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

All right. Well, welcome back, everyone, on the webcast, and thank you for joining us today. My name is Dan Perlin, I head the payments practice here at RBC. And I'm delighted to be joined with Nate Rozof, who is the Executive Vice President of Corporate Finance and Head of Investor Relations at FIS. So Nate, thank you so much for being here. And you've been a friend to the conference for several years, so I appreciate that.

Thanks, Dan. Excited to be here. Grateful to -- for the opportunity to participate. So thank you.

Absolutely. I thought what we could do, if you don't mind, is at a high level, is just talk about most recent trends that maybe you've seen through May and maybe what you've been sharing with investors, we could do here more broadly. Specifically, I just want to start with kind of the merchant volume trends, even if those are kind of directional, that would be great.

Yes. Thank you for asking, Dan. So the conclusion here is, is that our trends are highly correlated with what you're seeing come out of Visa and Mastercard. I've got the Mastercard data in front of me here today because that's most recent. The finance team here has done a terrific job of mapping the data that we've been getting from Visa and Mastercard with our own data and providing us with charts here, where we can kind of see the lines playing on top of each other, which is what they're doing. So whether it's U.S. or card present, card not present or in total, our trends are highly correlated to what we're seeing in -- from Visa and Mastercard. Again, I'll speak more to the Mastercard stuff today because it's more recent. But really, I think the reason for that is, and -- we've built the merchant business here to be the leading global player. We've got significant global market share, leading global market share, in fact, including 25%-plus market share by transactions in the U.S., greater than that in the U.K., and we're a leading global player in e-commerce. So we are a fully diversified, large-scale player. And given that scale and that market share, our trends are highly correlated with Visa and Mastercard, who also have significant share, obviously. So I think as you view that Mastercard data or Visa data, you would see us experiencing similar improvements, with April being the trough and improvement through the month of May.

Okay. That's good to hear. That's very good to hear. When you guys are talking with clients and thinking about the merchant business. And I know this is a bit of an impossible question to answer, but like how are the discussions going as you think through kind of the shape of the recovery for the course of the year, the remainder of the year at this point? What are the things that have to kind of occur in your mind in order for that to continue to be on pace with what we've seen thus far?

That's a good question. And it's a bit of a nuanced answer because it depends on the clients themselves or their particular segments. And so what I mean by that is, for example, Dan, is within our e-commerce business, clearly, this pandemic has accelerated the secular shift online, and those merchants are reacting accordingly. Particularly, as you know, we are strongest with large global multinationals, global brands. We have continued to sell to those merchants. We continue to implement them through the pandemic, and so there's been a significant focus there. On the SMB side of the house, a lot of those merchants are, quite frankly, closed. That said, we've been investing heavily to win share and support those merchants through the pandemic on a couple of vectors. One is by helping them to move their businesses online, giving them free access to our virtual terminals as well as other products that enable the transition online. We give them free fraud products, which is obviously important in an online setting; and we give them free access to our review tracker product, which helps them to manage their reviews and how they're perceived online. In addition to that, we're making investments in our channels and our channel partners. As you know, we have the leading portfolio of integrated software developers and ISVs and VARs in the integrated payments channels. We're making investments into that partner network in order to help us to accelerate our share gains coming out of COVID. So a lot is happening. While others are retrenching, we are continuing to invest in the business, invest in growth. Clearly, we'll have near-term impacts as the consumer is affected by the pandemic, but we will be looking to resume and accelerate our share gains coming out of the pandemic.

Yes. Now over the last several weeks, as the economy started to kind of open back up a bit, I'm wondering if there's anything that surprised you either positively or negatively in the data. I know you're talking to Visa and Mastercard. But as we just talked about the shape of your data in the case of the past several weeks in the economy opening back up, anything surprising you?

I think we've been -- well, I think I know. We've been pleasantly surprised by the acceleration of spend and volumes in our digital channel and business. Within e-commerce, as you know, we support a number of streaming services for television and movie and audio content, so we support a number of game platforms, and we've seen significant acceleration in volumes in that channel, up well in excess of 50% year-on-year. That's been a positive surprise. We would expect our large merchants to be more resilient, and we've seen that come into play, which is clearly helpful and allows us to track Visa and Mastercard's total trends versus being tied to perhaps the lower credit trends that would be more consistent with an SMB-oriented book. And we've been pleased with the acceleration in online retail. Clearly, the consumer was moving that way anyway. And seeing that secular shift accelerate, particularly given our capabilities there, I think, has been a positive surprise. And then the last thing I'll say is we were concerned about and remain concerned about the health and strength of small businesses coming out of the pandemic as shelter-in-place restrictions are eased. We've been pleased to see a number of those small businesses and small businesses reopening when the shelter-in-place is closed. I mean, obviously, there are some current concerns about small businesses closing, but the -- as what we've been seeing in our data is as shelter-in-place restrictions are relaxed in different communities, that the small businesses are reopening again and the consumers are returning to spend.

