Fidelity National Information Services Inc (FIS) 2017 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the FIS Global Third Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, today's conference is being recorded, and I would now like to turn the conference over to your host, Mr. Pete Gunnlaugsson. Please go ahead, sir.

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

Turning to Slide 2, Gary Norcross, President and Chief Executive Officer, will begin today's call with performance highlights for the quarter. Woody Woodall, Chief Financial Officer, will continue with the financial results for the quarter. This conference call is also being webcast and with today's news release and corresponding presentation available on our website at fisglobal.com.

Please turn 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 with 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 third quarter 2017 earnings call. I'm pleased to report that FIS delivered another solid quarter of results. Earnings were again above our expectations. Top line growth was driven by balanced demand across our solution portfolio. Our emphasis on operational effectiveness and executing our long-term strategy enabled us to deliver another quarter of solid returns to shareholders. Also, our sustained focus on operational execution allowed us to deliver another quarter of very strong ongoing margin improvements. Based on this strong performance and a favorable tax rate benefit in the quarter, we are raising our full year earnings per share guidance for the second time this year. Woody will provide more details later in the call.

Moving to Slide 5. In the quarter, revenue increased to $2.2 billion, and adjusted earnings per share increased 18%, which is above the high end of the updated EPS guidance we communicated last quarter.

Turning to our strategy. We continue to execute on strategic actions that reinforce our near- and long-term plan to drive transformational results for FIS. For example, and as we've previously discussed, we continue to successfully shift the IP-led structure of our GFS segment to enhance its profitability and predictability by driving greater EBITDA and recurring revenue. This structural shift continued to be enhanced with the completion of the Capco divestiture in the quarter. As a result, we exited the third quarter with GFS EBITDA margin expansion of nearly 400 basis points over the prior quarter -- over the prior year quarter.

We also continue to invest in transformational capabilities for our clients by leveraging assets from across our entire portfolio. For example, our new corporate digital payment solution, which we introduced earlier this year, has seen rapidly accelerating demand over the last 3 quarters. This is a proof point of our ability to drive value for our clients by combining assets from former SunGard and FIS in new and innovative ways. Additionally, we have continued to invest in our infrastructure, aggressively executing on our data center consolidation and cloud migration strategy. Today, approximately 40% of all distributed applications processed in our data centers are running on cloud-based technologies. Not only does this positively impact our bottom line, it also allows us to standardize and simplify our operations and provide more nimble delivery and security controls to our clients.

Turning to Slide 6 to review the segment highlights. Our Integrated Financial Solutions segment was driven by both balanced demand across our retail banking and wealth portfolio as well as our ability to cross-sell and up-sell within the segment's loyal client base. For example, 2 large financial institutions selected additional solutions from our wealth portfolio to gain operational efficiencies in their back-office. Additionally, the U.S. arm of a global bank expanded its long-term relationship with us by entering into a first-time IT-outsourcing agreement to improve efficiencies and gain best-in-class security and risk mitigation. Retail payments experienced a difficult quarter, driven primarily by the tough EMV comparables that we have discussed in prior quarters.

We continue to see strong card processing volume growth in our retail payments business, and are pleased by solid adoption volumes for our loyalty redemption program with the introduction of new innovative redemption options.

We are also pleased by early indicators of strong financial institution adoption of our new machine learning fraud solution, which is focused on our payments offerings. Fraud services has been a consistent strong grower for us over the last several quarters.

Our Global Financial Solutions segment delivered solid top line growth and another strong quarter of margin expansion. The growth was underpinned by continued demand for institutional and wholesale products across all geographies, including buy-side and post-trade solutions as well as risk and compliance.

While we see some softness in trading volume due to lack of market volatility, this is being more than offset by new client wins that will bring additional transactions in future quarters. Our solution bundling and digital enablement strategy continues to drive new opportunities across institutional and wholesale and banking and payments. This includes a prominent Middle Eastern investment company who selected an institutional and wholesale bundle to support its buy-side ecosystem, and a North East-based financial institution with more than $150 billion in assets, who chose our banking solutions to stand up a new direct bank focused on gathering out-of-market deposits.

