Fidelity National Information Services, Inc. (FIS) Earnings Call Transcript & Summary

All right. I think we're going to go ahead and get started here. My name is John Davis. I'm the payments and fintech analyst here at Ray J. We're excited to have Nate Rozof, EVP of Corporate Finance and IR at FIS, [ pitching in ] for Woody, who got pulled into a last-minute meeting here. So Nate's going to go through the story, and then we'll open up for Q&A. So Nate?

Great. Thanks, John. Appreciate you all being here. So as John mentioned, I'm going to [ pitch in ] for Woody today. I'm going to start by introducing FIS' superior business model. And then I'll take you through the financial characteristics of our company before opening it up for questions with John. As I'm sure you're all well aware, FIS acquired Worldpay in 2019, creating the #1 global fintech player. We're a leader in merchant solutions, banking solution and capital market solutions with key strength in global e-commerce and integrated payments and merchants. We're a pioneer in enterprise bank software and digital banking, with particular strength serving the largest global financial institutions. And we have unique end-to-end capabilities within our capital markets segment. So together, FIS is transforming the way that the world pays, banks and invests, and in doing so, creating multiple opportunities to transform the organic growth profile of our business and to accelerate organic revenue growth across multiple revenue synergy opportunities. As I mentioned, we go to market across 3 segments, each of which is seeing acceleration in terms of the organic revenue growth profile. Within merchant, which grew 10% on an organic basis in the fourth quarter, we're seeing that growth really driven by our leading position in e-commerce and integrated payments. Our capabilities in e-commerce are around helping large merchants to be able to span the globe with their offerings to accept transactions in multiple currencies and multiple geographies. And in integrated payments, we're a leader in the United States. We have significant opportunity to take that capability into the U.K. and then into Europe. So this secular exposure to high-growth markets gives us visibility into a durable revenue growth model. Within our Banking Solutions segment, during the first -- fourth quarter, we reached what we believe may be a pivotal inflection point in our ability to deliver seamless end-to-end capabilities for our large bank clients. We were able to sign an unprecedented level of large bank deals signing a top 10, a top 20 and a top 30 bank all in the same quarter really based on our ability to stay ahead of the technology and curves with multiple investments in our next-generation product suite. Finally, in terms of the capital markets business, we've seen accelerated growth there also as we have invested in advanced technologies to bring together end-to-end capabilities that span the front, middle and back office for both buy-side and sell-side clients, which has been driving increased sales as our clients look to transform their technology capabilities. Across all 3 of our segments, we're growing together -- going to market with a similar value proposition, where we're bringing to our clients access to innovation, unique capabilities around data and insights and the ability to leverage our world-class scale. In terms of access to innovation, we're developing next-generation solutions that really position our clients to be able to deliver unique value to their customers in terms of having next-generation capabilities. With our data and insights, we create new intersections from markets and technologies that help our clients to solve their future while delivering experiences for them that are more simple, seamless and secure. And by utilizing our world-class scale, we can enable our clients' global reach at a local level as they go to market across continents and geographies. Transitioning to our financial profile. And as I mentioned, our superior business model creates a unique and compelling financial profile. This begins with a high-quality revenue stream that is supported by long-term contracts serving mission-critical solutions. As a result, this creates a durable growth profile with high levels of visibility. Our world-class scale creates numerous opportunities for operating leverage in order to be able to enable us to drive margin expansion. We deliver our solutions using a one-to-many SaaS model and then aggressively focus on operational excellence in order to deliver more revenue on a stable cost base. Finally, FIS is known as a strong free cash flow generator. We continue to -- as we continue to achieve our integration targets, we expect free cash flow to nearly double over the next 2.5 years, dramatically expanding our ability to continue to invest for future growth and to deliver new technology innovations. These attractive qualities, combined with our consistent focus on creating shareholder value, will enable us to continue to deliver strong compounding earnings growth. As you can see, over the past 3 years, we've significantly accelerated our revenue growth profile from 2% in 2017 to 6% in 2019 and, based on our line-of-sight revenue for this year as well as our ability to start generating revenue synergies related to the Worldpay transaction, see a path to 6% to 7% revenue growth in 2020 and then accelerating further from there. Similarly, as I mentioned, in terms of our ability to drive operating leverage, we've expanded our EBITDA margins by 700 basis points over the past 3 year from 34% to 41% and expect to generate an incremental 300 basis points of operating leverage or margin expansion in 2020 and then expanding from there as well. I've touched on synergies a few times, so let me give you a brief update in terms of where we ended 2019 and what we're expecting for 2020 and beyond. In 2019, we ended the year achieving already $80 million in run rate -- annualized run rate revenue synergies. This is after closing our transaction with Worldpay on July 31 of this year. These are primarily driven by debit card routing benefits. And as we look ahead to the end of this year, 2020, we're on track to increase that $80 million annualized number to $200 million by the end of this year. And we recently increased our 3-year target from $550 million to -- I'm sorry, from $500 million to $550 million, principally driven by the strength of cross-selling that we're seeing early following our acquisition of Worldpay, principally along the lines of, first, our Premium Payback solution, where we're enabling consumers pay with points at the point of sale. This is a highly differentiated solution that other merchant acquirers can't do and that our large markets are verily attractive to. Second, our ability to bring new merchant and banking referral relationships together across the FIS core banking client base; and then finally, by being able to identify new opportunities to cross-sell products such as our prepaid card solutions across our combined client base. Similarly, in terms of our progress on cost synergies, again in just under 6 months post closing the transaction, we exited 2019 already achieving $465 million of annualized cost synergies. Approximately $275 million of these were generated by interest expense savings. Meanwhile, the remaining $190 million is from operating expense savings primarily by reducing duplicative corporate costs on the operating expense line. We guided to -- and this year, 2020, we're on pace to reach $600 million in annualized cost synergies, which will primarily be driven by increasing our operating expense savings towards $325 million annually as we end this year. And then we're on track to reach $675 million in total cost synergies by the end of 2022. So again, well ahead of our initial expectations and moving very quickly following the transaction that we closed just recently. I'll touch briefly on capital allocation strategy before we just touch on our guidance quick, and then we'll wrap it up there, John. So in terms of cash flow, I mentioned that FIS is a strong cash flow generator. We generated approximately $2.1 billion in free cash flow in 2019; on track, as I mentioned, to nearly double that over the next 3 years. We used that cash principally to delever or repay debt, paying down $1.4 billion in debt since the close of the transaction. We are on track to reduce our leverage ratio to 2.7x by the end of 2020 in order to -- us to enable -- to be able to resume share repurchase and large-scale M&A. In terms of our capital allocation priorities, this year, we will focus on delevering before then resuming -- as I mentioned, M&A would be our first priority, followed by return of capital to shareholders through share repurchase and dividend payments. And then finally, as I mentioned, I'll touch on our guidance very briefly. In terms of the outlook for 2020, we're expecting to generate 6% to 7% organic revenue growth, which will generate 10% to 13% adjusted EPS growth. As far as the shape of the year goes, we do expect some grow-overs in the first quarter of this year, which causes the first quarter organic revenue growth to be 5% to 6% before moving towards the upper end of our full year range for the following 3 quarters. And that's our outlook for 2020. So John, I'll end it there and open it up for questions.

