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

Well, like all of our businesses, what I would tell you is that one of the things that we can look ahead over the next 3 to 5 years, everybody asked us how we're going to continue to maintain margin expansion. We're already running arguably one of -- some of the highest margins in the industry. And frankly, you're hitting the nail on the head. Platform consolidation is going to be a huge key to that. If you look at what we're doing just like, for example, on Payments One, which we brought Payments One in the market just last year, I think we're up to about 800 clients that are already running multiple components or modules of Payments One today, but that's going to continue to grow. We've got thousands of customers that we're going to transform onto that platform. But we're now -- because of Payments One, we won some significant customers in the last 12 months, all because of that investment that we've made, which is really pulling together a very modern issuing platform that covers not only credit, not only debit, but also prepay, common fraud systems, common authorization systems where, as we all know, these systems were built in silos historically. So as you talk about the platforms, Brett, in all of our examples, our eventuality, you fast forward in 5 years, you're going to see these disparate legacy platforms to consolidate in Payments One. You're going to see our legacy disparate core platforms consolidated down on Modern Banking Platform. All of these are the future of how we're rolling it out, which is to give our customers confidence that the system they're on today is best in class. And honestly, we're taking share still in some of our legacy platforms because people don't want to be an early adopter, but also that they see we have the vision and the opportunity to upgrade them in the future to help them go through this transformation. And that's been a key storyline for us in the sales cycle. I'll highlight First Republic who has been just a great win. It was all about what we were doing in the future, and they realized they were going on arguably -- not arguably, the most competitive core banking system, IBS. It had done nothing but take share all across the country, but they like the fact that they can look out and say, "Okay, I'm going to modernize here as a step, but then I can transform to Modern Banking Platform down the road. And so I don't have to be an early adopter." And so all of that scenario is really playing together. But yes, the issuing side is very important for us. We've made a lot of investments. Part of the investment that we're making there and will continue through 2021 is around Payments One, and that's going to be the landing spot of those platforms.

One segment that has obviously popped up in the last 3 or 4 years is alternative lender, nonbank issuing. A lot of people have figured out that interchange is an interesting source of revenue and are taking advantage of that. As you guys think about Payments One and the modernization, how much of that is in the back of your mind? And are you -- is there a specific version of that that's going after some of those new kinds of issuers?

Yes. I think there's a real opportunity for us on that. When we look at it, we've actually gone after a lot of the fintech start-ups over the last several years. Our challenge has been -- very transparently, it's not that our capabilities can't handle those. We always like to talk about the ones that have been wildly successful. We don't talk about the dismal failures. And the challenge is can you make the commitment and partnership to help them through the early stages so they become wildly successful. But there is a real market opportunity. And so as you think about what we're doing around all of our next-generation innovation, all of those were -- depending on where they sit, if it's Digital One, it's on top. If it's something like Payments One or Modern Banking Platform, it's on the bottom. But in the middle is Code Connect, which is really our open, agile API framework. And so what we're doing now is starting to drive into those early-stage fintechs and saying, "Look, if you need access to issuer payments or any kind of payments plug into Code Connect. Go into our DevOps environment. You'll pay us for access, right, by click, by drink, however you want to describe it. But for us, it minimizes our need to invest into that," right? So we can be just as or even more responsive than what they are, but then allow them to self-serve into the environment, which really holds down our cost. And so you'll see us push more into that. I talked about, I think on the last call, our Chief Growth Officer, Asif Ramji. But as you think about his mandate, it's all about, as we pivot the growth and we continue to accelerate growth, how does he find another 1% or 2% on top of that. And so driving into some of these markets in a very open way through self-service is going to be very important. But we're excited about all the capabilities we've built, all the modules we've brought online and componentization we've done. But now we've got to start pushing into some of these markets. So it is an opportunity for us.

And just shifting gears a little bit, still on banking, on modern banking and Digital One. I think a lot of times, those -- in some of the big wins you've had, those seem to go hand in hand. Modern banking sort of has been on the boil since 5 years ago or so -- or 3 years ago. We got 9 or 10 remarkable deals, and we've talked a number of times on the conference calls that we've been waiting a long time for this. What is the -- what's the point of buying sort of psychology that's getting these big banks over the hump? Is it just they've been waiting so long and you finally found the right product and vision? Or what's kind of getting people over the hump?

