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

Great. Thanks, and welcome back, everyone, to Barclays' Payments and Fintech Forum. In this afternoon's session, we're very fortunate to have Gary Norcross, Woody Woodall and Nate Rozof joining us as CEO, CFO and Head of IR respectively from FIS. So guys, thanks so much for joining. With everything going on, I really appreciate your time today.

Thrilled to be here. Great to see you, Ramsey.

Thank you.

Glad to be here. Thanks for the time.

Fantastic. Maybe I'll hop right in on the banking side. I'll get to some kind of topical stuff around volumes heading into May in just a bit, but you guys seem to be on a tear when it comes to winning these larger banking, outsourcing deals. I mean it's been a long journey with rearchitecting and remodernizing the systems, which is paying off really nicely. What has been changing on the customer side in terms of the needs or pain points that your solutions are doing such a good job addressing now? How is the value proposition kind of resonated in a different way?

Yes. Ramsey, I think it goes back to shortly after I became CEO, which was almost 5 years ago. If you look, I've been with the company now 32 years. There's been a couple of milestone inflection points as you look at the evolution of technology that's occurred over the course of this industry. And what I was seeing in the early days as I was becoming CEO is that we were approaching some new technology that was going to require a massive transformation. We all talk about legacy technologies and how much those -- how much longer can legacy technology stay in place. And if you look, especially in the large bank market, they've held on to their core banking systems for a very long time. And so we made the decision not to rearchitect. We made a decision to ground-up build a true next-generation core banking system fully from the ground up using componentized architecture, highly containerized, all built for the cloud, all through open APIs. And so the good news is we timed that pretty well. So as you're seeing us move in that, we did that on a number of our capabilities. We launched our Code Connect platform, which was our early open API gateway that was due to GDPR over in Europe. We then came on with our Digital One platform, which is the first omnichannel capability. And then in Q4, we launched the modern banking platform, which is really the core underlying engine to the other large systems. And you've seen the result of that. We now have a number of very large institutions. I remember, I've been in a number of these calls. People used to say all the time, will we ever see a top 30 bank outsource their core banking system? And I knew that it was going to take something significant and transformational to make that occur, and clearly modern banking is that. We're now to a time where people no longer can hold on to their mainframe COBOL-based systems. Frankly, the pandemic's accelerating that because as you think about the push for digital enablement, all that needs a much more modern, much more open architecture, and that's really what modern banking platform is delivering. And you've seen it in our early wins. We had 3 top 30 banks choose modern banking platform in Q4. We followed on by 3 very significant wins in Q1. And leading into Q2 and the rest of the year, we've got the fullest pipeline I've seen on these kind of core transformations. And clearly FIS is becoming -- has established itself already as the leader in the space.

I think you just answered part of this question. But in terms of that pipeline and kind of reloading that pipeline in the context of everything that's going on, you're still seeing engagement from your customers. There are some critical issues they have to solve regardless, I'm assuming. But is that a fair characterization?

Yes. I think when you look, there's only so long you can hold on to these legacy technologies. We've got -- there are financial institutions around the world that are running on technology that was written in the 1970s or 1980s or 1990s. And when you look at the movement to digital, when everybody talks about being more agile, you can only be so digital and so agile and so quick on top of these legacy monolithic platforms. And so whether there's the pandemic or not, right, which we all wish there wasn't a pandemic, people have held on and they have to make these kind of transformational changes. And if anything, we're seeing an acceleration in the conversation. 4 or 5 months ago, I would have said even the surrounds, we were never going to see outsource. Now that we've all gone through COVID-19 and this pandemic, you now have conversations where our clients are saying, "Why aren't you taking all of this?" Right? And so the push towards outsourcing has accelerated very dramatically, and this being augmented by our new technologies. It's really working well. So pipeline is growing very well. We're coming off 9 consecutive quarters of very strong sales growth in banking. And I would tell you when we came out of Q1, that was one of the largest quarters we've had in banking Q1 over Q1, so very strong results again in the quarter. And that's proceeded into April and now into May. So I think we're teed up for a very good year on core banking, and the pipeline continues to grow and the sales teams keep closing business.

Okay. In terms of converting that business to revenue, one of the more of the more impressive things that you said on the earning -- on the recent earnings call was that you'd converted your implementation model to a remote delivery process. And what were -- how did you do that so quickly? And I guess I'm assuming a tie but maybe you could speak to your confidence level in terms of being able to kind of keep it up and continually roll out what you signed.

