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

Okay. With -- so FIS has had a string of wins with large institutions. I believe it's been 7 of the top 30 and recently one top 10, which has been pretty much unheard of in recent years. So what's changing? I mean are these institutions finally realizing that they can't attract talent? It's too expensive to attract talent? It's too expensive to iterate? I mean what's changing?

Well, I think it's a combination of things. I think if you look, first, you've got to back up. Some of these languages are -- that some of these languages these legacy applications are written in are 30, 40, 50 years old at this point in time. So as you're hiring talent, you're literally having to train them in a language that's no longer taught in college. So let's start there. So if you -- if there's any catalyst you need to have more than that, I mean, that's a huge catalyst. The challenge, though, is we're all seeing, and this is going to expand very dramatically as we move into 5G, et cetera, the digital platform is taking over. The need to self-serve for financial services is now a requirement to do business today. The challenge is when you're dealing with the older legacy applications, frankly the architecture and the way they were built, the languages they were written in, don't enable you to easily digitally enable something. It can be done. All of us have done it. But then when you think about digital enablement, there's a common factor in that, and that is one of speed, right? And so now, you're right back to those legacy systems don't allow for the speed of deployment. So fast forward to today and fast forward to the pandemic, but we were seeing this demand when we launched in Q4. Just to remind everybody, the reality is a lot of these clients, which I'm going to call are early adopters of cloud, have really almost held on too long. So at this point in time, they've got to really leapfrog where the rest of the competition is and where the rest of the market is to really be able to take advantage of what cloud has to offer, which is speed, agility, availability, digitally-native architectures and mindsets.

So speaking of digitally native, how are you thinking about new potential competitors in the environment, whether it's -- when you think about a company like Finxact, who talks about banking as a service and a different architecture that they claim they have to bring to bear?

Yes. Well, look, I mean, I mentioned earlier I've been in this industry for 32 years. Startups aren't a new phenomenon, right? We've had startups for decades. And what I would tell you is we do monitor startups. We realize that this is a competitive market. What I hope you're hearing from us at FIS is we're not going to allow a startup to disrupt us because we're going to disrupt ourselves. I mean we're a leader in cloud-based technologies today. When you look at the architectures, you're exactly right. The new architectures of a cloud-based system does allow you to move faster, does allow you to deliver services in very different and dramatic ways. The whole concepts around systems and how they were built in historical legacy solutions is different. But as I said earlier, I mean, we've had 10 decisions so far and we're 10 for 10. So I feel good about how our solutions stack is standing up against the new companies that are being formed, and we'll compete with them no different than we've competed with other companies historically.

And how has the acquisition of Worldpay changed the selling cycle or the pace of wins in the core processing business? And in terms of Worldpay, they had a core -- they had a -- I'm sorry, an issuer processing suite. And how has that integrated with the offering at FIS?

It's gone very well. Honestly, one of the things that we do in our playbook when we look at integration of these companies is we'd like to get them integrated very quickly from an operational alignment standpoint. So the Worldpay issuer business naturally collapsed into the FIS issuer business, which was much larger. We looked at -- across our combined issuer base, and it was clear our product pull-through into our issuer base was much higher than what Worldpay had experienced. So we were able to bring real product capability to cross-sell into that base, and that's gone exceptionally well. We obviously collapsed our small acquiring business into Worldpay and saw a similar response. So if you look at our overall sales from -- you mentioned a core banking standpoint. We really haven't seen any impact from the integration. And in fact, what we're seeing is a very full pipeline of new core banking sales and focused on more modern, more cloud-native technologies for all the reasons we've mentioned. When you look at the overall integration, we talk about revenue synergies of $500 million. I'll tell you we're well ahead of that. Woody and I both thought that by the end of this year, we would exit this year with $100 million in revenue synergies. We're well on pace to exceed $200 million this year even with COVID as a backdrop. We've seen tremendous cross-sell throughputs in the very areas that we thought we would. Our debit routing has gone exceptionally well. Our Premium Payback solution has gone very well. We've been pleased, pleasantly surprised, I would say, with our banking referral channel and the success we've had there. We actually thought that would be a little slower than what we're seeing, but we've really had some very nice wins. We just announced another one recently where a bank with more than 500 branches is moving their entire relationship to us. So from a revenue standpoint of cross-sales but also from a revenue standpoint of our existing segments prior to the integration, it's gone very well the last year.

Can you comment on the international market? We focused quite a bit on the U.S. market, but clearly, Worldpay is quite broad globally. What opportunities does that bring to FIS and the complete business?

