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

Hey. Thank you. Welcome, everyone. My name is Tien-Tsin Huang. I'm the payments processing and IT services analyst at JPMorgan. And this is the session with FIS. And like some of the other sessions, we'll do a fireside chat, and we will be taking questions from the audience through the Q&A button. So feel free to ask questions there to be sent -- if you have any, I'll weave it in. But I did poll the community to get some of these questions, and I hope to get through them all. So really happy to have the FIS team with us. I'm really excited about it. It's great to see all of you guys. So Gary Norcross, CEO; Woody Woodall, CFO; Nate Rozof from Corporate Finance as well as Investor Relations, all of you all know. But seriously, thanks, guys, for spending a few minutes with us.

We're glad to be here.

The -- I thought I would kick it off with you, Gary, because you have a pretty unique perspective of the world because you're on the -- you're a member of the Business Roundtable and of course, the CEO of the company here. We heard from Jamie Dimon earlier on the keynotes. I would love to get your quick perspective on the macro environment, again, what you're seeing on the ground and maybe what a path to recovery would look like.

Yes. Well, look, it's a -- it's probably too -- it's a little probably too early to predict what a recovery would look like and the timing of the recovery would look like. But what I would tell you is, certainly, what we're seeing, obviously, just like a lot of people, very focused on the health and safety of our colleagues, very focused on our clients and very focused on the delivery, also -- but also seeing trends of improvement, right? As we see shelter-in-place get lifted around the country, we're seeing transaction volumes improve. We talked about this. I mean Woody even said, coming out of April is probably going to be our low-water mark, and I think that's accurate. I mean you've seen that continue to progress in the back weeks of the month of April and continuing to improve through May. And given the fact of where things are going and as these shelter-in-place rules keep arising, I think you'll continue to see positive trends from the economy and transaction growth coming through May and coming through June. And of course, we're also seeing a number of trends coming out of this that's going to actually propel FIS forward. But to get a real recovery, obviously, we've got to focus on testing, therapeutics and vaccines. That's going to be the key to really get us back to a complete recovery. And I'm sure Jamie covered a lot of topics around that front in his keynote. But there's -- everybody's watching for that, and that's going to be the real key to the full recovery of COVID.

Yes. So maybe let's dig into FIS a little bit and what operating metrics you're seeing across your 3 big business lines. If you don't mind sharing some of that, that would be great.

Yes. Well, we talked a little bit about -- I talked a minute ago a little bit about just how we saw the low-water mark coming out of April, and we started seeing a turnaround in our transaction volumes across a lot of the verticals as shelter-in-place got lifted. But that translates in throughout the whole business, right? Those transaction trends are going to not only lift our Merchant business, that's going to lift our debit network business, that's going to lift our issuer business. And those trends are going to continue. We saw some real -- we're seeing some real movement around digital. There's going to be a number of things coming out of COVID, Tien-Tsin, that I think aren't going to come back. So as you think about it, we've seen a real drop in cash, right? We would argue that, that is going to be a fantastic conversion rate for electronic. And what would be the catalyst of why would cash come back? Did we just fast-forward and really move substantially more towards electronic? That's going to be beneficial to us. When you look at what we're seeing around our digital, we just released a survey. We surveyed 1,000 people, and out of that survey, what they said is -- 45% of those people said they've materially changed the way they deal with their bank and they're not going back. And I would tell you, we're seeing that on all things digital for us, whether it's our mobile banking downloads, whether it's our mobile banking average sign-ons per day, our Internet banking, our bill payment and our sales channel, with our new omni-channel digital in Digital One, our modern banking platform, we're just seeing a lot of momentum pushing towards the future in a very rapid way.

And so Gary, you've seen -- you've been great at making the right chess moves in the past. And you've seen a lot of trends here. And I would say FIS was very smart to make the investments in cloud and modernize a lot of your platforms. Do you think -- how much of the world do you think will change to embrace that model here? And look, I mean, we've seen a lot of different things, right, Y2K, the financial crisis, obviously, the -- you've seen all of that. But -- and I'm not trying to celebrate the pandemic here, but with the opportunity that you see in front of you, how would you characterize the pipeline for outsourcing?

