, nice job.

Thanks, Dave.

And I just had a couple of numbers questions. The first one is in the banking and payments part of GFS, you talked about the Sainsbury's, the one-time fee for converting them. Is that the difference really between -- you had 11% growth in banking and payments, and normally, you grow mid-single-digits -- is that maybe 6% difference or so the amount of that conversion fee in rough terms?

No. If you look at banking and payments at 11%, if you exclude the Sainsbury's one-time fee, we grew 8%. So solid growth in Asia-Pacific, as we have talked about with some of the wins in the India market and then continued revenue growth in Brazil, despite the macro economics. So I would say we had a very good quarter in terms of banking and payments within the GFS segment, even excluding the Sainsbury's one-time fee.

Got you. That's great. That's great. And the second one is, you talked about the synergies exiting this year, over $200 million and exiting next year over $250 million. What is the way, though, to think about the in-year synergies this year and next year? Is it something like $120 million this year and $220 million next year? I'm just trying to think about how much incremental we get next year for the in-year synergies.

The in-year, next year, I would say probably in that zone, Dave. More of our synergies in 2017 are probably back half than front half, as we've got some particular conversion dates and cut-over dates, but that is reasonable in how to think about it.

Okay. Great. Well, nice job in a tough environment.

Thanks so much, Dave.

And next we go to the line of Jim Schneider with Goldman Sachs. Please go ahead.

Good morning. Thanks for taking my question. Maybe Woody, or Gary, if you could maybe start off on the discretionary bank spending environment. You mentioned it is challenging. It is clear from all of the data points that things are difficult out there.

But can you maybe give us a sense of what you're seeing out there? Any differences between the larger banks and the medium and smaller-sized banks at this point, in terms of spending intentions? Can you maybe talk specifically about the SunGard business and the trading license revenues and whether you have confidence that will recover in Q4?

Yes, Jim, why don't I start with some of the macro economic issues and we will let Woody chime in, as well. If you look across the entire banking industry, we are seeing very consistent regulatory demand and changes with increases that are driving in the whole area of risk and compliance. We will continue to see those businesses be a tailwind within FIS.

We continue to see the need for our clients to drive more costs out of structures. As Woody highlighted, we are seeing a trend that our license fees are consistently going to be pressured because more and more of our customers don't want to license the software. They want to outsource it to process in our environments to help lower their overall costs, which is a very good outcome.

When you get to discretionary spending, specifically, because of those two fundamental demands, financial institutions are looking for ways, especially in the area when they've got something that is truly discretionary in nature, of lowering those dollars, to free up those dollars, to invest in something that is non-discretionary.

Such as risk, such as compliance, such as modernizing their digital platforms, et cetera. We are seeing that money get moved around in the ecosystem just based on those headwinds. Woody, anything you want to add?

Yes, with regard to the growth, we had a large license renewal in 2015 in the third quarter. That didn't recur in the third quarter of 2016, but we absolutely anticipate growth in the institutional and wholesale to be higher in the fourth quarter, as we've talked about in the commentary from last quarter, and still believe that we are in that 4% to 5% zone.

That's helpful. Thanks. Then maybe as we look into the future, clearly, there has been a lot of discussion about real-time inter-bank payments with the launch of Zelle recently. Can you maybe talk about how you are planning to participate in that and whether that could actually be a revenue generator for you next year?

Yes, Jim. It is a great question. We will participate in Zelle. We will certainly be exposing a lot of our clients to that opportunity. We talked a lot about real-time payments on this call in the past. We have what I would consider a multi-tenant approach. We are not sure that one size is going to fit all for all of our clients, but certainly Zelle will play a part of our strategy going forward.

If you think about it, Jim, though, we don't anticipate Zelle to be a significant driver of revenue growth for us in 2017.

Not in 2017.

But if it becomes a significant revenue driver, we would call it out. We don't anticipate that to be a significant driver in 2017.

Great. Thank you very much.

And next we have a question from the line of Bryan Keane with Deutsche Bank. Please go ahead.

Hi, guys. Just want to ask about the license fees. Is there a way to quantify that, just to see the impact of what it was year-over-year?

Yes. I would tell you license fees were down about $10 million year-over-year, in terms of the timing of renewals. We did about $80 million of license fees in Q3 of 2016, and about $90 million on an adjusted combined basis in 2015.