Yes. Look, we've always have believed that being a global company is the absolute right answer, especially when you're competing in such a broad market as financial services that FIS is participating in. So we've always -- we -- both of our companies have had a strong focus on non-U.S. business. What's really interesting is we didn't have as much overlap in our presence. So what we're excited about, and one of the theses that we leaned on in our revenue synergies, was the ability for FIS to accelerate Worldpay's penetration into new global markets, and we've actually seen some early wins on that. We've actually started being able to capture some e-com volume out of India. We've had a couple of really nice signings in Brazil. We've helped enable Worldpay to move into Australia. And so it's been a real nice complement. But the global marketplace is very important to our strategy. Being able to meet and expand the total addressable market around the globe is going to be very important. And you see us focusing on what I like to tell everybody, there's 10 to 12 countries that really matter for us, and we're going deep in each and every one of those countries, whether Worldpay had a deep presence and we can exploit that or FIS had a deep presence and we can exploit that. But that's what's going to be the winning combination for us here over the next couple of years.

Yes. I have a question from an investor. And I was actually planning to ask you this question as well because it was an important thesis for the combinations we've seen in the industry, which is when we think about Worldpay's e-com business, how has the acquisition by FIS been able to enhance the authorization rates and approval rates in e-com for Worldpay, especially on a cross-border basis or where it might be difficult? And have those authorization or approval rates been able to surpass peers like Stripe or Adyen because of the combination?

Well, I would tell you we already had very strong authorization and approval rates. We being Worldpay already had very strong rates and was actually a leader in the space when you look at that. I think where the investor is coming from is something that we're very focused on, is now how do we take the data FIS has to provide around the issuer base and our core banking base and everything we know about the end consumer? And how do we leverage that data to further take our auth rates and our approval rates even higher? And so we're actually working on that a lot. If you remember, when we made the announcement, we told everybody that would be in more year 2, year 3 of the transaction. And we're starting to see some of that come online. But we do believe and have got a lot of internal work that's going on that we're going to be able to raise our authorization rates very significantly across the e-com market. And we're even working on some things of -- that we even guarantee the transaction. So there's a lot going on by us leveraging our rich data capabilities in concert with what Worldpay already had, and the teams are actively working on that.

Okay. Just got another question through the platform, maybe inspired by our earlier conversation, which is, how long does it take to realistically integrate, replace, upgrade a legacy platform? And what's the hardest thing that a legacy platform faces when it moves into online processing?

Yes. No, it's a great question. So the real -- the quick answer for that at an individual account basis, it takes about 12 months to go through that implementation cycle and conversion cycle and data conversion. Now we are working a lot of things with artificial intelligence and machine learning to accelerate that time. But the long pole in the tent is still you've got data that resides in a legacy platform, and you have to get it to the future-state technology, and that takes time. And you have to go through training, you have to go through setup. And so there's a lot of pieces. But AI certainly provides a lot of opportunities to accelerate that and more to come on that in the future. You also have the issue even in Modern Banking Platform, and I've talked about this a lot over the last several months. Keep in mind Modern Banking Platform today only has deposit functionality. So if you were a bank and you wanted to bring your lending capabilities to Modern Banking Platform, today that feature set is not available. We're actually doing our first lending drop in Q4, right, bringing in unsecured lending, then we'll bring in secured lending, then we'll bring in syndicated lending, et cetera, et cetera, et cetera, as we build out the various asset classes across that. So that's going to give us an opportunity to go back to our existing wins, and now some of the benefits of bringing their lending portfolios on the -- something like Modern Banking Platform. So there's a functionality parity issue that you have to get to. But clearly, the big move of where legacy can't keep up is just the way the architecture was configured. So if you think about the design principles that existed 10 and 20 years ago, it was not designed for digital enablement, for self-service capability. Concepts around open frameworks or microservices or even components and being able to package those components to be able to offer solutions are just dramatically different in a cloud-based technology, not to mention you've got full real-time capabilities, which then allow you to really accelerate your defense against fraud. So there's just a lot of benefits that come out of a more cloud-native-type technology and the way the architecture is designed for the future.

So I want to ask you about a comment that was made a little while back in terms of revenue acceleration. Are you still expecting that the -- with the wins that we discussed in the top 30, that we could see acceleration of Banking Solutions revenue into the high single digits by the back half of '21?

Yes. I think when you look at -- well, I think when you look at FIS, I would not say for banking we're seeing that. But when you look at FIS, what I would tell you is when Woody and I announced the Worldpay acquisition, we announced a true pivot towards growth, and we announced that we thought FIS overall could get to a 7% to 9% grower. What people did not realize in that was the strength of what banking and capital markets, what we were seeing it was doing. So it wasn't we were going to take Worldpay, a 10% grower, and make it grow 18%, right? Our whole thesis is -- granted we've got revenue synergies in Worldpay. So if we can maintain that strong double digit, that 10% growth, move it to 11%. But really the secret was moving banking from 3% to mid- to upper single digits. So if we can move banking from a 3% to a 5% to a 7% and then we can move capital markets from a 1% to a 3% to a 5%, that then propels all of FIS into that 7% to 9% range. And I think at this point in time, we're not talking about 2021 yet, but we feel very good in the thesis of FIS growing in that 7% to 9% range over the horizon. And so that's going to be very important for obviously us to deliver on, but it's going to be as much enabled by capital markets and banking to continue to accelerate from their current position based on their sales success all while Worldpay after -- post-COVID being able to return back to its more normalized growth rate. And if that combination occurs, this company will be a 7% to 9% growth company.