I think that we're as well positioned as we've ever been. And you're exactly right. I kind of try to -- I like to think about technology and how technology is deployed in milestone events over the history of my career. I've been here for a long time. So I've seen most of these milestones, and I would say we're just at the start and I think COVID is going to accelerate that into what I consider generation 4 technology, which is all cloud-native, fully SaaS, fully containerized in the most robust modern deployment. And look, we were first to market with our open API framework in Code Connect, and about 2 years ago, we've seen massive adoption. Last year, we rolled out Digital One, which is our omni-channel platform, literally saw huge adoption in our regional banks, now pushing it down to community banks, pulling it up. And now we've seen a modern banking platform that we brought to market in Q4 of last year, signed 3 top 30 banks all in a full outsourced deployment model. So -- and then you got to follow on -- that on with 3 more. So we're right at that early stage. And what I would tell you is there are literally institutions that have held on to gen 1 and gen 2 type deployments. They're going to have to move. In order to get -- given the fact where interest rates are, given the fact what COVID is driving on a digital front end, given what's required to work from home now and how that's going to be the new face of work going forward in this market, all of those things would say you cannot do that on gen 1 and gen 2 very well. And for them to take a step function in cost, those customers are going to have to move. And they're not going to move to gen 3, in my opinion. They're going to move to gen 4. You've got others, and look, that are very successful and have moved over the last 5, 10 years to a more modern deployment, right, which is at least outsourced, which at least has a robust API framework that you can get digital enablement. And those generation 3 customers will move, I think, more down the road. But I shared with some customers -- or some investors earlier that I think we're just starting a 10-year tailwind for our Banking business, and we're really early here in timing. And if you back up 3 months ago, I was talking to CEOs in top 30 banks, and they would say I'm not going to outsource that, it doesn't make sense, it's mission-critical, I've got scale. COVID hits. It takes them 2 and 3 weeks to get work-from-home right. They've got problems everywhere. We actually had to step in and help one of our competitors because they were down for almost a week right in the middle of COVID. And thank goodness, through our technology, we were able to -- we didn't have any kind of issues like that. We had to step in to help money movement just due to the mission-critical nature of the environment. All of that now fast-forward in the last 9 weeks that we've been in the shelter-in-place mode, my conversations have shifted. And you now have CEOs going, there's nothing off the table, I have to get my cost out, I have to get more nimble, I didn't have the scale I thought I had, I was having problems all over the place. And so I think we're in a really good spot, and I think COVID's going to push this very hard.

Yes. No, I think even pre-COVID, we spoke to some of the strategic clients that you have recently won. And look, they don't take those decisions lightly.

No.

And they evaluate their tech vendors very, very, very seriously. And so those wins, I know, are a big deal. But part of it is implementation, right? And that thing stood up is not easy. And now you're mentioning work-from-home. And I was really surprised, and I shared this with the team, Woody and Nate, that you're able to do this all digitally and remote. So talk about that. I mean are you able to convert the backlog in a timely way if we need to stay in this condition for some time?

Yes. Look, we've been very fortunate, right? So as we put the 2 companies together, and I think you've seen this, we were there early. I always laugh and go -- I had to fly to Washington to explain to regulators what a cloud was, right, because we were so early in that process, they were like you can't even fathom about moving financial institutions to some new technology like this. And so now of course, you look back and you laugh on that. But we have, over the last 5 years, just really been an early adopter of a lot of technologies. And we've been standardizing those across the company. So we were very fortunate. Even with Worldpay, we were so far along on the integration. We had fully moved everybody to Microsoft Teams, all 57,000 of us, right? We had fully deployed to standardized -- to a brand-new cloud-based VRU, to a blended cloud-based call center, right? So because we've gotten all these standard tools, our ability to move very quickly has been to our benefit. Had we not done that work, we would have been in a much different situation. But because of that, our professional services teams that are doing the implementations really have not missed a beat. And so we talked about it on the quarter, 100% of our PS in banking is now being done remotely. Now in Capital Markets, it's still about 90%. So we have had a couple of instances in Capital Markets on some small deals like an implementation that was going to go live in Italy that got delayed because they weren't comfortable going live without anybody on site. And it was Italy. That's been a real hot zone for COVID, which I understand there's no way I was going to put someone on site in Italy. So -- but the reality is -- but when you look at banking and because of that, we've actually been so efficient for it. I'm sure a lot of companies are seeing the same thing. But we're seeing tremendous increase in productivity because what's happened during the virus is no one took time off for spring break, which, by the way, is going to be a long-term concern. No one's taking a vacation. So our productivity metrics have really gone through the roof during these last 9 weeks because no one's taking any time off. And so actually, when you look at our implementations, we're actually -- they have actually gone very, very smoothly. In some instances, we're literally trying to pull some of them forward because we're having such a high throughput of productivity. Now we've got to get some people to take some vacation coming up, right? We've got to make sure that everybody focuses on that side of it as well or we'll hit burnout. But -- and then Woody talked about, even on the discretionary levers we're pulling, we pulled none of our levers on engineering, we pulled none of our levers on professional services, we pulled none of our levers on capital. Our only lever, so far, we've pulled is short-term bonuses and corporate functions on [ TBHs ] and some of those functions and then, of course, on travel across the board, which no one is doing. So we just feel really good about the position, and we feel really good about the investments we've made over the last several years and the dividends, those we're paying right now.

