Fidelity National Information Services Inc (FIS) 2017 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the FIS Second Quarter 2017 Earnings Call. (Operator Instructions) Also, as a reminder, today's teleconference is being recorded. And at this time, we'll turn the conference over to your host, Mr. Peter Gunnlaugsson. Please go ahead, sir.

Thank you, Tony. Good morning, everyone, and welcome to FIS' Second Quarter 2017 Earnings Conference Call.

Turning to Slide 2. Gary Norcross, President and Chief Executive Officer, will begin with performance highlights of the company. Woody Woodall, Chief Financial Officer, will continue with the financial results for the second quarter.

This conference call is also being webcast, with today's news release and corresponding presentation all 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. The materials presented today 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. It is now my pleasure to turn the call over to Gary to discuss the business highlights for the quarter. Gary?

Thank you, Pete. Good morning, and thank you for joining us on our second quarter 2017 earnings call.

Let me start today by saying I am pleased with our second quarter results. Revenue was in line with our expectations, and earnings were above our expectations.

Please turn to Slide 5. We concluded the first half of the year with another strong quarter for FIS and our shareholders. And because of our overall strong performance, we are raising our full year earnings per share guidance.

In the quarter, both operating segments performed in line with our revenue expectations and exceeded profit expectations. Our focus on operational execution allowed us to drive significant margin improvements.

This exceptional work has also allowed us to complete several major milestones towards our strategic plan. First, we have been able to overdrive our initial synergy target for SunGard by over 60%, with the identified total run rate now exceeding $325 million. While we will continue to focus on driving operating efficiencies and cost savings, this will be the last call we will update you on our SunGard-related synergy programs.

Second, with the closing of our consulting divestiture on July 31, we have made significant progress towards our portfolio alignment strategy focusing on strategic IP-led businesses.

Maintaining a minority interest in the consulting business enables our clients to continue to benefit from our involvement while we focus our capital investments on IP-led solutions.

And finally, with our recent debt refinancing, we were able to reduce our total interest cost and tap new sources of capital. Our multi-year effort to build a scalable, global footprint with meaningful assets provided FIS the credibility to maneuver the successful alignment of our global capital structure. Woody will provide more details on this in his remarks.

Over the last 18 months, our strategic actions have driven transformational results for FIS. We have successfully executed on a strategic shift to enhance the structure, profitability and predictability of our GFS segment.

The SunGard acquisition, in conjunction with our recent consulting divestiture, on a like-for-like basis has expanded GFS EBITDA margins by over 1,000 basis points and increased its recurring revenue base to almost 75%.

We have also increased our total number of IP-led solutions by 25%, supporting our industry-leading, comprehensive global solution suite strategy.

And over the last 18 months, we have paid down over $2 billion in debt, which has positioned us to announce the new share repurchase authorization of $4 billion.

All these efforts combined are proof of our strategic plan and action. These accomplishments allow us to leverage our exceptional global scale to create long-term value and are freeing up dollars to invest back into the core business.

This provides future cash flow, which can be deployed for inorganic growth or return to shareholders.

These transformational results position us well for the next chapter in our strategy.

With this strategic backdrop, let's turn to Slide 6 to focus on the near-term results. We have exited the first half of the year in a very positive position, capped by the following Q2 results: Organic revenue increased 2%; adjusted EBITDA increased to almost $750 million, a 7% increase over the prior year with significant margin expansion; and adjusted earnings per share increased 13%.

Our year-to-date financial performance, combined with the strength of our business model, progress against our strategic initiatives and clear line of sight into the second half of the year, gives us continued confidence in our increased full year outlook.

Turning to Slide 7 to review segment highlights. Our Integrated Financial Solutions segment drove anticipated top line organic revenue growth for the quarter and strong year-over-year margin expansion.

Importantly, this profitable growth was, again, driven by a broad base of solutions across the segment. Digital solutions continues to be a driver of growth, as evidenced by 2 large regional banks who invested in FIS solutions to bring advanced digital capabilities to their customers.

We also saw another solid quarter for our small business solutions, which signed many new financial institutions and dozen of their downstream customers, while also seeing growth from existing customers in user and transaction volumes.

Our Global Financial Solutions segment also delivered top line growth at expected levels, with another very strong quarter of margin expansion. This growth was driven primarily by our international payments businesses and our derivatives utility.

In addition, we continue to see the benefits of our extended portfolio, enabling us to expand our presence within the existing client base.

For example, we successfully expanded a significant relationship with a financial holding company with more than $12 billion in assets through the addition of a new front-to-back securities processing solution for their retail and institutional business.

Leveraging our existing relationship, we expanded our footprint through a new contract for these additional solutions and extended the term of the existing core contract.