Can you talk about the contribution from capital markets for a minute? Because that's been a surprising area when looking at how that's performed over the last 6 to 9 months. What's driven that? And what's the sustainability of that?

Yes. Look, I can't tell you how proud I am of the team in capital markets that we have and what they've accomplished. I mean if you look, when we acquired SunGard in 2015, as everybody knows, that was a very broken company, right? It was very fragmented. The way they thought about going to market was broken. The way they packaged individual bespoke products was a problem. In fact, they only sold at the individual product level. They were an extremely federated organization structure, so they were getting no lift or no scale-out of the environment. And they were heavy dependent on license fees. And so what we did was when we bought the company, what we saw the opportunity was, was capital market was going to have to move from on-premise to SaaS. And when you start moving from on-premise and Saas, the one thing that's going to be driven by that is the need to package solutions in a SaaS model. One of the misnomers is people think I'm going to enter the issuer business and all I'm going to do is sell issuer. Well, the problem is, on a SaaS model, you can't just do issue, right? You've got to do fraud. You got to do case management. You got to do card management. You got to produce cards. You've got to be able to mail those cards. It's a much more packaged 8, 9, 10 products, and we're deploying it. Capital markets is no different. So what we saw was -- when we were doing our due diligence, going through the thesis, is, one, we were just about to start to move from on-prem to SaaS. So we wanted to take advantage of it. But what we really saw was that the whole front, middle and back office, the individual products were going to need to come together in solutions. And many of those solutions, we're going to have to span both buy and sell sides. So what we did was when we brought the company together, and the team responded very well, we -- first, we brought all of the products together in a commonality of solution-led leaders, and then we pulled the development organizations together in order to start developing within those solutions more end-to-end capabilities. We started leveraging FIS' expertise in SaaS deployment, and then we started leaning into that as well. The final thing we did was we pulled all of the go-to-market out, informed the Chief Revenue Officer reporting to the leader of that segment. And the results of all that has been a really transformed organization. And so we do believe that it's highly sustainable. If you look at the sales success quarter in and quarter out, the movement towards SaaS deployment, our SaaS sales continue to rise as we hold our license business flat year-over-year. And so what you're going to -- what you've seen just since 2015 is reoccurring revenue moved from low 60s to now about 72% of the revenues reoccurring, gives you a much higher, predictable model. You fast forward 3 to 5 years and you're going to see that business with reoccurring revenues that look just like our banking business. It's going to be in the 80%. And you're going to see a very strong mid-single-digit to perhaps even upper mid-single-digit grower because clearly, the solutioning of the product, the investment in product, the modernization of the product, all leveraged by our SaaS deployment capabilities, has been a winning combination.

Okay. With the minute or 2, we have left, I wanted to ask you just about the overall company margin. I believe in 2019, you had an adjusted EBITDA margin of just under 41%. Skipping 2020, which is an unusual year for about 1 million reasons.

Exactly.

Looking forward, how much upside is there to that margin over the long term, especially knowing what you know now about how well expense synergies have progressed in the Worldpay acquisition?

Yes. I think Woody and I have talked a lot about this. We really -- even with a backdrop of how successful we've been on the Worldpay integration, I mean, when you look at the -- our costs well exceeding over $700 million at this point of takeout between OpEx and also the below-the-line savings, we think there's tremendous opportunity for us to maintain margin expansion for the next 3 to 5 years. We're still in the early stages of leveraging a lot of our functional organizations. So we're pulling now -- well, I talked about pulling development together within capital markets. The future is now. We pull all of our engineers together in one common infrastructure. We've got a lot of opportunity as we move our legacy to our next-generation capabilities that we'll be able to get a lot of cost benefits from that as our legacy technologies will no longer need to be maintained. You've got -- we're a leader in the industry with our global delivery organization that we leverage out of India and the Philippines. So long story short, there's a lot of levers left that we're going to be pulling as we continue to push this organization, which makes us very confident that you'll continue to see good, solid margin expansion in the coming years at FIS.

With that, I think we're out of time. Gary, Woody, I appreciate you joining us today, very much so. Woody, hopefully, we'll hear from you next time. But...

Yes. But I'm playing a supporting role here, as you know. Absolutely.

I really appreciate it. And gentlemen, please enjoy the last few days of summer.

All right. Thanks, Craig. Talk to you later. Bye.

Thanks. We'll see everybody in 5 minutes for 3dcart. Thanks.