No. Great. That's a great summary. So before we bring Woody in then on the cost side, I do want to talk about Merchant a little bit. So that was running plus 10% revenue growth pre-COVID and then COVID hit, not surprising, down 30% in April. So help us understand how to benchmark performance here. I think we learned a lot. I learned a lot going through the process of how to benchmark certain companies. How would you suggest we do that?

Well, when we look into our volumes and we look at it, I mean, we're more of a global provider, frankly. So we're doing about 25% of the global merchant volume. So we saw a little more impact early on in Asia. In fact, on our Q4 call, a question was asked about are you seeing any COVID impact, and we estimated somewhere -- it was somewhere between $3 million and $5 million. But we also said the strength of the business is going to overpower through that. And we were feeling excellent coming out of January. We were seeing -- and even through February. We were just seeing great growth across the board. It was really when the WHO declared the global pandemic that the world closed, right? Everybody shut down very quickly. And I would tell you, when you break apart the volumes that we're seeing in Merchant on our distinct verticals compared to anything Mastercard and Visa, put forward, we're dead on top of it. So I mean you look at our e-com volumes minus travel and airlines, I mean, it grew 30%. You look at our digital streaming businesses, they grew 80%. You look at our grocery and drug, right, they grew 20%. So there's a lot of bright spots in the portfolio. What I would tell you, Tien-Tsin, our Merchant portfolio is going to perform very consistently to the industry just given our scale. There's just really no way around it. So as you start seeing improvement, we're going to see similar improvements. Our success is going to be, given our technology, our ability to take share and how are we going to make movements during this time to really garner share coming out of that. And we've got a lot of exciting things going on that we're making investments in to further enhance our e-com capabilities and our Worldpay gateway. We're doing some interesting things with Premium Payback. Woody talked about the acceleration of revenue growth. We actually raised the acceleration where revenue run rate was going up to $200 million coming out. And so if you look at that, that's the success of not only our debit routing or Premium Payback sales. And look, as those volumes grow, that revenue is going to even accelerate further. So it should give everybody a lot of confidence. We're well ahead on the cost side, Woody's going to cover, but we're well ahead of where we thought we would be on revenue synergies because those revenue synergies are impacted by the very same volume declines that everybody else has but it just gives the indication on how strong our sales team has been and how strong our onboarding has been through this -- through the early days of integration.

Yes. Now look, given your size and the volume you do, it's hard to outrun the market, I get it. But as you think about what we've learned here and how the world is shifting, you've talked about a lot of it already with e-com and omni, and obviously, you're big in e-com. But have you changed your strategic thinking about other areas, maybe owning some software or owning some hardware assets within Merchant or maybe changing your channel mix a little bit? Have you -- any big considerations or surprises there?

No. No. Not yet. Not at this time. Honestly, we continue to look at it. We really think that our route with software and hardware through partners is still the better outcome for us long term. We continue to look at it. We continue to have a lot of success with it. The strength of our capabilities is winning for us in the market. We talked about coming out of last -- not this quarter but the quarter before, in investment. We want to be very focused on not just -- it's not all about just synergies and revenue and payment. So we have also accelerated investment. In fact, we disclosed that we're accelerating investment in go-to-market and then implementations by about 150 bps. That should give everybody confidence about what we're seeing in our sales channels and what we're seeing in our close business. So we frankly think that our partnership approach on software and hardware is the right answer for us, and it continues to bear out in our sales wins.

