Fidelity National Information Services Inc (FIS) 2017 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the FIS Fourth Quarter 2017 Earnings Call. (Operator Instructions) Also as a reminder, today's teleconference is being recorded.

At this time, we'll turn the conference over to your host, Mr. Pete Gunnlaugsson. Please go ahead, sir.

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

Turning to Slide 2. With me today are Gary Norcross, President and Chief Executive Officer; and Woody Woodall, Chief Financial Officer. Gary will begin today's call with company highlights for the quarter and insights as we enter into 2018. Following Gary's comments, Woody Woodall, Chief Financial Officer, will continue with the financial results for the quarter and full year and will conclude with 2018 guidance. This conference call is also being webcast-ed with today's news release and corresponding presentation available on our website at fisglobal.com.

Moving 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. I refer you to the safe harbor language on the slide.

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.

Moving 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.

Today, I'm very pleased to announce that FIS delivered another strong quarter with full year results exceeding our profitability and earnings expectations, delivering exceptional margin expansion and significant shareholder returns.

Turning to Slide 5. In the year, we delivered total shareholder returns of 26%. This was driven by consolidated margin expansion of 240 basis points, adjusted earnings per share growth of 16%, contributing $1.6 billion in free cash flow, which allowed us to resume share repurchases and return $385 million to shareholders in dividends.

The bottom line is our strategy is working. Our leadership team has executed extremely well throughout 2017 and continues to position the business for accelerated growth and driving increased efficiencies.

Our sales and marketing teams are generating demand and cross-sell opportunities, resulting in strong momentum coming out of Q4. We're consistently generating strong results and are performing well in a dynamically changing industry.

Turning to Slide 6 for a quick review of segment highlights for the quarter. Our Integrated Financial Solutions segment drove top line organic revenue growth of 3% for the year, underpinned by very strong growth of 6% in the fourth quarter, driven by especially high demand for our retail banking, wealth and digital solutions.

Our GFS business recorded top line organic growth of 3% for the quarter and for the full year. Margins across this segment delivered expansion of more than 600 basis points in the quarter compared to prior year period and almost 400 basis points for the full year. This further reflects the material improvement to the operating structure of this segment and a focus on higher-margin solutions sales as evidenced by Wedbush Futures, who became the third organization to join our innovative derivatives utility.

Turning to Slide 7. I want to focus on the results of our strategy and execution and how it is driving transformational results for FIS. Since the SunGard acquisition a little more than 2 years ago, we have continued to successfully execute on the strategic shift to enhance the structure, profitability and predictability of our Global Financial Solutions segment. The SunGard acquisition, in combination with strategic divestitures, has expanded GFS EBITDA margins by over 1,000 basis points and produced a reoccurring revenue base of approximately 70% today. Our focus on leveraging our cloud-based technologies and driving our consistent one-to-many model has driven margins in our IFS segment to some of the highest in the industry, exceeding 40% with reoccurring revenue of approximately 90%, which drives high visibility for the future.

We continue to develop and bring to market new products supporting our industry-leading, comprehensive global solution suite. And over the last 24 months, we have paid down approximately $3 billion in debt. We also exceeded our initial $200 million SunGard cost synergy targets by more than $125 million through superior integration execution.

Finally, all these things together will result in a total company EBITDA margin in 2018 of more than 36% with further room to grow. Supporting this strategy, we divested our public sector and education business, a majority interest in our consulting businesses and announced the divestiture of our China-based Kingstar solution in the fourth quarter. We enter 2018 with a strong set of assets and a positive outlook for the year.

These results are proof of strategic plan that is working. It allows us to leverage our exceptional global scale to create long-term value and free up dollars to invest back into the business. In fact, over the last 2 years, in addition to our integration initiatives, we've also directed significant efforts and dollars in innovation to drive long-term growth. Our investment strategy has been driven with a focus on integration and modernization across our solutions, delivering infrastructure and client services, creating a modern path forward for clients to transform their businesses.

This transformative strategy and unified approach was driven with common design principles and is evolving the way we develop solutions, enable technology and ultimately support our clients. These innovation principles include creating open APIs and component-based solutions that allow us to build capabilities once and leverage many times, driving reusability and speed to market; delivering cloud-ready solutions on both open and proprietary platforms with a secure encryption framework built into every module; and driving rapid and seamless integration across solutions unifying user interfaces and client experiences, deepening end-to-end processing and modernizing client support.

These investments over the last 2 years are allowing us to launch several new offerings throughout 2018. These include core banking and payment solutions offering an open platform built on a modern technology stack with common reusable components and adaptable to a wide variety of financial arrangement and instrument types, geographies and currencies. Benefits include reuse and sharing capabilities across platforms, promoting our one-to-many model and delivering speed, agility and efficiency for clients.

Second, our unified payment solution consolidates our payment platforms, delivering a consistent modern user experience across all payment transaction types. It provides a 360-degree view of a financial institution's cardholder base, making it easier to engage their customers with more compelling services and solutions.

Third, digital one, our fully integrated omnichannel platform providing personalization, mobility and social engagement capabilities. These are offered across a multitude of devices, enabling a variety of customer experience choices such as touch, voice, gesture, auto technology and more.

Fourth, our next-generation post rate solution more than triples processing power and performance over legacy trade technology, bringing significant straight-through processing value to clients.

