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

Now we are live, so please start your meeting.

Okay. Okay. Thank you. All right. My name is Dave Koning. I'm a Senior Analyst at Robert W. Baird. I cover the Payments industry and BPO. I'm very pleased to introduce FIS this morning, with CFO, Woody Woodall; Head of IR, Nate Rozof. As many of you know, FIS is one of the biggest financial technology companies in the world today. It's been a huge stock performer. They recently bought Worldpay, another big stock performer in the recent years. And so we've had a nice year-to-date run in the stock. It's outperformed the market at the same time as trends in the economy have been more turbulent.

So maybe you can just start off by kind of talking about April trends, maybe anything recent, but kind of what you've seen in the market with card spending and financial technology.

Great. Thanks, Dave, and thanks for having us. Really appreciate the interest and being able to take the time to talk about FIS and our story. If you look back about 30% -- a little over 30% of our revenue stream is related to merchant acquiring with the acquisition of Worldpay almost this time last year. That business has certainly been impacted by the backdrop -- the macro backdrop that we're working through right now, with trends -- merchant and consumer buying trends dropping off heavily in late March and into April, which we saw and talked about on our first quarter earnings call that we believe that it'd be the trough. And I think that data is -- or that thought process is holding true. We certainly have seen improvements in the back half of April. We have seen improvements throughout May. We're starting to get data around June, and those trends continue to be going up into the right with regard to volumes coming back. I would tell you a couple of things. We believe it will continue to increase in terms of volumes as we see restrictions continue to ease, and various phases of reopening continuing to ease as we see restaurants begin to open up at 25% capacity, then 50%. And hopefully, we'll move back to regular capacity at some point in time. I can tell you, in Florida, we're opened up relatively quickly compared to others. We're certainly starting to see retail come back, seeing retail activity come back, seeing some restaurant activity come back, and I think that will continue. If you look very specifically at the trends, they would -- that Mastercard has given kind of intra-quarter and Visa gave a couple of days ago, our trends would lay right on top of those trends. We're probably 25% of the overall acquiring market, a scale player. So it wouldn't surprise you that card-not-present, card present, online, not online, debit, credit, overall, the volumes are lining up relatively similarly to the Visa and Mastercard trends that have been published recently. Again, improving but not where they were pre-COVID at this point.

Yes. And maybe the 2 things, just to kind of isolate, one is do your revenue trends match their volume trends? Or maybe how should we think about revenue volumes transactions? Like what's the best indicator for you when we think of your revenue?

I think vast majority for the Merchant business, specifically, is around volume trends, definitely aligns with it. We've got an anomaly with the government's change in the timing of tax filings, where, typically, April 15 is the tax deadline, which is a Q2 item. That's moved to July 15, which is now a Q3 item. So within the Merchant and the Payments business, we've got about a $90 million swing out of Q2 and into Q3, very specifically related to the change in the government's tax filing deadline. Full year, we think it has no impact, but it will have some swing between -- if you set that to the side, Dave, the revenue trends generally are going to align, we believe, with overall volume trends.

Yes. Okay. And what month, specifically, does that tax -- that $90 million fall out of? Or what was it in -- I guess, in 2019, what month was that in? And then what month will it be in, in Q3, I guess, of this year?

The vast majority of it sits in April, the first 2 weeks of April, right up to the deadline and just -- it absolutely just comes on right at that point in time. Traditionally, if you really look at the underlying detail, we have a little bit of February, where people are getting refunds or whatever, a little bit of March, where people are filing early. But vast majority sits right in April. Then you may even have some that comes in September as people delay their filings, right, later in the year. But again, vast majority comes right in around April 1 through the 15.

Yes. Yes. And so when you were kind of saying on the call that the worst month of it all or the worst couple of weeks, I think you said revenue down $40 million, it really was down $30 million when we take out the tax, and then that was the trough. So things since then have gotten better, basically.

That's exactly right. Revenue was down $40 million. You take out the tax, it was down $30 million, which is where volumes were in April, basically. And then you've seen improvements since then. You're exactly right.

Yes. Okay. And you talked a little bit about verticals and where is some of the benefits. Maybe you can go through just a little bit on the really tough verticals and how those have gone, the better verticals, how those have gone, just a little bit.