Well, I think there's a lot of things. But look, I'll try to boil it down in the most simplistic of terms. I mean when you look at the 10 customers that are signed to date and nothing like batting 100%. I'm pretty sure every decision that's been made so far, we've won, which we don't take for granted if there has been a decision made that we're unaware of it. But if you really look, very strong performance in the sales channel. But if you look at the key difference, let's back up to -- let's go with MUFG, right, which is a huge win. And really, they're transforming their entire deposit stack to Modern Banking Platform. It's just a massive migration and transformation. They're running technology that was written in the 1970s. Aren't a huge number of people supporting it. The challenge for them, I can't speak for them, but when you looked at what existed prior, you were moving from, okay, great, COBOL to COBOL. I'm moving from a mainframe to a mainframe. I'm moving the exact same data structures. I'm moving -- I'm really stretching myself and going to move to this -- I mean, technically, there was not a category killer that really promoted the moot, right? I would just move to a spot, but then I'm going to have to move again. And so what happened was, about 5 years ago, what we started seeing was this new technology called the cloud. And we all started talking about the cloud. FIS didn't start talking. We started moving to the cloud. And today, well over 70% of our global compute's running in our private cloud. And by Q1 of next year, we'll be well over 80% of our global compute. And the data center consolidation program that we announced at one of our investment updates will have exceeded 250 million in run rate takeout, and we'll be in a totally different paradigm than any of our competitors with regards to availability, reliability, how we deploy and speed. Well then, once we started getting traction with cloud, now you've got to really start building cloud-native technologies because your application can move to it and take advantage of the reliability but your application layer doesn't become more open. It doesn't become more flexible. It just runs better, but still then solve a lot of the problems, which allows customers to lower their total cost of ownership and drive into a much more open fintech environment with DevOps, et cetera, et cetera, that I talked about earlier. And so now you're starting to see larger institutions realize, "Okay, now I'm going to make a step, and this step is not for 5 years. This is a multi-decade decision I get to make again and really move to a totally different generation of software with a totally different design architecture, a totally different database structure in a much more open services-based architecture that allows me to take advantage of that. And I can consume it myself or I can utilize FIS to consume it." And for us, that's the key differentiator. So when I say we're just getting started, really you have to ask every customer what technology they're running on. And you'll hear everybody is running -- the whole industry is still running on legacy technologies. And so we're just starting to see this move to really cloud-native applications. So that's been the big driver. And as we're engaging in the sales cycle, so why now? I talked about the technology. I talked about the application. But we're also reaching a point where customers can't take any more cost out. They've done the labor arbitrage. They've done the centralization. They -- and they still can't take that next step function. And so in order to lower their total cost of ownership and allow them to be competitive, they're going to have to move through this generation of technology to do that.

And Woody, just sort of a corollary on this one to you. Once we sort of get the platform sale done, I'm assuming that frees up a little bit more margin. Is that the thing that you can feed the -- you can still put up nice margins and margin expansion, yet still have a little extra to keep investing to keep your lead ahead? Is that the idea with the incremental margins on that one?

Yes. I think you got that exactly right, where we'll continue to drive margin through the efforts that Gary just talked about as well as incremental initiatives and programs that we're continually looking in place. As you look back over the last decade, since we've -- Gary and I collectively been kind of running the company here, we've always found ways to drive margin expansion through initiatives and focus. We'll continue to do that. But this is certainly one of the levers that will help us drive that margin going forward as well.

And then on the growth there, I know that we're kind of a module in, I think, where -- the base case and then deposits, and I think there's more coming. So Woody, what's the -- as we think about size of contract, when these things -- when does the layer cake start building once the next module come in? And how do we think about that from an incremental growth point of view?

Yes. I think it's really built off the backlog and the backlog growth, Brett, beyond just MBP with broader offerings that we've been selling. We've been selling that -- or seeing that kind of grow in the high -- mid- to high single-digit area. So that's one of the reasons we, in October, are having some confidence in talking about banking accelerating into mid- to high single digits into 2021. That layer cake flows in roughly a year later. And you've been seeing good MBP signings from fourth quarter last year all the way through third quarter of this year. So that's what's driving our confidence level and seeing that acceleration of growth in banking into 2021 and beyond. Certainly, we'll continue to have to sell new modules and sell to incremental customers to continue to drive it, but we got a lot of momentum in the market right now on that front.

Great. Switching to capital markets, which is one that you guys have worked on diligently ever since SunGard. And Gary, I think once -- I remember you saying that this -- that capital market is just commercial banking. But we already know how commercial banking ends, and so capital markets seemed like another whack at the ball. It seems like we're getting too cloud or hosted faster maybe in capital markets than we did with commercial banking. And you sort of reflected that, I think, in your comments in 3Q.