Okay. And that's good to know. So maybe Woody, bringing you in the conversation here, just on the expense side. And I know you just updated revenue expense synergies. I don't need you to go through that. But just the same old question of how much confidence you have to expand margins this year and what other additional levers you might have at your disposal should this pandemic or the recession lasts a little bit longer than we think.

Yes. We certainly are pleased with the execution on the cost synergies and the revenue synergies. We've talked about that. We increased our cost synergies by another $100 million run rate exiting 2020 that are going to be permanent in terms of cost reduction. In response to COVID, we also took some short-term actions on the cost side. We talked about a roughly $300 million number. Those were designed, Tien-Tsin, to basically minimize employee impact and minimize impact on any future growth. So you can think about those being more short term in nature in terms of reducing short-term bonuses, reducing travel and training, reducing third-party spend on more discretionary items as the vast majority of those. We're also looking at some real estate, some incremental real estate work. That could be more permanent in nature as we align how many offices we open up fully when we come to the recovery and whether or not we have some certain areas that don't need to reopen at all. So we're certainly looking at that. That gives me conviction on the full year margin just given at least what we're forecasting in terms of trend and recovery. We certainly have incremental levers that we can pull on that as well. There would be further reduction in travel in the third and fourth quarter where we certainly have got some expectation about it reopening and us being able to travel in certain instances. We've certainly got capital spending to reduce cash costs coming out if we need to, if we have just an extended period of time. And then, obviously, we could take another turn at corporate costs, if necessary, should we just continue to have an extended period of time in the current environment, which we're not seeing, as we saw again trends starting to improve in April and continuing through the first half of May here, continuing to see improved trends. Again, thinking we've seen the low-water mark, and it's behind us, not in front of us.

Yes. I mean you've said it, right, the contribution margin on the business is high. So on the way down, there's a big impact. You can only do so much in a short period. But it's always that question, like how much more can you do between -- before you cut into muscle, but it sounds like there's still quite a bit more to do potentially, if necessary.

If necessary. I think the real setup is around it should accelerate our margin expansion in 2021 beyond what we originally modeled as we're trying to accelerate cost synergies and accelerate some more permanent cost reductions here that probably were lined up in 2021 or 2022 anyway. This has given us an opportunity to just try to accelerate those in response as well.

Yes. So thinking about the balance sheet a little bit, you mentioned your target leverage to 2021. You expect to get to the right place again. What happens then? I mean is the priorities right back to M&A? Or has this changed your thinking around target leverage?

I think this really hasn't changed our fuller view around capital structure and capital allocation long term. We're still focused on reducing our debt load. We didn't use that much debt in the Worldpay transaction in the first place to make sure we maintained a strong balance sheet. I think that balance sheet strength is obviously paying dividends right now and certainly paid dividends in terms of being able to finance the Worldpay transaction at extremely attractive rates. So I think that balance sheet strength, we're going to maintain. It's also giving us some flexibility in the interim here to continue to invest. You saw us announce the joint venture -- or the FIS Ventures announcement where we're going to invest $150 million over the next 3 years in early-stage and fintech start-ups to make sure we are on the cutting-edge of where technology is and is going. We continue to invest in some tuck-ins over the course of the year, which you'll probably see. You saw that Virtus in the first quarter. There's still some items in the pipeline for the remainder of the year. And I think some of the strength of the balance sheet gives us some opportunity to potentially even allocate some capital to try to drive some incentive to some players that might be a little weaker in this environment, to move volume over or to incent some customers to move volume to us in the short term. And once you get that move, I think it's going to be sticky once we get them over.

Yes. Okay. All good here. I want to make sure I hit some of these questions that are coming through, plus some of the questions that I have that match with them. So let's talk about SunGard, which you bought before Worldpay, obviously, and has grown way beyond my expectations. I used to cover it back in the good old days. So what's driving that? What's -- how is that -- is this sustainable, I suppose, is the question, and how does the world change here post COVID?

