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

Citi's payment processors and IT services analyst. And it's my pleasure to bring the next session to you. It's FIS. And from FIS, we have Woody Woodall, who is the CFO. And we also have Nate Rozof, who's Head of IR. Gentlemen, welcome. Thank you for doing this for us.

Woody, maybe I could start with you. It's a little more than a year past when the deal with Worldpay closed. I mean I know the year has brought us a lot of different things that everyone has had to deal with, but you're still known as a deal stock. So I think it's still fair to start by asking you to kind of grade yourself on deal execution, a couple of things that went right, but also equally important, a couple of things that could have gone better.

Great. Thanks, Ashwin. I appreciate you hosting us today, and thanks, everybody, for joining, first of all. We are about a little over a year into the transaction itself, in about 18 months post deal announcement in March of '19. I think on the good side, I think a lot of things have gone right. I'll say this in terms of a pre-COVID concept. No one probably really expected that going into this year. This year, we felt really good about accelerating our revenue growth. We felt very good about our synergy execution and continue to feel good about our synergy execution. On the cost side, we exited Q3 at about $385 million of EBITDA or OpEx synergies with another 300-plus below the line between the interest and CapEx reduction. We'll exit 2020 with over $700 million of total cost synergies, 400-plus above the line and 300 or so below. We've also accelerated our revenue synergies. There was a good bit of skepticism going into the transaction or post announcement of the transaction on our ability to announce a pretty hefty revenue synergy number and then ultimately trying to execute against it. We originally anticipated exiting 2020 at about $100 million of revenue synergies. We're going to exit 2020 at over $200 million in revenue synergies. So certainly, pulling that forward with some things that we expected that were just higher and better than we expected and some things that were like Premium Payback and then some things that we didn't expect as much out of, like the merchant referral that actually have been better than we originally expected. I would tell you, coming out of SunGard, I think we have honed some of the chapters in our playbook around faster integration and faster synergies. I think that's one of the reasons we're able to get these out pretty quickly. I'm very pleased with that side of it, and we'll continue to execute on the revenue side over the next couple of years and continue to give color around where we see that revenue synergy number ultimately landing, but feel very good about our ability to drive it. On lessons learned or things that we probably could have done better, there's always things you could do better when you look back and play quarterback on Monday morning. I would tell you, we really expected the NAP, the new acquiring platform, to be converted earlier and faster. It's taken us at least a year longer than we originally anticipated to get it done. We are in the final throes of conversion right now. We've been doing migration, so it's functioning and up and running, but it took us longer than we thought. I would tell you, too, we typically have used the financial crisis of 2008, 2009 as our litmus test for stress testing a business model and in doing due diligence. Certainly, we will use a pandemic-type approach and stress testing a model as it has been a pretty stressful year in trying to navigate, not only executing on day-to-day and working with employees remotely, but honestly, trying to give the market transparency on what we know and what we don't know. And it's been a pretty challenging year on that.

Yes. Yes. No. Those completely fair points there. You recently spoke about the ability to do 7% to 9% revenue growth in 2021. And it was interesting. I heard a variety of reactions to that. So I want to kind of get into the puts and takes of the 7% to 9%. On the one extreme, I kind of heard 7% to 9% seems low relative to what should be easy comps, right? On the other side, it was sort of 7% to 9%, that seems like you're making maybe rosy economic assumptions going forward, kind of a smooth linear transition back to normalcy. Can you provide some of the puts and takes what went into your thinking when you said -- yes.

Yes. I think, first, knowing what you have for quite a while, Ashwin, then coming out in late October with a number for February and next year, particularly in this backdrop, I had to have a pretty good level of confidence on that number. But I would also probably have some level of conservatism in terms of giving color. The backlog and the sales activity that have happened in banking and capital markets, the growth in the backlog that we've been disclosing for a number of quarters now in the higher single-digit area for several quarters, along with the pipeline, it gives us a lot of confidence in banking to move up from mid-single digit to mid to high single digits. So let's call it 6, call it 7, pick your number, but it gives us a high level of confidence into being able to deliver on that. The revenues booked now, the conversions are happening from MBP sales all the way from last year this time. So feel really good about visibility and executability into there. Certainly, you've got some uncertainty around the payments portion of it, which is about 13% or so, but feel pretty good about banking continuing to accelerate, which we've been talking about a lot this year. If you move to capital markets, we've got 2 things. One, we've been moving towards a SaaS engagement with our client base in the sales cycle and away from licensing. So we've been building backlog in the capital markets area as well. I would tell you, we anticipate that moving from low single digits to low to mid-single digits. Let's call it 4 for argument's sake, just for the moment. And then we certainly anticipate merchant to come back at some level. It's obviously the big wildcard right now, probably where you're getting a combination of the questions where some are saying it's too low a number because merchants should come back, and it will grow 22%, 25% next year. Others are looking at what we're seeing right now in some of the new shutdowns, new lockdowns. U.K. is locked down. A lot of Europe is pulling back a bit, how robust do we see it? So the puts and takes would say, look, if you do the algorithm, I think, we just did there, it would take merchant being 10% to be below the low end of that number, below the 7%. So I don't see that as a reality, right? Moving it up somewhere between, call it, 15% and 20%, which is probably more in some level of normal recovery and some level of easier comps, that moves you closer to that 9% number I described in the 7% to 9% guide. So that's kind of where I'm coming from on it in terms of what the algorithm would look like by the different segments with a lot of visibility in banking, a lot of visibility in cap markets and a little more of -- don't know exactly how margin's going to come back, know it will come back at some pretty robust level next year, but don't know exactly what that level will be.