Yes. We've had bright spots and more difficult spots in terms of the verticals that we serve. We serve a little bit of everything across the globe. On the difficult side, I'll start with it first, travel and airlines has been heavily impacted to the negative with heavy restrictions, particularly heavy cross-border restrictions on the travel and airlines. That bottomed out at probably 90%-plus down, Dave, in the April time frame. Since then, we have seen some level of increase in travel. We've seen some new bookings. We've seen some airline bookings start to come back, a little more in Southeast Asia compared to other areas. But we've even seen some of the nonairline, travel-related, for example, an Expedia-type company starting to see bookings come back a little bit, nowhere near the levels they were at, still down but not at the trough anymore either. That's probably the worst. On the good side, we certainly have seen e-commerce continue to be a very strong grower, same as travel and airlines. It was about 30% growth even in April. That growth has continued to be very strong. Within that area, you further dial it down into the digital area. Think about online streaming, think about gaming -- online gaming, those were up about 80% in that April time frame. And then grocery and pharma, obviously, as people are spending more time at home and cooking at home, we saw grocery and pharmaceuticals up roughly 20% in that April time frame as well. So you certainly have got some bad. We've got some bright spots as well. And then in the middle, which is the vast majority of the business around traditional retail in restaurant, it was down about $30 million, which is what you saw with Visa, Mastercard. And again, that being the trough, and that started to improve and come back a little bit as restrictions are being lifted.

Okay. And the last thing on the Merchant business, I often think of incremental margins being around 70%, either way, up or down. And the reason I think that is because Worldpay's sales and marketing costs were, give or take, 30%. So are we thinking of that right? Like this quarter, if revenue is down, whatever it is sequentially, should we just think of 70% incremental? Or how do we think of that over time?

We've talked about it being a little bit higher than that, Dave, at about 75%, but you're in the ballpark. Volumes are going to be impacting revenue and the profit pretty heavily in that merchant business. And it is a highly scaled environment that as volumes come on, they come on very rapidly. And as they come off, the profits come off pretty rapidly as well. I think we've done a lot in terms of trying to react quickly with increasing our synergies, accelerating our synergies and taking some short-term actions that are not permanent in nature but are short-term in nature to try to react and protect margins as best we can. We gave some color around that. We do think Q2 margins will be down year-over-year, at least based on what we saw in April and through mid-May. We do believe, based on our cost actions and our belief that volumes will come back, we still are going to see margin expansion for the full year 2020. I think it really shows the resiliency and power of the business model overall with, obviously, Merchant being heavily impacted. And then the Banking business and Capital Market is having a lot less impact -- well, there's some, but a lot less impact overall on both revenue and profitability.

Yes. Great. When we move to the Banking segment, kind of the legacy FIS segment, really, that's half of revenue. And is that being -- I mean you mentioned it's a little impacted with the transactional-type business, but is the general core processing business as good as ever? And in some cases, banks are saying, "Hey, we're relying more on technology than ever." How is that trending?

Yes. The foundational business is doing very well, as you would expect and most investors have expected. And it's been very sound in a difficult environment. I would tell you, we've continued to see increases in terms of demand for digital, for demand for mobile, for demand for different ways to provide consumers' banking activities in a non-branch way, in a new non-brick-and-mortar kind of way. So I think that demand has continued to actually increase through this time horizon, Dave. And then, obviously, you've seen us with the Modern Banking Platform wins that we've talked about and signed over the last 2 quarters. We're continuing to see a strong push by institutions to modernize their technology, to move into more of cloud-based infrastructure and to actually embrace some of the outsourcing capabilities that we have to, in fact, have that more open experience, have that end-to-end digital experience that's more seamless and reduces friction out of the consumers' transaction, which is what they're really trying to do to compete with the very largest money center banks. And we've had a lot of success there. I really think the investments we've been making over the past several years are paying a lot of dividends right now.

Well, that's great. Is -- and do you feel like this current situation wins is almost the longer-term catalyst for banks to almost accelerate the shift away from branches and more to tech?

We certainly believe so. We've talked about that for a number of years that, if you ask, "Are banks going to use more technology in the future or more legacy branch than connectivity to customers?", everybody believes it's going to be more tech-enabled. We believe the seamless end-to-end digital capabilities we have, the open architecture and our ability for these institutions, even these larger institutions, to consume it on a component basis, where you can take a little -- a smaller bite at the elephant as you're trying to change out the entire bank's infrastructure, is really resonating well with the customer base. Our ability to deliver it remotely right now is resonating well with the customer base. We were able to really prove that we can mobilize and deliver remotely. I think it's shown really the strength of our business model, where others thought they could do things remotely or thought they could do things that are having some difficulties in our bank customer base that we're able to help pick up the pieces and drive them forward and let them continue to deliver support for their end-user consumers.

Yes. Okay. And what about the portion of the business that's a little more transactional, right, the legacy, the Vantiv debit processing, the Metavante debit processing, the Certegy credit. How much of banking is transactional? And does that correlate with Visa, Mastercard pretty well?