That's good to hear. That's very encouraging. If we think about dimensionalizing the Merchant Solutions business and growth for a second. In terms of transparency, I think you guys took the trophy coming out of the quarter. You had that slide, I think it was Slide 12 in the earnings deck, that really broke down a lot of this stuff which was super helpful. I'm wondering if you could just kind of remind us, as we think about the portfolio in terms of discretionary versus nondiscretionary, how big are we talking there? And then again, like this e-com, ex travel, versus the traditional book and what kind of progress is being made there broadly?

Yes. So let me dimensionalize the merchant segment revenue and mix on a couple of different vectors just to help you frame it and think about it. And I'm going to go back to and kind of point to volume trends from April, which was admittedly the trough. But as you -- but I think there -- we've given them publicly, and so they give you a sense. So a few different ways to think about the revenue mix. From kind of a top-level business perspective, e-commerce is 25% of the revenue in the segment. The U.K. accounts for about 15% of the revenue in the segment. And then the U.S. is the remaining 60%, with 20% of the 60% being integrated payments and the remaining 40% of the 60% being traditional point-of-sale across different channels. By vertical, we've -- our largest vertical is retail. I think spanning across all of those first 3 segments or 4 segments that I mentioned, it's about 30% of our revenue mix. There is variation there that the e-com doing very well, online retail trends in April up 30% year-over-year. Large merchants also doing better than small merchants. Grocery and drug is, for example, up 20% year-on-year in the month of April, so very positive there. Next would be retail entertainment, call it, 15% of the segment -- I'm sorry, restaurant and entertainment, not retail entertainment. That -- again, generally weak, down significantly as you might expect, improving as things open back up. I would call out that there's a little bit of a difference between quick service, kind of fast food restaurants versus sit-down, where the quick-serve has done materially better and I think actually returned to growth in some instances in some days in the month of May, where sit-down is much more tied to the [ relaxation ]. And then the last thing I'd call out, while there's a number of different verticals there, but of note is our travel and airlines vertical. With -- it's all included within e-commerce. It's 6% of the merchant segment revenue. There, that volume dropped 90%-plus in the month of April. It started to improve a little bit, but really still rounds to down 90% as global travel restrictions have had a material impact on those volumes. So that's a snapshot for you, Dan, in terms of the different verticals and how to think about the business.

That's a good snapshot. So the other question we get a lot, and it's funny, we haven't used to talk a lot about this, but now it's topic du jour, is just card-present versus card-not-present transactions. What's that mix for you guys today? And the other question we get a lot is, is there any real economic difference for you guys materially between the 2?

So what I'll point you back to, Dan, which doesn't exactly answer your question, but it's -- I think the way I would think about it from an economics perspective is 25% of the mix is e-com. That's web-based merchants where we do earn higher economics than we would for a traditional physical point-of-sale transaction. Because quite frankly, the -- there's incremental risk related to fraud in e-comm as well as incremental complexity around oftentimes cross-border, foreign exchange management, driving the business in terms of auth rates, fraud products I mentioned already. So there is some incremental there. But I'd say about 25% of the mix related to e-com and therefore card-not-present. In a traditional point-of-sale space, there is card-not-present there, but less of a difference or less germane than what you'd see in the e-com versus physical point of sale.

Okay. So we'll stick with that as kind of the mix. And the economics sound like they tilt a little bit obviously in favor of the e-com side of the equation. So let's shift over to some of the bigger themes that we might be seeing in the market and kind of how you guys are positioned relative to those themes. Obviously, we just talked about e-comm in a big way. Omnichannel solutions becoming a bigger part of the equation. Can you talk through maybe some of the things you're delivering to clients today that are in big demand?