Well, look, I mean this is something we've been focused on a lot lately. So if you look back over our quarters, we've talked about technologies around mass enablement of our applications and rolling out product faster and mass enabling the customer bases. And these were all things that were geared around more remote implementations. But even with all that being done, we had moved it to about 70% remote, about 30% on-site. We also have been really focused on tools given the Worldpay integration. So we took advantage of rolling out a lot of collaboration tools on an enterprise-wide level. And that's whether it's video conferencing like this but even development collaboration tools. And all of that's allowed us to move that in banking to 100% due to COVID. We've signed those big wins. A lot of people asked about that on the call. Every one of those signings are on target, right on track with all -- overall the platforms. But we also have a lot of other implementations going on. Now the question is will we stay at 100% once there's a strong therapeutic or once there's a vaccine or once we return to normal? I don't know, but I don't think it's going to fall back to 70%. I do think people like to interact face to face at times. Keep in mind, these will be the largest programs that any single financial institution rolls out for the next year. And so -- but will it come back to 90/10? I definitely think there will be some benefits that come out of COVID that will allow us to stay much more heavily remote than on-site, which will be beneficial in the cost structure, obviously very beneficial in productivity. We're seeing productivity increases across the board at FIS with this work from home. And so I think that will continue. But it was all fortunate because it was just the investment that we had made early on to move more to a remote basis, whether it was through mass enablement technologies or also development technologies that I mentioned earlier.

One of my follow-up questions had to do with potentially seeing this as a long-term -- this is one for you, Woody, potentially seeing this as kind of a long-term operating leverage-type driver going forward, which it sounds like the answer is yes on that. And -- but it's probably tough at this point, maybe this is more of a question than a statement, to kind of calibrate how much of it is going to be sticky versus not, maybe time will tell?

Yes, I think there'll be a combination of all of the above. I definitely think we'll enter into a new normal in the way we execute. If you look, Woody talked about how well we're doing on the integration of Worldpay, and I'm sure we'll talk more about that. We've continued to raise the amount of expenses that we're taking out every single quarter. And our ability to accelerate that and all of those savings will be permanent in nature. But there's also -- we have seen significant impact on the top line, especially in our merchant business due to COVID-19. And so like any crisis that occurs, there's short-term levers we can pull, right? You can pull back on discretionary hiring that's not tied to revenue for an example. You can pull back on your travel and your -- which is an example in the short term. Obviously, hirings will come back. Obviously, travel, some of it might come back. Some of it though, we're going to pull -- probably won't come back. I think we'll take a real hard look at our facilities. We're so effectively working from home, there are going to be certain facilities around the world. Why would we reopen? And those would be examples of items that were possibly pushed on us by COVID but will have very long-term outcome for us. There just won't be any reason to reopen the facility as an example. And there'll be combinations in between.

Okay. And then maybe one last one on banking. Can you talk a little bit about the competitive environment? It feels like you guys have done a really good job. And this might not be restricted to banking as well, maybe a little bit on the capital market side as well. You've done such a good job kind of skating where the puck is going in terms of building out your systems that are really paying dividends right now. What does it look like with these outsourcing deals on banking? Are there other people at the table who have similar solutions? Are you kind of in charge of -- you're running the table for a little bit here? Or how would you characterize the competitive environment?

Yes. We were -- back to my point earlier, we were very fortunate, right? We made a decision to really pivot the company and focus on modernization, transformation and next-generation technology very early on. And we've talked about programs like data center consolidation, which is just a simple term. But as we collapsed all of our data center, we heavily embraced cloud computing, which now today we're the leader in the industry with regards to availability. And we've pushed some really interesting things to our customers on behalf of just all of the investments, so they get benefits out of that. We've now invested in our application stack. We talk a lot about banking. We've done the exact same thing on capital markets. And so now, we are seeing some competition when we're in these large financial institutions but it would be early stage start-ups that are also trying to build out a next-generation core banking system for the cloud, for example. But at the end of the day, you're looking at FIS and the scale we have and the credibility we have. If you're going to look to outsource your institution, why not go with the person who's the leader in that space? We have tremendous credibility there. If you're going to go through one of the single biggest conversions you've gone through in the last 30 years, any large-scale implementation around the world has typically been led by FIS. And so now you get the history of our ability to build applications on world-class technology. We're just doing very well in the market because of all of that.