Yes. It's a great question. I think it's one that people didn't anticipate. But once you talk them through it, they get it. Consumer spending is also going to not only impact the merchant-acquiring side of the business, where the point of the transaction or the start of the transaction happens. It's going to impact the issuer side of the business, too, where the transaction terminates, and you actually fund the card or move the funds from the bank into the merchant's hands. It's about 13% of our business, between debit, credit and networks, primarily, Dave. There's also a little bit of what we call Decision Solutions, which is where people are going to go back to do new account openings that obviously had some pressure in the late March and early April time frame as everything is kind of locked down. It's certainly going to flow with probably the overall Visa, Mastercard trend lines. I would tell you, it probably would flow closer to their debit trend lines than others. We just got a little more debit exposure than credit. But yes, it's impacted to a negative. It's about 13%. It's really the only headwind right now we've seen in the banking business right now. The consumption of professional services has continued the consumption of by-the-drink SaaS capabilities, which is still roughly 70% or so of the total revenue base, has continued on as you would expect.

So in Banking, even some of the less recurring stuff, the professional services, is still trending pretty well.

At this juncture, it's been okay, it really has. I think everything had a little bit of a shock to the system as people try to figure out in April how to deliver these services remotely and how to consume the services remotely, even if you're on the bank side. But certainly, applications like we're working and talking on today, Teams, Microsoft Teams, Webex, for example, the ability -- the capabilities that are out there where you feel a more close interaction, even though we're not sitting across the desk or across a chair from each other, has certainly helped in this environment. And not only are we able to deliver the capabilities remotely, really, the bank is able to consume them remotely as well, which is just as important here.

Yes. Yes. And you touched on it a little bit, you said debit transactions are -- you're a little heavier in debit than credit. As Visa reported May volumes, and it showed debit coming back, I think it went from negative 5% in April to plus 12% in May, it came back really strong. I mean, I would imagine, you just -- you feel the same types of trends, but is this stimulus? Is it hard to tell if it's short-term or if it's sustainable, I mean, right now?

I'll tell you what I believe, and then I can give you a couple of data points behind it, but I can say -- let's start out with very difficult to predict, really uncertain, unprecedented in trying to forecast or think about where we're at. I think we all kind of table that as a baseline for where we're at right now. That said, we certainly are seeing, as restrictions and openings happen, both the phased approach, retail, restaurant, et cetera, as the restrictions are reduced or removed and commerce comes back, we see that come back along the lines that you're talking about. I think that is sustainable as long as we don't have some sort of resurgence of cases from the virus that requires somebody to re-shutdown the economy, right? That's the million-dollar question right now as to -- as we reopen the economy, can we continue to keep the growth coming back and the consumer spending coming back the way it was. That said, we also saw what we believe -- but it's difficult to determine, but we believe was a spike in spending after the stimulus did come. We saw some of that in late April and into early May. Hard to distinguish whether it's a reopening or a stimulus payment in the channel, but we did see a little bit of a spike right along the same time lines as stimulus came back. So I think it's a bit of both, Dave. My gut says it's much more connected to the restriction lifting and reopening than just the stimulus, Dave.

Yes. Well, that's great to hear. The one other component of Banking that I think is so interesting right now is you've done a lot of tech development, a lot of innovation. Investors often have in their mind that this industry is at some risk of new entrants coming in and creating new technology. And we often say yes, but the really heavy investment, the hundreds of millions of dollars is spent by you and some of your competitors. And maybe that's why you and others have been growing faster today or faster recently than any player in the last 10 years in that Banking business. Maybe talk a little bit about wins in new technology and maybe how that's working together.