We also expanded our relationship with a leading trust company with more than $26 billion of assets under management. These are 2 great examples where we are now starting to get pull-through of SunGard solutions into the existing FIS client base.

Moving to Slide 8. Our consistent Q2 and year-to-date results and outlook for the remainder of 2017 confirm that executing on our strategy is driving direct value to our clients. We remain focused on executing on our multifaceted investment strategy, capitalizing on our expanded scale and operating leverage and paying down debt. All these measures are aimed at delivering sustained value to our clients, continued long-term earnings growth and consistent shareholder returns.

Woody will now provide additional detail on the financial results for the quarter. Woody?

Thanks, Gary. I'll begin on Slide 10. In the second quarter, revenue increased to $2.3 billion or 2.3% on an organic basis, and adjusted EBITDA grew to $746 million, a 7.2% increase compared to the prior year quarter.

Adjusted EBITDA margin expanded 240 basis points to 31.8%. Adjusted net earnings from continuing operations was $342 million, and adjusted earnings per share increased 13.3% to $1.02 per share compared to $0.90 per share in the prior year quarter.

For the first half of the year, revenue increased 2% on an organic basis, and adjusted EBITDA grew to $1.4 billion, a 7.1% increase compared to the prior year period.

Adjusted EBITDA margin expanded 220 basis points to 31%. Adjusted earnings per share grew 11.2% to $1.88 per share.

Consistent with last quarter, a detailed bridge of revenue growth from GAAP to organic is included in the appendix material.

Moving to Slide 11. In the second quarter, Integrated Financial Solutions organic revenue grew 2.6% to $1.2 billion. Adjusted EBITDA increased to $469 million, an increase of 4.8% compared to the prior year. EBITDA margins improved 90 basis points to 39.7%, driven primarily by favorable revenue mix and continued cost management.

Excluding the consulting divestiture from both periods, which includes a small consulting group within IFS, this segment would have grown 4.3% on a pro forma basis and EBITDA margins expanded 110 basis points to 40% for the second quarter.

For the first half of the year, revenue increased 2.1% on an organic basis and adjusted EBITDA grew to $911 million, a 4.6% increase compared to the prior year period.

Turning to Slide 12. Banking and wealth grew 2.5%, in line with our expectations. Payments grew 1.1% for the quarter, reflecting difficult EMV card production comparables that we have previously discussed. Corporate and digital grew 6.1%, driven primarily by new client signings for our small business solution, coupled with increasing transaction volumes from existing users and consistent demand for our digital solutions.

Turning to Slide 13. In the second quarter, Global Financial Solutions organic revenue grew 3.9% to $1.1 billion. Adjusted EBITDA increased to $331 million, an increase of 15.5% compared to the prior year. EBITDA margins improved 340 basis points to 30.8%.

Excluding the consulting divestiture from both periods, GFS would have grown 3.5% on a pro forma basis, and EBITDA margins would have expanded 420 basis points to 34.3%. These results are consistent with prior commentary on our strategy of growing higher margin, IP-led solutions and ongoing synergy efforts.

For the first half of the year, revenue increased 3.5% organically. Adjusted EBITDA grew to $614 million, a 14.2% increase compared to the prior year period. This represents 290 basis points of margin expansion.

Moving to Slide 14. Our institutional and wholesale business increased 1.4%, driven primarily by our derivatives utility. Growth was partially offset by the timing of implementation work. We remain confident in our second half growth expectations for this business.

Banking and payments grew 6.2%, driven primarily by steady performance in processing volumes in Asia Pacific and Brazil, while consulting grew 6.7%.

Moving to Slide 15. The revenue from our nonstrategic assets in Corporate and Other declined 17.8% on an organic basis, consistent with our previous guidance. Corporate expenses were $75 million, a 4.5% decline from the prior year, driven by a continued focus on cost management initiatives.

Moving to Slide 16. For the quarter, free cash flow was $275 million and $637 million for the first half of the year. For the first 6 months of the year, cash conversion was 102%. We expect cash flow conversion to be between 105% and 115% for the full year. As of June 30, our debt outstanding was $9.7 billion.

In the second quarter, we returned $97 million to shareholders through dividends, and have returned $192 million in dividends year-to-date. We ended the quarter with weighted average shares outstanding of 334 million on a fully diluted basis.

Our non-GAAP effective tax rate decreased to 29.5% for the quarter, resulting in a $0.03 benefit to the second quarter earnings compared to original expectations. The decrease in our effective tax rate is primarily driven by a year-to-date combination of tax benefits related to stock-based compensation and from higher international profits. We now expect our full year rate to be about 30% to 31% versus our original guidance of 32%.

Moving to Slide 17. Since our last call, we executed 2 significant transactions that create long-term benefits to shareholders. On May 23, we announced the sale of a majority stake in our consulting assets, which consisted of Capco and a small consulting group from the IFS segment.