Finally, Code Connect, our robust online gateway to over 300 and growing FIS-enabled APIs to serve banking, payments and consumer finance. The FIS APIs allow clients easy integration and enable rapid development for modern fintech innovation.

In addition to new client offerings, we continue to invest in our data center consolidation projects and in fully transforming our services infrastructure to our FIS secure cloud environment driving continuous availability, high performance and agility. This environment allows our next-generation cloud foundation applications to take advantage of scale, performance and resiliency that is industry-leading. By the end of 2018, we will have well over 50% of our U.S.-based products in this environment. Our clients will benefit from the automation of service management, capacity on demand and fast provisioning, all delivered in a fully secure FIS environment.

As a final point in our investment strategy recap, I'd like to comment on our capital deployment strategy considering the immediate and positive impacts resulting from the recent Tax Cuts and Jobs Act. We're focused on a multiyear plan and anticipate adding $650 million to $700 million in cash flow over the next 3 years as a result of this legislation, enabling us to positively contribute to the economy focused on the long-term interest of our shareholders, clients and employees, all of which achieve the intended goals of the tax legislation. Based on this legislation, we saw 4 important areas for increased investment, all building on investments we've made over the last several years as I've just discussed.

First, the savings will translate to enhanced compensation and benefits for our most important asset, our employees, through increased funding in our annual wage and bonus pools, paying for high performance and rewarding results.

Additionally, we will be increasing and creating new employee benefits, such as increased tuition reimbursement and a new solution focused on helping our employees pay for their student lending debt that was incurred during their undergraduate or postgraduate studies. All these programs will help attract and retain strong talent.

Second, we will further accelerate our already substantial investment in solution innovation to generate increased growth and provide further long-term and competitive benefits for our clients.

Third, we will also accelerate capital investments in our data center consolidation and secure cloud efforts, driving continued long-term margin expansion and enhanced client service.

Finally, we will also be returning some of this benefit to our shareholders through increased earnings per share and dividends. Woody will provide more color in his prepared remarks.

This multiyear plan leveraging the benefit from the Tax Cuts and Jobs Act will accelerate our progress in all these areas, funding both current and new investments. We are very pleased with this opportunity to further advance the long-term interest of our employees, clients and shareholders.

Before I turn the call over to Woody for the financial review, I'd like to acknowledge several important achievements. 2018 marks our 50th anniversary year, a significant achievement for which we are all very proud. Also, FIS was recently recognized as one of Fortune's most admired companies, a recognition that complements our market leadership. I am very appreciative and proud of our employees who achieved this award by delivering to our clients across the globe.

In summary, I'd like to reaffirm that we are very pleased with our full year 2017 results, which highlight our ability to drive revenue growth and realize exceptional gains and profitability. We expect the positive momentum we have created to continue into 2018.

To meet our 2018 goals, we will continue to execute our differentiating capabilities, capitalize on our global scale and continue to invest for long-term growth. Put simply, we are confident that we will deliver another year of enhanced value to our clients and returns to our shareholders.

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

Thanks, Gary. I'll begin on Slide 9 with a summary of our consolidated results for the quarter and for the full year of 2017. Following a review of our financial results, I will also provide information on the impact of the recently passed tax reform legislation, the adoption of the new revenue recognition standard, ASC 606, and our 2018 guidance.

In the fourth quarter, revenue increased 3.1% on an organic basis and EBITDA grew to $881 million, a 4.1% increase compared to the prior year period. EBITDA margin expanded 340 basis points to 37.8%, and adjusted earnings per share grew 19.3% to $1.36 per share.

For the year, revenue increased 2% on an organic basis and EBITDA grew to $3.1 billion, a 4.2% increase compared to the prior year period. EBITDA margin expanded 240 basis points to 33.6%, and adjusted earnings per share grew 15.7% to $4.42 per share.

We are very pleased with the ongoing margin expansion of the business, primarily driven by our one-to-many model, creating significant operating leverage in the business as well as continuous efforts to find operational efficiencies.

We have also seen structural improvements specific to our GFS segment with the successful divestiture of the majority stake in our consulting business and anticipate further meaningful margin expansion into 2018.

Moving to Slide 10. In the fourth quarter, IFS revenue grew on an organic basis by 5.6%, while EBITDA grew 5.3%. Top line growth was driven by strong demand for our banking and wealth solution and, as expected, a rebound from our payments business.

For full year 2017, IFS revenue increased 2.8% on an organic basis and EBITDA increased 3.9% compared to the prior year period to $1.9 billion. Margins expanded 60 basis point to 40.3%.

Turning to Slide 11. Banking and wealth grew 8.5% for the quarter. This was driven by balanced growth across the businesses with elevated volumes in our output and wealth solutions. We are pleased with the 4% full year growth from this group. As expected, payments rebounded and grew 5% this quarter as we are seeing increased demand for our fraud solutions in the payment space. Growth was also driven by a data analytics deal.

Corporate and digital was impacted by a difficult license sale comparable and corporate liquidity, which was called out in the prior year period. Growth in our digital and mobile solutions remained strong as we see continuing demand for this product suite.