Our growing pipeline, coupled with the strength of our business model, gives us clear line of sight into the fourth quarter. This enables us to confirm we are on track to deliver our full year consolidated revenue plan and will exceed our original EPS expectations, which has been raised twice this year.

Turning to 2018. We are fully engaged in our planning process, [accompanying] all aspects of our operations and solution portfolio. Some of the focus areas include continuing our data center consolidation initiatives to drive additional scale and efficiency; executing on our investment strategies to bring modernized open architecture component-based solution and user experience-driven digital capabilities to market, including the launch of our open API gateway Code Connect; and streamlining our portfolio, further enabling us to focus on our strategic businesses.

Moving to Slide 7. Our year-to-date results and outlook for the remainder of the year confirm that our strategic execution is driving direct value to our clients and shareholders. We remain focused on capitalizing on our scale to drive further operating leverage. 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 9. In the third quarter, revenue increased to $2.2 billion or 1% on an organic basis, and adjusted EBITDA was $760 million. This represents 180 basis points of margin expansion. Adjusted net earnings from continuing operations was $397 million, and adjusted earnings per share increased 18% to $1.18 per share compared to $1 per share in the prior year quarter, driven by a lower tax rate and margin expansion.

For the first 9 months of the year, revenue increased 2% on an organic basis, and adjusted EBITDA grew $2.2 billion, a 4.2% increase compared to the prior year period. Adjusted EBITDA margin expanded 210 basis points to 32.2%. Adjusted earnings per share grew 13.8% to $3.06 per share.

Moving to Slide 10. In the third quarter, Integrated Financial Solutions increased to $1.1 billion or 1.3% on an organic basis. Adjusted EBITDA increased to $458 million, representing 20 basis points of margin expansion to 40.9%.

For the first 9 months, revenue increased 1.8% on an organic basis, and adjusted EBITDA grew 3.4% compared to the prior year period.

Turning to Slide 11. Banking and wealth grew 3.8%, driven by healthy demand across the solution set. As we previously discussed, payments was affected primarily by a difficult EMV card production comparable.

Additionally, we had lower term fees in the current quarter. As we anniversary this difficult comparable, we expect payments to rebound in the fourth quarter due to an increase in forecasted volumes, a strong sales pipeline and an easier compare.

Corporate and digital grew 3.5%, as Gary mentioned, primarily driven by growth in our corporate digital solutions and mobile capabilities, partially offset by slower growth in corporate liquidity.

Turning to Slide 12. In the third quarter, Global Financial Solutions grew to $1 billion or 2.5% on an organic basis. Adjusted EBITDA grew 5% to $359 million, reflecting margin expansion of 390 basis points to 36%. For the first 9 months, revenue increased 3.2% on an organic basis, and adjusted EBITDA grew 10.5% compared to the prior year period.

Moving to Slide 13. As expected, our institutional and wholesale revenue accelerated and grew 6.3%. Growth was driven by continued demand for our risk, compliance and global security solutions and continued processing volume growth on our post-trade derivatives platform. In addition to the third quarter performance, and as we've previously discussed, we expect the institutional and wholesale business to have a strong fourth quarter, which is supported by a robust pipeline.

Banking and payments declined 2%, as growth was offset by the previously discussed Sainsbury milestone in Q3 of 2016. We are pleased with the 4% year-to-date growth from this group and its long-term outlook. Additionally, this will be the last quarter we will report consulting revenue in our consolidated results.

Moving to Slide 14. As expected, the revenue from our nonstrategic assets in Corporate and Other declined 20.6% on an organic basis, primarily driven by a continued secular decline in retail check processing and client attrition in our global commercial services business. We expect these nonstrategic assets to continue to be a headwind to overall consolidated growth. Corporate expenses were $75 million, which is about flat compared to the prior year quarter.

Moving to Slide 15. For the quarter, free cash flow was $402 million and over $1 billion for the first 9 months of the year, resulting in a year-to-date free cash flow conversion of approximately 102%. Historically, the fourth quarter has produced the strongest cash flow generation. We remain confident that our full year cash flow conversion will be 105% to 115%.

During the quarter, we paid down approximately $700 million in debt. And as of September 30, debt outstanding was $9.1 billion, resulting in a leverage ratio below 3x. We remain on track with our deleveraging efforts that began 2 years ago and are approaching our targeted ratio. As a result of these efforts and our underlying free cash flow, we expect to generate excess cash in 2018.