Got it. Got it. The -- let's talk about banking maybe for a bit. The high level of confidence you have, it is a very repeatable business to begin with. You've gone through obviously, multiple years of modernizing the tech stack, if you will. My thinking is probably moves you from an upper 80s to something in the 90s, perhaps from a repeatability standpoint going to subscription or is that -- I don't know if that's fair, but that's part of the question. The other part of it is, obviously, these large deals that you've been signing, top 30, top 50, top 10 accounts -- banks, so is -- so which is the wildcard, if there is a wild card on the banking side? Is it the implementations? Is it the continued convincing clients that they need to go to subscription? Where is the wildcard in that stage?

Yes. In the mid to high single digits, what moves you to the high end of that, what moves you to the lower end of that? What would move you to the higher end of that would be continued execution on sales that we've delivered on, getting those clients converted in the time lines that we expect and have planned for and then continuing to sell either incremental new capabilities to those existing clients. Obviously, lending is coming out in the fourth quarter now. We want to start a process of cross-selling and upselling that. It will be a lot easier to cross-sell and upsell the lending capability once we get the deposit capability up and running in the time frames and in the way we described to those customers. I think we certainly have got some positive momentum in the market from MBP right now. There have been 10 decisions. We've won all 10, so feeling really good about that. What could move it towards the lower end or what could slow it? An extreme pullback in processing on the issuer side, on that 13% that is transaction-centric, maybe COVID-related or lockdown-related, that could certainly be a downside and then execution risk on our side that we can control as to whether we get these clients converted on the time horizons and on the schedules that we've been able to deliver. We started talking about this over each quarter, and I think it's a critical component for our owners to continue to ask questions on where are you at in the delivery cycle? Because it's one of the most critical things of taking the pipeline, turning it into a sale and now turning that sale into a revenue.

Got it. Got it. And does the climate for bank IT spending itself, what your bank clients, how your clients' budgets are looking, does that play at all into these expectations? Or is it just less of a factor?

Yes. We've gotten that question in a decent amount over the last few weeks. And I think client IT budgets are always a factor, right? There's no doubt about that. What we have seen really over the last several years in a low interest rate environment is clients getting more and more focused on where do they prioritize and how do they prioritize what I would consider a finite spend. So if they've got $100 of IT capital to spend 3 years ago, it might be 50-50 on legacy IT and $50 on new IT or new technology. I would tell you, over the past few years, that has moved further and further towards more and more of a percentage of that same $100 is being spent on newer technology, digital technology, things that enable customers to have more open architecture with higher resiliency that can reduce their overall IT costs and less and less on legacy mainframe-type applications. It's one of the theses that we use when we started building in the data center consolidation. It's one of the items that we use in thinking about investing and modernizing all our architecture stack. And I think, ultimately, it's resonating in the higher sales that we're seeing and the accelerating revenue growth that we're seeing in banking.

Got it. Got it. You mentioned sort of the cross-selling maybe of the early wave of MBP clients. You got the deposit piece first before the lending piece. Are the modules ready to go? Or are you still building them? From your perspective, if these clients came in and say, "well, this works great, let's go with the next one," you'd be able to do it?

Yes. Two flavors on that. One, we're always continuing to improve the existing capability, right? Even the deposits thing is not completely done, and we're continuing to build feature and functionality on top of it as we go. Second, on the lending platform, the first component of the lending platform will be available in the fourth quarter of this year. In fact, in the next few weeks, we'll have it commercially in market and being sellable. It won't be a full end-to-end complete lending stack that a bank would need, but it would certainly be a start. So yes, we continue to bring these things to market, and then we'll continue to enhance them and continue to build them on a go-forward basis. So you'll have other modules that customers can plug into and buy into, and you should be able to transition them a little faster once they're on the deposit side and once they're on the base system, and they can push in incremental modules a little faster than maybe the original conversion.

Okay. Okay. And how about bank M&A? We've obviously had a recent large announcement again. Does that affect how you think about your prospects?