Turning to Slide 12. In the fourth quarter, GFS revenue grew 3.1% organically while EBITDA grew 7.5%. For the quarter, this represents 630 basis points of margin expansion to 42.3%. In addition, to -- continued strong operating leverage and favorable revenue mix, margins also benefited from our recent consulting divestiture.

For the full year 2017, revenue increased 3.1% organically. EBITDA grew 9.6% compared to the prior year, reflecting 380 basis points of margin expansion to 34.2%. We're extremely pleased with the EBITDA margin profile in this segment approaching the mid-30% range. We exceeded our original plans, and this momentum continues into 2018 as we anniversary our recent portfolio divestitures and we remain confident in our ability to drive margin expansion through our ongoing operating leverage and scale.

Moving to Slide 13. For the quarter, our institutional and wholesale business grew 5%. We remain pleased with the continued high client retention rates resulting in strong software license renewals during the quarter. We are confident in the long-term growth prospects with this business as we continue to see sales progress and our bundling of solutions for clients and why the strength of our balance sheet continues to be a competitive advantage in the marketplace. Banking and payments was relatively flat as growth in North America was offset by some softness in Europe and Asia, which is directly tied to the timing of sales.

Moving to Slide 14. Corporate and Other revenue in the fourth quarter was $83 million with an EBITDA loss of $60 million. The Corporate and Other segment results include $79 million of corporate expenses for the quarter compared to $88 million in the prior year period, reflecting ongoing efforts to drive operational efficiencies, which will be leveraged by the business model driving incremental profitability.

As expected, this segment was approximately a 100 basis point headwind to consolidated full year revenue growth in 2017. This 100 basis point headwind will continue into the first half of 2018, which should improve as the year progresses, resulting in approximately 50 basis points of headwind through our consolidated revenue growth for this full year. We expect that impact that this segment has to overall growth become less meaningful as its contribution to our consolidated revenue continues to decrease.

Moving to Slide 15. Cash flow generation remained strong. Free cash flow was about $550 million for the quarter and $1.6 billion for the year, representing 108% full year conversion rate, which was in line with our previous guidance. We reduced our debt by $1.9 billion in 2017 and had approximately $8.8 billion of debt outstanding as of December 31. As expected, our effective tax rate for the full year was approximately 28%.

During the fourth quarter, we repurchased 1.1 million shares for approximately $100 million. Approximately $3.9 billion remained on our existing repurchase authorization. The weighted average diluted share count was 336 million at the end of the year.

Finally, we returned $96 million to shareholders through our dividends in the quarter and $385 million for the full year. We exit 2017 with a strong balance sheet and are positioned to continue to drive top line growth, margin expansion and strong cash flow to drive shareholder returns.

Consistent with our historical capital allocation principles, we'll continue to invest in innovation and product development to better serve our clients. Our Board of Directors recently approved a 10% increase in our quarterly dividend to $0.32 per share.

And finally, we continue to assess value-creating M&A opportunities. Absent any actionable deals, we will continue to repurchase shares.

It has been a very busy time for our tax and accounting teams over the past several months, and the team's efforts have really paid off. I will now spend a few moments discussing the impacts of the recently passed tax legislation and implementing the new revenue recognition accounting standard. Bear with me here as there is a lot of information to cover.

Turning to Slide 16. The recent tax legislation resulted in a significant impact to our tax liabilities, which created a net tax benefit of approximately $780 million in our GAAP net earnings or $2.32 per share of diluted EPS for the fourth quarter. This net benefit is excluded from our non-GAAP results.

This was driven primarily by the revaluation of existing deferred tax liabilities at the lower rate and, to a much lesser extent, the transition tax on foreign earnings. We anticipate being able to utilize foreign tax credits to effectively offset the transition tax, resulting in the net cash impact from our foreign operations being immaterial.

For 2018, we anticipate an 8-point reduction in our effective tax rate from 28% to 20%. We believe we can sustain this 20% rate into future years. This drives incremental earnings and cash flow into 2018 and beyond.

As Gary mentioned, we anticipate reinvesting up to $100 million of this 2018 benefit into broader employee benefits and increased wages, higher innovation spend and accelerating data center consolidations. Roughly half of this reinvestment will impact operating expenses in 2018. The remainder of the tax savings will benefit shareholders through earnings per share and dividends.

Turning to Slide 17. Effective January 1, 2018, we are required to adopt the new accounting standard for revenue recognition. As previously discussed, we are adopting the standard by restating all historical periods to give a transparent view of the impact to all periods and show historical and prospective comparisons on an apples-to-apples basis. Our prior period financials in 2018 planning will be affected by the implementation of this standard.

The graphs on Slide 17 show these impacts for 2016 and 2017 on revenue, EBITDA and adjusted EPS. For example, the impact to EPS is approximately $0.15 for each of these years. We've built our 2018 plan and guidance under the new rules and anticipate a similar impact for 2018 as a result of the adoption of the accounting standard compared to the old rules. As previously discussed and, more importantly, this accounting change does not impact cash flow of the business nor is it expected to have a significant effect on expectations of future growth. However, while 606 does not have an impact on consolidated revenue growth for the full year, it does impact the segments.