In the third quarter, we returned $97 million to shareholders through dividends and have returned $289 million in dividends year-to-date. We ended the quarter with weighted average shares outstanding of 336 million on a fully diluted basis.

Our non-GAAP effective tax rate decreased to 23.5% for the quarter, resulting in a $0.10 benefit to third quarter earnings per share compared to our original expectations. The decrease in our effective tax rate is driven primarily by higher-than-expected stock option exercises during the year and the impact of our foreign rate differential. We now expect our full year effective tax rate to be approximately 28%. At this time, we do not anticipate our effective tax rate to be this low in 2018.

Before I update you on guidance for the remainder of the year, I would like to provide an update on the new revenue accounting standard which will impact 2018. As most of you are aware, beginning January 1, 2018, calendar year-end companies must adopt ASC 606, the new standard for revenue recognition. We will be implementing the standard by applying the retrospective method of adoption. This option will require us to restate historical information, applying the new rules. This will provide an apples-to-apples comparison for all the periods presented, and we believe provides the most transparent view of the impacts of adopting the standard.

Currently, we expect the following 3 main changes. Certain pass-through fees for services provided by third parties will no longer be included in revenue. Instead, the revenue will be recognized net of these fees. This will have no profit impact. License revenue from early renewals will be deferred until the expiration of the original license term, and the license portion of software rental revenue will be accelerated and recognized upon delivery of the license rather than ratably over the rental period. At this point, we do not anticipate these required changes to have a significant impact to our historical organic revenue, nor adjusted EPS growth rates. In addition, these required changes will not impact cash flow.

In February, when we provide 2018 guidance, we will also provide comparisons, showing the impact of the adoption of 606 on revenue growth, EBITDA margins and EPS growth for the historical periods.

Moving to Slide 16. We are reiterating consolidated organic revenue growth of 2% to 3% and GFS organic revenue growth of 4% to 5%. IFS organic revenue growth for the full year is now expected to be 2.5% to 3%. We are narrowing the range of our expectations for full year EBITDA to $3,040,000,000 to $3,065,000,000. Additionally, due to strong margin expansion, coupled with the lower effective tax rate mentioned earlier, we are increasing our adjusted EPS expectation for the year to $4.38 to $4.43 per share. This represents 15% to 16% growth compared to the prior year period. We are very pleased with our year-to-date EPS results and outlook for the full year despite the dilution from recent divestitures.

Moving to Slide 17. We remain confident in the long-term financial profile of the business. We continue to focus on consistently improving cash flow generation, strengthening 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) And our first question today comes from the line of Dave Koning from Baird.

Yes. I guess, my first question, the Q4 implied guidance is actually very good. And so GFS, it looks like, has to be 6%-plus. IFS looks like it has to be 4%-plus. I guess, a, I think those numbers, the math is right, just to check on that. But secondly, is this a better way kind of longer-term to think about the business now the way Q4 is kind of shaping up kind of post all the comp issues and all that?

Yes. I think a couple of things, Dave. Your implied numbers are right. We're looking at a strong fourth quarter in both IFS and GFS. As we talked about, we're seeing some rebound in payments in terms of card production as well as some deal flow that we're expecting in the fourth quarter. GFS, pretty strong. You saw accelerating growth in institutional and wholesale. We expect that to continue to flow through and accelerate into the fourth quarter, and we don't have the headwind from Sainsbury. That said, are we looking to continue at that level? It's probably a pretty strong growth quarter in terms of 5% IFS and 6% GFS, but we're pleased with the outlook for the fourth quarter.

Yes. Just to build on that, Dave, I mean, your other question though, we've talked about it several times, Q4 is always our biggest quarter. So now that all the noise is starting to separate out with the divestitures, you'll continue to see -- in any IP-led business, you'll see, at least in our industry, that Q4 does spike up. We've got great momentum coming out of sales. Q3 was a very strong quarter across the board for our sales, and the pipeline is also very strong. So that's why we're so comfortable in the Q4 outlook.