Yes. Yes, absolutely. I mean one of the things that's interesting for us is, this sounds crazy, we could literally rip the BAND-AID off and say no more on-prem, and you'd see the license business just go away. We're actually pushing against all the people wanting to embrace SaaS. We're intentionally managing where we're trying to keep our renewal business, right, that are on-prem today, renewing them on-prem and taking all new customers to SaaS going forward. That was a successful strategy we implemented back in retail banking. Probably 10, 15 years ago when we saw this implement, but it's going to continue to accelerate. Frankly, there's just that desire for people to run these solutions. Given the investment we've made in our data centers and in our cloud-based technologies and what we're willing to sign up with regards to SLAs and availability, it's getting very hard for anybody to justify running it themselves. And so we're real excited about the future of capital markets. We think it's going to continue to move north into the mid-single digits and be a real strong contributor for us. But there will be a little bit of volatility quarter in, quarter out with renewal headwinds or lack of renewals in that quarter. And also to Woody's point earlier, there still are some license fees for new customers, but most of the new logos are all going to SaaS.

Okay. That's helpful. And then just thinking bigger picture, and maybe this is a Woody question. Just thinking about the long-term growth algorithm. I know we talked about this a lot. 7% to 9% still sounds -- as we outlined when we did the Worldpay deal, that still is sort of the bogey. You talked a little bit about capital markets into next year. You talked a little bit about banking into next year. And then merchant, you sort of said, "Hey, we got to see." Can you just walk us through what your current thoughts on each of those are and kind of how we end up in that 7% to 9%?

Yes. I'd just kind of take it from the top. I think the very first part is we're, in October, talking about a 7% to 9% in 2021. So you know me pretty well, Brett. I got a high level of confidence if I'm willing to say it in October as we complete the framing process. Secondly, the growth in the backlog and the growth in the sales that we've been talking about that are in the quarterly filings are obviously building out some confidence in the banking and capital markets area as well. Banking, I think, will go into the mid- to high single digits into 2021 based on the sales success that we've had and the pipeline that we've had, continue to be robust into the course of -- over the course of 2020, excuse me with that little sidebar there. And then we'll continue to see that accelerate into 2021 into that high to mid- -- mid- to high single-digit area. If you move to capital markets, the shift to SaaS is building backlog that will layer cake in as we've talked about as well. And we've got a good license renewal year piped up into 2021. So that will move from the low single digit to the low to mid-single digit into 2021. And I have a high level of confidence in both of those. It's kind of full circle where we started. The wildcard is around merchant volumes and what happens into 2021. Certainly, we'll be facing easier comps, knock on wood, assuming this continues to get better over time. But that's the big wildcard in us delivering a robust outline of the revenue profile by each segment, is having a good foothold on merchant into 2021. We know it will be high double digits into the -- even into the 20% zone area is our expectation, but obviously continues to be faced with what the volumes are going to do.

That's helpful. And then as we think about -- all the businesses that you all are in now tend to be more scale businesses. And so is that -- we should feel comfortable -- even after the cost takeout and all that kind of stuff, you guys have been cranking at this for a long time, the business portfolio is just better and seems to lend itself to that margin expansion. Is that the right way to think about it?

Well, I think...

Go ahead.

Yes. I think there's a number of things there. You're exactly right, our incremental contribution margin to the next transaction is very, very high because of our scale. And our ability to leverage that scale globally allows us to take advantage of that. So that will continue. You're also going to see us -- Woody talked about programs, right? You're also going to see us -- back to your earlier question, we've got a tremendous number of platforms that will be consolidated now, all right? So between leveraging our ability to continue to push offshoring through global delivery, our ability for incremental contribution margins based on transactions and our global scale that exists in the ecosystem today and our ability to rationalize our platform over the next 3 to 5 years, we're not going to have any problem whatsoever in margin expansion for the next 5 years. And we feel very confident about that as we look to the future. So still a lot of work to do, but we've already done a lot of work. And so now it's just a matter of continuing to turn the flywheel as we move forward.

And then moving into -- we talked a little bit about investment. So as long as we're talking about margin, we got to talk about the other side of the coin and the bills we got to pay. I think you or Woody mentioned $1 billion-ish type run rate in terms of CapEx and cap software. It's a big number. One of the things that we think these large deals came out from in '19 was the sense that there needs to be a bigger war chest as we continued to invest. You guys, a handful of others are sort of well positioned because you got a big checkbook. Is that a competitive moat? I mean should that -- others should worry a little bit about the kind of firepower you guys have?