For 2018, IFS revenue growth includes about a 1 point headwind and GFS revenue growth includes about a 1 point tailwind. The most significant change was related to certain pass-through fees. About 80% of the revenue adjustment was from changing gross revenue recognition to net revenue recognition for these fees. This will have no effect on earnings. The majority of the EBITDA and EPS impacts are related to the deferral of early software license renewals to the original renewal date and software rental fees being recognized upon delivery rather than ratably over the rental period.

We expect to publish our full year 2017 10-K the week of February 19 under the old rules. Following this, in late February or early March, we will publish 3 years of historical financials reflecting the new rules. We'll also provide supplemental quarterly data to help with modeling. At that point, all financial results reported in 2018, including historical results, will be comparable under the new rules.

Primarily as a result of the adoption of 606 and the related timing of recognition of known items, our GFS segment planned growth in the first half of the year is expected to be below our guidance range, and growth in the second half of the year is expected to be higher than our guidance range, aggregating to full year growth guidance. While we expect this to impact GFS and result in consolidated revenue timing during the year, we expect earnings seasonality to be basically in line with the average quarterly contribution we've seen the last few years.

Moving to Slide 18. With that behind us, let me move on to our guidance for the year. For 2018, we expect consolidated organic revenue growth of 2.5% to 3.5%, IFS revenue growth of 2% to 3% and GFS organic revenue growth of 4% to 5%; consolidated adjusted EBITDA margin of 36% to 37%; and adjusted earnings of $5.10 to $5.30 per share, representing growth of 19% to 24% compared to a restated for 606 baseline EPS of $4.27. Consistent with historical practices, we have provided supplemental planning assumptions in the appendix material.

Moving to Slide 19. We're excited to enter 2018 with a more focused set of solutions serving the financial services industry, a healthy balance sheet coupled with strong cash flows and a meaningful share repurchase authorization. We are confident in our guidance for the year and our ability to continually drive value to our shareholders through our compelling business model and strong cash flow generation.

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.

Your 2018 outlook for IFS revenue growth of 2% to 3%, or 3% to 4% if we make the adjustment for ASC 606, what are the puts and takes embedded in that outlook? And in particular, are you seeing any more optimism among bank CEOs with respect to spending intentions for 2018?

Yes. If you look at how we exited the year with roughly 4% in banking and payments, low single digits in payments itself and in corporate and digital and roughly 4% as well, we would anticipate similar levels into 2018 in terms of the growth components. When you look at the 1% headwind in IFS and the 1% tailwind in GFS, the underlying business of both segments is doing about 3% to 4% with about 50 basis points of headwind from Corporate and Other, David. But we would anticipate similar expectations regarding it. With regard to overall spending trends, I think we still think around IT spend in the 3% to 4% level, which would be close to growth of the overall market, and we're growing in line with it.

Yes. Let me build on a little bit from the sales standpoint, David. As you know, historically, we're coming off Q4 with very strong sales kind of across the board. We're looking good for Q1 in our pipeline. But as you know, we have very long sales cycles and then, once you close the deal, very low onboarding cycle. So even if those changes do increase spend over time, to Woody's point, you'll see that translate into higher growth in IFS, especially, really, 12 months down the road, right. We've got to sell through that process and then you got to onboard it. So it's -- it really is a longer lag for it to start translating into our growth numbers.

Good. And then as a follow-up, your EBITDA margin guidance calls for 290 basis points of expansion at the midpoint of your outlook. Beyond the SunGard benefits that might flow into '18, what are the big incremental drivers of your EBITDA margin forecast?

Let me give you just a rough walk there, David. If you came out of 2017 at roughly 33.5%, the impact of 606 is about an 80 basis point benefit, as we're having some of the no-margin revenue coming out for those pass-through fees. Divestitures for the year are about 140 basis point benefit. And the rest is operational, driving you to 36% to 37% for the full year 2018 expectation.

Got it. And then just a quick final question on capital allocation. You indicated that you do maintain an active acquisition pipeline. How do you think about capital return versus M&A in this environment given where asset prices are?

Well, your point is valid. At least a few days ago, valuations were very high, so multiples are high in the area. I think you've seen us be very disciplined over the years, trying to find assets that increment our capabilities, add a new service or a new market or ideally both. But we're disciplined in terms of valuation. If we don't have deals that fit strategically or actionable or don't meet our valuation screens, we'll certainly buy back shares. You saw us buy back $100 million in December. And we're entering into 2018 with a $3.9 billion authorization.

The next question comes from Dave Koning with Baird.

So I guess, just 2 questions. The first one, is it fair to think -- you said 19% to 24% EPS growth kind of x the 606. Is it -- just looking at the numbers, it looks like about half tax and half core. So does that mean each of tax and core growing about 10% to 12% EPS for the year? I'm just trying to kind of isolate what the core is growing.

Let me give you even an easier walk on this, Dave, in thinking about our midpoint of $5.20 in 2018 as a plan, you really need to add $0.15 related to the impact of adopting 606, add about $0.10 related to the operating expense component of the tax reinvestment and back out $0.55 related to the net impact on the tax rate differential. I think that drives you down to about a $4.90 and that would be an apples-to-apples pre-606 and pre any adjustment for taxes.

Got you, yes. So your core, yes, 10%, 12%-or-so. That -- okay. That's good. And I guess, the second thing, just on 606, just so we're clear on the segments, about $455 million of revenue comes out in aggregate. Is that about half in each segment, just so we know what base to use for each segment?