Got you. And I guess, the one other question I had, margins look really, really good in GFS. Is there still significant expansion coming? Or are we kind of -- has it been so good, and with all the synergies coming? And are we kind of at the end of those synergies, and it just gets tougher to expand margins from here?

Well, as we've talked about, I mean, we're always looking for ways to be more efficient. The nice thing about our business, now that we've got a lot of our people services businesses out of our revenue, you're starting to see more of the leverage drop to the bottom line as we bring on more robust processing transactions. So while you're not going to see 400 basis points, you should expect to see, in both IFS and GFS, good margin expansion in the coming years as we continue to consolidate data centers, as we continue to rationalize product. Frankly, as we continue to spring on more volume on these leverage deployments, all of that is going to attribute to the bottom line and to margin expansion.

And we do have a question from the line of David Togut with Evercore ISI.

Gary, as you approach year-end, I'm curious what you're seeing from your banking credit union customers in terms of [2,000 and IT] budget planning. Any shift toward more of a growth IP spending mindset just given the deregulatory nature of this administration?

It's a great question, David. We -- honestly, I just highlighted, in Q3, we saw a very nice result across the board out of the sales engine. We've had good sales result this year, but it's been lumpy. Certain segments have performed well one quarter and not the next. But balanced out, we've had good sales throughout the year. This quarter, we had good sales across the board. I think there's a lot of people looking to certainly make investments, especially in digital enablement. A lot of people are starting to push to modernize platforms. Two, as we talked about in the past, would I be predicting a large tailwind from that for 2018? At this time, no, but I'm optimistic on some of the things we're seeing in the sales engines and seeing what we're seeing in the pipeline. But we'll continue to monitor a couple of quarters and then come back to you on it. My conversations at the executive level have been very positive, and I think clients are definitely looking to figure out ways to get more efficient and actually drive more engagement with their clients and revenue. So that's a positive for FIS.

Good to hear. Just a follow-up on the derivatives utility. You had highlighted in the last year Barclay's and Crédit Suisse's big signings. How does the pipeline look there?

It looks good. It continues to perform very, very well. We've got to get -- we've talked about the next customers we sign will probably be Tier 2 in nature. We're working with several. We just got to get one of them across the line. I mean, these are long sales processes, as you would expect, but I'm very confident that the team's going to get the next customers signed soon, and we'll be bringing those on in 2018. But the growth rate of that business has been -- performed very nicely with the 2 large anchor clients.

Got it. Just a quick final question. Woody, on the increase in the guidance for this year, how much of that is driven by a lower tax rate versus a higher-than-expected margin?

Yes. I would tell you, in the quarter, we have a $0.02 beat in my mind on margin profile, with a $0.10 impact from tax. So you would anticipate that flowing through, certainly. We're certainly looking at good margin outlook in the fourth quarter along with that growth. So most of it is tax, but certainly some operating beat underlying there as well.

And we do have a question from the line of Darrin Peller with Barclays.

Let me just start off. If you could -- if you don't mind on the IFS side first, the change in guidance down. I mean, how much of that was surprise around term fee timing? Or -- and what was the impact of lower term fees there? And then maybe just to home in a little more on the changes and what sort of caught you guys, if anything, off guard in the quarter's revenue growth rate or if any of this was maybe just pushed to fourth quarter?

Yes. I'd tell you 2 things. Term fees were lower in the third quarter by about $10 million, a majority of that in the payments business, as you see the Slide 5 there. The second would be card production. Card reissues are a little lower than we anticipated this year, so that EMV headwind is even higher than we thought. So if you combine term fees and card production headwind in the third quarter, it was about a $25 million headwind compared to where we thought we would land. So it's most certainly been a headwind from our original expectation.

Got it, all right. That's helpful on the FIS guidance side. So then -- but beyond that, I mean, when we think about the bigger picture here, I mean, you guys have guidance for -- long term, we talked about IFS being 3% to 6%, GFS being 3% to 8%. I mean, again, there's a lot of tough compares that we're growing over right now. And so fourth quarter reaccelerates. Is there anything that's changed in the model that's around -- that would indicate any difference to those ranges?

The only one I would say is the high end of the GFS growth was potentially going to be driven by consulting growth.

That's right.

That's not there anymore, but I would still tell you that 3% to 6%, as we outlined back in May of '16, is a reasonable guide for the long-term outlook of the company.