Okay. That is helpful. And then the EMV card production, you guys are saying it is going to soften a little bit, obviously with the big spike taking place, or the bigger spike taking place already. Just trying to quantify that impact. Does it actually decrease sequentially or how do I think about that impact for the EMV card production?

To be clear, it just makes growth more difficult. The volumes of EMV issuance themselves continue to grow, but the year-over-year impact in terms of the growth percentage becomes more difficult in terms of comparables.

Exactly.

We issued about 12 million cards this quarter from an EMV perspective, and would anticipate that level going forward.

Okay. Then I know we will get more details going into next year, but just thinking about the analyst day and the three-year outlook, I think it was a 2016 to 2018 outlook that you guys laid out. I know there are some moving pieces with the macro environment, but just want to see if there is any high-level changes to that outlook that you guys laid out at the investor day?

None whatsoever. Feel very good about how IFS is producing. It will be above midpoint of that guide for the full year. GFS will be in that midpoint of the range for the full year, as our anticipation, with probably higher margin expansion than we originally anticipated. This being partially offset by lower growth in our Corporate and Other that I highlighted will continue to be a headwind for us.

Okay. Super. Thanks for answering my questions.

And next we go to the line of Glenn Greene with Oppenheimer. Please go ahead.

Thank you, good morning.

Good morning, Glenn.

First question. You may have touched on it, Woody, but adjusting for the moving parts and the license fees in the institutional wholesale, it sounds like SunGard is still growing in that 4% or 5% and you're comfortable with that. More importantly, is, that the expectation we should be thinking about beyond 2016 still or anything that has changed there?

To answer your first question, if you normalize timing, I&W for the quarter was about 4%. It about 4% for the full year. We underwrote the deal at probably 3.5%, so it is performing better than we underwrote the deal, as Gary mentioned. I feel good about that level of growth.

Okay. Then on the margin side, and I'm not sure if the question makes more sense from a GFS margin perspective or overall, but my thinking is, you had higher incentive accruals, lower term fees, you had the $10 million timing on the license fees, yet you still put up -- I'm sure, relative to most people's expectations, above expected margins.

I think you also called out on the second quarter call, not to expect a lot of cost synergies in the third quarter. That it will be fourth-quarter weighted. Maybe you could help us understand how you got such margin expansion?

If there was a non-expected item, it would be greater synergies than we anticipated.

Absolutely.

The teams are very focused on it, as we've talked about throughout the year, and certainly happy with the results on the synergy side right now. Obviously, being able to upgrade that a couple of times this year.

Just to build on that, Woody hit it, Glenn, earlier, on an earlier call, but the structural improvement in GFS, the percentage of our revenue truly tied to a software solution now, whether it is on an outsource or a license basis, with synergies, a lot of those synergies coming to GFS, the incremental margins on those dollars being produced are just higher. And we are seeing that.

As Woody talked about in his prepared remarks, we are now, if you remember, when we started off this year, we were thinking that we could get GFS from a low 21%, 22% margin business, up to that 27%, 28% margin business. Now it looks like we will be exiting the year at 30%.

So you can see where the synergies are falling and then that plays to the contribution going forward as our revenue -- while revenue continues in that market, it is continuing now in software solutions instead of services-based solutions. So that structural transformation is significant for us.

Just one quick one. The Sainsbury's, it sounded like it ramped at the end of the third quarter, putting aside the one-time benefit. Are we fully ramped on Sainsbury's, or could it potentially be a meaningful tailwind going forward?

It is a great outcome to the implementation of Sainsbury's. The team did a phenomenal job getting that bank converted. We've talked a lot about the history of it. We've got another phase of implementation. It will be coming on next year, which the team feels very good about.

But you've got now a decade-long processing agreement that, as Sainsbury's continues to grow and expand the business, we will benefit of that, as our unit times rate continues to accelerate. So we feel great about the long-term relationship and the outcome of this engagement.

Great. Thank you.

And next, we have a question from Tien-tsin Huang from JPMorgan. Please go ahead.

Thanks. Good morning. Just wanted to ask on the license sales. You mentioned the secular shift to processing, which you've said it in the past, but I'm just curious, when we are thinking about NPV, are you still in a positive position there when you get a processing deal in lieu of a license deal? Just trying to understand the trade-off of revenue versus profits over the life of a contract?

Certainly you're making sure you're at an NPV-positive position on it, but customers are looking at more of an outsourcing solution versus some of the license model. I don't think that turns overnight. That is a multi-year transition, but we are certainly starting to see it.