All right. Any questions from the audience? All right. Nate, I'll start. Just the obligatory coronavirus. Remind us how much of your revenue in the merchant business is cross-border. And just any kind of color or commentary there would be helpful.

Sure. So we had our fourth quarter earnings call about 2 weeks ago and included some expectation for coronavirus impacting the guidance we provided at that time, which I just took you through on the screen. I think the way to think about the coronavirus impact or certainly the way we're thinking about it is the part of the business where we would expect to see the most impact from corona would be in our merchant business, which is about 30% of consolidated revenue, and in specific within our e-commerce segment within merchant, which is about 25% of merchant. So in terms of revenue that could be most impacted by corona on a total basis, you're looking at less than 10% of total revenues. We'll certainly see some impact in terms of cross-border, airlines, travel-related e-com transactions. But at this point in time, we believe that to be immaterial, which is consistent with our expectations when we provided the guidance a few weeks ago.

Okay. And as you approach sub-3x leverage by the end of this year. And you hit on M&A, large-scale M&A. I think, talk about your appetite. Is it you think more in banking or capital markets, most likely merchant? And maybe geography, kind of where you would look to kind of hone in from an M&A perspective.

As we look ahead to future M&A, really, I think what you'll see us prioritizing is assets that can further enhance our organic revenue growth profile. Really, we'll be looking for assets in strong secular growth markets where we can bring to bear FIS' capabilities and scale to further enhance those assets and then, therefore, to create incremental top line growth for FIS. You could see us pursuing assets that meet those characteristics really across the breadth of the financial services space that we support today, whether that be in merchant, banking or capital markets.

Yes. Could you give us a framework of how you're going to double free cash flow in 3 years?

Sure. So the question, in terms of how we will double free cash flow over the next few years. I think there's a few things going to our advantage. One is from an operating cash flow perspective, we'll continue to see benefit as net income increases through accelerating revenue growth, margin expansion. We've also seen some headwinds related to CapEx related to integration, our data center consolidation. Those lessen over time. So as the business scales and as some of those integration-related CapEx, expenses begin to taper off slightly, that will drive the increase in cash flow over the next 3 years.