Yes, I'd be happy to. So starting on -- with e-com and omnichannel from a merchant perspective, we are seeing a significant shift there. Consumer was already adopting e-com at an accelerated rate, and that's only been reinforced by COVID. Further, we've been continuing to benefit from our strength -- or the strength of our global reach. With our business, we're really the one provider that can provide e-com and omni at scale in the U.S. and around the world. Our primary competitors are strong either in the U.S. or outside the U.S., respectively. And we have had significant traction from being able to bring a truly global solution to market. I think we talked recently about a large global brand who is working with 40 different providers, one of the leading players in the U.S. and then likewise, in multiple countries around the world. That provider is consolidating their volumes from 40 providers down to 1, which is FIS. So that global reach is significantly important. We're continuing to make great progress with our ability to improve authorization rates and fraud rates. We're continuing to make significant progress with our approach of providing tailored solutions and alternative payment methods. And so that's been helpful as well. In terms of omnichannel capabilities, obviously, we're very strong there in the U.S. We have significantly improved those capabilities in the U.K. and Europe. I think we recently highlighted a significant win where we were able to pick up the business for a very large and well-known coffee chain throughout Europe based on our omnichannel capabilities. Really, it seems like the stars all aligned there, if you follow my meaning. And so that's been important. I do want to say before I turn it back to you, Dan, that this concept of omni is also super-important from the banking segment perspective in that the consumer is also moving online into digital channels and banking. And our Digital One solution, which enables consumer to interact with the bank in an omnichannel way across their mobile platform, their online banking platform and in the branch itself in terms of -- you can start a loan application on your phone and pick it up where you left off on your computer and/or at the branch, is a differentiator for us. So that's important. And our investments in innovation are really helping us lead the way there.

Well, maybe since you pivoted to the Banking Solutions segment, let's spend some time there. I think it's holding up relatively well, but maybe you could dimensionalize that business for us as well. How do we think about issuing inside of that? I think it's 83% recurring at this point. You do have some transactional components to it. So if you could dimensionalize that piece as well, that would be helpful.

Yes, Dan, I'd be happy to. So it is 83% recurring, and that recurring business is highly resilient in almost all scenarios. That -- within that 83%, about 13% of it is transaction-related, so affected by reduction in consumer spending and activity related to the pandemic. Typically highly resilient, not affected in most recessionary scenarios, but this has been a bit of an unusual set of circumstances. That 13% is primarily driven by issuer processing and our debit networks, most notably NYCE. We've seen, as you've seen, I'm sure, debit trends improving. We've seen improvement there in that business as well. And we've been really encouraged by our ability to win share in the market on the back of what's been a multiyear investment journey in terms of developing next-generation solutions and technologies and bringing those to market. We've announced 6 very large bank wins in the past 6 months on the strength of our new modern banking platform, which is new to market and really leads the way as the first gen 4 core end market, built from the ground up to be cloud-native, fully modular and componentized and really leads the market in terms of capability. So the -- I think we've seen very strong trends in banking, excluding the near-term impact from COVID. And we think that this is a trend that will continue over the next 10 years as financial institutions really look to upgrade and adopt cloud-based technologies to position themselves for the future.

That was one of the questions I wanted to ask you specifically is, it does seem like this -- the current environment is actually a bit of a catalyst, and it's exposing a lot of the vulnerabilities that the current tech stacks and platforms that banks have relied on for years have, I would say, meaningful issues that they need to kind of address. You won these 6 banks, this is -- a lot of that was kind of pre-COVID, it seems like. Maybe not all of it, but some of it. I'm wondering if you're seeing these types of discussions for large-scale, cloud-based implementations. I mean, is this going to act as kind of this big compression cycle in and around technology for financial institutions? And is that the discussions that you guys are having with executives today?

It is, Dan. We're having conversations with the bank executives today, and they're really making 2 observations that I think are emblematic of the shifting perceptions and technology and customer requirements in the financial services space. The first of which we've touched on already, so I won't belabor the point, is the way the expectations of the consumer are rising. Branches have been closed. They want to move to digital channels. They want to use a robust mobile product. They want to do online banking and online bill pay. And they want that experience to be seamless when they do go to the branch. And the banks recognize that. I don't think that's a new trend, but I think it's a trend that's being accelerated by COVID. And also specific to COVID is that as the financial institutions think about delivering that -- delivering on that customer expectation, they've got 2 choices: One is to try to continue to bully legacy on-premise solutions into enabling a more positive customer experience, which is expensive and time consuming and takes a lot of manpower. The alternative is, as they consider business continuity and resiliency in the face of the health crisis is moving to a more automated, cloud-based solution that requires significantly less manpower, is much more flexible in terms of meeting those rising consumer expectations. And they see that. And it's a catalyst to lower the risk of their own institution while delivering on a larger promise to their customers. So that's the trends or the thinking that we're hearing from the financial institutions as we engage with them through COVID.

Okay. And the implementation cycles and potential delays there, are you finding that those are starting to work their way through the system, that banks are becoming more comfortable with the remote delivery process? And if -- some of the delays that occurred, are there any knock-on effects or air pockets that we need to be mindful of occurring kind of later in the year?