And absolutely, Darrin, as you're seeing at a much higher contribution margin, profit margin on the EBIT line due to the divestitures.

All right. And last question for me is just on the -- this capital structure, revisiting that again. I mean, obviously, your free cash, you're reiterating once again that 105% to 115% conversion should be strong. And obviously, you're showing continued strong free cash. I mean, are we still going to be in for very material buybacks, potentially keeping leverage levels at that 2.5% level? I just want to reiterate that's still your view or if anything has changed incrementally around the M&A side.

Yes. I would tell you that we would say this. We're going to pay down all our prepayable debt in 2017, as we originally talked about, then get our leverage back in line with our longer-term targeted leverage. We will anticipate having excess free cash flow in 2018. You saw us get an authorization from the board for a $4 billion buyback in the third quarter. So we've got flexibility to utilize that excess free cash flow to potentially do buybacks. If we saw something that fits strategically, and the value proposition was there, we would look at it from an M&A perspective. Certainly, we would, but we would be defaulting back to some share buyback if we didn't have a higher, better use for that free cash flow.

And we do have a question from the line of Brett Huff with Stephens.

Can you talk a little bit about some of the institutional and wholesale strength you guys are seeing? I knew you've talked about it, and it's been kind of a trend, but how underlying is that? And as we think about doing our models for '18, is that a -- can you give us any sort of qualitative sense of the continuation of that strength?

Yes. Let me start with -- from the sales side, and Woody can step in on the financial side. I mean, we're very pleased with what we're seeing now, the growth rate in I&W. As we talked about, when we acquired former SunGard, we saw the opportunity to accelerate that growth rate by pulling the sales organizations out of the direct business lines and leveraging that sales organization to sell a broader product portfolio, cross-sell and up-sell to existing clients. And that strategy has played out very nicely. The team's executed very well. As you see every quarter, we're just highlighting some examples of where now we've stepped from getting just cross-sell and up-sells to individual products, we're now moving into bundling, where we're bundling those products and accelerating that growth further. We're also starting to see some combinations, where I highlighted they were IFS capabilities and former SunGard capabilities coming together. So that's a long-winded answer to we're very pleased and we do think that the growth rate will continue to be strong for the next several quarters and the future, not only just based on sales success to date, but also pipeline, pipeline quality and where the team's executing today.

That's helpful. And then can you just -- again, follow up a little bit. One of the questions we get a lot is, how are we progressing based on our original expectation of not just cross-sales, but in SunGard? I know you broke down some of those barriers. But also really between the FIS legacy and SunGard, you mentioned that a little bit. How are you tracking against that versus your expectations? And how should we think about that as a success (inaudible) acquisition?

Well, I think as we talked about on prior calls, we're pretty much in the early stage of that process. Frankly, when we originally did the SunGard acquisition, we saw a bigger opportunity of leveraging the ability to cross-sell and up-sell across the existing SunGard franchise clients and this bundling approach to really start deploying solutions. We saw that as the single biggest opportunity. Everything that would come out of leveraging a more holistic FIS relationship was just increase on top of that. But the team is doing an excellent job of really looking across the asset portfolio and coming up with interesting ways to bundle that. So we are starting to see pull-through on FIS to SunGard as well. We're doing something very interesting around a payment product that was launched that came out of the corporate treasury solution that comes in to some of our clearing and payment capabilities. So there's interesting connections here that are really starting to drive value and get our clients' attention. So I think that will be the next wave, Brett, that you'll see us focusing on, but we're very pleased where we are with organic revenue growth regarding the former SunGard assets at this point in time. And it's certainly exceeding where we thought it would be at this point in time.

And we do have a question from the line of Tien-tsin Huang with JPMorgan.

I think, Gary, you mentioned -- you had some comments on cloud. I think you said 40% of workload has been -- is kind of being delivered on cloud. What's the goal there in terms of shifting more?

What -- yes. Oh, sorry. Go ahead.

No, no, no, that's it, and what the impact on revenue is. I was just trying to understand that a little bit better since you talked about it.