Nate, maybe talk a little bit about the recent banking wins, the investments. That business is accelerating nicely. I think you also have some macro tailwinds from the segment of the market you play in. So maybe just talk about sustainability of the banking growth into the kind of mid- and maybe even potentially close to upper single digits.

Sure. I'd be happy to. So really, the progress in the banking business is the result of a multiyear journey that we've been on in the company, where 4 or 5 years ago, we started to see a need for banks to upgrade their technology and move to next-generation solutions. So we began the process of building those capabilities; modernizing our software; and building new, from the ground up, next-generation, cloud-based modular solutions as well, our FIS modern banking platform being that new next-generation system that we've really built over the past few years. We saw our -- banks like that story. It resonated with them. We did see them pause in order to see us complete the process of developing that technology. And they wanted to see that promise, I think, come to fruition in the market. As we completed that development curve, we've now had really almost 2 years of record new sales growth. I think, in each of the past 2 years, we've had net new sales up nearly 20% year-on-year, culminating with the 3 large bank wins that, John, you mentioned in your question, where we've had the question in the past several years, "Can you get a top 20 bank to move from fully in-house solutions to a -- an outsourced platform from FIS?" And our belief was along that, yes, we would see that happen because, quite frankly, those large banks are competing with the absolute largest money center banks at the top that are spending tens of billions of dollars a year on technology as well as competing with smaller banks that have moved to outsourced solutions and become more nimble at the bottom. So really being squeezed by a need to be able to be competitive in order to deliver consumers with mobile banking, Internet banking, other next-generation solutions. In this quarter, being able to sign 3 of those large banks, we think, was significant and will prove to be a point that are going to cause other large banks to stand up and take notice of their existing technology stack and how they're going to compete in the market going forward. So we feel, I think, very good about our competitive position and our product set that we have in market today on the back of that multiyear development path and on the back of these large wins, which we think validate that investment we've made over the past 4 or 5 years.

And are competitors reacting to your [indiscernible]...

Yes. The question was are our -- how are our competitors reacting to these wins. I think it's still too soon for them to have made a significant change. As I mentioned, we've been developing this technology for several years. So I think my expectation would be that they're now discussing and beginning their own potential development cycle, which will take them some time to do on their own side. And we'll utilize this our head start to continue to go to market and compete aggressively against them. I think the other thing that's important to note, though, however, is really in terms of the competitive set. There's much more competition among small banks and credit unions, some in the midsize, but really, as you move up to the larger banks, it's really FIS competing against in-house, custom-developed software. So even as our peers develop new capabilities at that large end of the market, we're still not quite standing alone but highly differentiated.

Can you give us a bit of an indication on how revenue will ramp [indiscernible] maybe how costs [indiscernible] [ in time ].

Yes. So the question is, "Can you give us an indication of how revenue and costs will ramp relative to those new large wins?" Absolutely. So these are significant implementations for these financial institutions that can take 12-plus months. So we are beginning the implementation process for those banks now. And you'll see us spending ahead of revenue. Relative to those 3 specific large wins, we'll be spending through 2020. We made some -- or had some discussion of incremental investment that we'll be making in 2020 on our fourth quarter earnings call ahead of those. And really, we would expect the revenue to ramp following implementation really more so in 2021 and beyond. So there is a mismatch in terms of expenses [ and ] running revenues.

How are you thinking of [indiscernible] SaaS [indiscernible] your competitors [indiscernible].

Yes. So the question is are we considering offering SaaS options for our clients. And the answer to that is absolutely yes. In fact, when we began the -- our product development journey, we also began a data center consolidation and modernization program in order to be able to move these applications to our private cloud to be able to sell them on a SaaS-based model both across banking and capital markets. And the modern banking platform which I just referenced was built to be cloud native. So absolutely, we're on the journey and, frankly, have been at the forefront of moving banking applications to the cloud and to a SaaS-based model.

So it's something like Cognos [indiscernible] Temenos [indiscernible]. Can you [indiscernible]...

So the question is, relative to Cognos, who's partnered with Temenos, is that the kind of thing you do. So I think one thing that's a little bit distinct and different there is we develop our own software. We sell-in that software, and then we have our own implementation teams to deliver it. So in terms of partnership with third-party systems integrators, really, that's less of what we do versus providing our clients with a full end-to-end solution both in terms of the software, the delivery and then running it out of our private cloud.

So Nate, when you closed the Worldpay transaction, you guys gave midterm revenue growth guidance in a range of 6% to 9%. I think most investors, when you smash together 2 businesses, you can get 6% to 7%. Synergies get you 7% to 8%. But what needs to go right to get the upper end to that 8% to 9% level just from a consolidated basis?