The transaction closed on July 31 and produced $469 million of upfront cash proceeds or $441 million net of taxes and deal-related expenses, and included a retention of a 40% equity interest in the business. The transaction initially values our retained equity interest at about $175 million.

In 2017, these businesses were expected to contribute $630 million of revenue, $75 million of EBITDA and approximately $0.15 to $0.17 of earnings per share for the full year. The majority of the earnings per share contribution, $0.11 to $0.12, was expected to come in the second half of the year. We expect $0.01 to $0.02 of earnings per share contribution from the ongoing minority interest in the business, resulting in net dilution of $0.10 per share in 2017.

On June 26, we successfully priced our inaugural European debt offering of EUR 1 billion and GBP 300 million at a weighted average coupon of approximately 1%.

Simultaneously, we launched a tender offering on $2 billion of outstanding debt with a weighted average coupon of approximately 4%. The tender was funded on July 25 with proceeds from the European bond issuance and borrowings from our revolving credit facility.

On July 31, all of the proceeds from the divestiture of the consulting assets were used to pay the revolving credit facility.

This transaction highlights additional value from our global footprint by utilizing our assets and cash flows in Europe to optimize our capital structure, allowing us to issue debt in favorable market conditions. We're able to designate this new debt as a net investment hedge against the equity in our European operations, eliminating currency risk. This transaction is a continued evolution of our capital structure to align with global operations and gives us access to a broader investor base and new sources of capital.

These refinancing activities will reduce our interest expense by approximately $25 million for the remainder of the year and about $60 million in 2018.

Overall, this transaction will provide $400 million of total interest expense savings over the next 8 years. Finally, our weighted average interest rate declined 60 basis points from approximately 3.9% to 3.3%.

Turning to Slide 18. For 2017, we are reiterating our organic revenue growth rates and revising consolidated and segment revenue dollar ranges due to the divestiture.

Full year consolidated organic revenue growth is expected to be 2% to 3%, resulting in a range of $9.1 billion to $9.2 billion. IFS organic revenue growth is expected to be 3% to 4%, resulting in a range of $4.62 billion to $4.67 billion. And GFS organic revenue growth is expected to be 4% to 5%, resulting in a range of $4.15 billion to $4.2 billion.

Despite our relatively slow start to the year on a top line basis, which we expected, we remain confident in the full year growth rates we provided at the beginning of the year and the underlying strength of the core operating segments.

Turning to Slide 19. Based on the results of these transactions, operating performance and a lower tax rate, we are increasing our full year adjusted EPS guidance. Our increased range includes $0.10 of dilution from divestitures, which is more than offset by a combination of a $0.05 benefit from the impact of the debt refinance and a $0.07 to $0.12 benefit from year-to-date performance, outlook for the remainder of the year and a lower tax rate. The net impact to full year 2017 adjusted earnings per share guidance is an increase to $4.22 to $4.32 per share or 10% to 13% growth compared to the prior year period.

I also wanted to give some insight into our expectations of the quarterly earnings spread for the second half of the year to help with modeling. In line with the timing of these changes noted above, we expect our third quarter earnings results to be between $1.04 and $1.06 per share. Adjusted for the timing of consulting and public sector divestitures and the refinancing activity this summer, normalized EPS growth will be approximately 10% in the third quarter.

Finally, we're announcing the authorization of a $4 billion share repurchase program, which will expire at the end of 2020.

While we remain focused on deleveraging our balance sheet, we're anticipating generating excess cash flow in the fourth quarter and throughout 2018. Our revised 2017 EPS guidance does not anticipate any share repurchase impact.

We are pleased with the execution in the first half of the year, which allows us to increase our full year EPS guidance even with the divestitures. We continue to focus on consistently improving cash flow generation, deleveraging our balance sheet, investing for growth and returning cash to shareholders.

That concludes our prepared remarks. Operator, you may now open the line for questions.

(Operator Instructions) Our first question will come from David Togut with Evercore.

Good to see you raise the SunGard class takeout target. My question is on organic growth, perhaps in the SunGard assets, but more broadly, enterprise solutions selling, which was a key goal of yours when you acquired SunGard. Are you starting to see that enterprise selling, let's say, across the mid-tier and Tier 1 banks with SunGard?

Yes. David, it's a great question. The quick answer is yes. I highlighted a couple of examples in my prepared remarks, but we really are seeing the ability, as we discussed when we originally bought SunGard. SunGard operated in a very independent product-by-product basis with separate sales teams, et cetera. We've consolidated all those sales organizations into a global sales force. We've also consolidated the products that belong together under common leadership, and we're now starting to bring bundles and packaging of solutions to market. And we are starting to see that pull-through, as we discussed when we announced SunGard. We thought the timing would take about 12 to 18 months. And honestly, that's about what we're seeing. You first have to bring the sales forces up to a global basis get everybody trained on the new solutions, obviously do some development work to integrate those better, but highlighted just a couple of examples of that this quarter. And we believe that's going to continue.