Well, keep in mind, when we talk about cloud-based computing, for us, that's -- while that will help improve our solution nimbleness, our security posture, our availability, which will translate into continued sales growth, the main driver for us by moving to cloud-based computing internally is to lower our overall cost structure. And you're certainly seeing it contribute to the bottom line significantly. We talked about in the last investor update, one of the big areas of focus for us is to consolidate the number of data centers we have in North America down to a single-digit number. And the team is doing an excellent job on executing against that. So what our goal would be is to move all of our distributed systems that can run in a cloud. Not all of them can, but the ones that can perform in a cloud, we want to get that moved to cloud-based computing. And it's the vast majority of the applications we process today. So it's going to make a substantial impact to our bottom line and, frankly, has been a contributor already this year or over the last 18 months as the team's executed against that. We're focusing an application at a time in a little more responsible way of moving that. And as those applications convert into our cloud solutions, by nature, they're now being processed out of our strategic centers going forward. So it's worked out real well. We've got several more years to complete all of those consolidations, but it's going to be a meaningful contributor to the bottom line and will certainly help us compete in the open marketplace to drive the top line.

Got it. Okay. Good to know. Just my follow-up, just the obligatory M&A question, just your appetite for deals -- for larger deals given SunGard synergies are what you've been expecting.

Yes. I think we've got a proven playbook on doing large transformational transactions. I'll answer the question the same way I always do. We have to find something that makes sense strategically. It has to bring a new product or a new capability to an existing market, break us into an adjacent market within financial services or both. Culturally, the firms have to be aligned, so it has to make sense to get the combination done. But to Woody's point earlier, we certainly would be open to doing something transformational, but it would have to meet the criteria I just laid out. But if not, we're very comfortable in returning cash to shareholders through share buybacks and other means. So at this point in time, we're focused on getting our debt back in the line. Woody talked about getting all of our prepayable debt paid off by the end of this year, and then we'll just see if anything might make sense.

And we do have a question from the line of Ashwin Shirvaikar with Citibank.

So you've raised the year outlook a couple of times. You're pointing to the upper end of the range here or possibly higher. You also have a 3-year outlook that's going to $4.70 to $5.10. Does that also correspondingly go up? Or are you pointing us towards the upper part of that now? Any -- I'm not asking for specific guidance, but is there a reason why -- given your comments on revenue and demand and margin improvement and Woody's comments on tax planning and such, is there a reason why we shouldn't be looking at the upper part of the range now?

Yes. I think the challenge is, Ashwin, in giving the 3-year outlook is things change. And we've had a number of moving parts, some being very good guys and some being not-so-good guys. Our tax rate's better than we anticipated. Our interest expense is better than we anticipated, but we've divested around $0.35 of EPS since that time horizon. So there's some moving parts back and forth. We're going to give some full color on that when we give 2018 guidance. But beyond that, we're not going to give 2018 guidance today.

Right, right. But I am not asking for guidance, but what I'm saying is most people's numbers already include the impact of the divestitures that you've done. So going forward, as you kind of look at the -- look at sort of exit rates and stuff like that, I mean, if you consider the range as is, the lower part of the range is like a partly 5%, 6% improvement on EPS. That upper part of the range is fine. So that's what I'm asking about.

Yes. Again, we're not going to give '18 guidance today, Ashwin. We haven't changed our outlook in terms of growth rates. I've tried to outline that a couple of times over the course of the year, and then we'll give sort of a full recon from where we were in 2016 to where we go in 2018. But I would anticipate still getting good strong EPS growth in line with what we've outlined before.

Got it. And one quick question on the nature of contracts that you're signing today and the pipeline. Is that -- I mean, we heard from a few sources that, potentially, the size of contract is a little bit bigger. The complexity of contracts is bigger. Is that consistent with what you're seeing as your core client base banks basically seek to do a lot of digital transformation, cyber security, things like that? Are you basically selling bigger, more bundled solutions? And what's the impact of that?