Yes. I would tell you more of it is going to be in IFS because, as you saw, about 80% of that number is related to pass-through fees for interchange in network, where the vast majority of that is in our domestic payments business or IFS. So the majority will be in the IFS group.

Okay, like 70-30 or 80-20 or something in there.

Somewhere in that zone.

Next question comes from Brett Huff with Stephens.

(inaudible) back to your 4 -- or your $5.20 midpoint, that's helpful. And a couple of questions from me. Number one, can you talk a little bit about data center consolidation? I know this is -- you guys are sort of perennially working on this kind of stuff. What kind of bene did we get from it last year? And kind of what are we going to get from it this year? Is it kind of measurable? Is that some of the underlying margin improvement that we're seeing?

Absolutely, Brett. We exited last year with a little over 38% in our private cloud, as I shared in my prepared remarks. End of this year, we'll be over 50%. We're -- we are seeing a lot of benefit. The team's doing an excellent job of executing against. This is a big program, right, as we take all of these data centers that we've collected over the years through acquisitions and consolidate them down in the U.S. But we are seeing real benefit. You're seeing it flow through some of the corporate client improvements in Corporate and Other, and then that's translating into the business lines through our segments, through our allocations as well. So -- and we'll continue to see that. As we look into 2018 and we're guiding to more margin expansion, that'll continue to be a contributor to that overall benefit.

Yes. To add to it, Brett, it's certainly a contributor of margin expansion also as part of our confidence and continuing to drive margin expansion going forward. We're working through updating our business case connected to this accelerated spend. And we're going to come back at Investor Day and outline it fully as to what the base plan and what the accelerated spend associated with the plan is driving in terms of benefit, timing and savings, and that'll be in May.

Okay. And then, Gary, I think you mentioned kind of some technology you have been working on several different sort of areas. And one that I didn't know as much about was the -- a new open core platform. Can you talk a little bit about that?

Yes. We've talked in the past, Brett. I mean, really, the whole industry is really based on legacy-based technologies, whether that would be mainframes or client servers or whatever the underlying technology might be. But they're very closed in nature historically. And so over the years -- over the last several years, we've been very focused on building the future of where we think financial services is going. And obviously, we need to enable our clients -- our existing clients to upgrade over time to those new technologies. But they're also needed in order to continue to compete and take share going forward. So this year, in 2018, we're bringing many of those new technologies to bear. And one of them is a fully open core banking system that we've built from the ground up. It's day 1 cloud-ready. It runs and you can run it where the -- our clients can build their own user experience by coming through our open API framework, or they can consume our new state-of-the-art user experience. But we think these are going to be very important launches as we look at where the future of this industry's going. We all know how all of the technologies are becoming more and more digitally enabled. If you don't really start deploying some of these foundational elements, you're not going to be able to take advantage of that. And so we're not only excited about core componentization coming online but our next-generation payments platforms and the other things that we mentioned in the prepared remarks as well. So '18 will be a big year for us as we start bringing these to market.

Our next question queued, that will come from Tien-tsin Huang with JPMorgan.

Sorry if I missed this, but did you give the SunGard cost savings achieved in fiscal '17? And I'm curious on the SunGard revenue front. How did that come in versus plan? Are you satisfied with the revenue synergies, et cetera?

Yes, yes. The revenue synergies have done very well. The team has executed extremely well. Q4 is always a very busy quarter for us given the nature of the SunGard assets and, frankly, the high-concentration license fees engine. So they executed extremely well. And we had the best quarter in sales we've had. So we're very pleased with where revenue is overall with the SunGard assets. We continue to see nice leverage of relationships, and we've cited a number of examples of that. So I would tell you, looking back on due diligence and what we modeled, the SunGard revenue synergies, they certainly exceeded our expectations. In the prepared remarks, we didn't get an exact number. But when we originally did the SunGard acquisition, we did declare $200 million of synergies, and we exceeded that number by more than $125 million. And frankly, while we've stopped tracking true SunGard synergies at this point in time because the company is so integrated in IFS, there's a number of programs that are still ongoing that's going to help us continue to grow margins for several years in the future. So we just couldn't be more pleased with how that overall acquisition worked out.

Well done. Just a quick second question just on the margin front. IFS margin is quite high, I guess, it was at 40%, 41%. You're getting closer to a ceiling here. And I'm curious, does your -- did you give margin outlook by segment in fiscal '18? And does it reflect the 606 adjustment?

Yes. Let me take first the IFS margin and are we reaching the ceiling. The quick answer is no. If you look at all the things that were going on with data center consolidation, if you look at our one-to-many model on how we're deploying software to, in some instances, thousands of clients, and you look at all of the focus that I just deployed about heightened innovation and the deployment of those innovations, those innovations will go into that base. So what will those innovations allow us to do? One, grow share, further cross-sell and up-sell into that base, which will drive more revenue that'll come on at much higher incremental margins. It'll also allow us to consolidate some of our legacy platforms. We have, in certain areas, redundant platforms for certain functionality, and we'll be able to consolidate that over time. And then you add on data center consolidation. When you look at all those things, we think there's still plenty of room in IFS for the long term to expand margins. We'll go into a lot more details on that in the upcoming investor update. But no, we're not to the ceiling yet.