Understood. And we've seen this initiative from BofA, Goldman and Morgan Stanley Project Scalpel to form a consortium to try to bring down their trade processing costs. And I'm wondering if you've had any talks with those banks around outsourcing derivatives processing given the strength you've highlighted in that business.

Well, we never talk specifics about our pipeline. But we have been talking to a lot of people. What you're seeing is in all of the large global institutions, you're seeing a lot of people looking for ways to take their various in-house developed products or one-off products, leveraging those to get cost taken out and actually improve service levels and delivery. And so we highlighted our derivatives utility and how well that's been performing. We've got very full pipelines on a lot of these types of initiatives, where we're leveraging more of a utility outsourcing processing approach to some of these systems that more traditionally have been run in-house historically.

Understood. Quick final question on capital allocation. Good to see the $4 billion increase in the share repurchase. On your current capital structure, you're a little under 3x net debt-to-EBITDA on your 2017 EBITDA guidance. So more broadly, how are you thinking about capital allocation here? And do you have an appetite to do another strategic transaction like SunGard?

Yes. I'll start, and Gary will add some color. With regard to the leverage itself, we had talked about being in a 2.6, 2.7 range by the end of 2017, targeting getting back to around 2.5x. That said, based on the refinancing activity we've done, we'll repay all our prepayable or maturing debt by the fourth quarter. So we'll have some excess cash then. We certainly anticipate having some excess cash flows, significant excess cash flow in 2018 that we could apply across a number of different ways, but we wanted to make sure we have some flexibility to do share repurchase. I think we're always looking to add strategic capabilities and expand our market capabilities, but we always do that in a disciplined way, looking at financial, strategic value and relative valuation. Right now, we think on a relative basis, we're a very good buy. So we wanted to make sure we had access to buy some of our shares back.

Yes. I think, David, just to add a little bit to that. That's exactly where I was going to go. If you look at our current valuations against the rest of the market, we feel like we're a very good buy opportunity ourselves. Frankly, once we get our debt paid down to a level, we will continue to look for ways that will bring us a new product or a new service to an existing market we serve or break us into an adjacent market of financial services or, ideally, both. But to Woody's point, it's got to generate a strong return for our shareholders, and it has to make good strategic sense. And so we're just not a company that looks around to do big acquisitions that don't fit our overall strategy. But we'll continue to drive the company in a manner that you've seen for the last several years out of this team.

Our next question in queue will come from Dave Koning with Baird.

Yes. And I guess, first of all, just a couple modeling and understanding questions of the GFS segment. You guided now to $4.15 billion to $4.2 billion of revenue. I'm wondering, for this year now, if that includes 1 month still of Capco in Q3 or if you wiped out Capco for the back half. And then secondly, if your FX guidance in that segment, I think you had a $75 million headwind early in the year, if that's kind of wiped out now because FX has gotten better.

Yes. I'll hit your FX first. As you know, our organic calculation excludes FX and excludes the impact of acquisitions or divestitures. With regard to FX, you're right. We had a very minor impact in the second quarter. And right now, based on FX rates, we're modeling a very insignificant impact for the full year. Neither one of those would impact organic growth in the way we calculate it. With regard to Capco, we are removing Capco from the organic base and the consulting businesses from the organic base. So they would be out of the number. But the 4 to 5, again, is -- removes any divestitures and removes any FX.

Okay. Got you on that. And then, I guess, secondly, just on EBITDA progression, I mean, your margins have gone up so rapidly because you've so quickly taken out costs. And we're at a point now where it seems like you're at a pretty full synergy level. Is there still room for a lot of margin expansion in the overall business? Or are we getting back to kind of that more modest level as we look into the next couple of years?

Well, I think we've guided to what we think we'll consistently see from -- regards margin expansion over the next several years out of the business. The quick answer, Dave, is we still see a lot of opportunity to continue to get more efficient with the overall company. The reality, to your point, we've integrated SunGard, we're about 6 months ahead of where we thought we would be at this point, maybe even a little more. The team's done an excellent job. But at this point in time, once you get these companies so integrated, it's very difficult to tell is this really a synergy related to the acquisition or, at this point, is it just good operating execution focused on getting leverage out of the global enterprise. And so we'll continue to focus on that, as we always have year in and year out. But we're very confident that we'll continue to see good margin expansion out of GFS for the next several years. There's a lot of opportunity with the right-shoring of talent. There's a lot of opportunity in data center consolidation. There's a lot of opportunity in product consolidation, both in IFS and GFS. And so we feel very good about continued margin expansion over the next several years.