Yes. Well, I'll start, and Woody can jump on. If you think about where that asset was when we got it in 2015, right, very federated, very independent, really no investment in software. That whole industry at that point in time was heavily on-premise in nature, heavily licensed in nature. You just look, it's a totally structurally different company today, right? We've retooled the entire management team. Martin Boyd, who's running that business now, has really put a lot of process in place. We functionalized the whole sales and go-to-market. We also started investing heavily in the software, which is a consistent theme of ours, embracing cloud-based computing. We also started focusing on how do we pull solutions together. Up until that point, we never sold but an individual product. We never pulled together our front-, middle- and back-office capability and sold it as a suite. And now we've doubled down on stuff that's really high-growth like RegTech, and so you saw the result of it in Q1. I mean it was a 7% grower. Even if you strip out of the tailwind -- strip the tailwind out from volumes on it, it grew 6%. So the business has just really structurally improved over when we had it. And we think that growth is going to continue. We've seen real strong results out of the sales team. We continue to take share across the board from a lot of the well-known competitors. We're taking people. They're moving from on-premise deployment to outsourcing. We've now raised that recurring revenue a full 10 percentage points. That's up to 70% now and continues to grow every quarter while we're still driving revenue on license businesses. And you saw a little -- you saw some noise in the system as we moved to 606. Now we no longer can pull an early renewal forward. There's no advantage to that. We're actually getting economic benefit out of it. We're actually able to increase price now on renewals or at least hold price at the time of renewals. So that's a nice tailwind for us. And we're continuing to see our SaaS business new sales outstrip our license business quarter in, quarter out. So I think we shared that we've got about a 4-year period of time here where we're going to see this transition, but at the end of 4 years, I readily expect the recurring revenue to be dead on top of where banking is today and license, at that point in time, will be a very small piece of the business. It probably could even accelerate due to COVID, but I couldn't be more pleased. And so the results of that, as you kind of bowl it over with all of FIS, you've got a Merchant business that's the crown jewel that's growing 10% -- call it, 10% to 11% quarter in, quarter out, high-value e-com minus COVID, once COVID gets run; you got a Banking business that's now moved from 2%, 3% to 5%, which easily is going to grow above that given its timing on cloud-based next-generation technologies, so you got a 7% grower over the next couple of years there; and now you've got your Capital Markets business that's accelerating very dramatically. And so as you look at that, it's easy to see how we are going to move from where we were historically to an easily a 7% to 9% organic growth story. And frankly, as Woody just talked about, we're not stopping there. I mean every investment we're making is on timing for the future to further accelerate growth. So whether it's M&A and tuck-in, it's all about accelerating growth, whether large-scale M&A, we're never going to damage our balance sheet again and we're never going to give up on investment grade, but we will be looking for things that will accelerate our growth further from where we are, not something that we'll need to accelerate. So it's a very exciting time for us at the company.

Woody, did you have something to add there? I didn't want to...

Yes. I think he's right. His points are all on -- right on point with our thinking. I would echo them. I think the point I might try to point a little heavier on would be I believe in Capital Markets, you may try to -- you may see an acceleration of customers moving towards our SaaS model, given COVID, and away from license even faster than we originally anticipated. We certainly -- again, it just sets up a better long-term growth profile and a better foundation from a resiliency perspective year in, year out on a go-forward basis when you look to 2021 into 2023 and beyond.

And as we've talked about, we kind of -- we could have accelerated that even pre-COVID. It's going to be natural to accelerate post.

Okay. No, it's good to know. It's amazing how much that business has changed. It's -- I know it gets forgotten with the focus on the other areas. But...

As you know, it's honestly in a good market segment because, as you know, there's a tremendous amount of in-house-built software on the Capital Markets side, and everybody was fragmented across their various front, middle and back office. And now you got to get cost out of that. So it's just a really good timing and a lot of really good tailwind coming into that market. It's a really good business for us.

So we want to wrap up on a couple other questions I want to pick your brain on, Gary, if you don't mind. Just with the fintechs on the rise here with -- you got Visa buying Plaid, and pre-COVID, you had a lot of well-capitalized fintechs out there. And FIS itself is a large-scale fintech, but you've got a lot of these well-funded modern companies that are sort of on the heels on both the Merchant side, the Banking side as well as the consumer side. And so as you examine that, what -- how does that change your thinking on running FIS? Can these smaller, more nimble players break through and take advantage of some of the same trends that you've highlighted? Or is in the end, scale going to trump all? How do you think about them as competitors?