And Tien-tsin, we did not give specific individual margins. We gave consolidated margin of 36% to 37%. That implies around roughly 300 basis points of margin expansion. I'll tell you both segments are going to expand. IFS will expand less than GFS as we continue to drive operational efficiencies through GFS. But both segments will expand in 2018 operationally.

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

I was wondering if you could maybe provide a little bit of color on the institutional wholesale that's been quite strong, as you mentioned, for a while now. Do you think that kind of 5-ish percent outlook can hold throughout 2018. And any color you can provide on the capital markets side more broadly?

Yes. I'll start from the sales perspective then let Woody build on it. We're very pleased with the I&W group and how they've performed. I mean, obviously, I've just commented, they came off a very heavy Q4, which is very traditional for this business. I'll tell you, our sales leader over that group's a gentleman by the name of Jim Neve, continues to execute, he and his team, extremely well with not only closing but also building out future pipelines, adding -- bringing in and expanding the sales talent to continue to grow the output out of our overall sales engine and doing that globally. So we're very pleased with that group. We're very pleased with the future. When we look at what's going on in the whole capital markets world, specifically, one of the things that attracted us to SunGard is that was a very, very fragmented market, so a lot of competition, a lot of in-house developed software and, arguably, a need for all those customers to take advantage of more commercial grade-type solutions. And we're seeing that in our sales efforts. So as we look forward to 2018, the team is going to be very focused on solution bundling, right, instead of just selling an individual product for a capability, how do you take multiple products, build a solution to solve an end-to-end need within capital markets. And we certainly think we've got some of the best assets in the industry. I also mentioned on innovation. We're in some -- we're in very late innings of some very large rewrites or development from the ground up of some of those capabilities that will really help propel us also into the future.

And Jim, to add some color from sort of how the cadence will go. Because of 606, we would anticipate the first half of the year, particularly in the I&W, to be a little lower than our guidance range and the back half of the year to be higher than the guidance range based on the timing of recognition there, aggregating to that 4% to 5% we outlined.

That's helpful. And then maybe just kind of going back to the broader macro outlook. In terms of what you're hearing from your bank customers, understand that an improving spending environment may take some time to materialize, as you point out, in the 12-month range. But as you kind of look at your sales today and the new deals that you're looking to sign, how do you think the 2 kind of forces of higher rates and lower potential regulation has come playing out in customers' calculus in terms of are they feeling less pressure to outsource with enhanced profitability? Or they feeling any more willing to outsource -- just kind of any directional color on that would be helpful.

Yes. I wouldn't -- I would tell you at this point in time, Jim, we're not seeing this massive increase in pipeline that we could point to expanding interest margins and lower regulatory spend. We're also not seeing any trend that would suggest that more and more customers aren't looking to outsource. I mean, I highlighted Wedbush who's the third client for us coming into our derivatives utility. Frankly, what clients are looking for is how do we lower our total cost of ownership by leveraging commercial grade solutions. If we can deliver that at a lower total cost, they're going to want to outsource that on top of just licensing the software. And we see no indication of those trends changing. I just highlighted, we've got a very strong pipeline, and we just closed out one of our strongest quarter in that area. And that pipeline continues to grow and the sales team continues to execute against that. But showing some massive uptick from more of these animal spirits that people like to talk about, we've not seen that indication yet. But as it does, if it does occur, what I suggest to you is we'll first see it in our pipeline, we'll then see it in our closings. And then we'll see it in our revenue after we do our onboarding anywhere from 9 to 15 months down the road.

Our next question that will come from Dan Perlin with RBC Capital Markets.

Can you -- and I may have missed it, but the $100 million of incremental investments, did you guys specify how much was going to be recurring versus onetime at this point?

Yes. Of the $100 million, we would say the 3 areas we've talked about being employee benefits, incremental innovation spend and incremental data center consolidation. The full outlay is roughly 1/3, 1/3, 1/3. I would tell you, half of the -- up to $100 million, we have operating expense in 2018. I would anticipate us continuing to invest in employees going forward. I would anticipate continuing to invest in innovation going forward. And then hopefully, we can, at some point, get data center consolidation behind us and won't have to have that ongoing long term. But this would be a multiyear plan in terms of the spend.

The open banking platform that you guys talked about, cloud-ready day 1, is presumably, that's for your smaller institutions so that would be within IFS. The question, I guess, I have is, is some of that ultimately like self-cannibalizing? And then to that extent, is there anything we need to be aware of as we think through the implementation of that affecting your revenue growth rates? Or was it all incremental?

Well, first, let me clarify one thing. Our open banking platform is not just going to be for IFS. We're actually seeing a lot of momentum in our GFS market around that platform as well. Frankly, when you look at some of the ancient architectures that are in place around the world, this is a great opportunity. As large banks want to transform their infrastructure, these are the kind of solutions they're actually looking for. So it'll actually drive benefit to both of those segments and a great indication of us being able to leverage our investment once across many markets. Now the reality is those -- that platform will be deployed in different ways, right. So we would expect to see that because the customer demand is different, but we will get leverage out of that. From revenue growth, I think you'll see both. You won't see cannibalization as much. We will see our customers upgrading to it. So we'll see maintaining and growing of the existing revenue as customers upgrade to these technologies and then take additional services. And then, obviously, we expect to see increased revenue growth by taking share, as well, with some of these newer technologies.

