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

Good afternoon. I'm Bryan Keane, senior payments processors and IT services analyst at Deutsche Bank, and we're excited to have the team from FIS on. We got Woody Woodall, the CFO; and Nathan Rozof, who's EVP of Corporate Finance. The format for today's virtual fireside chat is I'll ask the team here some questions. And then if you want to get on the portal, you can ask a question through that and I can ask it or you can e-mail me your questions.

So with that, I will start it off and kick it off. Gentlemen, thanks for joining us. I guess big picture, if I think about COVID-19, some of the impacts are obvious to merchant. But has there been impacts to the Banking and to the Capital Market Solutions business as well?

Yes. First, Bryan, thanks for having us. We really appreciate taking the time and certainly appreciate the interest in FIS. You're right, it's been certainly an interesting year, to say the least, with Merchant having impact. We also had some level of impact on the other segments. I'll start with Banking. We called out about 13% of our revenue was tied more closely to consumer transactions. This would be primarily in our issuer processing business as well as our PIN debit networks. The trends have been improving, as we've talked about before. This line, this revenue line was down about 8% in the second quarter. It was about a 1-point headwind to Banking's overall organic revenue growth in the second quarter. With regard to Capital Markets, you saw much less impact in the core business. I would tell you, in the late March and really April time frame, we did see some level of elevated trading volumes that drove some higher growth than normal. Those trading volumes have generally normalized at this point. But both segments are doing remote implementations at this point, and then Capital Markets is also doing its professional services around the license component remotely at this point, and we have not had any slowdown on that front. The teams have done an excellent job of being able to continue to deliver capabilities remotely this year as we've all had to transition and learn how to do business a little differently.

FIS reported new sales of $1 billion in TCV and $21 billion in backlog, I think that was up 7% organically last quarter. What type of new sales and backlog growth does FIS need to achieve in order to drive that organic growth up to that 7% to 9% in the future in a more normalized environment?

Yes. Our 7% to 9% revenue growth expectation assume really a mid- to upper single-digit growth in the Banking business and a low to mid-single-digit growth in Capital Markets. That's where our backlog sits, is in Banking and Capital Markets. We've been very pleased with sales driving that incremental backlog growth. We've been highlighting it for about 8 quarters now. Very strong sales, including some of the significant sales of our MBP platform, our Modern Banking Platform, to some of the larger institutions. It typically takes roughly a year for some of these large sales to translate in revenue due to the timing of the conversion and implementation, so that revenue should start driving incremental accelerating revenue growth for Banking and Capital Markets in 2021 and beyond. In fact, I would tell you, you have seen some level of accelerated growth in Banking, where 2019, we were at about 5% organic growth. 2020, Banking was looking at closer to 6% growth sans COVID but will obviously -- our expectation is it will continue to accelerate into 2021 as those issuer volumes normalize, and we can convert these customers driving that growth rate back to where our expectations were. Very, very pleased with the sales organization. They've been also selling remotely. Selling remotely is probably actually a little easier than delivery, but they've done an outstanding job in this environment.

Yes. I was going to ask that on Banking. I know there's been 7 large wins in the last 3 quarters in roughly 2 years of that double-digit bookings growth. So given that pipeline, I know that there's been a little bit of a hit from -- I think you said it was 13% or so of the business that's still tied to maybe some more consumer volumes. How long do you think it'll take to get back to mid- to potentially even higher single-digit growth in Banking?

Yes. I think we certainly have seen it continue to improve in terms of those volumes. Our expectation today is that volumes around payment and consumer transactions will get closer to normal in 2021, which I think would push us accelerating that revenue growth, not only through a combination of a little easier comp, but through really some of these wins that we've talked about converting into revenue. We originally talked about the wins of the MBP in the large institutions on the fourth quarter call this year, which seems like an eternity to go right now, where those revenues would begin to convert basically end of the year 2020 with run rate starting really more into 2021 in the first quarter and beyond as those deals start waterfalling in. I think we're still on that trajectory, which will certainly help us see some accelerating revenue growth into 2021.

Is there a scenario where Banking could go up towards high single digit? Or is it predominantly -- just given the mix and the flow and the size, it's more of a mid-single-digit grower?

I think if we can continue the sale and deliver at the pace that we have right now and have over the past several quarters as well as the demand continuing to be robust as it is right now and is our expectation, I do believe it can get towards the higher single digits, at least mid- to higher single digits. We've moved from roughly 3 to 4 to 5 to 6 this year post -- pre COVID, and I see that continuing to show signs of acceleration into '21 and 2022. So I'm optimistic that we can start moving in that mid- to high single digits with execution at the levels it is right now, driving us closer to the higher single digits in the mid.

Merchant grew 10% organic in the fourth quarter of last year. And that's, I think, your goal for merchant mostly low double-digit growth post COVID. How much dollar volume and transaction growth is necessary to reach that type of organic growth? Because I know you guys disclosed a little bit of those metrics this last quarter where July or June, I think, was volume was up 4% and transaction was down 1%. So I'm just trying to understand volume transaction versus revenue growth inside of merchant to get back towards that low double digits?