No, I think that's -- well, I mean, obviously, you would expect me to say I think that's right. But I do think that's right, I mean, given our size and scale and our ability to invest. And then look at what we're doing through the pandemic. I mean we're investing through the pandemic, right? We're not sitting around having to cut off our CapEx and our investment because of the global pandemic. And that could go on for the next 9 months, and we'd still be able to continue to maintain that. Also our ability, we talk about it. When you look at even some of our modern, what I would consider, cloud-native platforms coming to the market, they've always asked, "Who do we run into from a competitive standpoint?" It's start-ups. We don't look at traditional competitors. And the challenge is every time you get down to fruition -- I mean if you're Goldman Sachs, are you really going to invest your entire franchise on a 35-person start-up? I mean at the end of the day, you're going to throw 200 or 300 people at the program. You are only going to square off when someone says, "Well, I can put 35 in, and I've got 6 months left of free cash flow," right? So -- or 6 months left of cash flow on my burn rate. So the reality is it is a differentiator. And as we crest that application innovation stack and continue to pivot towards growth, we'll have an opportunity to start to actually pulling some of that capital down but always having the firepower to accelerate that capital if we see an opportunity to take advantage of organic growth and continue to accelerate that. And that's once again where our chief growth officer comes in. If you look, not only are we doing that level of investment, Brett, but we're also -- we're doing $100 million venture fund. We're doing a lot of next-generation testing and learns coming out of Asif's work. We're trying new capabilities on proof of concepts and partnering with some of our clients to see about early-stage launches and disruption. And so there's just a lot going on in FIS given the scale that we've grown to, but also we're doing it in a very -- what we would say, pragmatically because we're continuing to put up margin expansion. We're continuing to focus on that. We're making sure that we're paying down our debt and continuing to accelerate our growth from here.

And then -- so as we think about -- you've kind of identified a lot of the major investment initiatives, the platform in MBP, Payment One, Digital One, Code Connect, a lot of those. Sort of what's the next -- in a year, what's the next thing that we'll be talking about with you guys as you think about deploying that capital?

I think we'll have some things coming out of the chief growth officer function that we'll be talking to you early about next year, where we're doing some really rapid deployment and test and learns that we're doing with large customers. I think there's a lot of opportunities as we think about data, as we think about real-time payments. So we'll be talking about a lot of that as it comes online next year. There's a lot of opportunities there. But then there's plenty to still do with our existing investments we're making in the applications you just mentioned. Some of those are in very early stages of deployment, development, a lot more work to be done there. And so it's a real exciting time to be part of FIS. And -- but there will definitely be some things coming out of the chief growth officer function that we'll be talking about next year.

Just -- we're about out of time. We have 2 or 3 more minutes. Woody, I want to make sure we talk about return on capital, leverage, how we're thinking about debt. Great -- I think it's 1.6% average debt rate. So that's fantastic. Where do we want to go with our debt? And kind of where do we -- what's our next step once we get there? And given that the stock's trading probably a little bit too cheap, do we think about buybacks? And when do we institute those?

Yes. I think first, we think about cash flow deployment and taking the operating cash flow and putting it back into the company first, the investment for the future that we've talked about, that's been consistent. We'll continue to pay our dividend and anticipate growing that again as we get our debt leverage down back to where we thought it should be. We've made a commitment to the debt capital markets to reduce our leverage overall. Back down below 3 turns, back down to about 2.7 is what we've been talking about. Still got a little bit of a ways to go. COVID certainly slowed us down a little bit this year in terms of debt repayment. Originally, we were anticipating paying that down by the end of 2020. That's rolled into 2021 at this point. So we're certainly looking at that. We've talked about before, if we're investing at the levels we want to invest in, we're paying our dividend and growing it and our debt is where we want to be, we'll look at M&A as an opportunity to deploy capital to drive incremental returns. That would be our goal and our rather, if you will. But we'd certainly not be afraid to buy back shares in the future should we not have good M&A opportunities that drive incremental good returns.

And then last question for you. On an M&A point of view, you guys have done both consolidating transactions where it was a grinded out, grab some margin, et cetera. Others -- the Worldpay was a little bit different, a little bit more growth-oriented. As you guys think about when you're at the point to make that choice, how do you think about growth accretive versus more margin focused, consolidation focused?

Well, we made a commitment with the Worldpay combination that, that was a real pivot towards growth. So don't expect us to -- you'd see us buy turnarounds where we're grinding it out and then accelerate growth. I mean we're looking for things that would accelerate growth further from here, not retrench the growth from where we are. So as you think about that, obviously, it's got to fit that criteria. It's got to fit our strategy, which we don't talk about anymore but we also divest things that don't fit our strategy and have done that historically, but really focusing on stuff that fits our strategy, accelerates our growth from this point. Timing's got to work. Valuation has to work. Culture has to work. If we get all those things right, you'll absolutely see us do M&A.

Great. Well, I'm going to -- we're right at 45. So I want to say thank you all, Woody, Nate, Gary. I always appreciate the time. Thanks for tuning in virtually. Thanks to all the buy siders on the call as well. Please let us know of anything you need to follow up. Guys, hope you have a great day, and again, appreciate your time.

Excellent. Thanks, Brett.

Thanks, Brett. Thank you.