Okay. And if I could sneak one more in. Your leverage now is, I guess, close to 2.6 turns. And you said, absent deals, you're doing repos. I'm just wondering, your appetite to do multiple smaller deals. Or are you kind of targeting larger deals kind of given the effort that management team has to typically put into those types of things?

Yes. We would traditionally -- we tend to look for something more larger, something that really brings us a substantial new offering to an existing market that we're serving or break us into an adjacent market. Obviously, we want to continue to make sure that we play a substantial market leadership role. And so that all tends to typically push you towards something on the larger side. To Woody's point, values are high. We've never been an irrational buyer. We've never been someone that has just felt like they had to go do a transaction. And so frankly, Woody went through the capital allocation. We always like to look at investing into our existing capabilities or new products, which I highlighted a lot. We think that's a great way to continue to accelerate the growth of the company. But -- and then we'd always look if we can find something that really fits our strategy and makes sense for FIS to own, look at -- looking at those acquisitions. But if not, we still have a very large authorization from our board on share repurchases. So -- and we'll continue to kind of fall through that list in that order.

The next question will come from George Mihalos with Cowen.

Wanted to ask a question on the M&A side. And maybe just to kind of kick things off, I've always been under the impression that from a -- an M&A characteristic standpoint, you haven't wanted or you've avoided deals that would be dilutive to the overall organic growth rate of FIS. Just curious if your thinking on that has evolved at all, if there's a certain threshold given some recent deal activity where you may kind of put that aside to do something that would be very accretive for the business.

George, I don't think our viewpoint on transactions really changed. Obviously, we want to make sure that it's a good financial deal for our company and, therefore, for our shareholders, so accretion is very important. Obviously, we want it to be synergistic not only just through the operating line but also through the revenue line. We want it to be complementary of our existing solution set. So we don't like to swim too far out of that lane. So all of those are pretty consistent guide rails that we maintain as we think through what potential M&A activity might be.

And then maybe on the other side, how are you guys thinking about bank consolidation going forward in M&A activity in the FI space? Has that potentially bit of a bigger headwind for you guys going forward?

Yes. It's a great question, George. We continue to see consolidation occurring in the market. We don't see anything that's going to slow that consolidation. Frankly, we're kind of watching the SIFI classification if you see that number raise up. This is just my opinion or our leadership's opinion. I think we've got an opportunity to see consolidation accelerate some there, feel like that SIFI classification has really kind of dampened down some of that. So we're watching that closely. But those will be the things. We don't see anything that would slow consolidation, although valuations are continuing to go up and banks tend to not be irrational buyers as well. So -- but we're kind of counting on 2018 to be fairly consistent and are in alignment with the consolidation we saw in '17. But there could be some regulatory change that might accelerate that. Well, that remains to be seen. Not really seeing anything that I would suggest is going to slow it, unless it's just valuations get too far out of range.

The next question in queue will come from Ashwin Shirvaikar with Citi.

So as I look at the strong end to the year from IFS subsegments, like bank and wealth, payments or maybe the institutional side of GFS, I'm wondering why this does not translate to stronger growth as we head into 2018. I think, Gary, does this have anything to do with -- you mentioned APIs and cloud and new solutioning quite a lot in your prepared remarks. I'm wondering if there is a competitive impact or a pricing impact from these things.

Yes -- no, I wouldn't tell you that I think that we're losing competitively because our -- our existing software is not competitive. We're not seeing that. In fact, we continue to perform well in those areas in competitive situations. I think innovation, my comments were more about -- and typically, we do this at FIS. We don't bring things to this call until we're ready to bring them to market. And so I think a lot of people thought we were strictly heads-down on integrating SunGard for the last 2 years. And frankly, we have been heads down integrating SunGard. We've also been heads down running the business. And software takes a long time to develop, right. And these are very complex systems. And that's more of a future statement where I want you to realize that we are moving into the future. We're proud of what we're seeing around cloud-based technologies. We're proud of what the teams are building, and we'll continue to do that. When you look at the headwinds, we did have a good, strong quarter on IFS and very pleased with that. Woody talked about some of the headwinds we're experiencing with the accounting change. Frankly, we continue to see consolidation high in IFS, right. I mean, we're -- when you look at the level of acquisitions that are occurring in that space and depending on what subsegment of IFS that's occurring in, that can be a headwind to this business. But no, we're very pleased. We are forecasting accelerated growth of IFS over 2017. We feel confident about that, that the team will execute. And so you'll see that growth continue to recover as we continue to cross-sell and grow through the markets.

Okay. I'm just kind of saying that this late in this cycle, the growth approaching 3% does seem fairly partly to a lot of people. But my second question is with regards to what specific capital return and repurchase assumptions are embedded in 2018 in guidance. And could you comment on the free cash flow conversion rate?

Yes. I'll take the last question first. We ended 2017 at about 108% free cash flow conversion. We anticipate 2018 to be about 110%, if not a little more. I would tell you that we always look at capital deployment in terms of generating cash flow and redeploying that cash. We anticipate, based on that conversion rate, about $1.8 billion of free cash flow in 2018. We've got a bond to repay that comes due in the year, about $1 billion. But we would anticipate maintaining our leverage at similar levels. So if we don't find M&A activity that is appealing and fits strategically and valuation-wise, we'd certainly repurchase shares, Ashwin.