It's a great question. We step back to 2015 when Gary became CEO. We sat down and talked about we're going to need to really modernize our entire application stack. And as you know, in a business our size, that is an enormous undertaking. We started with data center consolidation, where, as we consolidated data centers, we improved and upgraded the underlying foundational infrastructure to converge cloud-based infrastructure. We then started investing probably 3 or 4 years ago in the application, a cloud-native Modern Banking Platform that was built from the ground up on cloud infrastructure, with open APIs and a lot of flexibility to consume it on a component basis, has all the techy buzzwords that Gary can tell you a lot better than I can. But it certainly has resonated with customers. That is the road map as well as the actual application itself that they did a ton of diligence on and dug in on. It's clearly what's showing the wins at the larger institutions with this Modern Banking Platform. The Digital One omnichannel capability is also resonating, where you've got the end-to-end digital experience for the customer, end-user consumer, that's resonating with our bank customers. And that investment is certainly proving to be a win for us right now. I do believe, the point you made as well, a lot of people talk about fintech start-ups, and we've talked about this a lot. You've got a larger institution who is betting their own career on upgrading technology or outsourcing. It is very difficult for them to make that decision with a start-up fintech that is undercapitalized or is starting to build up things, et cetera. We've got a very relevant example, where an early start-up trying to go pitch their capability into one of these wins that we had. When we looked at the RFP, we actually declined the RFP because what you're asking for is just not doable yet. So if that's what you're looking for, we can't help you. They went towards one of these fintechs that said they could do everything. They found out after taking a peek under the cover, wow, it's all slide, where there's nothing really here. It's not industrial strength. They can't handle the loads. They can't handle the volumes. They don't have the resiliency. Ultimately, came back to us, honed in their RFP a bit, and we ultimately signed Modern Banking Platform 60 days later, and are delivering that today. So it's a very relevant example of the strength and scale of the company, winning with innovation, winning with investment and still showing an ability to be relatively nimble in the environment against some of the fintechs. Don't get me wrong. Our head is not in the sands. We've got about $150 million venture-based investment that we've talked about, where we want to spend $50 million or so a year on fintech start-ups, either take a minority position or buy the companies outright, to make sure we're looking at capabilities in the marketplace, we're looking around the corner, we're looking over the horizon, pick your buzzword, but to make sure we don't miss something in terms of a new or interesting capability or technology that we can either build out and scale and industrialize and then push through the distribution channel or at least understand and try to build our own capability we think we've got pieces of that puzzle that we can put together more expeditiously than just buying it. So that's a long-winded answer, but I hope I've covered at least some of the thoughts you were thinking about.

Yes. I mean I think that's really important to think through all of that. And maybe the one other just piece is, does this actually expand your TAM? Have you developed some things now that gets you into new parts, maybe bigger parts, to banks that you're actually have more to address now than you've had before?

I think that's a fair comment, right? One of the things we're really trying to highlight, not only we've got 6 wins at these larger institutions that are converting to outsourcing, what they're converting is deposits, right? That's what we have to offer right now is deposits. They're buying both the existing application for deposits, and they're buying our road map for the lending side, the channel side of the business, et cetera, that we're building out right now. So you're exactly right. We've cracked in there on some large contracts that are in backlog and being converted right now. Not only they'll be converting and driving revenue, but they create cross-sell, upsell opportunities as we continue to build out other components of the Modern Banking Platform architecture application that we can then go cross-sell into that larger addressable market.

Well, no, that's all great. And we can move to Capital Market. I mean, I would say, to me, that one of the biggest surprises is you bought SunGard, and very quickly turned it into a very nice growth business. And recently, you've been taking shares. You've been growing, I think, the last couple of quarters, 6%, 7%, 8%, somewhere in that ballpark. What's -- I guess, maybe the current environment? What happens to the business? And why have you done so well recently?

Yes. I think if you step back on that one, 5 years ago when we bought it, we knew we had to change the underlying business model there from a license model to a SaaS model, like we had seen in the Banking business and converted for some period of time. I think that mix has continued to increase. We started about a 55% or 60% recurring revenue. We've moved that up to about 70%. The vast majority of the new deals are SaaS-based deals that are coming online, where they're on an outsourced basis. We've improved the technology and the architecture around the different applications, so they can be delivered on a multi-tenant SaaS basis, so we can get our margin profile close to that of the licensing business. The demand in the marketplace right now is definitely not for license, it's for Saas, where customers don't want to build it, put it on their on-premise capability. They want somebody else to do their work and buy by-the-drink. So that structural improvement has helped the, Capital Market business a lot. We have seen some bumps in terms of volatility between quarter-to-quarter around renewals. We'll still have to deal with that. First quarter had a little bit of a renewal benefit. Second quarter has got a little bit of a renewal headwind. We also saw some benefit, I'll call it 1 point, a little less than 1 point of benefit in Q1 based on market volatility. And you just saw capital markets and the equity markets and the debt markets, transacting a lot with a lot of volatility that gave them benefit. I think the professional services and licensing does have some exposure in capital markets as customers are trying to figure out how to consume and what they want to do in this environment. I think it certainly had a bit of a shock to the overall system, along with everybody else in the April time frame, as everybody is trying to figure out how to work remotely, how to deal with things remotely, how to take delivery of products and capabilities remotely. But we've got our client base consuming on a remote basis, and we've got our delivery teams being able to deliver on a remote basis now. So I think you'll see it continue to start to come back as we go into Q3 and Q4 this year. But it's a significantly better business than it was 5 years ago, both in terms of profitability, the resiliency and where it can go and grow going forward. I think it will end up in a mid-single-digit growth business over time.