Okay. Maybe we'll talk about merchant a bit. And you'd mentioned on the earnings call some of the trends you're seeing coming out of April, maybe a little bit more sort of a topical question. Can you give us an update on what you're seeing out there in your portfolio now on the merchant side?

Yes. I mean if you look -- and Woody can certainly chime in on a number of these things. I mean if you look right now, we have about 25% of the global acquiring volume today. So anything we'd be seeing in our numbers are right on top of what you would see in the disclosures around from Mastercard and Visa. So we've seen very, very -- we've seen some bright spots. We've seen some real strong growth in grocery and drug. Those were up about 20%. We've seen really strong growth in our e-com. If you take away our travel and airline business, our e-com volumes have been growing very, very strong. Our digital e-com business is growing 80%. But we're also seeing the same trends other people are seeing where a restaurant and SMB business, due to shelter in place, due to closures, are off. We have seen some nice recovery in April. We've seen that recovery continue into May. As shelter in place continues to be lifted, I think you're going to see nice recovery here. Of course, what we're watching for is does this become a V-type recovery? Or do -- what we all hope we don't see is a W, right? We hope we don't see the increase of COVID and another reaction where people start reclosing states or reclosing geographies. But we're very focused on watching the trends. And right now, with shelter in place lifted, those trends are maintaining. But all in all, our book has performed right in line with others with some real bright spots, given the nature of our book of business.

Yes. I'll just add on to that, Ramsey, that over the last couple of weeks in May, we've definitely seen continuing improvement in line with some of the Visa, Mastercard data that they put out or Mastercard put out late last week. So we certainly believe mid-April was the low-water mark and then have seen improvement ever since then. And I think it's going to continue, to Gary's point, as we continue to see openings, reopenings and shutdown and restrictions lifted or reduced as we go forward.

Okay. That's great. And then of the 3 major segments you guys operate in, merchant feels like -- the end market there as the one that's going through some greater upheaval for obvious reasons. And this is a big question but --and it's still early days but how do you even frame up kind of the longer-term impact in merchant? How do you frame up how the channels may respond, how the customer base may change fundamentally? It's a big question, but just wondering if you guys had any insight there.

Well, it's really hard. I mean to answer your question, I mean, we monitor it day in and day out. We monitor it by type of merchant, municipality, right, county, state, geography around the world. And as I said, we're seeing real trends of improvement as shelter in place continues to be lifted. But the question is how long do we go until we have an effective therapeutic? How long do we go until we have an effective vaccine? What does the return to normal look like? And that's where it gets hard to determine when we get to full recovery. So we continue to watch it like everybody else. We'll continue to come back to our shareholders and informing everybody of what we're seeing. As I said, we're going to lean in on the bright spots. One of the things we're doing, which we're fortunate given the nature of our company and our position, we're actually taking this time to actually invest, right, and continue to invest in our capabilities. So we're making a lot of progress with our new acquiring platform, making a lot of progress with our omnichannel. On the merchant side, we're doing a lot of things to help augment our merchants today, whether it's our virtual terminal access that we allowed everybody to use for free through April, or some of the other new technologies we're rolling out. So we see this as an opportunity that actually during the crisis, FIS can continue to invest, very similar to what we did in banking, by the way, in capital markets, and really use this opportunity to not only come out of the pandemic stronger but to really continue to drive differentiation across our global e-com channels and actually take more share through this process.

Interesting. And so you're seeing merchants who are coming to you saying, "We need to change the channel." Is it where we need to try to figure out how to sell in different channels? And have you had to kind of adjust your product strategy pretty rapidly to accommodate them? I mean I know you had a lot of solutions kind of on the shelf already, but...

Yes, as I was about to say, we're pretty fortunate. Worldpay was very similar to FIS. I mean they were the leader in global e-commerce. They really were known in the market as the leader with technology. And so that's played very well. And so you see it in our cross-sell synergies, then FIS was able to come in and augment with a lot of capabilities and vice versa. So we've got a pretty compelling platform right now and a lot of really good assets that can help our merchants during this time. We're launching a lot of diagnostic tools, right, that really give them firsthand information about what's going on in their environment. We're giving them an opportunity to help transition more through omnichannel and more to an online capability, away from a direct brick and mortar during this difficult time. So we're doing a lot of really creative things. The team is doing a nice job of continuing to meet our merchant where -- in their time and need and helping them differentiate for the future.