Well, Ashwin, you know the company very well. As traditionally, we've always signed larger contracts just due to -- especially in IFS. The majority of that revenue is on an outsourcing basis. So that comes on at a much larger size and much larger complexity than, say, a traditional product sale. What's interesting is now you're starting to see more visibility into the GFS revenue stream, and you're starting to see that reoccurring revenue line increase, and not only increase, but be tied to more IP-led solutions. And as more and more GFS, which is one of the reasons why we highlighted the large global bank in the prepared script -- as more and more GFS now moves to outsourcing Software-as-a-Service, however you want to define it, you're going to see -- yes, we are going to see much higher revenue contracts associated with that. Frankly, as part of doing business with FIS, you're going to get highly resilient systems and certainly a level of cyber and security that our customers see benefit in. But our continued contracts tend to be more application- and product-focused, leveraging our data centers. And we're going to see that trend continue. Balancing that in GFS, where you start swinging from a licensed model to a processing model, that's something that will take multiple years to really have that pendulum completely swing. But just like we saw it in IFS more than a decade ago, you'll see that occur in the GFS model over time.

And we do have a question from the line of George Mihalos with Cowen.

So you've expressed confidence in that long-term outlook. Again, I think, Woody, you talked about comfortably being in that 3% to 6% range. But just as we think about going into next year, you're jumping off the fourth quarter with 5%-plus rate of growth. Is there anything today, when you look at '18 broadly, that gives you pause for why revenue growth, organic revenue growth in '18 shouldn't accelerate from, call it, the 2.5% that we're looking at for '17?

Yes. I think the only challenge I would say is we still have headwinds in Corporate and Other. The secular declines continue to be headwinds with about 1 point of growth this year. We're working through the planning process right now. We're going through it right now, but we still think the strategic segments will be in line with the growth rates we outlined a few years ago.

Yes. And George, I mean, as you think about, especially like in IFS, that risk-based consulting business we sold had been a headwind year-to-date for us. So we're also getting into a market where the comparables are cleaned up. EMV has been a big headwind for us. Woody talked about some of the card production volumes. Those headwinds will start falling away, frankly, some of the tokenization work that was done in 2016. So we feel good about the growth rates in '18.

Great. Really appreciate that color. And just a quick housekeeping item. As we think about the tax rate going forward sort of in the low 30s, 31-ish, is that sort of a good place to be thinking about it long term?

That's a ballpark, George. I'm hopeful something will happen out of Washington and that rate will go down, but I think that's a reasonable place to be thinking about it.

We're hoping for the same thing.

And we do have a question from the line of Ramsey El-Assal with Jefferies.

This is Damian Wille on for Ramsey. So actually kind of following up on the tax question there. I understand that -- how it impacts your business, but maybe can you speak a little bit about the conversations that you're having with your financial institution clients? Is there sort of an expectation baked into their sort of discretionary spend that there's going to be tax reform? Or is it more of a wait-and-see kind of dynamic?

My conversations, Damian, have been more around a wait-and-see, right? I mean, I think a lot of people -- we're starting to see some regulatory pullback, but other headwinds, people are just waiting and seeing the timing of that. While we're seeing some benefits, the timing has been very -- [of like] regulatory pullback, the timing's been very hard to predict. So I don't see people ramping up anticipated spend in anticipation of, say, tax reform, right? People are focused on running their business. They're focused on how to lower their total cost of ownership, focused on how to retain and attract new clients, and those are the consistent conversations we have. Granted, if we saw some pullback, would that be a help? Yes, that would create some more discretionary spend and certainly an opportunity to get to the longer list of projects that our clients are trying to get to.

Okay, great. That's helpful. And then, I guess, over in Europe too, PSD2, obviously, implementation's kind of coming up here. Can you kind of speak to some of the conversations that you're having over there? Is there maybe a slowdown in decision-making or demand in the weeks and months before we have implementation?

It's interesting, I just was over throughout Europe for an 11-day trip, and I met with clients every day during that period. And obviously, PSD2 was a very big topic in those conversations. I think people are very focused in hitting the date, in hitting the compliance. I will say certain clients are further along in that process than others. Certainly, for us, at FIS, we've got a number of clients in market, and we're certainly doing the things we need to do to meet the requirements. But everybody's focused on it. I do think that when you look at Europe in general, Woody and I talked about it on prior calls, we've been a little disappointed in our sales performance in Europe over the past year or so. But we made some changes with our -- in our sales force. We've made some changes around go-to-market and how we're serving those clients. And I think that's going to reap some very nice results for us. So we expect our growth to perform better in Europe, and there's a lot of opportunity to sell against those changes.