Next question in queue will come from Darrin Peller with Barclays.

So just starting off, obviously, compares in the quarter were tougher around EMV and then the people-based contract lapping. I guess, first of all, what do you mean -- if you back those out, any idea what your organic growth would have been in the quarter? And then if you can also provide us on the other items that would drive acceleration in the second half, and whether those are sustainable as a run rate into '18, how to think about that going forward? And then, Gary, just a follow-up on the overall market. Sorry. Just Gary, if you can also comment on the kind of conversations you're having in the market, the sentiment with your clients, what kind of specific areas they're investing in.

Darrin, with regard to your first one, we've done some calcs, and we've tried to give some color in the prepared remarks around what organic growth would look without the consulting business. We haven't pulled out what the impact specifically of the risk-based project and some of the compares are, particularly on the EMV. That's just ordinary business. Difficult compares and we got to grow through it.

Exactly.

But it will certainly help both IFS and, we believe, GFS for full year in terms of organic growth. Probably, more importantly, it helps both their margin profiles. IFS will be up to about a 40% margin with it. And GFS will be in the 34-type percent, which is a significant improvement from a few years ago from a structural improvement. So it will definitely help organic revenue growth. It will help margins, but we haven't specifically carved out all the moving pieces there that you just mentioned.

Yes. But I mean, so compares get easier, for sure, in the second half. Any other variables that would drive some acceleration, which I know is sort of embedded in your guidance, and whether that's sustainable into next year?

Well, we certainly think, once you move compares out, the original guidance that we had, which was around 3% to 6% on IFS and 3% to 8% on GFS, still hold together. You certainly should see some improvement and acceleration in the back half of the year, particularly in the strategic segments. As you know, we were looking at about a 1-point consolidated headwind from Corporate and Other, but feel very good about the strategic segments, about the growth rates we outlined and about where they can go long-term, in those sustained rates we mentioned back in May of '16.

Yes. And keep in mind, Darrin, before I get to your question about the conversations going on in the market, keep in mind, especially in the GFS group, with bringing the former SunGard business into the mix, Q4 is always historically a heavy license quarter, right? So you get a lot of license activity typically in Q4, where our financial institutions are agreeing to move forward with a project, signing that in Q4, so that it can kick off in early Q1, and then deliver in the next year. And so we don't see that trend changing. So by nature, when we look at our planning and as we plan the year, naturally, Q4 does accelerate because of that. Getting back to your question about the conversations going on in the market, really, a lot has not changed from what we've talked about in previous quarters. There is a tremendous amount going on in the market. So people are looking to push as much to an outsourced fashion as they can to lower their overall cost. A lot of focus on digital, but the extension of digital to really next-generation user experiences. So what we used to think of as the digital interaction around mobile banking has now extended very dramatically over that time. We're seeing a tremendous amount of activity around data. We're talking to our customers about how they maximize data and address stuff like how do you take fraud to the next level, utilizing data, how do you take next available product and interact and build relationships through data with customers. So -- and that then leads us all into a lot going on in the payments ecosystem as well. A lot's going on in real-time payments. Once again, all abilities to help streamline processes. So -- and whether we're in the U.S. or outside the U.S., and whether we're in very, very large institutions or even community institutions, those conversations resonate very well. And so we're seeing a lot of activity around those [frames].

All right. Just a quick follow-up on the buyback again, and then I'll turn it back to the queue. But look, I mean, you guys historically were very shareholder-friendly. Obviously, before the SunGard deal, you would keep your leverage ratio at a certain rate and add leverage and keep buying back stock with a considerable amount of free cash flow. Is that the strategy we should expect to resume again with regard to if there's not a real tuck-in deal or a real acquisition, you can assume that most cash flow is going to go towards the dividend and entirely towards buybacks with even the extent of maybe even keeping leverage at 2.5?

Yes. I think you've seen us do exactly that in the past. We feel very comfortable at an aggregate 2.5x leverage. That said, as we grow, right, you could even take on some debt to continue to keep that leverage at that level. But you've seen us default to share buyback versus trying to just reduce debt lower than that. So you've seen us do that a number of years, then we did the SunGard acquisition. We're getting our debt and our balance sheet back to where it needs to be, and you could certainly see us moving back into that from a default position while continuing to look at strategic opportunities.

Our next question in queue, that will come from Brett Huff with Stephens.

Can you talk a little -- the free cash flow came in a little bit lighter than we thought for 2Q and even for the first half. I don't think the conversion maybe was quite as good as what you guided, Woody, I think 105% to 115% for the year. Can you just run us through the thoughts on that, and what kind of changes, if it's working capital or other?