Yes. I think this is another one of these anomalies that we've seen this year. Historically, there's been very little spread between transaction volume and revenue growth. On average, those metrics have been tightly correlated and have been relatively tight. The current dynamic is really driven off of mix changes. Our consumers have been shopping at large retailers, and average tickets have increased while shopping less frequently. Our pricing model at those larger areas is on a per transaction basis for those large retailers. And on a volume basis, really with SMBs and travel and the spread changes between volume and transaction revenue growth are being reflective of those changes there. For example, people spending at the grocery store and at health care, large pharmacy, volumes have been very robust. But revenue yields are lower there than they are at restaurants and/or at airlines, which have been much more significantly impacted by COVID, particularly in the second quarter. We have seen that spread begin to narrow as SMBs and restaurants have opened back up and started to come out of the pandemic. And as those impacted verticals continue to recover, we could see this actually as a bit of a tailwind over the next several quarters. But over time, longer term, we would generally anticipate volume and revenue growth to be correlated pretty tightly.

Got it. And when we look at merchant volumes, they're tracking to positive mid-single -- mid- to high single digits, I think, in July. And that was kind of similar to the networks, and we've seen the networks kind of come out with their August data. Is there any reason to believe that your volumes shouldn't be tied more or toward -- tied correlated to the August data that some of the data we've seen with the networks?

Well, I think, one, we've got a benefit related to the timing of that tax drag we talked about last quarter...

Yes, that 6 points. I think?

Yes, yes. I think we've estimated that to be about 6 points of benefit in the third quarter driven by that shift in the timing around tax payments. Again, with regard to acquiring volumes and transaction trends, we don't really provide here intra-quarter updates, but we have seen again similar trends compared to the networks throughout the second quarter and even into the third quarter, and we wouldn't think we'd vary very much from them. We haven't seen any month of data coming out from Visa or Mastercard where we're significantly different. Obviously, again, seeing, back to the first question or the previous question, some difference in revenue yield compared to volume but seeing that gap narrow a bit.

How much exposure does the Merchant vertical have to airlines and travel? You talked about that obviously being weaker. And just thinking about other exposures like big-box retailers, that obviously has an impact on yields. But how big is your percentage of revenue from big-box retailers as well?

Yes. Merchant has about 6% of our revenue tied to travel and airlines. This flows through our e-commerce business, which we've been highlighting before. That 6% rolls up into Merchant, which is roughly 25% of our overall revenue, something like that. We haven't disclosed the size of our big-box retailer specifically. But our direct channel, which is really primarily focused on large merchants, composes about 20% of the Merchant segment. And we typically charge those big-box retailers on a per transaction basis compared to Merchant discount rate for SMBs. So the yield on those transactions tend to be a little lower as we've been talking about.

Got it. How has the Integrated Business performed during the pandemic? And what's the prospect for mid-teens growth coming out of the crisis?

Yes, it's a good question. The Integrated Business has a meaningful exposure to SMBs, primarily restaurant and retail, so it's certainly seen some negative impact from COVID. We have seen some level of improvement as shelter-in-place and some of the reopenings have started, as shelter-in-place orders have been relieved over time. We continue to invest in this vertical and do believe its underlying growth is in the mid-teens area from a profile standpoint, and that's the right way to think about it. We've been working with our clients throughout the pandemic in this space and have continued to be investing in our ISV partners and have taken some market share specifically during this time as we've been investing in those partners. So still an important channel for us. Still overall in light of the backdrop, we believe doing well as it will come out of the pandemic with strong growth again, but in the short run, has certainly seen some impact from COVID.

Yes. How much penetration is left in that ISV channel?

Yes, I don't know that we've disclosed it specifically. I think that ISV will continue to be an important part for us, but I don't know that we've had a specific disclosure of penetration rates on that.

And then is there an opportunity to take it international? I know we've talked about that before, but has there been much traction on taking the integrated piece overseas?

Yes. It was one of the specific strategies that we had connected to Worldpay and one that Worldpay and Vantiv, we're already starting to execute on in their own integration activities. So yes, we continue to work on that capability and invest in that area. We think it's certainly an opportunity, particularly in Europe, and continue to try to move that ball forward. As you might imagine, a lot of the international work has been at least hindered a bit as you're trying to think about traveling overseas, et cetera, in the current environment. So still a high level of focus, still moving forward, but obviously, having a little bit of more difficulty in the current backdrop.

And then thinking about e-comm, how -- what percentage of e-comm now of the segment? And I think you guys called out, it grew 30% excluding travel last quarter. So I guess I was a little surprised you've seen some metrics from PayPal and others that have been even a little stronger in that when you ex out travel and some other things. Can you just talk about the e-comm business? And what percentage of revenue it is exists of today?

Yes. E-comm for us continues to do well. E-comm for us is about 25% of the Merchant segment. And you're right, it grew about 30% excluding travel and airlines. Underneath that, there are certain verticals that did even better. The digital-only channel, I think, grew about 80% in Q2, and I think of that in terms of gaming and streaming, for example. It's done very well. The customer base continues to show strong demand for e-comm, and I think that will continue. So we're really pleased with it. It was running in the upper teens in a pre-COVID world, and we believe we could see some upside to that coming out of COVID as volumes return just because the demand is higher with -- and the accelerated shift towards these digital channels for consumers on a go-forward basis. So still very excited about it. We think that asset is still a crown jewel as part of the overall set of assets that we picked up through Worldpay and still pleased with its overall results and performance.

Yes. I mean the 30% ex travel is nothing to look past, but some had been higher. But I think if you guys can come out of this -- the crisis and e-comm could grow maybe in the 20s or higher just due to the secular trends, that could obviously have a positive impact on organic growth in the segment.

I think that's exactly right. When we think about, on a normalized basis, Merchant growing double digits for the foreseeable future, this e-comm component is certainly one of the underlying drivers to help us get to those levels and sustain those levels for a while. So you're exactly right. Again, I think it's a significant positive asset out of the overall set of assets that we picked up, and it continues to perform well in a high-demand secular environment.