The implementation cycles are often 12 months, so a full year. And we've moved, for banking implementations, really almost to a fully remote delivery mindset or capability through the pandemic. We haven't seen any significant delays at this point in time, Dan. So inclusive of the 6 large banks that we've announced over the past 6 months, those implementations remain on track. And we would expect the revenues from those 6 large wins to begin ramping in the first half of 2021, consistent with that kind of 12-month implementation curve that I mentioned. So we're watching it closely. We're obviously mindful of the stresses that banks and every -- and all of us are undergoing through COVID and in the interest rate environment. But frankly, what we believe and what we think we're seeing in terms of our new sales, our pipelines and our conversations with the banks are, they need to invest and move to next-generation technology. And we think that this is the start of -- it could be a 10-year investment curve as these banks, particularly larger financial institutions, shift to products like FIS' leading modern day platform.

Yes. No, that's super exciting to hear, and it's a long-tenured process for you guys. It's going to be good. The capital markets business, not unlike banking, has actually held up quite well in the current environment. So maybe you could just touch on the key dynamics that are enabling that level of stability, and then kind of expectations around why that would be sustainable.

We have -- like banking, we have been benefiting from and seeing accelerating new sales in capital markets from 5 years or a period of technology and product investment in capital markets. When we acquired that business, it was one that had a number of leading -- so point capabilities and products in market. But we've been able to really enhance the value proposition to our clients by integrating those point solutions together into truly end-to-end, bundled solutions that can span the front, middle and back offices of our clients to deliver on the promise of a fully integrated solution suite. And that's been resonating in market. By using that approach, not only do you get the benefits of integration, you get the benefits of total cost of ownership through a bundled solution. And that's, I think, been helping us in market. We see that benefit continuing based on the product cycle. And further, we've been moving the revenue model from a onetime license-based model to more of a subscription-based or SaaS-based revenue model. That transition has been underway for a few years. We've still got some room to go there. But as we continue to make that migration, it will enable increased sustainability of the growth profile. So we remain confident that we can continue to accelerate the growth rate of capital markets going into the future. I think you could see some variability near term, just given the strength of the acceleration in revenue growth over the course of last year and the fact that, that creates much more difficult compares for us in the back half of this year. But as a longer-term trend, the acceleration appears evident to us.

Yes. Okay. That's good to hear. Let's pivot a little bit to kind of integration and synergies. You've updated us here, these numbers continue to come in higher and faster than, I think, originally projected. Maybe you could just talk through, again, with respect to achieving the $700 million of cost synergies by the year-end 2020, kind of where we stand today, your confidence level and the ability to do that. And then also, you talked about $300 million of expense savings kind of separately. Just how that meshes altogether.

Yes. Let's start with the cost synergies before we get to the $300 million because the cost synergies are annual, they're recurring, they're permanent and our confidence in them is very high. And we added the words at least with the update that we provided on cost synergies this past quarter and said we get to at least $700 million in annualized cost synergies on a run rate basis by the end of this year. We wouldn't have said that if we didn't have great confidence in our ability to meet or exceed that commitment. The -- where we stand today is we've achieved over $500 million of that on a run rate basis already. That's inclusive of $275 million in interest expense savings that we were able to generate by leveraging Worldpay's European assets to issue sterling- and euro-denominated debt, which is obviously attractive from a rate perspective. We hadn't initially anticipated that. But in addition, we'll exit this year with over $425 million in operating expense savings. We're well on the way there already because we've been able to accelerate our elimination of duplicative corporate costs, we've been able to accelerate our adoption of a functional model in terms of where we had multiple development groups across the segments, consolidating those into a unified technology team. And we've been able to accelerate the rationalization of our real estate footprint. Frankly, COVID has helped us in a way in terms of with everyone working from home, we've been able to identify offices that were much less likely to reopen and we'll just have those folks continue to work from home permanently. So those will build linearly through this year, and then you'll receive a full benefit next year. The $300 million is tied to volume. So that's -- those are short-term cost savings we'll achieve in year related to things like reduction in discretionary compensation, reduction in travel expense, reduction in hiring for nonrevenue-generating roles, costs that we would expect to come back in 2021 as we lap the COVID impacts we're experiencing this year.

Okay. That's great. Well, Nate, that was a fantastic update for us. I really appreciate it. Thank you so much for taking your time to spend with us today, and I hope you can stay healthy and safe out there. So thank you again, sir.

Thanks, Dan. Likewise.