Yes. I think it is just working capital movements. You've seen some timing around cash tax payments with some of the divestiture activity that we've had. Q2 is always our lowest cash flow generation item over the last 4 or 5 years. So what we try to do is not look as much on the quarter-by-quarter cash flow generation, but look at what the total year is going to do. Through the first 6 months, we're at 102%. And I think, again, we're going to be at 105% to 115%. Some of that comes through heavier cash flow at the end of the year with renewals and license maintenance that we've always seen in the past. So I feel good about it, have good visibility into it, Brett. So...

Okay. That's helpful. And then just on the guidance, you guys raised, which is great. Give us a sense of how you feel about that conservatism-wise. I mean, I think many folks have felt that you guys were being very prudent about kind of what your guidance was. And this raise, is it a little bit less conservative? Or how do we feel? What's kind of our stance on how this -- the pro forma EPS guidance plays out?

Yes. I would tell you we feel very good about what we've laid out to the market, continue to take a conservative stance on the guide to make sure we are delivering our expectations, if not exceeding those expectations. So it seems like every time I put a guide together, some of the broader groups seem to get a little higher than I do in terms of picking a midpoint. But that said, I feel very good about where we're at, what we've guided to, and have continued to keep a conservative stance on it.

Yes. Brett, just building on that. I mean, if you look at the back half of the year, I mean, we're obviously just very confident that we'll continue to be able to deliver the results we've delivered for the last 18 months. And so the team's executing very well. The sales pipeline is strong. Obviously, we've got to go still close business for the back half of the year. But as Woody and I always do, we dig through the results very aggressively and meet with the teams. And we're confident in the back half of the year.

And just last, just remind us, you mentioned a couple of things. We've got a 100 basis points headwind in corporate still organic revenue growth this year, if I'm remembering right. And then also the people-based project, I think in IFS, is about 100 basis points. Are those the 2 biggest chunks that we can expect to not -- or that we can lap in the next year as we think about your long-term guidance and hitting that?

Yes. Those are the 2 biggest chunks. We had a conversion fee in Q3 of last year that we called out last year. I want to say it was around $15 million. But that's outlined in our view this year. But those are the big chunks, Brett.

Our next question in queue will come from Jim Schneider with Goldman Sachs.

I was wondering if you can maybe talk specifically about the SunGard and broader institutional wholesale business. Growth there, a little bit less than I think we had modeled, but you called out some of the onetime impacts in the quarter. Can you maybe just talk about the complexion of the discussions you're having with customers around the capital market space right now, and whether you see any kind of discretionary spending for things like software investments freeing up? Or is that still muted until we get into a little bit better interest rate environment? Or is it something else?

Well, Jim, I'll tell you, we're actually very pleased with the whole institutional and wholesale business and how it's performed. The sales team's done very well. Frankly, as we've shared on a number of calls, when you look at that business, organic revenue growth quarter-by-quarter can be more lumpy just due to the timing of license fees. You've also got through revenue recognition opportunities where you can't -- where you sign a license, you can't recognize it because you've got professional services tied to it. And so then you get that license fees over the delivery of that professional services work. But frankly, I&W came right in where we thought it was going to come in for the quarter. We feel very good about the back half of the year in that business, given the pipeline and given the results the sales team's been able to get and, frankly, the operating business and their ability to get the software implemented and launched. So we feel good about the business. Conversations continue to expand in those markets. As we've shared, it's a really kind of unique -- the capital market there is really kind of a unique area for us since we did the SunGard acquisition. And as we have conversations with those customers, there's a real drive to try to get cost out and to get more on a commercially available solution, which plays -- which is a very good thing for FIS going forward. And I think that resonates in our pipeline and the results we've seen.

And then maybe as a follow-up. Can you maybe just comment on the international business broadly? You talked about the growth in APAC and Brazil. Are we back in a position where emerging markets can continue to drive double-digit growth for the foreseeable future? And then if you can maybe just make a comment broadly on business in the U.K.

Well, I would tell you, when I look at the overall international business, we're pleased with the results and how it's performed this year. We've got some very nice clients that we've onboarded, and we're seeing the results of that. Once again, depending on the region, we highlighted payments in Asia Pacific continues to do very well. We see some strengthening in Brazil with our joint venture. Other areas, frankly, Europe continues to be muted for us, right? So the team continues to execute there. But just in general, that's more of a muted market for us in general. So will we see it return to strong double digit growth? We certainly aren't planning for that over the next several years, but we do think it will be a strong contributor to our overall growth in the future.

Next question will come from Tien-tsin Huang with JPMorgan.

Just want to ask on Capco, if the minority agreement in any way, terms-wise, preserves the merits of owning Capco outright. In other words, I know, Gary, you've talked about how it was the tip of the spear and helped you get a lot of relationships. So how does that impact your ability to replenish your pipeline going forward?