Yes. It's interesting. I think the piece that most investors may have overlooked in the growth algorithm for FIS is the underlying acceleration in the heritage banking and capital markets businesses. And as you'll recall, in the first quarter of '19, FIS had a very strong quarter, a year ago, putting up 5% growth and was, I think, on pace to continuing to accelerate that growth towards 6%. But then it -- that quarter was immediately followed by the Worldpay acquisition, and we started talking about 7% to 9%. So I think that a lot of folks didn't have an opportunity to understand the accelerating growth dynamics in banking, in capital markets. As we've gotten to be a year later, and we've been able to put additional proof points on the board in terms of banking continuing to grow mid-single digits, continuing to have robust new sales, putting up these 3 large bank wins at the end of the year, as well as the capital markets business accelerating through the year and ending the year really with a very strong 6%-plus revenue growth quarter, assuming you back out the 2 points of what we described as kind of onetime revenue, I think that it's -- that's the piece that investors, I think, need to take a look at. It's our ability to continue to accelerate heritage FIS, blend in a faster-growth Worldpay revenue and then layer on top of that the revenue synergies in order to move you up through that 7% to 9% range.

Okay. And then maybe just to touch on the revenue synergies a little bit. You talked a little bit about it in the presentation, but where do you think the majority of the potential upside or your confidence level in getting to that $500 million number? You've raised the number you -- to a $200 million run rate by the end of this year, and that's ahead of where you expected when you closed the deal. So what kind of drove that upside in the revenue synergies this early on in the implementation...

Yes. We've been seeing the revenue synergies come in more quickly than initially anticipated, particularly from the perspective of the cross-selling opportunities. I think we always had a high degree of confidence in our ability to bring in incremental revenue synergies related to debit card routing. Worldpay was already the largest provider of PIN-based debit transactions in the U.S., which is really where this opportunity resides. And when you -- adding to that FIS' network capabilities and scale, the ability to bring those together, I think, was relatively straightforward. What we expected to take longer was our ability to cross-sell in new products and capabilities into our client base because we're oftentimes selling to very large merchants or very large financial institutions, where the selling cycles are long. 12-plus months is not uncommon. But what I think has pleasantly surprised us is where we expected to be able to sell our premium payback solution in the large merchants because the value proposition of enabling consumers to be able to pay with points, for merchants to be able to benefit from that increased consumer demand as well as the cost savings related to those transactions is pretty clear. We expected the selling motion to still take some time given that it's large merchants. We've been very pleased with the fact that, 2 quarters post close, we've signed a groundbreaking relationship with PayPal for them to be able to use the solution, as well as one of the largest retailers in the United States, and have a very full pipeline of incremental large merchants opportunities as well. I think it's -- but what we underestimated was the fact that this is a truly differentiated and very unique solution in market. And given FIS' reputation and Worldpay's reputation of being able to serve the largest clients, those clients are eager to then partner with us and implement the solution. Similarly, in terms of the bank referral channel, given that we're pursuing the largest global financial institutions, again we presume that, that would be a much longer selling cycle. Again, having been able to sell and close multiple referral relationships so quickly post closing really exceeded our expectations. So I think, John, it's about the pace with which we've been able to move through and secure some of these revenue synergies that have really been the upside for us.

Okay. Last one for me here. Maybe we'll just take a step back, I know we have some guys who are newer to the name in the room, and talk about the merchant business, specifically the value prop and why it made sense to put Worldpay and FIS together, in the first place, and especially as the acquiring business outside the U.S. differs so much from inside the U.S. Maybe just talk about the market opportunity and kind of what you bring to market and what putting these 2 businesses together meant for the long term of the business.

Yes. We've been going through a period of domestic consolidation within the financial technology space for several years. And we've entered a period of global consolidation. And so being able to bring together FIS and Worldpay will enable the combined company to pursue that global expansion opportunity, while others are still kind of getting organized. And so what I mean by that is if you take the e-commerce opportunities, for example, while one of our domestic peers moved into the domestic e-commerce market early when significant market share has been difficult to compete with in order to try to win that share back from them, there hasn't been a similar competitor on a global basis, yet large e-commerce merchants are very rapidly expanding around the world. So by being able to bring FIS' global reach and assets and capabilities in different countries around the world, we can then accelerate Worldpay's ability to expand globally and win that share, try to have that first-mover advantage that we saw other players do in the domestic e-commerce market in the past. So it's those types of opportunities and being able to expand and really lead the curve in terms of global consolidation that we see as a significant opportunity for the combined FIS and Worldpay.

Okay. I think we're out of time. We'll wrap it there. Thanks, Nate.

Thank you.