That's great. I wanted to also ask about your capital markets segment. I think that's a segment that is a little bit less understood -- less well understood by some investors. It's been a nice growth acceleration story there as well. And there's a SaaS, and migration to a SaaS-based model definitely played a role there. Can you just talk about your kind of road map there, kind of where you're coming from, and how sustainable you think some of these tailwinds might be in that business?

Yes. No, we couldn't be more pleased with them. Honestly, just the entire structural change that occurred in capital markets. Once again, when we did the SunGard acquisition back in 2015, we really were looking at that industry. And it was such a nice adjacency to the large financial institution marketplace where we had a lot of credibility in financial institutions but then a nice extension into broad-based asset managers and others. When we looked at the industry, it was very fragmented. It reminded us of banking almost 2 decades ago. You had people that were only focused on the front office, people focused on the middle, people focused on the back office, so tremendous fragmentation. A lot of that software had been deployed on-prem. And what we were seeing is what -- given all the change that was occurring in capital markets, someone was going to have to focus on pulling together a total end-to-end solution on a highly outsourced basis to be able to drive the costs out of that ecosystem, given the change. And so that was the thesis that we saw when we looked at SunGard. And so as we pulled that together, as you probably remember, that was a highly, highly federated model. We truly moved that together, put all the common applications together. Started innovating around the solution stacks, started deploying them through our cloud-based SaaS model and just seeing tremendous success with that. Reconfigured their entire sales team, pulled them out of the product organization, now run a global sales force. And as I said, just couldn't be more pleased with it. And what you're seeing in the industry, that thesis that we saw end up being right. So now what we're seeing is people are looking to go across all of the very front, middle, back office; leverage on an outsourced basis; and take advantage of FIS' world-class scale and our ability to develop and deliver solutions. And so you saw great growth in Q1, 7% organic growth. Even if you took the volatility, right, the transaction volatility, it was a 1%, I mean it still would have grown 6%, which is just outstanding. And as we look going into Q2 and the rest of the year, we feel really good about the business. We feel really good about the positioning. The team also not only built solutions, they focused on some pretty evolving high-growth areas as well, so the whole area of regulation and technology. And so we're doing a lot in that space and capturing whether it's the consolidated audit trail that's rolling out. I've lost track of now how many clients we've signed for that capability. And so the team's done a nice job of anticipating various changes and embracing that, and you're seeing the results in the growth curve.

That's great. On the business development side in capital markets, is there -- how is your sales force structured? Is it a similar -- are there -- obviously, there are larger banks that have needs from both the retail banking side of things as well as the capital markets side. I know looking back when you did the SunGard deal, we were thinking through how those synergies would work. It would strike me that as, as SaaS becomes the delivery method, perhaps there's some opening there for some kind of longer-term synergies to emerge on the revenue side. With SunGard, I'm talking about, not Worldpay.

Yes. No. Look, I think we're already seeing some of that. I mean we've highlighted some really big wins, especially on our wealth and retirement business, given with some of our trading relationships and vice versa. We've seen some large-scale wins where we just signed a big syndicated lending deal with one of our large retail customers. And so those are examples where the teams are coming together. And I think that's going to continue to grow. I think you're exactly right. We now have both organizations, banking and capital markets, has a single global Chief Revenue Officer. We're leveraging all of our sales teams to carry every arrow in the quiver. And then they're doing joint calls on these large customers that can have both retail banking and a capital markets relationship. And so more to come on that but we are seeing some success and actually highlighted a significant win this quarter in that example.

Okay. Maybe we can now pivot over to the Worldpay merger and the synergy outlook there. I was thinking specifically about revenue synergies. I guess first, it would be great to get an update in terms of what inning you think we're in? I know COVID is kind of shaking up the game board quite a bit but you've still been able to pull some nice revenues -- cost synergies forward. How do you -- maybe we'll get to cost synergies in a second. First of all, revenue synergies. How do you navigate COVID with the revenue synergies? It strikes me that some of those things are dependent on volumes and market activity, if that's suppressed, yes. Maybe you could speak to that and your confidence level around synergies?