Well, hopefully, what you're seeing, Tien-Tsin, from us is exactly what we talked about at the start of this, and you said, we've always had pretty good foresight ourselves into where the trends are headed. And we've invested in front of that, and it's paid huge dividends. So I think of us as a very aggressive fintech today. We're doing a tremendous amount around disruption now. But also, let's not lose sight of we've been a great enabler of new fintechs. You go back to our Accelerator, and we're going into year 5 on that, you can put those stats of fintechs coming out with an Accelerator compared to any Accelerator in the world, and they pale in comparison to the FIS Accelerator. If you look at what we've done since 2008 around venture investments, and some of them have led to great success, I mean, we were an early, early investor in mobile banking when no one even knew what mobile banking was in mFoundry and then grew on to be the largest third-party mobile provider in the U.S. because of that and the full acquisition. And now Woody just embraced -- just talked about our commitment of $150 million through a venture fund over the next 3 years. So we've always been an early adopter of it, but I will tell you, scale does matter and trumps everything. And I'll give you a real-life example. Coming into COVID, we've never seen the response out of the government that we've seen. I mean if you want to give anything credit, this government has responded with incentive plans to keep this from becoming a much worse financial recession or depression than we would like, and they have come with tremendous incentives. And one of them was the Payroll Protection Program (sic) [ Paycheck Protection Program ]. Now most people don't realize, we had not invested much in SBA processing. Why? Because almost no one in the country did SBA process. There were a few banks that actually specialized in it, but there was just never a lot of money to be made. So now you've got the PPP program that hits the market, and they're going to run it through the SBA program. So we have made an investment in an early-stage fintech and who had built an end-to-end real-time lending solution around the SBA process. So since we had made an investment, we said, look, we'll partner with you, and we will launch this. Now coming into this, that fintech had 10 customers running their capability. We said, "Look, we'll stand it up. We'll focus on our large regionals and large banks because if we're going to really make a difference here, we're going to have to hit the market that's going to generate the most loans." So in 4 days, we stand up and convert 81 banks, all right? Day 1 of that fourth day, the fintech was doing 20 discrete elements of the implementation, 20 for 20. We were just the sales channel. By day 4, we were doing 100% of everything because they just can't scale in that kind of environment. Because we had leveraged cloud and because this is cloud-based technologies and because of our private cloud, we were also able to scale up in that 4 days to a volume level that no one ever thought would come through. And so then, what you saw is some of the largest institutions, right, some of the big 5, they fixed -- they did PPP through just hiring people. They have put 4,000 people online keying in manually, and they were averaging 1 loan every 45 minutes. We were averaging 1 person doing 2 loans a minute end-to-end, from onboarding, to approval, to close. And now we're rolling that out into the whole forgiveness process. Now what does that mean? That means tens of millions of dollars in revenue for FIS. Had that fintech done that on its own, it would have gotten none of it. I mean it literally would have gotten $500,000, right? So scale really does matter. So I don't want people to think that just because 4 people in a garage are going to invent something cool, that they're going to be able to scale and displace FIS. It just doesn't work that way because these are complex deployments, complex environments and they have complex scale needs. And I think that's a great example of why we invest in early-stage fintechs but also how our scale can make the difference in making them successful or not. And then, obviously, inevitably, if it ends up turning to be a real revenue stream for long term and can further accelerate our growth, it's a good M&A platform, so -- for us. But so we actually embrace the fintechs. We think of ourselves as a fintech ourselves. We think of ourselves as being extremely nimble. And so we're not concerned about being displaced by any stretch.

Yes. No. That sounds really interesting. And it sounds like there's going to be more collaboration and maybe consolidation. But like you said, it's really, really tough to scale. So I think we're out of time. This was really fun. I appreciate you guys spending, again, your afternoon with us. And I hope we'll have you back in person next year.

Exactly. Exactly.

That would be mighty cool for a lot of reasons. But fun. I appreciate the time, guys. I do.

See you, Tien-Tsin.

Thanks. Great to see you. Thank you.

Be well, please, okay?

You too.