Frankly, we're very pleased with how this ended up with 40% ownership. We think it does maintain all the benefits we were getting out of Capco historically, but also, frankly, gives them the necessary independence to really grow that business. I think we've shared before, we intentionally muted the growth of Capco just frankly because we wanted to direct our capital investments to some of the more IP-led, higher-margin businesses. With their independence, they're now going to get the ability to do that. But yet, we're still going to be able to bring them in or they can bring us in from that tip of the spear. We've got a lot of great relationships now with common clients that we've built over the last 5-plus years. That also gets to maintain those relationships. So the last thing we wanted to do was for our clients, where we've brought in consulting expertise, to feel like we've abandoned them in that transaction. So we believe this combination really allows us to get the best of both worlds. There'll be several people in FIS involved in the board of Capco going forward. So all in all, we think it's kind of the best of both worlds for us.

Sounds like a good outcome. And then just as a follow-up, just overall, obviously, the push towards IP is happening. You did Capco. I mean, is there more to do? I know you have some professional services businesses, some more classic sort of tech outsourcing business as well. I know it's small, but is there potentially more to do?

We're always looking. And hopefully, we've showed that. We've always looked at assets that are within FIS that might work somewhere else, be more strategic under a different ownership structure. We really have rightsized the portfolio very significantly. Frankly, there's a couple of solution sets that probably would belong somewhere else. But frankly, as we've discussed in the past, some of those are very hard to sell just given the dynamics of what are going on in those businesses. So we'll continue to look at that, but I would tell you, in general, we would say, overall, the asset pool has been pretty well rightsized over the last 18 to 24 months.

Our next question in queue will come from George Mihalos with Cowen.

Two quick modeling questions, if I can ask. One, Woody, when you guys did the SunGard transaction, one of the key things was bringing down the tax rate. You're obviously making good progress there. Is there more room to go below that 30% to 31% tax rate longer term? Or is that sort of a good way to think about it going forward? And then just lastly, the mechanics of the minority interest with the 60% Capco sale, I think you said from the $0.11 to $0.12, you'll make up about a $0.01 or $0.02 from the 40% share that you still own. Why wouldn't it be higher than that? Why wouldn't it be something closer to $0.04? Just want to make sure I'm understanding that.

I'll answer your second question first with regard to it not being $0.04, only being $0.01 to $0.02. The new owners put a little bit more leverage on there in terms of what we would do. And they'll continue to invest heavier as they try to grow that top line within the consulting business. So you're not going to see the same amount of net income that will ultimately pick up our 40% share. That's the biggest delta between just picking up 40% of what we operated at from a margin profile. The second would be around -- the discussion point around the revenue growth profile and what it looks like. So ultimately, we think it will flow like that.

Okay, great. Just on the tax rate, is there more room for that to go below 30% longer term? Or is this is sort of a good way to be thinking about the business?

Yes. I think the tax rate itself, I think this is probably about where it needs to be, George. We had a bit of a catch-up in Q2, which is around a higher stock-based comp, a higher international profit. I'll caveat that with as we continue to see margin expansion outside of the U.S. in those lower rate jurisdictions, we'll continue to see a lower relative tax rate than maybe some others in the business. But 30% to 31% is a pretty low effective tax rate.

Yes, we've seen -- to build on that, George, I mean, obviously, we've seen the tax rate come down fairly dramatically, as you've pointed out. You'll now start seeing more operating execution. And naturally, as we grow the international business, you'll see some benefit from that.

Our next question in queue will come from Bryan Keane with Deutsche Bank.

Yes. Just looking at the IFS business and the payments business, obviously, it's being watered down because of the EMV comparables. What is a more normalized growth rate you think that business can do? And what are the main drivers of that?

Well, I think if you look -- I mean, Bryan, frankly, as you're very aware, our -- the predominance of our payment business is very issuer-centric. So when you look at the issuer side of payments, since we're not doing much on the acquiring side, frankly, we think we'll be a low to potentially mid-single-digit grower. The team's doing a nice job of rolling out new capabilities across that issuer base. You saw them do a nice job with EMV. We did some nice things with the launch of Apple Pay that actually drove some nice growth. But we're not modeling that business to be a strong single-digit grower. We just don't have the penetration on the acquiring side to do that. A lot of new payment types are coming out in the market, so we're certainly focused in executing against the real-time payments agenda. There's certain new payment types like Zelle that are launching. Frankly, we're always in a wait-and-see mode on those things. We want to capture as much of that opportunity with our clients as we can, but then let the volumes grow. But the nice thing about that business is its predictability and, frankly, the strong margin profile that's thrown off by that business. But the team continues to do a good job. But it's going to be a lower single-digit growth business for us.

Okay, that's helpful. And then, Woody, just on the third quarter guide, the $1.04 to $1.06, I think you talked about there's a term fee that's impacting that -- the earnings. I'm just trying to figure out and go back to the notes to see if there's anything else to think about there in the third quarter in particular with the big pickup in the fourth quarter.