And we do have a question from the line of Andrew Jeffrey with SunTrust.

As I -- and I appreciate all the color on sort of the ins and outs because you've got a lot of moving pieces in your business. As I step back and think about your global growth profile, is it -- versus -- and especially some of the things you're doing from a technology architecture standpoint, should we start to think about FIS on balance as being a little more margin-driven than revenue growth-driven as far as EBITDA expansion from here? Or am I overstating the case?

I think we've always been a combination. Having 3% to 6% type top line growth and ultimately driving 13% to 18% earnings growth, you certainly have got to do a combination of margin expansion with revenue growth as well as some of the other factors in capital structure. I think we'll continue to be a combination company, driving top line growth in those ranges and expanding margins to continue to grow earnings per share double-digit plus.

Okay. So balanced is kind of the way you'd characterize growth and margin, I guess. If I think about the technology re-architecture to the cloud, does that have the potential to accelerate speed to market, accelerate innovation? Again, I guess it's a question of how much of that is margin-facing versus revenue growth-facing?

Yes. No, absolutely it will because, as you can expect, right, as you're porting these applications to our own cloud-based technologies, you're moving to a much more nimble, much more efficient architecture, which it does increase speed to market with new capabilities. And I've been very pleased with how the team's responded to that. Obviously, that's a long journey, right, as you move these technologies to more cloud-based technologies. But it will absolutely increase our nimbleness, and our clients are already starting to see some of the benefit of that.

And our final question today comes from the line of Jeff Cantwell with Guggenheim.

You've been talking about the strength in your GFS margins, which have stepped up pretty quickly. Just hoping you could perhaps talk a little more about the subsegments individually, I&W and banking and payments, in terms of their incremental margins right now. In other words, I'm just trying to understand a little better where the contribution to the margin expansion in GFS is coming from. Is it fair to say that I&W has the higher incremental margin, and banking and payments have slightly lower incremental margins than I&W? If you just frame that for us, that'd be helpful.

Yes. No, your framing is very well done. As you would expect, right, in the I&W, which is also the majority of the former SunGard, obviously, we've had just fantastic success in synergies in combining the 2 companies. So you would expect a lot of that margin contribution and ongoing margins will -- have fallen there. Also, the I&W business is much more license-focused today. So as you would expect, the contribution margin of a license fee is much higher. So -- but with that as a backdrop, we've done -- the team's done an excellent job of raising the margins in B&P and GFS as well. So I don't want to construe as it's all in I&W and nothing in banking and payments. When I look on a go-forward basis, I would say because you're going to see more license fees starting to swing to processing, all right, you're actually going to see a bigger opportunity for margin contribution and expansion in GFS to come out of the B&P side as we continue to execute against some of our strategies there. But it's going to be well balanced. And so in the long term, GFS will certainly continue to accelerate margins faster than IFS. The question always comes up, will we be able to get GFS margins to the IFS level? We don't think so. But just given the scale in certain countries, I mean, when you look at IFS' overall scale in the U.S. on highly leveraged platforms, we don't think that, that will get there, but we'll continue to push it as close to that as we can over time.

Great. Appreciate that. And also, I just want to ask a quick follow-up in terms of what you're seeing in India with regards to demonetization, remonetization and how that's impacting you. Can you just update us on India in terms of what your expectations are right now? So whether that could be more of a contributor or less of a contributor to the top line for next year?

Yes. It's a great question. India continues to be a very strong market for us. As most people in the call know, we turned our focus on India as a market several years ago, and the team's done an excellent job. It started out with a large payment solution that we rolled across more than 10,000 ATMs, but we've now moved that into core banking. We continue to see very nice growth in the core banking business. You now see us starting to roll out omnichannel capabilities in that country and more digital enablement. So India is, for the foreseeable future, going to continue to be a nice growth business. Obviously, some of the stuff going around with demonetization has caused some headwinds on some of our businesses, but it's also driven some benefit in some other areas. So the net of it is, when we look at India holistically, we continue to see it as a strong country for us and a strong growth, organic growth country for us in region. And we think it will continue to be that way.

And for closing remarks, I'll now turn it back to your host.

Thank you for your questions today and for your continued interest in FIS. In closing, 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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