Well, look, I mean the revenue synergies, just like on the cost side, the revenue synergies really couldn't have been going any better than what they were pre-COVID. And that's actually continued to pay dividends even during the crisis. If you look early on, we said we're going to really focus on debit routing. I would tell you we're in the very late innings of debit routing, and it's gone very well. And it's -- we captured a lot of revenue. I'll remind you that originally we thought that we would exit this year at $100 million. We've now raised that by another $100 million, so feel very confident about the run rate benefits there. So we've seen a lot in debit routing. We've seen a tremendous amount of uptake with our Premium Payback solution, which is really taking loyalty points and converting it to a currency. That's a really perfect product coming out of FIS where it's very friendly to the merchant, right? It's very friendly to the issuer, and the consumer really likes it. So we're seeing a lot of adoption there. And we continue to build on it. So as Woody talked about, our current run rate is $100 million of annualized synergies. And obviously as you suggest, as volumes increase, even that book of business is going to accelerate further. But the sales pipeline is very full. And the third option -- So those first 2, I would say, is what we expected. The third option, I keep bringing this up. We're -- this one's ahead of where we thought it was going to be. When we entered this, we thought there would be some opportunities for bank referrals, right, and for them to outsource the merchant referral business to us. But we also knew Fiserv and First Data was a well encumbered position provider there. And so a lot of those contracts were long term in nature. And I think we thought we might sign 4 or 5 of those a year, best case scenario. We've been very pleased with our signings and frankly the size of our signings. And so when we're making these announcements, it's hundreds of branches moving over in some instances and just seeing a lot of demand. And frankly it's just back to the position FIS has in these large financial institutions. We're doing a lot of their retail banking today. We're focusing on them on their digital landscape. It's just a natural augmentation. Plus Worldpay was extremely good at this merchant referral channel and had -- while they didn't have near the volume that others had, the ones they had are very highly referenceable and have really good metrics coming out of it. So that's been a real pleasant surprise. So all of that would say we're very bullish on the revenue synergies and the opportunities. We still have a lot more opportunities to come. We're still working on our auth and fraud rate opportunities that we've talked about in the past. And we've got a number of other things. So all in all, I feel great about exceeding expectations on the revenue synergies over the 3-year period. And even with COVID, we're all -- we're off to a great start. The sales team has done a really nice job.

Good, good. I think we just have a couple of minutes left here but I wanted to ask about balance sheet deployment, capital allocation. Talk about maybe what's the -- has the current environment changed your thinking there at all? Maybe frame it up this way, what should we be looking for over the next few years? How will you leverage your capital basically, whether it's M&A or otherwise, to kind of get to where you want to get to over the next few years?

Yes. Maybe I'll start on that one and then let Gary kind of add on it. I would tell you, we're still aligned with the communication and the philosophy that we've talked about for a while, which is maintaining a strong balance sheet. We want to get the balance sheet delevered back to about 2.7x, which was our target originally through 2020. With COVID here, that's extended into 2021 as we talked about, but very focused on deleveraging the balance sheet. We didn't put much debt on when we did the Worldpay deal, which gave us some flexibility to do some tuck-ins acquisitions even in the interim where we did Virtus earlier this year in the capital markets segment. We got a couple of things in the pipeline. And then we've got the FIS Ventures that we announced a week or so ago, a couple of weeks ago, to invest in early-stage fintech of roughly $50 million a year or $150 million over a 3- year period, to make sure we're looking around the corner and looking over the horizon with respect to new technologies or new things that are coming into the market that could be relative to our customers or customer base. We're going to continue to pay our dividend. You saw us do that and continue to drive that. And then once we get our balance sheet back into a good, strong position, I think we've always talked about M&A being a long-term strategic part of our overall strategy or overall direction to drive growth and shareholder value. We think we've done a good job in being disciplined with our M&A, making sure the integrations work well, get the synergies out and ultimately drive that shareholder value. And I think it will continue to be a portion of the long-term strategy.

Okay. Terrific. I think that's about all the time we have for today, gentlemen. But I do appreciate your joining us. And looking forward to keeping in touch, and stay safe and healthy.

You do the same, Ramsey. Thank you.

Thank you. Take care.

Thanks so much. Bye-bye.