The Derivatives Utility is a perfect example of that, where we have seen the first two customers actually come on and convert. As we continue to put more clients on that platform, you will see additional scale over time, a lot like you saw the transition in the IFS group over the past decade.

That's exactly where I was going to go, Woody. We have seen this transition before. This takes years and years to complete. We will continue to see extremely high renewal rates on our licensing clients. We will continue to see new deals in licensing. This doesn't happen overnight.

But as we continue to see growth in the processing business, it will be a very positive long-term outcome. You will see our overall reoccurring revenue percentages of GFS continue to accelerate. You can look at IFS now in the upper 80%s, but it will take years for this to transition.

Great. Thanks. And then on the debit wins. Are those processing and switching? Are you doing something differently there? It seems like we are seeing some pick-up in growth from the non-Visa/MasterCard players?

A lot of that growth has been in fraud processing, Tien-tsin. We think we have got a really, really good product there and have seen some wins.

Absolutely.

Okay. Last one, on PSD2, I don't think it has been asked, but if it was, just tell me, but the opportunities and risks there. I would think with assets like Clear2Pay and some of the others, you might see more opportunities. Just trying to understand if there could be a measurable impact on the PSD2 in the midterm here, maybe in 2017. Any comments there?

We don't see that is going to make a significant impact. I will tell you, you highlighted Clear2Pay, specifically continues to do well and continues to be a nice growth engine for us, but no real commentary on that.

Okay. Thanks for taking my questions.

All right.

Thanks, Tien-tsin.

And ladies and gentlemen, our last question is from the line of Paul Condra with Credit Suisse. Please go ahead.

Thanks. Good morning, everybody.

Hi, Paul.

I'd just follow-up on some of the commentary around CapEx and near-term investments. I'm curious if you can give some more detail in was that an opportunity that maybe, with the synergies tracking the way they are, you decided to move into, or had that always been part of the plan?

Let me first start at a high level, Paul, and then let's let Woody get into the details. But keep in mind, as we accelerate these synergies, there is capital involved in those. As we select enterprise systems, and we move all of former SunGard to a common payroll system, for example, common human capital system for FIS, these come at a capital cost.

We were always planning on that, but as we accelerate these synergies, you are going to see an accelerated need for capital. So it is all a positive outcome from our perspective. But I also don't want to trivialize, there's a lot of things that we are excited about in the industry.

I highlighted one, but there's some great opportunities to make some investments into our products, to continue to maintain the growth, accelerate the growth in some areas, and generate the profits we are looking for and our shareholders are looking for. So we don't think it is going to be something -- you are never going to see this capital accelerate significantly, but as I said, we will be running right at about 6.5% for the year.

This is not a significant shift forward, but does come at a slight change in depreciation that we just wanted to call out so everybody's models get accurate.

Okay, thanks. Then would the 6.5% also be next year? And then on the interest, it looks like it was [$]112[million] or so in the fourth quarter. Is that the run rate next year or is there some kind of -- are there any one-time interest costs in the fourth quarter just from the refinance?

No, the interest cost is more of a normal run rate. You can look at the refinancing that we did, with the rates on the individual bonds and do the math on that one, but it will certainly flow into 2017. With regard to the capital, we are not given a guide on 2017.

We are right in the middle of the planning process right now. The really thing to stay in mind is we are comfortable with the revenue and profitability guide back in May that we outlined.

Okay. Thank you very much.

We are pleased that you could join us today. Thank you for your questions and continued interest in FIS. The market and our clients continue to ramp very positively to our expanded ability to serve the breadth and depth of their needs. This is evidenced in our results year-to-date.

Our outlook for the remainder of the year remains positive, as the team continues to focus on driving profitable revenue and maximizing shareholder returns. Thank you to our loyal clients who depend on us and trust us to keep their business running, growing, and competing every day.

Thank you also to our FIS leaders and our more than 55,000 employees around the globe for their hard work and commitment as they champion our clients' success every day. It is because of our clients and employees that FIS continues to empower the financial world. Thank you for joining us today.

Ladies and gentlemen, this conference is available for replay after 11:00 AM Eastern time today. You may access the digitized replay by dialing 1-800-475-6701 and enter the access code of 403143. International participants may dial 320-365-3844.

Those numbers again are 1-800-475-6701 and 320-365-3844 with the access code of 403143. The replay is available after 11:00 AM Eastern time today through November 15 at midnight. This does conclude your conference for today. Thank you for your participation. You may now disconnect.