That's really the only thing in the third quarter of last year. What you got to think about is between the consulting sale and the PS&E sale earlier this year, that's about $0.07 that was in last year's that won't be in this year's. That's partially offset by about $0.02 of debt refi. So you've got about a $0.05 delta just through divestitures this year and the timing associated with those divestitures. That's the biggest issue. As we did mention last year, we had about $0.03 in the quarter related to a conversion fee in the GFS group.

Our next question will come from Chris Shutler with William Blair.

A question on GFS margins. If we were to exclude SunGard cost synergies as well as the consulting sale, what's a good way of thinking about the annualized adjusted EBITDA margin expansion opportunity going forward? And what will be the key drivers in that segment?

Yes. On that, if you go back prior to the SunGard acquisition, we were in the low-20s in terms of margin profile there. We had outlined that we anticipated our international business is going to continue to grow and gain scale, and we would expand margins through that over time anyway. You couple that with SunGard and the consulting exit clearly is driving incremental heavier margins. But I would tell you, we've probably got 300 to 400 basis points of underlying margin improvement before you added synergies and before you got the impact from the SunGard sale. As Gary mentioned, that group is up about 1,100 basis points from that timeframe. And that is a blend between synergies, the absence of consulting longer term, and then just ongoing scale in the existing businesses that we had even pre-SunGard.

Yes. So let me just build on that a little bit, Chris, about where the future and what's the opportunity in the future. As we've guided in the past, we think GFS still has more runway from -- with regards to margin expansion, at least at a higher rate than what IFS is. And where those opportunities exist is we're still, on certain businesses, in the early stages of right-shoring the talent and getting the people in the right places. Data center consolidation, this will be GFS as well as IFS, will be big benefit from that as we continue to consolidate. I think we've highlighted on prior calls, we'll be well over 45% of our compute, at least in the U.S., will be in some type of cloud-based deployment by the end of this year. That will continue to grow. So -- and then you've also got product consolidation and modernization. And then you layer on top of that just the execution by our sales team in that market and layering more scale on in the individual markets. All of that gives us a lot of confidence in continued margin expansion for that business at a pretty high rate.

Okay. And I also want to follow up on a topic earlier around free cash flow conversion. I know you're talking 105% to 115% this year. But I think, historically, you've been a little reluctant to guide anything more than 100% free cash flow conversion. So can you just talk more over the medium term? I think some of your peers have been a little more aggressive in free cash flow conversion historically. Are you getting any more aggressive in the way that you think about that? Or how would you want us to think about that?

Well, I think part of it would be around the structural improvement we've talked about.

That's right.

We're going to see some margin improvement because the consulting business has lower incremental margins. With the removal of that, I would anticipate seeing better margin. And ultimately, that drives better cash flow. So we're not updating our guide around that. I feel good about the 105% to 115%, but certainly anticipate EBITDA margins to continue to improve. And if we do what we need to, that should improve cash flows as well.

And Chris, just to build on that. The operating teams have done a very nice job of getting very focused to help lower the DSO as well, right? So we continue to want to make sure that we're collecting our cash as timely as possible. So I don't know that that's a different aggressive stance. I just think, to Woody's point, as you see the transformation that's occurred and the continued execution on our IP-led businesses, you're naturally seeing our DSO come down, you're seeing our free cash flow conversion trend up. And so we feel good about it.

And we do have time for one more question. That will come from Jeff Cantwell with Guggenheim Securities.

Most of my questions have already been answered, but wondering if you maybe can clarify one thing from your updated EPS guidance. I was just wondering if you could isolate the impact, the net positive $0.07 to $0.12 you gave in the slide deck. That's from the change in your tax rate. Back of the napkin, going to have an impact of about $0.04 or $0.05 to get to that 30% to 31% range for the full year. I just wonder if that's consistent with your own thinking.

Yes. It's probably in the $0.05 range. If you saw the second quarter, the true-up was about a $0.03 benefit. So we actually see that slightly lower in the back half. So about $0.05 is a good estimate there.

And I'll turn the conference back over to our presenters for any closing comments.

Thank you for your questions today and for your continued interest in FIS. FIS continues to drive change in the industry through our deep focus in investment and financial services. Our expanded scale, operating leverage and investment focus on IP-led solutions aligns the current client demand and is driving shareholder value. This, combined with our year-to-date performance and clear line of sight into the second half of the year, gives us confidence in achieving our full year results.

I'd like to thank our loyal clients, who depend on and trust us to keep their businesses running and growing every day. I'd also like to thank our leaders and our more than 53,000 employees for their hard work and dedication in serving our clients. It is because of our clients and employees that FIS continues to empower the financial world. Thank you for joining us today.

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