I wouldn't say it affects how we think about the prospects. If you think about potential impacts from it, traditionally, we've seen banks consolidate larger and larger that tends to play towards the end of the spectrum we play on in terms of the verticals that we serve versus maybe other competitors in the market. The recent announcement, certainly, we have some connectivity into both those institutions and have some opportunities in both those institutions and feel good about our competitive position there. Historically, as we've seen very large or larger M&A within the bank space or in the financial institution space, we've been able to win a lot of those opportunities either by our capabilities just working better for the very large, very complex, very industrial-sized bank or by the acquirer or moving the acquiree's tech stack to our tech stack. So we think -- we've talked about this for a number of years. You play the long ball on this one as well. We feel very good about how we're positioned in the consolidator portion of the equation within bank M&A.

Okay. Okay. So just a couple of quick sort of wind-up questions on banks. One is obviously, you're a player not just in North America, but globally. What's the global environment look like from both the sales perspective? I mean how transportable, transferable are some of the innovations that you're putting in, the newer systems that you're putting in? How big of an opportunity might that be?

Yes. I think it's a great question. We certainly architected the new platforms to be able to move them and passport them around the globe more rapidly than maybe in the past. One of the MBP deals that we won was a German bank, actually. So certainly, it has some global applicability. We have always thought outside the U.S. was also a significant opportunity for FIS. You've seen us continue to try to grow our global footprint over the past decade or so. So certainly, we believe it's still a significant opportunity for us. Obviously, we're architecting new modules and new capabilities to be able to passport them even more rapidly than we have in the past. So we still think it's a really good opportunity, Ashwin.

Okay. I'm going to loop in a question that I got from an investor while we were speaking, which is kind of a beyond 2021 question. As you think of growth beyond '21 -- obviously, you're at that, let's call it, 6%, 7%, like you said, growth. Do you take down afterwards because it's a tough comp on the other side? Or are we at a sustainably higher level because of sort of the modularization of what you bit?

Yes. That algorithm on both banking and cap markets, we think, is a longer-term algorithm, right? This is a -- on the banking side, the larger institutions converting, outsourcing and buying multiple modules that we can build out into the market for several years, we feel good about that being, call it, a 5-year or more long-term accelerated growth profile as we've been able to really crack the code in this larger institution space. Cap market, similarly, we continue to convert the SaaS. We've moved that recurring revenue up from below 60 over 10 points to above 70. We think we can move that up into the 80% zone. As we do that, that SaaS will continue to layer cake into the growth algorithm beyond 2021 and into the outyears. So we feel really good about that transition and where we're at on that front. And then the merchant, let's take a 2-year window of 2020 and 2021 out because of the comp issue that we think we got in COVID. We were looking at coming into 2020 with roughly a low double-digit -- high single-digit or low double-digit growth profile between revenue synergies and just ongoing growth in that space, we still think that's a reasonable answer there on a go-forward basis between executing and annualizing revenue synergies over the next several years as well as continuing to see strong growth in demand around e-com and omnichannel and integrated and believe all those together can continue to see that in a high single, low double-digit growth for the merchant segment. If you add all that together, I think you're still in that same range that we've talked about all the way back to the Announcement Day deck and kind of how we're teeing this up for 2021.

Okay. Okay. Understood. Let's spend maybe a few minutes on capital markets, and that, also going through that SaaS transition that you mentioned. The old stack, it used to be reliant on a number of different things, capital markets, deal activity, trading, AUM. There is a general macro. It was also very large. It had an existing large market share in many of Fidelity's products. So penetration was a factor. As you're making this transition, do those factors still matter? Or is it just a straightforward subscription? A little bit detail on that would be helpful.

I think those broader factors in the environment for the customer base remain similar, Ashwin. They're the drivers of the underlying business at the end of the day, right? How we've been able to win some share is stitching some of these things together, removing friction from the front office to the middle to the back office, bundling some product capabilities that can reduce their cost of ownership on, let's call it, trading or risk and compliance in certain areas compared to buying bespoke or one-off solution set. And that's been resonating. The end-to-end solution on a cloud-based environment has really been resonating with our customers. And building out that architecture that they can move things faster and react quicker, I think, has really resonated. And it's where we've seen the sales growing. Third quarter sales in cap markets were 24%, really strong sales. So it's really coming through in the -- not just in the pipeline and in the storyline. It's coming through in the backlog build, which is really exciting to see.

Yes. Okay. Okay. The -- let's move to the part of the business that you kind of call the determinant between 7% and 9%. So let's talk about merchant. Maybe let's start with what led to the delay in your new platform? Was that more of a management transition issue? Worldpay? What was going on there?

Yes. I think you had some management transition issues. I think you had probably just some distraction with the transaction on top of a transaction a little bit and then just complexity, right? It's a big, new acquiring platform, and it has some complexity to make sure you get it right. You don't want to have transactions being dropped or merchants not being able to deliver goods and services and get payments. So you had to get it right. So we ultimately slowed it a bit but are migrating customers now, and we'll finish that out either the end of this year or early next year, and that will be the final migration. I think we're through 17 migrations now. So a very large complex project that just took longer than people anticipated, to give you the most transparent view.

Okay. Okay. As you think of transaction and volume growth trends in the merchant segment, what should investors take away from the current environment?