Yes. That's great to hear. And is that similar to the banking business, where you've -- not only have you moved to the outsourcing model, which is much better, but you've also developed a lot of new technology, new stuff to sell, too, right?

That's exactly, right where you not only got greenfields with these larger institutions that we're cracking into and seeing some specific wins that we're highlighting because they're big, and we think we're very differentiated in our capability there, but you also build out new capabilities that you can cross-sell into your installed base. That has been bread and butter for us for a long time as to take the install base and continue to take more and more of their share of wallets and/or take next year's incremental IT spend from them and put it into our coffers versus someone else's or for them spending it externally. So I think it's definitely both of those fronts, where we've got innovation for our existing customer base for cross-sell and innovation that we're cracking into new names and new logos that we haven't seen before in the past.

Yes. Okay. And if we move on to the balance sheet just a little bit, maybe let's talk about your leverage position, kind of how you're addressing that. I mean, I think, you're taking cash flow and paying that down. Are you thinking about M&A and buybacks kind of near term or for now, it's just to pay down debt?

Yes. We've been pretty focused on capital allocation being delivered to delevering the balance sheet. It was our commitment to rating agencies. It was commitment to our fixed income holders. It was a commitment that we made, and we're going to live by it. The current environment is stretching that out, probably rolls into 2021 now, depending on the curve of improvement. Obviously, it's impacting not only revenue and EBITDA but associated cash flow. Once we get that 2.7x leverage, which is kind of really where we are from a targeting perspective, we would look at M&A probably as the most attractive use of capital at that point, Dave. But as you know, and you followed us for a long time, we also look at share buybacks as a use of capital at that point in time. So nothing is really available. We probably are not going to delever down below 2.7x. We think that's a very good spot for us and a pretty effective use of capital in terms of returns.

Yes. That makes sense. And I guess, one last thing. We have a couple of minutes left, but maybe going back to a margin comment, I know you've guided to margins being down year-over-year in Q2. If I step to last year in Q2, it was before Worldpay. You had a little over 37% EBITDA margin before Worldpay. This Q2, you've got Worldpay, which has been running 50% margins, so a lot better, plus all of the synergies and cost initiatives. I guess, I'm having a little trouble thinking why would margin be down.

Yes. I think it's -- really trying to give some color around April volumes, while not guiding very specifically. Looking at where April volumes were and at those levels, we were going to see margins decline, right? If we see volumes continue to come back, that obviously improves every day with the improvement in the volumes. But the level of volumes that we saw coming out of Q2 at that 75% to 80% contribution is difficult to overcome, even with synergies, even with cost actions, et cetera, it's difficult to overcome.

Yes. Okay. Well, we have a minute left. I just have to ask you a question that you've been running one of the most stable companies, big companies in the world, probably. You go into work every day. You know what you're going to collect with the core processing platforms. What is it like, all of a sudden, to hit an environment like this that's unlike anything you've ever -- what's just managing through that like?

Well, it's a really interesting question because March 15 or so to probably end of April will be a career memory, to say the least, as we mobilized 57,000 people to work 95% from home, where we had data centers and areas that we had to remain open as critical infrastructure in both the Philippines and India as well as the U.S., trying to navigate all the different jurisdictions and government requirements to keep our employees safe, but also provide those services in a very difficult environment. Watching volumes drop rapidly, dealing with merchant float and watching refunds coming through around airlines and travel companies, it was one of the most turbulent sort of times I have ever seen in my career. I am extraordinarily proud of what the team has been able to do, closing the books remotely, continuing to deliver services, having very little service-level penalties and SLA outages over that time horizon, servicing our customers and continuing to maintain that infrastructure, where you and I can go out and buy something on Amazon or buy something at a retail store or buy something at a restaurant. And that transaction continued to take place, and your deposit, your check coming in, continuing to go into your bank and you continue to pay your mortgage, et cetera. Extraordinarily proud of the team and our ability to continue to provide capabilities that kind of keeps the economy running. But one of the most crazy times I've ever seen in my career, no doubt about it.

Yes. Well, thanks for keeping the banking system going during that time. It's obviously very important to all of us. So thank you. And that's actually all the time that we have. So normally, I would say, please thank -- join me in thanking Woody and Nate, and I did the clapping.

Yes. Thanks, Dave. I appreciate you taking the time. And certainly, everyone who's on the call, appreciate the interest in FIS. Thank you.

Yes, thank you. Have a great day.

You, too.

Thank you.

Thanks.