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

What were term fees in Q4? And what's the outlook for term fees? And just to clarify on the buyback, you're assuming that besides debt pay-down and any dividend, everything is used for buyback and that's what's in the EPS guide.

Yes, on your term fees, we were about $21 million for Q4 compared to $22 million last year. Full year was $59 million in 2016 and $64 million in 2017. We're expecting it slightly down maybe $50 million in our 2018 planning for term fees. Again, on share repurchase, we look at excess free cash flow, and to the extent we're not paying down debt, we would certainly look at buying shares back, particularly at these valuations for us.

Okay. And then on the derivatives utility, give me -- maybe just talk about the incremental margin profile of that business. I know that the first 2 banks, you took on some staff from those firms. Is that true with Wedbush as well? And then what -- I know there was a bit of a gap, like a 2-year gap, between signing clients. I'm just curious what the pipeline there looks like.

Let me the take last one first and then I'll back into the other one. Anytime you're launching a utility like this, finding the right foundational clients to come into an environment is very, very important. We've done that historically at FIS. And we could point back to a lot of those historical utilities. So getting the right partners early on is very important. But I'd also tell you, these are very complex transactions. You've got to find clients who want to enter into something that is starting from scratch and someone who sees the vision of where this is going. And so it's a combination of finding the right customer to onboard as well as a very big sales effort. So I don't want to trivialize that. Pipeline, still got good pipeline on this. Obviously, we'll be onboarding and selling more clients in 2018, and we're counting on that in the planning cycle. Also with any start-up, just like you said, I mean, margins -- because we onboarded a number of people through the first 2, margins started out in -- frankly, in a negative position as we build out that platform. But we're very confident that utility will not only come into profitability. It'll continue to expand and grow throughout 2018, so a very nice business for us. But like any business start-up, it takes a while for it to onboard and start producing. So we're certainly going to do that in 2018.

And we will take our last question from Ramsey El-Assal with Jefferies.

In the context of 2017 results, '18 guidance and all the recent divestitures, can you just kind of take a step back and update us on your thoughts around the long-term organic growth kind of trajectory of the business? Maybe help us think through what are sort of upside and downside risks to organic growth going forward and whether there's any potential accelerants you could conceive of or call out.

Well, as far as long-term guidance, we're going to be updating all that at our upcoming investor update, which I'll talk about in our closing comment. So what -- we'll certainly share that with you at that point in time. As Woody pushed forward, our annual guidance for 2018, you'll notice fairly tight bands on that guidance range. Frankly, when you look at our -- the nature of our sales engagements, you look at the time to onboard, there's always only so much we can do to really influence in here. IFS has over 90 -- right at 90% reoccurring revenues. So obviously, the ability to accelerate that material inside a given 12 months is a little tougher. But as far as long-term guidance, we'll certainly share that with you in the upcoming investor update in May.

If you look at kind of some of the puts and takes, we've got headwind in Corporate and Other that will continue to diminish over time, 100 basis points, now 50 basis points. Looking in to '19 and '20, continued further diminishment in terms of its impact on growth. The other comment would be, while we have removed ourselves from some of the higher revenue growth through divestitures, we also removed much lower-margin business connected to that. So you're seeing our margin profile increase significantly, although, it puts a little bit of a damper because some of those were higher revenue growth, even though they were very low-margin businesses.

Okay. And last one from me. I wanted to just ask about your view on P2P and then, I guess, on Zelle, in particular. Definitely seeing an aggressive marketing campaign for Zelle here in sort of the metro New York area and also some nice volume growth being reported. Could P2P, in general, evolve into a longer-term contributor for you? And are you seeing any traction, in particular, on that Zelle relationship?

Yes. Let's just go payments broadly. There's so much going on in payments right now. We'll be giving you guys a full update in May on all that. We're very excited about all the changes that are coming in payments. And I think P2P is just one of many opportunities out there to really accelerate to growth in that area. As far as Zelle's success, we've been very successful. We've already onboarded a lot of clients into that, enabling them to offer Zelle. We've got a very full pipeline. So we'll -- I think we'll continue to see that onboarding. What we want to see, and I love to see the marketing campaign, is real transaction growth that's going to then accelerate everybody's revenue. And so we'll certainly be keeping you apprised of that. But right now, we've had very good success in the sales cycle and a very full pipeline. We've had very good success with onboarding clients. So we've got a lot of clients in production now with Zelle. And so as we watch the marketing impact kick in and some movement of those transactions and increasing those transactions, that'll naturally drive our revenue stream. So -- but there's a lot more going on payments just -- other than just P2P. And we'll certainly be giving you guys a real thorough update on that in May.

Thank you for joining us today and for your ongoing interest in FIS. We're pleased to deliver another year of strong profitability performance and earnings growth. We have a robust pipeline heading into 2018. And we are confident in our business model and, more importantly, our strategy. I invite you to learn more about our strategy and outlook and to see real-life results of our innovation investments by joining our upcoming Investor and Analyst Day scheduled for May 8 at the St. Regis in New York City.

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 employees for their hard work and dedication in serving our clients. It is because of both that FIS continues to empower the financial world. Thank you for joining us today.

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